CHAPTER- 3

REVIEW OF RELATED LITERATURE & RESEARCH METHODOLOGY

CHAPTER INDEX
No. Content of the Chapter Page No.
3.1 Introduction 86
3.2 Review of Related Literature 86
3.3 Research Gap and Research Problem Statement 108
3.4 Research Methodology 109

85
 CHAPTER- 3
REVIEW OF RELATED LITERATURE & RESEARCH METHODOLOGY

3.1 Introduction:
The process of reviewing the literature helps the researcher to understand the
subject area better and thus helps him to conceptualize his research problem clearly
and precisely. It also helps to understand the relationship between their research
problem and the body of knowledge in the area.
How does answers to researchers questions compare with what others have
found? What contribution have researcher been able to make in to the existing body of
knowledge? How are researchers findings different from those of others? For
researcher to be able to answer these questions, he needs to go back to literature. It is
important to place the researchers findings in the context of what is already known in
his field of inquiry. 1

3.2 Review of Related Literature:

For the purpose of research of NPAs in banking industry the researcher has
reviewed several thesis, reports, books and articles from the journals of national as
well as international repute. From this study the researcher has found out several
important topics which are mentioned as the review of the literature hereunder:

Ammannaya, K.K. (2004)2 concludes that future of PSBs will depend on their
alertness operational efficiency, customer orientation and standard of customer
service, creation of large volumes of performing assets, attainment of optimum levels
of productivity, profitability and overall performance. Those banks which are pro-
active and which quickly respond to changing customers needs and which give
adequate attention to the factors indicated above alone can survive successfully face
the emerging challenges perform well and prosper.

Angadi, Ansuya and Kumar, Ashwin (2007)3 have stated that NPAs are posing a
great problem for not only public sector banks but also for the whole banking system.

1
Kumar, Ranjit (2005), Research Methodology- A Step-by Step Guide For Beginners, Pearson
Education, Singapore, 2nd Edition, p.55
2
Ammannaya, K.K. (2004), Indian Banking: 2010, IBA Bulletin, Special Issue, Vol. XXVI, No. 1
(January), pp. 156-160
3
Angadi, Ansuya and Kumar, Ashwin (2007), [email protected], Edited book New Trends in
Risk Management, RBSA Publishers, Jaipur, pp. 63-78

86
They have described that the lenders have been making every possible efforts for
recovery of NPAs but because of Indian legal system they have failed to recover the
NPAs. They have suggested that the banks should follow the capital adequacy norms
for reduction of NPAs and improving profitability.

Arora, Usha (2000) 4 suggests that the Indian banks must achieve the level of
international standards in NPA management. In the long run, only better credit
management in terms of appraising and monitoring of loan assets can only solve the
problem of NPAs in Indian banks. By doing these Indian banks can maintain the pre-
eminent position in the global set up.

Arora, U., Vashisht, B. and Bansal, M. (2009) 5 analysed and compared the
performance of credit schemes of selected banks for the last five years. The study
found a positive relationship between total loan disbursement and total non-
performing assets outstanding of selected banks.

Banerjee, B. and Dan, A.K. (2006)6 observed that non-performing assets are one of
the problem areas which require attention for improvement in the management of
PSBs and their profitability. The present scenario shows that the NPAs of PSBs are
increasing very speedily. These NPAs cost the economy in several ways. First, the
government has to bail out banks with budgetary provisions periodically and
ultimately taxpayers bear the cost. Secondly, money borrowed for investment, if not
utilized properly, affects the creation of assets and the growth of economy is
endangered. The author has suggested several strategic measures to control NPAs of
PSBs.

