Bankers agree that Non-performing (NPAs) [1] and restructured assets are the bane of their existence. And in the current context of NPAs ballooning and outpacing credit growth the situation looks rather grim going forward. The latest Reserve bank of India (RBI) report on financial stability endorses this observation, pointing out that the growing numbers in NPAs had touched a 10-year high in the third quarter, starting September, 2015.

Though it’s not just banks, NPAs have become a cause of concern for the Government and regulatory bodies alike. This, coupled with slow credit growth is emerging as a major worry for sectors which depend heavily on the banking sector for capital.

 For the uninitiated, NPAs are classified into two kinds: gross NPAs (GNPAs) [2]  and Net NPAs (NNPAs) [3].The GNPA is normally used as a measure to gauge the extent of non-performing assets. The gross NPAs of scheduled commercial banks was to the tune of Rs 2.6 lakh crore in the above mention quarter, as against Rs 2.3 lakh crore in March quarter 2015. This is an increase of 13.3 per cent (see table.1). It must be noted that total gross advances rose only 2.5 per cent in the same period. Gross non-performing advances (GNPAs) of Scheduled Commercial Banks, as percentage of gross advances, increased to 5.1 per cent from 4.6 per cent between March and September 2015. The net non-performing advances (NNPAs) as a percentage of the total net advances for all SCBs increased to 2.8 per cent from 2.5 per cent during the same period.

Table.1: NPAs as percentage of gross and net advances


Gross Amount

(in lakh crore)

As Percentage of Gross Advances

As Percentage of Net Advances

2014-15 Q1




2014-15 Q2 2.6 5.1


Source: Financial Stability Report, December, 2015

The more important concern amidst all this though is the growing NPAs of public sector banks. The gross NPAs of public sector banks were at six per cent at the end of June, as against 5.2 per cent in March 2015. The role of large borrower is also evident from the data published by the RBI. A significant increase in the GNPA ratios of large borrowers among PSBs from 6.1 per cent in March 2015 to 8.1 per cent in September 2015, led to an increase in the GNPA ratio of the whole banking system. Such a sharp increase in the share of GNPA of large borrowers to the total GNPAs from 78.2 per cent in March 2015 to 87.4 per cent in September 2015 has raised many eyebrows at lending institutions and amongst concerned parties.

Increase in size of stressed assets

To understand this phenomenon better, let’s look at the trend in the NPAs of Scheduled Commercial Banks (SCBs) for a period of 12 years, starting 2002-03 is shown in table. 2. The gross NPAs were Rs 687.17 billion in 2002-03 which increased to Rs 2641.95 billion in 2013-14, an increase of 284 per cent in12 years. As percentage of gross advance it was 8.8 per cent in 2002-03 but it was contained to 2.3 per cent in 2008-09. It again started picking up and it reached 3.8 per cent in 2013-14 and to 5.1 per cent in September 2015. The same phenomenon can be noticed in the case of Net NPAs too. The NPA witnessed an increase of 380 per cent during the period 2002-03 to 2013-14. The underlying reason behind this is the increase in size of the stressed asset in the banking sector.

Table.2: Gross and Net NPAs of Scheduled Commercial Banks (Rs in Billion)


Gross Amount

Net Amount

As Percentage of Gross Advances

As Percentage of Net Advances

2002-03 687.17 296.92 8.8 4.0


648.12 243.96 7.2 2.8
2004-05 593.73 217.54 5.2 2.0
2005-06 510.97 185.43 3.3 1.2
2006-07 504.86 201.01 2.5


2007-08 563.09 247.30 2.3 1.0
2008-09 683.28 315.64 2.3 1.1
2009-10 846.98 387.23 2.4 1.1
2010-11 979.00 417.00 2.5 1.1
2011-12 1429.03 652.05 3.1 1.3
2012-13 1940.74 987.10 3.2 1.7
2013-14 2641.95 1426.57 3.8 2.1

Source: Financial Stability Report, 2015

Gross NPAs along with standard restructured advance[4] make up stressed assets. The stressed asset of the Indian banking system is over Rs 8.9 lakh crore in absolute terms. These have grown by over 26 per cent on a year-on-year basis in 2014-15. The more accurate picture will emerge only when we understand the relation between stressed asset and restructured standard advance ratio. In fact, the restructured standard advances as percentage of gross advances declined to 6.2 per cent from 6.4 per cent, while the stressed advances ratio increased to 11.3 per cent, from 11.1 per cent during the March- September 2015 period. It was 9.2 per cent two years ago.


Public sector banks to blame?

