DISSECTING NON-PERFORMING ASSETS: AN ANALYSIS OF INDIA'S BANKING INDUSTRY

Abstract

Loans and advances play a pivotal role in fostering economic growth by providing financial resources to individuals and businesses. These funds facilitate the expansion and diversification of economic activities, contributing to overall prosperity. However, this lending process carries inherent risks, most notably credit risk, which arises from the potential default of borrowers. Non-performing Assets (NPAs) represent a significant challenge in the banking sector, as they indicate loans at risk of default. When a borrower fails to make interest or principal payments for 90 days or more, the loan is classified as a Non-performing Asset. These NPAs pose a substantial risk to financial institutions, which rely on interest payments for revenue. Banks are required to categorize NPAs into three distinct groups based on the duration of non-performing status and the likelihood of recovering the outstanding dues: Sub-standard Assets: These are assets that have been NPAs for up to 12 months. Doubtful Assets: Assets classified as doubtful have remained NPAs for over 12 months, indicating higher uncertainty regarding recovery. Loss Assets: These assets are considered irrecoverable, signifying a complete loss. Effectively managing and reducing NPAs is crucial for the stability and sustainability of financial institutions. This paper explores the various aspects of NPAs, their classification, and the strategies employed by banks to mitigate credit risk, ultimately contributing to a sound and resilient banking sector.