4
Arora, Usha (2000), NPA Management in the Indian Environment, The Banker, Vol. 47, no. 4,
April, 2000, pp. 27-29
5
Arora, U., Vashisht, B. and Bansal, M. (2009), An Analytical Study of Growth of Credit Schemes
of Selected Banks, The ICFAI University Journal of Services Marketing, Vol. VII, no. 1, March,
2009, pp.51-65
6
Banerjee, B. and Dan, A.K. (2006), Management of Non-performing Advances in the Public Sector
Banks in India, New Trends in Corporate Reporting (Edited Book), RBSA Publishers, Jaipur, pp. 115-
137

87
Bhagwati, Jaimini (2011)7 reviewed that the worries about global financial market
have been increasing because in US the bankers have postulated Tier-I capital
requirement should be raised to 9% of risk weighted assets. This will lead to reduction
in lending. Assessment for China conducted by World Bank and IMF indicates that
there has been increasing in the vulnerabilities in the financial sector. Credit rating
agencies in India have downgraded the SBI and have put it in the negative list because
of mounting NPAs. From the analysis it is concluded that private sector banks
performed better than PSBs in terms of recovery of loans and advances.

Bhatia (2007)8 explored an empirical approach to the analysis of NPAs of public,

private and foreign banks in India. NPAs are considered as an important measuring
rod to judge the performance and financial health of banks. The level of NPAs is one
of the drivers of financial stability and growth of the banking sector. It was observed
that the NPA affects the banks on micro and macro level.

Bhosle, J. and Tiwari, D. (2011)9 reviewed that the countrys largest lender, SBI, is
aggressively marketing its gold loan scheme for farmers to prevent defaults after the
agriculture sector witnessed the sharp spike in bad-debt in the past one year. Other
banks are also promoting gold loans just to avoid bad-debts and to get good security
against the loans.

Biswas, P.K. and Reb, A.T. (2004)10 analyzed the process leading to formation of
high levels of NPAs in Indian Public sector banks. The paper discusses the random
and non-random reasons of NPA formation in PSBs. The study observes a number of
reasons for the generation of NPAs which are important and peculiar to India. The
paper also presents a critical evaluation of the series of policy measures that have
been adopted to improve the NPA scenario since liberalization. The study concludes

7
Bhagwati, Jaimini (2011), Indian public sector banks: pitfalls ahead, Business Standard, 18th
November, 2011, Volume XI, Number 188, pp. no. 11
8
Bhatia (2007), Non-Performing Assets of Indian Public, Private and Foreign Sector Banks: An
Empirical Assessment, ICFAI Journal of Bank Management, Vol. 6, no. 3, pp. 7-28
9
Bhosle, Jayashree and Tiwari, Dheeraj (2011), Hit by NPAs, PSBs Now Offer Gold-Backed Farm
Loans, The Economic times, December 16, 2011, pp. 18
10
Biswas, P.K. and Reb, A.T. (2004), Determinants of NPAs in the Indian Public Sector Banks: A
Critique of Policy Reforms, IUP Journal of Bank Management, Vol. 3, no. 3, August, 2004, pp. 11-41

88
that the high degree of NPA is due to the malfunctioning of banking institutions in
India.

Bodla, B.S. and Verma-Bajaj, Richa (2010)11 analyzes the efficiency of 29 private
sector banks with the data set ranging from the period 1998-99 to 2005-06. The
researchers have thrown the lights on the limitations of ratio analysis technique.
Considering the limitations of ratio analysis technique the researchers have used
production approach of Data Envelopment Analysis (DEA) to judge the efficiency of
private sector banks. In this model, banks are considered as service providers and
while interest expenses, non-interest expenses and Non- performing assets ratio, i.e.
net NPA to net advances are considered as input variables, deposits, advances and
investments are considered as the output variables. The results of this study shows
that a majority of private sector banks in India need to take steps to decrease the NPA
level and improve their output parameters such as deposits, advances and investments
because they have failed to acquire full efficiency in all these years of study.

Chari, P.S.V. and Narasimham, P.S. (2002)12 revealed that among various other
aspects of performance of co-operative banks, recovery performance is the major
eligibility criterion for co-operatives to obtain re-finance from the apex bank. NPAs
impair their capacity to obtain re-finance. The increase in quantum of NPAs would
out do the actual expansion of credit in real money terms.

Chaudhary, Kajal and Sharma, Monika (2011) 13 compared the performance of

public sector and private sector banks in India. It is observed that most of the changes
in the functioning of banks have taken place only after liberalization, globalization
and privatization. The result of such changes is visible now. The result is mounting
NPAs in these banks. The author has compared the trends of NPAs in public and
private sector banks using statistical tools. It was concluded that the economic
reforms have adversely affected the profitability of banks.

