Loan Recovery and Asset Quality of Commercial Banks- An Empirical Analysis

Abstract

The recovery pcrfonnance of commercial banks is the sine qua non for their liquidity of funds. Loan recovery is the main the factor which dctennines the quality of loan assets of banks. The mounting overdues lead to high level of non perfonning assets (NPA) and thereby deteriorate the asset quality. ft consequently restricts the banks' lending capacity and stands in the way of dilution of funds to developmental activities and hence, the socio economic development of the area gets impacted. Thus, improving the quality of loan assets is the true test of improved efficiency of the banking system. The NPA of banks is an important criterion to assess the financial health of the banking sector. It reflects the asset quality, credit risk and efficiency in the allocation of resources to productive sectors. Since the refonn regime, there have been various initiatives to contain growth of NPAs of banks to improve the asset quality of the banking sector. Commercial banks have envisaged the greatest renovation in their operation with the introduction of new concepts like income recognition, prudential accounting nonns and capital adequacy ratio etc. which placed them in a new platfonn. The growing competition from internal and external constituents and sluggish growth in economy coupled with poor credit deposit ratio, the large volume of NPAs in the balance sheet and lack of automation and profcssionalization in operation have been flaring up the banking situation in the country. High level of NPAs in banks and financial institutions are a cause of worry to the public as bank credit is the catalyst for the economic growth and any bottleneck in the smooth flow of credit i·s bound to create adverse effect on economic development due to mounting NPAs (Sinha, 2006) 1 • The management is seriously concerned about the growing NPA menace, which is taking its toll on efficiency and profitability. NPAs are serious strain on the profitability because the banks cannot book income on such accounts. Further, they are required to charge the funding cost and provision requirement to their profits. High levels of NPAs adversely affect the financial strength of banks and enforce the government to recapitalize the weak banks from time to time. On the other hand, the banks have failed to confonn to stringent international standards