Management of NPAs in Public and Private Sector Banks: A Critical Evaluation

Abstract

A lending institution's financial health and the integrity of the banking system depend on effective NPA management. It involves regular monitoring of loan accounts, early identification of stress, and implementing corrective action to resolve the issue. The advance and deposit mobilization can have both positive and negative impacts on Non-Performing Assets (NPAs).
With increased deposit mobilization, banks may be tempted to lend more, which can increase the risk of NPAs. With more deposits, banks have more funds to lend and a higher exposure to credit risk. If the bank has a high proportion of low-quality deposits, such as time deposits with a short maturity, it may have limited funds available to lend, which can increase its exposure to NPA risk. If the lending is not done judiciously the NPA levels of the bank can increase. This is especially true if the loan appraisal process is not stringent and the bank doesnt have adequate risk management practices in place. Additionally, unproductive bank branches might not have the same level of loan appraisal expertise as their more recent locations. This may result in a loan portfolio with worse quality and a higher NPA risk. To lessen the negative effects, banks must have robust risk management procedures in place. This includes conducting thorough loan appraisals, having adequate loan loss provisions, and implementing effective loan monitoring and recovery processes. An attempt is made in this paper to understand causes of NPAs and to provide necessary suggestive measures to control NPAs in both the Public Sector and Private Sector Banks.