11
Bodla, B.S. and Verma-Bajaj, Richa (2010), An Analysis of the Efficiency of Private Sector Banks
in India, IUP Journal of Bank Management, Vol. IX, no. 1,2, February-May, 2010, pp. 60-82
12
Chari, P.S.V. and Narasimham, P.S. (2002), A Priscription for Good Credit Management, The
Hindu (Chennai), January, 3, pp. 1 (BS)
13
Chaudhary, Kajal and Sharma, Monika (2011), Performance of Indian Public Sector and Private
Sector Banks: A Comparative Study, International Journal of Innovation, Management and
Technology, Vol. 2, no. 3, June, 2011, pp. 249-256

89
Das, S. and Bose, S.K. (2005)14 elaborated while there have been several schemes in
the past to facilitate the recovery from NPAs, the success of such efforts in terms of
NPAs reduction has been far from satisfactory. It was hoped that SARFAESI Act
would greatly help banks to reduce and recover money from NPAs. Nonetheless, the
recent developments have also brought out the limitations of the act, thereby creating
apprehensions amongst banks and financial institutions.

Dash, M.K. and Kabra, G. (2010)15 discussed that the purpose of this research is to
analyze the sensitivity of Non-performing loans to macroeconomic and bank specific
factors in India. In particular, it employs regression analysis and a panel of data set
covering 10 years (1998-99 to 2008-09) to examine the relationship between non-
performing loans and several key macroeconomic and bank specific variables. The
researchers concluded that both bank specific and macroeconomic factors impact on
the loan portfolios of commercial banks in India. It is also concluded that there is
positive relationship between nonperforming loans and real effective exchange rate.
This makes that deterioration in international competitiveness of the local economy
may result in higher levels of NPAs.

Garg, I.K. (1997)16 states that banks encounter various risks such as credit risk,
liquidity risk, interest rate risk and currency risk. Out of them credit risk and liquidity
risk are dealt with properly but interest rate risk and currency risk are new to Indian
banks.

Georgekutty, V.V. (2000)17 described that the lending capacity of the banks is
adversely affected due to their inability to recycle the resources or to raise more
resources from higher financing agencies. Any liquidity crisis in co-operative banks
will subsequently hinder capital formation in agriculture, which will decelerate the
economic development.

14
Das, S. and Bose, S.K. (2005), Risk Modeling- A Markovian Approach, The Alternative, Vol. IV,
no. 1, March, 2005, pp. 22-27
15
Dash, M.K. and Kabra, G. (2010), The Determinants of Non-Performing Assets in Indian
Commercial Bank: An Econometric Study, Middle Eastern Finance and Economics, no. 7, pp. 94-106
16
Garg, I.K. (1997), Risk Analysis in Banking Management, SBI Bulletin, Vol. XXXVI, no. 4,
April, 1997, pp. 305-314
17
Georgekutty, V.V. (2000), Non-performing Assets in Agricultural and Rural Development Banks,
Indian Commerce Bulletin, Vol. 4, no.1-2, pp.108-116

90
Gokhale, Nihar (2011)18 observed that the future prices of selected bank stocks
crashed because of the fear of rising non-performing assets and high interest rates
turned sentiment against the sector. The banks like SBI, ICICI, AXIS and PNB have
higher non-performing loans. This has affected the share prices of these banks.

Goyal, Krishna and Agrawal, Sunita (2010)19 described that the fast changing
financial environment exposes the banks to various financial risks. The banking
industry is passing through a process of change. The changes like rising global
competition, increasing deregulation, introduction of innovative products and delivery
channels expose the banks to the risk of NPA. The solution to this risk is only the
ability to measure the risk and take appropriate position. Besides this, the paper
throws light on the challenges and opportunities regarding implementation of Basel-II
in Indian banking.

