Non-performing Assets of Commercial Banks

Prudential norms in respect of the financial sector (commercial banks, in particular) were envisaged in the early 1990s by the committee on financial system set up in 1991 and various norms were introduced for its smooth functioning.¹ These norms covered among other things, capital adequacy, income recognition, and provisioning for bad debts, which were expected to improve the productivity, profitability and efficiency of the commercial banks. Although there have been modifications of these norms over the years, the objective was to clean up the accounts of institutions. Even so, deregulation and liberalisation measures, increasing competition among commercial banks for retaining their share in the market, enormous growth in cross-border transactions, and speculative deals in forward exchange contracts and derivative markets were predominant during the last decade, which changed the portfolio behaviour of the banks.

The implementation of Basel norms over different periods aimed at insulating the institutions from credit, liquidity, and speculative risks have been in vogue for nearly two decades,² compelling banks to suitably adjust their portfolios for necessary compliance. The global financial crisis in 2008, which created ripples in the financial system of this country as well, had an impact on the operations of the commercial banks and the private corporate sector (PCS) in particular. These unprecedented developments prompted the Reserve Bank of India (RBI) to introduce measures to help tide over the crisis by inducting the corporate debt restructuring (CDR) scheme, indirectly affecting the asset quality of commercial banks.