Non Performing Assets - Trends and Effects of major policy initiatives like ARC

Submitted by Group 5

Amit Kumar - IPMX04005 Chandrakala - IPMX04017 Pravin Shankar - IPMX04043

Background
The Indian banking sector has played a commendable role in fuelling and sustaining growth in the economy. In the recent past a large part of the banking sectors growth has been on the back of financing consumption, as reflected in the growth of retail banking. While the progress on this front is likely to continue, sustaining this growth in the coming years may require focus on the supply side capacity building. A growth driver in this phase would involve financing the emerging Small & Medium Enterprises (SMEs) sector of the economy. As such, banks would have to gear up for the challenges of managing growth and consequent risks in the SME sector financing. Addressing this issue and putting in place a suitable risk mitigation mechanism is going to be a fairly daunting challenge. One way of ensuring focus would be to free up capital both financial and human and make them available for sustaining the growth in assets and profitability. Farming out the banks Non- Performing Assets (NPA) portfolio to asset-recovery companies, which specialize in this segment of the financial sector, is worth evaluating. By the late-nineties the ballooning figures of NPAs sounded alarm bells throughout the financial corridors across the country. As a result, two committees were set up in quick succession and reports were submitted: one in April 1998 (Committee on Banking Sector Reform Narasimham Committee) and another in October 1999 (Restructuring of Weak Public Sector Banks Verma Committee). The recommendations of both the committees in handling of NPAs in the banking sector were along similar lines: a separate vehicle, by creation of Asset Management Companies (AMCs) for resolution of NPAs, was suggested. Finally, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (the Act) was passed to pave the way for setting up Asset Reconstruction Companies (ARCs) in India. Under the Act, it was envisaged that ARCs shall be registered with the RBI and the RBI would issue necessary guidelines to ARCs for conducting business. The RBI came out with the guidelines in April 2003, and the first ARC was granted registration in August 2003. Obviously, an inclusive and macro view has to be taken on the issue, which in turn would give an idea of the much larger role that the ARCs would require to play if they have to make a true and lasting impact. This would entail bringing the impaired assets of the other equally important players within the ambit of functioning as ARCs

Research Gap and Specific research objective

Public sector figures of NPA are high compared to private sector. Public sector compliance on priority sector lending is also less. To analyze the reasons for the increase in the NPA of the public sector banks and see the impact of ARC helped on public sector banks

Research Methodology and Data Source

To analyze the trend of the public sector NPA growth and see the possible reasons with economic and banking industry background. RBI trends on the banking industry will be a helpful data source to analyze the growth in the NPAs

Literature Review & References

Report On Trend and Progress of Banking in India 2010-11 http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0TPBI121111_FULL.pdf Designing Solutions for ARC http://www.crisil.com/youngthoughtleader/winners/topic13-ParikshitYagnikNMIMS.PDF