Non performing assets in banking industry

1. BUSINESS ETHICS

2. 1. What is the problem? Why is it a problem?
A Non-performing asset (NPA) is well-defined as a credit facility in respect of which the interest
and/or installment of principal has remained ‘past due’ for an indicated period of time. In
simple terms, an asset is tagged as non- performing when it ceases to generate income for the
lender. A classification used by RBI that refer to loans that are in jeopardy of default. Once the
borrower has failed to make interest or principal payment for 90 days the loan is considered to be
a non-performing asset.
Non performing assets is a problem for the banks because-
 It reduces earning capability of the assets and as a result of this return on assets get
affected.
 Blocks capital: NPA’s carry risk weight of 100% (to the extent it is uncovered). Therefore
they block capital for maintaining Capital adequacy. As NPA’s do not earn any income,
they are badly affecting “Capital Adequacy Ratio” of the bank.
 While calculating Economic Value Added (EVA =Net operating Profit after tax minus cost
of capital) for measuring performance towards shareholders value creation, cumulative
loan loss provisions on NPAs s considered as capital. Hence, it increases cost of capital
and reduces EVA.
 Low yield on advances: Due to NPAs, yield on advances shows a lower figure than actual
yield on “standard Advances”. The reasons that yield are calculated on weekly average
total advances including NPAs
 This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest
rates will shoot up badly. Shooting of interest rates will directly impact the investors
who wish to take loans for setting up infrastructural, industrial projects etc.

3. 2. What should have been done, to avoid the problem? Why was it not done?
The plan for solving the problem of NPA focuses upon, revamping the corporate debt
restructuring (CDR) mechanism, creating a special resolution mechanism for the infrastructure
sector, setting up of a national asset management company, liberalizing norms to increase
capitalization of asset reconstruction companies, and improving the effectiveness of the
insolvency regime and implementation of legal framework. But because of political and legal
issues, the reforms were not made effectively. Both the RBI and commercial banks are taking
crucial steps to solve the NPA problem but the intensity of problem is too high so it will take
more time to solve this problem from the root.
3. What are the short term difficulties and long term benefits of following ethical
practices or best practices?
Businesses small and large must act ethically to protect themselves and their business
environments. Otherwise, they pose a threat to their employees, customers and communities.
A lack of business ethics endangers the future of your company, jeopardizes the public good
and can have many other negative effects on a business environment.
Some businesses unethically pursue temporary profits without considering the long-term
impact of their actions on the physical environment. For example, if timber companies fail to
plant trees to replace the ones they harvest, sooner or later the industry will destroy itself, as
well as the world. Ethical businesses, on the other hand, recognize that sustainable practices
maximize their future prospects and have the added benefit of minimizing environmental
damage.
Not following ethical practices in the business can create some problems for the company in
the short run but it will create a goodwill of the company in the long run, formation of sufficient
community development, sustainable behavior of profits, eliminate risk of recklessness. If
unethical business practices are prevalent, everyone in a business environment is at risk. For
example, if financially reckless companies fail to follow ethical accounting guidelines,
shareholders can’t make informed decisions. Consequently, some investors might lose

4. everything if a company’s true financial position is shakier than revealed. Similar risks exist even
on the level of small businesses. If a local company lies about its finances, its employees can’t
make informed decisions about their futures with the unstable company.
4. How does society ensure such problems do not recur, without affecting tax
revenues and employment?
The family is the primary social institution from which all other institutions are developed. The
society is a bigger forum where the child learn the social patterns, mannerism, multi-
dimensional individual and community value. The family carries its rituals, traditions. The
society caresses, transmits and preserve the age old racial culture, civilization and norms
through its members. The school owns special responsibility to enable the future generation to
up held the prized values which satisfied human desires.
In school, children are members of a small society that exerts a tremendous influence on their
moral development. Teachers serve as role model to students in school; they play a major role
in inculcating their ethical behavior. Peers at school diffuse boldness about cheating, lying,
stealing, and consideration for others. Though there are rules and regulations, the educational
institutions infuse the value education to the children in an informal way. They play a major
role in developing ethical behavior in children.
General Steps are: Accountability Role model & Helping and Appreciation
5. Your views and recommendations, based on your study of similar situations
elsewhere
Companies with a strong ethical identity tend to preserve a higher degree of stakeholder
satisfaction, positively prompting the financial results of the company, according to the Ethical
Investment Research Service. Conversely, lack of personal and professional ethics can lead to
negative financial results, as recently evidenced by the collapse of Wall Street firms. Risky loans
and questionable business practices put many banking and insurance firms in a hazardous
position. Ensuring ethical behavior at a company can help improve the company's economic

5. performance as people become more aware of companies' impact on the environment, they
want to do business with companies that reflect their values.
For example, if your production processes causes water pollution, you may be able to conduct
business in a cost-effective manner for the short term, but public opinion and pressure to
improve your impact on the environment may actually reduce your sales profit in the long run.
Avoid these situations by acting responsibly in the first place.