there Development Bank of India (SIDBI) and Industrial Investment

therewere five financial institutions (FIs) under the full-fledged regulation andsupervision of the Reserve Bank of India (RBI), viz.

, Export Import Bankof India (EXIM Bank), National Bank for Agriculture and Rural Development(NABARD), National Housing Bank (NHB), Small Industries Development Bank ofIndia (SIDBI) and Industrial Investment Bank of India (IIBI). However, IIBI isin the process of voluntary winding-up. The Indian Financial Institutionsunderwent significant and radical changes since liberalization movement in1990’s.

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From a regulated banking system with social and national objectivesintegrated into operations, banking sector moved to a deregulated regime withincreased competitive pressure. As observed by Hanson (2005)i1, India began to reverse its long standing policies of financial repressionand banking sector intervention in favor of policies supporting a greater rolefor the private sector in development, with more and better allocated credit.The radical shift was inevitable, to address the weaknesses of banking sectorduring pre-liberalization period and highlighted the requirement ofimplementation of prudential norms and international best practices tostimulate the banking sector.

The regulatory authorities and variouscommittees’ revealed their concern over the deteriorating asset quality andalarming level of Non Performing Assets (NPAs) in bank’s balance sheet. Thehealth code system on assessment of loan during pre-liberalization period, to agreater extent, could not reveal the real quality of asset. This was also dueto the accounting practices that allowed banks to book interest on accrualbasis, thus hiding a proper differentiation between quality assets and badassets of banks. To improve the efficiency of banking sector and to enable itto compete effectively in the world of globalization, liberalization andopening up of market, banking across the world incorporated prudential normsfor income assessment, income classification and provisioning. In IndianBanking sector, the reform measures initiated in the post-liberalization periodwere part of broader structural adjustments policies in response to worseningasset quality, inefficiencies in banking sector and focused mainly to develop avibrant and efficient banking sector. ¬†Financialinstitutions unlike other sector are considered as indispensable element forsocial and economic development of India. The objective of financialinstitutions in over the period is mainly focused on supporting government toachieve the social and economic agenda.

Indian financial system witnessed thenationalization of banks in 1969 and regulated banking environment, primarilyfocused to achieve social and economic development objectives of thegovernment. This was achieved through spreading bank branches, providing employmentopportunities, directed lending, regulated interest, etc. Even though bankingcontributed significantly to support government in achieving its performanceobjectives, bank’s performance was not satisfactory in terms of profitabilityand quality of assets. ¬†Theprimary aim of any business is to get profit. The ability of business togenerate income and compete effectively in market confirms the survival. Italso depends on how well the business maintains its assets and utilizes it forgenerating revenue. Financial Institutions are not an exception to this.

Themain focus of this study is to evaluate whether there has been improvements inasset quality of the financial institutions under the full-fledged regulationand supervision of the Reserve Bank of India during post-millennium period.More specifically, we have discussed the trend in movement of various NPAindicators, and to the extent to which it is managed. Such an analysis revealsthe effectiveness of various prudential measures incorporate sincepost-liberalization period. The asset quality of banks/financial institutionscan be accessed through monitoring the trends in movement of NPA of banks.

Wecompare the trend in movement of NPA indicators of financial institutions underthe full-fledged regulation and supervision of the Reserve Bank. The studyutilized the NPA statistics is from 2008-2012.