Why Non-Performing Assets Are More in Public Sector Banks in India?

Abstract

The paper identifies why there are more non-performing assets (NPAs) in the public sector banks (PSBs) than those in the private sector banks (PVSBs). It evaluates and reviews the policies and practices of scheduled commercial banks (SCBs) in terms of NPA management. It studies the causes of NPAs, such as ownership structure, credit terms, conditions and covenants, nature of loans, kind of borrowers, bank management practices and business cycles. The study suggests that PSBs have adopted liberal and loose credit policies, and ha ve concentrated loans on borrowers and sectors , i.e. , huge credit exposures to a few large corporate borrowers and to a few sectors. It also find s that PSBs are subject to weak and mild regulatory and supervisory impact s on their operations and functions as these are owned by the Government of India. The managements of PSBs are indifferent to the success and performance of PSBs as there are no incentives or penalties for their performance and nonperformance. It is suggested that the PSBs should develop both the skills and practices towards credit and credit risk management. The government has to introduce flexible compensation package and incentives to the managements of PSBs linked to the performance so that it will improve profitability and reduce NPAs. The Reserve Bank of India’s regulation and supervision should be ownership neutral.