Growth from the people (Mohanty and Mahapatra, 2010) [2].

of banking is inevitable for social and economic development. They are the
biggest purveyors of credit and they also attract most of the savings from the
people (Mohanty and Mahapatra, 2010) 2. The modern banking, in addition to
intermediating function, also carry out many other financial services and
ventured into other financial markets including insurance, etc. The stability
and viability of commercial banking is synonym for sustainable economic
development. Banking distress leads to economic crisis. The post-liberalization
period observed an era of decontrolled system and reasonable pressure in
banking sector, leading to improved importance for asset quality for sustained reasonable
edge in the market. Even though financial institutions in general are controlled
by Reserve Bank of India, bank efficiency depends on the quality of credit risk
management followed by financial institutions. NPA management is measured crucial
for overall efficiency of banking sector. The best indicator for the health of
the banking industry in a country is its level of Non-performing assets (NPAs).
Reduced NPAs generally gives the intuition that financial institutions have toughened
their credit evaluation processes over the years and growth in NPAs employ the requirement
of provisions, which decreases the total profitability of banks (Prasad and
Veena, 2011) 3 .


P (2000) 4 documented the significance of non performing loans as one of the main
exhibit in explaining the bank level disparity in intermediation costs and
profitability throughout the financial liberalization phase. The economic disaster
in fact originate from banking crises due to higher levels of non performing
assets. Khan and Bishnoi (2001) 5 observed that banking crises subsist in
countries if the level of NPA touches 10% of GDP. NPA is a bug distressing the
economy. NPAs force banks in a different way including a decline in interest
spread (Brahmananda, 1999) 6, reduction of profitability and shareholder
value (Kaur and Singh, 2011) 7 and jeopardize the viability of the bank
(Micheal et al, 2006) 8. On one hand, it reduces the income earning capacity
of banks, at the same time, banks need to provision from their income towards
probable credit losses. The effect of NPA is not limited to bank alone, it
affect the economy, borrowers, creditors, industries, etc. At macro level, NPA
blocks the flow of funds to prospective borrowers and hence results in reduced
capital formation and economic activity. Also, higher levels of NPA force banks
to invest in risk free government securities and other investments. This also
results in reduced capital formation and economic activity.

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of NPA is one major objective promulgated in various reform measures since
post-liberalization period. Prudential measures on income recognition, asset
classification, provisioning, etc were carried out in order to control the NPA
in banking sector. Various committee’s (including Narasmiham Committee, Verma
Committee) were appointed to chalk out strategies and reform measures to manage
NPA. The reform process has shifted the focus of public sector dominated
banking system from social banking to a more efficient and profit oriented
industry (Ketkar and Ketkar, 2008) 9.


study on efficiency of NPA management is extensive folded. Some study explained
the efficiency of several recovery management measures, such as SARFAESI, Debt
Recovery Tribuals, Lok Adalats etc (Siraj and Pillai, 2012 10; Mahlawat and
Kajal, 2012) 11, while different studies also observed the comparative
efficiency of different bank groups in India and explaining their NPA levels
(Rajeev and Mahesh, 2010 12; Siraj and Pillai, 2012 13; Vallabh et al, 2007
14; Malyadri and Sirisha, 2011 15; Chaudhary and Sharma, 2011 16). Since
post-liberalization period, various studies have utilized NPA statistics while
assessing the relative efficiency of banks in India (Prabhakar, et al, 2012)
17. The reforms in post-liberalization period have led to the increase in
resource productivity, increasing level of deposits, credits and profitability
and decrease in non-performing assets (Badola and  Verma, 2006) 18. Indian banking system can argue
that their intensity of NPAs have recorded a declining tendency over a period
of time and which is parlance of international standards, with prudential
provisioning, classification (Chaudhary and Singh, 2012) 19.


results from many internal and external causes. The reasons for NPA are
classified differently; into systematic and situational causes (Istrate et al,
2007) 20 into overhand component and incremental component (Poongavanam,
2011) 21, into internal and external factors (Misra and Dhal. 2010; 22
Muniappan, 2002) 23, based on its effects (Islam, et al, 2005) 24. The
reasons classified into internal factors and external factors are more common
in literatures. NPA cannot be eliminated completely from the market; rather it
can be controlled and brought in to acceptable limits. Rawlin and Saran (2012)
25 found that Gross advances and NPA of banks have strong correlation and NPA can be predicated based on its
relationship with Gross advances. Studies also indicated the relevance of
directed lending mostly priority sector advances to generate NPA of banks
(Uppal, 2009) 26.