Effects of NPA on profitability

The assets of the bank, classified under NPA cease to generate income to the bank. In addition to stoppage of income generation to the banks, banks are required to make provision for NPA. Therefore NPA is a double edged razor; damaging the profit, weakening the capital structure and reducing the rating of the bank.

Measures for reduction in NPA:

In pursuit of reduction in NPA banks undertake various steps such as Rehabilitation of potential viable units, Rephasement of term loan installments depending upon income generating capacity of the unit, Exploring the possibility of acquisition of sick units to a healthy unit,          Recalling the advance when it appears that borrower is diverting the bank finance to some other purpose or diluting the security offered to the bank,          Recovery through Lok Adalat, DRT and SARFAESI Act 2002,                 Establishment of Asset Recovery Branches/Recovery cells for speedy recovery of NPA, Applying for settlement of claim from CGTMSE/ECGC, Filing civil suit for recovery of dues, Write off, Compromise settlements like One Time Settlement (OTS),Out of Court Settlement (OCS) etc.

The disadvantages of Compromise settlement:

1. Loss of money towards difference between loan outstanding and amount actually received.
2. Unapplied interest for the period up to which payment is likely to be received waived after compromise
3. Other notional sacrifices which otherwise must have added to outstanding.
4. It sets a wrong precedence to defaulters

The advantage of Compromise settlement:

1. Reduction in NPA.
2. Recycling of funds
3. Saving of time/expenses involved in legal proceedings
4. Tax relief due to write off the unrealized portion of the outstanding.

Gains of NPA recovery:

NPA recovery leads to multiple gains to the bank. Every Rupee recovered adds up cost free resources to the bank. The recovered money can be recycled for further lending which enhances that current earning of the bank. The operating and net profit of the bank would improve. The capital structure of the bank would be strengthened. Recovery in NPA accounts improves the efficiency and profitability ratios of the bank and thereby improves Bank’s rating.