Gujarat Samachar Daily (2011)20 published that increasing interest rates and
slowdown in the production have increased NPAs of PSBs in the last three months.
The steps taken by RBI to control inflation have adversely affected the NPAs of
PSBs. Moreover, adversities in the domestic infrastructure have lowered down the
production, which is also a reason for increase in NPAs. The NPAs of PSBs have
increased to Rs. 16,172 crores during the quarter ending on September 30, 2011,
which is higher than the total NPAs of the previous year.

Gupta, S. and Kumar, S. (2004)21 analyzed that redeeming features of banking sector
reforms is the continuing fall in gross and net NPAs as a proportion of total assets for
all bank groups except private sector banks. Huge backlog of NPAs needs resolution
of the earthiest as otherwise it can weaken the foundation of entire financial system.

18
Gokhale, Nihar (2011), Big Banks Face the Hit as Investors Short Future, The Economic Times,
December 20, 2011, pp. 5
19
Goyal, Krishna and Agrawal, Sunita (2010), Risk Management in Indian Banks: Some Emerging
Issues, The International Journal of Economic Research, December, 2010, pp. 102-109
20
Gujarat Samachar Daily (2011), Jaher Kshetra ni bankoni NPA ma toting vadharo, 18 th
November, 2011, p. 08
21
Gupta, S. and Kumar, S. (2004), Dimensions and Prospectus of Non-performing Assets:
Challenges Before the Banking Sector Reforms in the New Millennium, Edited Book Banking in the
New Millennium, pp. 279-291.

91
Husan, Huzaifa (2011)22 stated that the banking sector is the sector to avoid for FIs,
because there are more loans which will turn NPAs in the near future. Through his
article he has given negative remarks to banking sector for FIs as the risk of NPAs is
going to increase day-by-day.

Jain, Jayanth lal and Balachandran, K. (1997)23 described that the loss of income
from NPAs not only brings down the level of income of the banks but also hinders
them from quoting finer PLR. Thus, the foremost concern of banks is how best to
reduce the share of NPAs to total advances but also the level of NPAs, though they
are familiar with non-payment risk.

Jatna, Renu (2009)24 reviewed that the root cause of increasing NPAs in public sector
banks is malfunctioning of the banks. This malfunctioning led to the setting up of
Narasimham Committee which, in fact, identified the NPA as one of the possible
effects of the malfunctioning of PSBs. According to RBI report, 1999 it was stated
that the reduction in NPA should be treated as a national priority.

Jaysree, M. and Radhika, R. (2011)25 studied the trends in non-performing assets of

Indian banks and made a comparison of public sector banks, old private sector banks,
new private sector banks and foreign banks. The article attempted to establish
relationship between net profit and NPAs and total advances. It was concluded that
the increasing level of NPAs is a serious matter of concern for Indian banking sector.

Jilani, Rashid (1999)26 points out that the quantum of NPA in public sector banks in
India is quite large. It indicates the fundamental weakness of Indian PSBs. This
cannot be indicative of any systematic risk and we cannot consider Indian banking as
unsound.

22
Husan, Huzaifa (2011), Foreign Investors Will Wait For Clarity on Rupee, The Economic Times,
Dec. 5, 2011, pp. 7
23
Jain, Jayanth lal and Balachandran, K. (1997), Managing Financial Risks in Banking, The
Banker, August, 1997, pp. 23-33
24
Jatna, Renu (2009), Impact of NPAs on Profitability of Banks, Indian Journal of Accounting, Vol.
XXXIX, no. 2, June, 2009, pp. 21-27
25
Jaysree, M. and Radhika, R. (2011), Non-Performing Assets: A Study of Scheduled Commercial
Banks in India, International Journal of Research in Commerce, Economics and Management, Vol. 1,
no 1, May, 2011, pp. 60-63
26
Jilani, Rashid (1999), Non Performing Assets: Issues and Prospects, IBA Bulletin, Vol. XXI, no.
8, August, 1999, pp. 8-13

92
Kakker, Rajendra (2005)27 opined that a high level of NPAs in banking system can
severely affect the economy in many ways. He has emphasized the active role of
ARCs in managing NPAs in Indian banking system. To relieve Indian banks from the
clutches of NPAs, the ARCs can play an effective role.

