Question

Unit Assignment Task:

Loans can turn bad and increase banks’ impaired loan position (non-performing loan). The impaired loans would increase credit risk to the detriment of bank insolvency. Discuss this issue complete with thorough analysis of the issue, causes, bank actions and solutions to minimize loss from rising credit risk and bank insolvency.

Marks will be awarded for thorough analysis of issues, causes, bank actions and solutions to minimize impaired loans and bank insolvency. Comprehensive analysis of issues 8 % In-depth discussion of causes with examples 10% Sound discussion of bank actions and solutions 12% Total 30% Word Count : Do not exceed 3,000 Words

Answer 1

A) The issue of Non Performing Loans (Assets) has been discussed for financial system all over the world.

This problem is not only affecting the banks but also the whole economy. In fact level of NPAs banks is nothing but a reflection of the state of health of the industry and trade. Granting of credit for economic activities is the prime duty of banking. Apart from raising resources through fresh deposits, borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However, lending also carries a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. These loans affect the bank’s profitability on a large scale.The rising NPA is a great challenge on the survival of Banking Industry.

B) Causes: Can be divided as internal and external.

External Factors: They are non-controllable by
Banks

Ineffective Statutory Recovery Procedures, Willful Defaults, Natural Calamities, Industrial Sickness, Lack of Demand. Change in Government Policies etc.
Internal Factors: They are internal in nature and controllable by the Banks are namely: Defective Lending Process or Poor Lending Decision (Non execution of Principles of Safety, Principle of Liquidity and Principle of Profitability), inappropriate Technology, Improper SWOT analysis, Poor credit appraisal system, Managerial deficiencies, Absence of regular industrial visits, Re-loaning process etc.

C) Actions and solutions

Banks can take actions before and after sanctioning credit to borrower. Such as by identifying early warning signals, preparing special mention categories, detection of wilful default by identifying diversion and siponing of funds, Creation of legal and regulatory environment, building asset reconstruction company for acquiring default company and their resolution etc.