There is every possibility of suffering financial losses as well as morally losing reputation if any entrepreneur does not adhere to the basic parameters of financial discipline in his business. As long as he does not avail any finical assistance any losses incurred out of his business on account of his imprudence shall affect him only and not anybody else. Banks are also a business entity like any other business with some sort of inherent risk. But these risks are different than other business organization. In other words they are highly leveraged and the borrower money runs their entire business from the depositors. The deposits collected from the customers rate not bank’s own property. As authorized by the Reserve Bank Of India, the collected deposits are required to be deployed in a prudent manner for the economic growth upliftment of the down trodden and common man. If the Bank conducts its business without exercising the required prudence not only the banks suffers the losses wiping out, the owner’s capital but also detrimental to the interest and stability of the entire financial sector affecting adversely the potential economic growth of the country.

Due to failure of Banks in European countries and America, the World Bank and the international companies have constituted Basle Committee (Basle Committee for Banks International Settlement (BIS). The committee has prescribed certain capital adequacy standards to be followed by commercial banks and these standards have been accepted for implementation by several countries. The BIS standard, as it is popularly known essentially cover three aspects of the banking parameters i.e. the adequacy of capital and reserve of the bank in relation to the risk it is expose to in its lending operations, the quality of its lending i.e. the assets it has created and consequent guidelines for provisioning of assets of bad and doubtful quality, recognition of income that the assets generate so as to five the true and correct picture of the profitability of the banks. The limits to which a bank should expose itself to a single party also form part of the prudential norms.

In India too the need was felt and a committee under the chairman-ship of Shri. Narasimham, Ex-Governor RBI was appointed. This Narasimham Committee recommended far reaching changes in the financial sector as a whole and banking system in particular to be implemented for the accounting year 1992-93. Since then there have been dramatic changes in the banking sector and conceptual shift is seen in banking philosophy.

Thinking about the Non Performing Assets following factors constitute to NPAs.

• Delay in sanctioned disbursement of funds whereby borrowing units are starved of funds when in need.
• Inadequate of funds
• Slackness on the part of credit management staff who fail to detect and prevent diversion of funds in the post disbursement stage.
• Working capital funds are used to acquire fixed assets, thereby disturbing the working capital cycle and funds block up in fixed assets.
• Sanctioning authority succumbing to external pressure of Chief Executive Officer and ineffectiveness of the board to check in time.
• Recession, praise escalation, change in government policies, inputs, power shortage etc.
• Siphoning of funds through frauds/ misappropriation.

NPAs are better avoided at the initial stage of credit consideration by appropriate credit appraisal pre and post lending inspection of the securities, movement of securities, borrowers stand should be in the interest of viability of the banking system on which they are dependent. They should resist all temptations to divert bank funds for uses other than for which they are sanctioned. They need to change their mindset so that a culture of proper utilization of credit facilities and timely repayment is developed. Banks too on their part should be vigilant to detect and prevent diversion of funds, as any failure in this front is a potential source of NPAs.