Kamath, K.R. (2012)28, chairman and M.D. of Punjab National Bank, said in his
interview that the PNB is not worried about bad assets going up as banking is a
business of taking risks and the formation of NPAs is an integral part of banking. He
said If I shy away from NPA, probably I will shy away from sanctioning loans also.

Karunakar, M., Vasuki, K. and Saravanan, S. (2008)29 have concluded that the
problem of NPAs in Indian banking sector has become critical mainly after the
economic reforms in India. They have found out various factors contributing to NPA.
They have found out the magnitude of NPA in Indian banking sector. They have
explained various reasons for high NPA and their impacts in Indian banking
operations. They have also discussed the capital to risk weighted assets ratio of public
sector banks. They have also given certain suggestions for managing the credit risks
and measures to control the problem of NPAs. According to them the ultimate
solution of the problem is only with proper credit assessment and risk management
mechanism.

Kaur, H. and Pasricha, J.S. (2004)30 highlighted the problem of non-performing

assets in public sector banks. The study covered the prudential norms given by RBI
and also analysed the NPA management policies of public sector banks. Authors
suggested that for effective handling of NPAs, there is an urgent need for creating
proper awareness about the adverse impact of NPAs on profitability amongst bank
staff, particularly the field functionaries. Bankers should have frequent interaction and
meeting with the borrowers for creating better understanding and mutual trust.

27
Kakker, Rajendra (2005), NPA Management- Role of Asset Reconstruction Companies, The
Chartered Accountant, May, 2005, pp. 1522-1527
28
Kamath, K.R. (2012), Bad Loans are an Integral Part of Banking, Bankers Trust (special edition
of Mint Daily), January, 2012, pp. 38-39
29
Karunakar, M., Vasuki, K. and Saravanan, S. (2008), Are non-performing assets gloomy or
greedy from Indian perspective?, Research Journal of Social Sciences, Vol. 3, pp. 4-12
30
Kaur, H. and Pasricha, J.S. (2004), Management of NPAs in Public Sector Banks, Indian Journal
of Commerce, Vol. 57, no. 2

93
Kaur, Harpreet and Saddy, N.K. (2011)31 have prepared the comparative analysis of
nonperforming assets of public &private sector banks. In this article, she has
discussed the issue of non-performing assets at length for financial system all over
India. According to her, the problem of NPAs is not only affecting the banks but also
the whole economy. In fact the high level of NPAs in Indian economy is nothing but
the reflection of the state of health of the industry and trade. In her article, she has
studied various aspects of NPAs in the banking sector of India. She has given the
meaning of NPAs in this article. She has explained various factors contributing the
growth of NPAs in the Indian banks. The article also brings out the magnitude of
NPAs in the banks. She has explained various reasons of high NPAs and their impact
on Indian banking operations and the economy. In this article she has studied the
capital to risk weighted assets ratio of the public and private sector banks. She has
also discussed the management of credit risk and measures to control the problem of
NPAs.

Kaveri, V.S. (2001)32 studied the non-performing assets of the various banks and
suggested various strategies to reduce the extent of NPAs. In view of the steep rise in
fresh NPA advances, credit should be strengthening. RBI Should use some new
policies/strategies to prevent NPAs. Other strategies to prevent the NPAs are stock
inspection, study of ledger book transactions, scrutiny of periodicals statements and
discussions with borrowers and co-bankers.

Kaveri, V.S. (2002)33 studied the developments not only in the recovery and
prevention of NPAs but also suggested future strategies. She has described nine legal
measures and eight non-legal measures to reduce NPAs effectively. Besides the legal
and non-legal measures, sincerity and hard working along with professional approach
on the part of bank management may help to recover the NPAs.

31
Kaur, Harpreet and Saddy, N.K. (2011), A Comparative Study of Non-Performing Assets of Public
and Private Sector Banks, International Journal of Research in Commerce and Management, Vol. 2,
no. 9, September, 2011, pp. 82-89
32
Kaveri, V.S. (2001), Prevention of NPAs Suggested Strategies, IBA Bulletin, Vol. XXIII, no. 8,
August, pp. 7-9.
33
Kaveri, V.S. (2002), Recovery from NPAs: Emerging Challenges, The Chartered Accountant,
April, 2002, pp. 1192-1196

94
Khan, M.Y. and Bisnoi, T.R. (2001)34 stated that NPAs affect the economy both at
the macro and micro levels. At the macro level, alarming degrees of NPAs have a
detrimental effect on the macro economy. A high level of NPAs or loss, eliminating
fully or partially the banks capital could cause significant banking crisis or banking
distress. Banking crisis exists in the country if the level of NPAs touches 10% of
GDP.

