Non Performing Assets in Banks: Causes and Effects

Abstract

Non- Performing Assets in banks are those assets, which cease to generate income and remain irregular for more than 90 days due to non-payment of interest and instalments. Such accounts carry more than normal risks attached to the business and are under threat of loss as recoverability of dues are in doubt. RBI has laid down detailed guidelines for identification of account as NPAs. High NPAs in the banks have devastating effects not only on the banks but also on the economy as a whole. To explain its ill effects in better to quote excerpts from the Narasimham Committee Report 1998, which reads as NPAs constitute a real economic cause to the nation in that they reflect the application of scarce capital and credit funds to unproductive uses. The money locked up in NPAs is not available for productive use and to the extent that banks seek to make provisions for NPAs or to write them off. It is a charge on their profit. To be able to do so, banks have to charge their productive and diligent customers a higher rate of interest. It thus becomes a tax on efficiency. It is the customer who uses credit efficiently that subsidies the inefficiency represented by NPAs. This also raises the transaction costs in the system thus denying the diligent credit customers the benefit of lower rates, which would help them to be more efficient and competitive. NPAs in short, are not just a problem for the banks but they are bad for the economy.