Non-Performing Assets (NPAs) of Foreign Banks in India in the Post Reform Era: An Analytical Study

Banks are the significant players in the Indian financial market. They are the biggest purveyors of credit and they also attract most of the savings from the people. The banks are continue to be the major leaders in the economy due to their sheer size and penetrative networks which assure them high deposit mobilization. They control nearly 80 per cent of the banking business in India, which acted as efficient partners in the growth and development of the country. The socialist ideologies and the welfare state concept driven by public sector banks have long been the supporters of agriculture and other priority sectors. They act as crucial channels of the government in its efforts to ensure equitable economic development.

The banking sector in India has undergone remarkable changes since the economic reforms initiated in 1991–92. The period has been marked by a slew of reforms in the sector, which provided the much needed impetus for the growth of the sector as a whole. The major reform initiatives during this period include deregulation of interest rates, adoption of prudential norms in terms of capital adequacy, asset classification and provisioning, lowering of reserve requirements in terms of Statutory Liquidity Ratio (SIR) and Cash Reserve Ratio (CRR), dilution of government equity holding in public sector banks, opening of the sector to private participation, permission to foreign banks to expand their operations through subsidiaries, introduction of universal banking, greater emphasis on risk management by allowing banks to participate in instruments such as interest rate swaps, cross country forward contracts, liquidity adjustment facility, liberalization of FDI norms in banks and the introduction of Real Time Gross Settlement (RTGS), among others. Those measures along with Reserve Bank of India's (RBI) efforts to adopt international banking standards and best practices as prescribed in the Basel Accords have no doubt helped enormously the banking industry to enter a new era. In February 2005, RBI had stated in its “Road Map for Presence of Foreign Banks in India” that it would revisit the policy in 2009 and explore allowing Foreign banks a larger play locally (giving national treatments and market access within WTO norms) subject to interests of all stakeholders. RBI has been much more liberal in its policies towards foreign banks vis-a-vis developed countries. Against such backdrop, the article evaluates the Non Performing Assets of Foreign Banks in India in the post reform period.