there Development Bank of India (SIDBI) and Industrial Investment

were five financial institutions (FIs) under the full-fledged regulation and
supervision of the Reserve Bank of India (RBI), viz., Export Import Bank
of India (EXIM Bank), National Bank for Agriculture and Rural Development
(NABARD), National Housing Bank (NHB), Small Industries Development Bank of
India (SIDBI) and Industrial Investment Bank of India (IIBI). However, IIBI is
in the process of voluntary winding-up. The Indian Financial Institutions
underwent significant and radical changes since liberalization movement in
1990’s. From a regulated banking system with social and national objectives
integrated into operations, banking sector moved to a deregulated regime with
increased competitive pressure. As observed by Hanson (2005)i
1, India began to reverse its long standing policies of financial repression
and banking sector intervention in favor of policies supporting a greater role
for the private sector in development, with more and better allocated credit.
The radical shift was inevitable, to address the weaknesses of banking sector
during pre-liberalization period and highlighted the requirement of
implementation of prudential norms and international best practices to
stimulate the banking sector. The regulatory authorities and various
committees’ revealed their concern over the deteriorating asset quality and
alarming level of Non Performing Assets (NPAs) in bank’s balance sheet. The
health code system on assessment of loan during pre-liberalization period, to a
greater extent, could not reveal the real quality of asset. This was also due
to the accounting practices that allowed banks to book interest on accrual
basis, thus hiding a proper differentiation between quality assets and bad
assets of banks. To improve the efficiency of banking sector and to enable it
to compete effectively in the world of globalization, liberalization and
opening up of market, banking across the world incorporated prudential norms
for income assessment, income classification and provisioning. In Indian
Banking sector, the reform measures initiated in the post-liberalization period
were part of broader structural adjustments policies in response to worsening
asset quality, inefficiencies in banking sector and focused mainly to develop a
vibrant and efficient banking sector.


institutions unlike other sector are considered as indispensable element for
social and economic development of India. The objective of financial
institutions in over the period is mainly focused on supporting government to
achieve the social and economic agenda. Indian financial system witnessed the
nationalization of banks in 1969 and regulated banking environment, primarily
focused to achieve social and economic development objectives of the
government. This was achieved through spreading bank branches, providing employment
opportunities, directed lending, regulated interest, etc. Even though banking
contributed significantly to support government in achieving its performance
objectives, bank’s performance was not satisfactory in terms of profitability
and quality of assets.

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primary aim of any business is to get profit. The ability of business to
generate income and compete effectively in market confirms the survival. It
also depends on how well the business maintains its assets and utilizes it for
generating revenue. Financial Institutions are not an exception to this. The
main focus of this study is to evaluate whether there has been improvements in
asset quality of the financial institutions under the full-fledged regulation
and supervision of the Reserve Bank of India during post-millennium period.
More specifically, we have discussed the trend in movement of various NPA
indicators, and to the extent to which it is managed. Such an analysis reveals
the effectiveness of various prudential measures incorporate since
post-liberalization period. The asset quality of banks/financial institutions
can be accessed through monitoring the trends in movement of NPA of banks. We
compare the trend in movement of NPA indicators of financial institutions under
the full-fledged regulation and supervision of the Reserve Bank. The study
utilized the NPA statistics is from 2008-2012.