The growing concern over NPAs can be put into greater perspective by gleaning insight from bank-wise analysis. Disaggregated analysis exposes the fact that 16 banks have stressed asset ratio of over 16 per cent. Estimates show that 34 Scheduled Commercial Banks (SCBs) with 12 per cent share in advances showed very low stressed advances ratio of less than 2 per cent. Nine banks have negative returns on assets, and another six have less than 0.25 per cent.

Bank group analysis shows that public sector banks (PSBs) have the highest level of stressed assets at 14.1 per cent. This is followed by private sector banks (PVBs) at 4.6 per cent and foreign banks (FBs) at 3.4 per cent. With respect to NNPA, it increased from 3.2 per cent to 3.6 per cent for PSBs, where as it remained unchanged for PVBs and FBs at 0.9 per cent and 0.5 per cent respectively. One can see why public sector banks are often criticized in literature on NPAs.

The growing concern is not simply the increasing rate of stressed asset or NPA but also the sectors, which are responsible for the mounting NPAs. Some sectors are responsible for the creation of NPAs. It is very clearly expressed in the Financial Stability Report that industry continued to record the highest stressed advances ratio of about 19.5 per cent, followed by services at seven per cent. Sub-sector analysis reveals that five sectors are largely indebted to high NPAs. These sectors are: mining, iron and steel, textiles, infrastructure, and aviation. As of June 2015 these sectors together constituted 24.2 per cent of total advances of SCBs but contributed to 53 per cent of total stressed advances. It’s important to point out here that the main culprit in this is aviation sector which contributed 61 per cent of stressed advances. Among the sectors, the retail sector recorded the lowest stressed advances ratio at 2 per cent.

The sector wise and sub-sector analysis throws light on another interesting aspect: size of enterprise and the size of loan.  In terms of size, medium and large industries each had stressed advances ratio at 21 per cent, whereas, in the case of micro industries, the ratio stood at over 8 per cent. According to the Financial Stability report, “the performance of these sectors and their impact on asset quality of banks continue to be a matter of concern”.

Large banks and poor accountability 

In conclusion, it is evident from the data that 78 -88 per cent of the NPAs are created by large enterprises. But banks or related authorities often extend the period of repayment of bad loans through restructured advances or by giving exemptions to the corporate, which in turn, make an effort to declare bad loans temporarily out of the NPAs limit. This is really a strategy to convert bad loans into good loans. However, such a long rope isn’t extended to small borrowers.
The establishment of specialized branches for disbursing loans and advances and transferring the power of sanctioning loans (especially beyond a limit) and advances from branch managers, particularly in city branches to zonal offices, is a consequence of banking reforms. And this is a major reason for the increase in NPAs. This change in the reforms resulted fall in the share of small loans, which were collected by the branch managers efficiently from the borrowers on the one hand, and the increase in size of loans and poor repayment from medium and large-sized firms on the other.

The change in the direction of size of loan from small to large coupled with the transfer in the power of sanctioning loans by zonal offices, especially in cities and for large loans, is a concern that needs to be addressed in containing the huge number of NPAs. The absence of innovative ways to collect outstandings on NPAs further worsens the problem.

Developing a suitable model to eliminate the NPAs should be given top priority by the banking authorities. For, unless we properly tackle this issue through necessary regulation, one can foresee a situation like it had been created in the West, rearing its ugly head in the Indian banking system.

[1]A non-performing asset is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days.

[2] Gross NPA is the amount outstanding in the borrowal account, in books of the bank, other than the interest which has been recorded and not debited to the borrowal account.

[3] Net NPAs is the amount of gross NPAs less (1) interest debited to borrowal and not recovered and not recognized as income and  kept in interest suspense (2) amount of provisions held in respect of NPAs and (3) amount of claim received and  not appropriated. The Reserve Bank of India defines Net NPA as Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received  and  held  pending adjustment + Part payment received and  kept in suspense account + Total provisions held).

[4] Suppose a person or organization is unable to pay back the loans. Then banks have the option of restructuring it basically which means putting a moratorium on payment of interest and principal. This will give the borrower some time to arrange the money and continue the business. It also helps the banks to avoid putting it under NPA. Standard advances ratio is the ratio of their restructured advances to their gross advances (normal advances + restructured advances).

* The Author is Chief Economist at CPPR. Views are personal

Dr. Martin Patrick
Dr. Martin Patrick
Dr Martin Patrick is Chief Economist at CPPR. He has a PhD in Applied Economics from the Cochin University of Science and Technology (CUSAT), Koch and had a post-doctoral training at Tilburg University, Netherlands. Presently, he is a Visiting Fellow at Indian Maritime Institute, Ernakulam and Xavier Institute of Management and Entrepreneurship, Ernakulam. He can be contacted by email at