Non-performing assets (NPAs) reflect performance of banks. A high level of NPAs loans is indicative of a large number of loan defaults that affects the profitability and net worth of banks. Growth in NPAs necessitates larger provisions, thus reducing the overall profits and shareholders value.

Rising NPAs is a big concern for the Indian banking sector. According to Associated Chambers of Commerce and Industry (Assocham), the net non-performing loans have risen by an average 26 percent in the second quarter of current fiscal as compared to corresponding period previous year. The net NPAs of India's largest private lender, ICICI stood at Rs.4,553.94 crore as on March 31, 2009 as compared to Rs. 3490 crore on March 31, 2008, an increase of nearly 30 percent. The situation in public sector banks is similar. Amidst rising NPAs, the banking regulator, RBI has directed the public sector banks to increase the provisioning requirements to 70% to provide a cushion against loan losses.

Reasons for rising NPAs

• Relaxed lending standards: Inappropriate personality-morale profile assessment of the prospective and current customers is one of the reasons for rising defaults on loans.

• Aggressive selling of unsecured loans: The increase in bad loans can also be attributed to aggressive unsecured lending by banks. Rise in non-performing loans in case of ICICI was due to change in its retail loan portfolio mix towards non-collateralised loans. The net non-performing loans in the collateralised retail portfolio were 1.59% of net collateralised retail loans and net non-performing loans in the non-collateralised retail portfolio (including overdraft financing against automobiles) were about 10.08% of net non-collateralised retail loans.

• Legal Issues: There have been instances when banks have extended loans to doubtful debtors. Loopholes in the legal system and insufficient internal control mechanisms have intensified this problem.

• Market failure: Another reason for the rise in NPAs is said to be the global financial meltdown and its impact on India.