Khurana, A. and Singh, M. (2010)35 studied that seven out of eight new private
sector banks have significantly reduced the net NPAs to net advances ratio and fall in
the category of less than 2% class. The new private sector banks have managed to
sustain CRAR above the regulatory framework of Basel-II requirements.

Kotnal, J.R. and Naikwadi, I.A.M. (2010)36 studied the level of NPAs in the two co-
operatives banks of Bagalakot, Karnataka. They found that the levels of NPAs in
these banks were increasing rapidly. They have made suggestions like up gradation of
assets, compromise settlement, and recovery through legal recourse to reduce NPAs.

Krishna, A.R. (2008)37 analysed the trend of NPA in the last five years and suggested
measures to reduce them. The reform measures and policy initiative have resulted in
reducing the level of NPAs in Indian commercial banks. The category-wise analysis
showed that the PSBs have higher level of NPAs in comparison to private and foreign
banks.

Krishnamurthi, C.V. (2000)38 states that the mounting NPAs is harmful for the public
sector banks. It is seen that the gross NPAs of PSBs are rising very heavily. In banks
the NPA curves vary between a gross of Rs.39,253 crores in 1992-93 to Rs.45,653
crores in 1997-98.

34
Khan, M.Y. and Bisnoi, T.R. (2001), Banking Crisis and Financial Reforms: Lessons for India,
Chartered Secretary, January, 2001, pp. 44-48
35
Khurana, A. and Singh, M. (2010), NPA Management: A Study of New Private Sector Banks in
India, Indian Journal of Finance, Vol.4, no.9, pp. 3-13
36
Kotnal, J.R. and Naikwadi, I.A.M. (2010), A Study on Managing of Non-performing Assets in
Distrct Central Co-operative Bank, ELK: Journal of Finance and Risk Management, Vol. 2, no.1,
Dec., 2010, pp. 201-206
37
Krishna, A.R. (2008), An Analysis of NPA in Indian Commercial Banks-What Ails Non-
performing Assets, Journal of Commerce & Trade, Vol. 3, no. 1, April, 2008, pp. 5-10
38
Krishnamurthi, C.V. (2000), Non-performing Assets- Banks and Financial Institutions: NPAs
Plaguing National Economy, Southern Economist, Vol. 38, no. 5, July, 2000, pp. 19-20

95
Krishnamurthy, N.S. (1994)39 expressed the view that the public sector banks will
always have an edge with regard to those investors for whom security and liquidity
are the most important factors. The rate of return is also important these investors. So,
marginal shift of funds need not cause undue concern or alarm for the PSBs.

Kumar, R. (2000)40 concludes that if NPA recovery rate is high, further disbursement
would be automatically high. However, if NPA rise beyond the manageable limits, the
health of the banking system would be jeopardized and the recycling of funds which
is the key element in development would be severely stilled. An effective monitoring
and control, aided by proper legal reforms would change the contours of NPAs in
Indian banking on par with internal standards and build resilience for stronger and
vibrant financial system to realize the objectives of the reforms measures
implemented so far.

Kumar, Sanjay (2000)41 in a study relating to non-performing assets in regional rural

banks states that high level NPA reduces the risk taking ability of the bank. It also
affects the credit rating of the bank thereby restricting its ability to approach the
public for capital subscription, which will ultimately affect the financial health of the
banks.

Lall, S.B. (2011)42 stated that the most crucial factor that governs the performance of
banks is health of its credit portfolio level of non-performing assets of the total loan
assets of public sector banks. In offset of financial sector reforms the level of NPA is
continuously increasing. NPA acts as a drag on the banks profitability and inhibit their
lending decisions. The author concluded that the PSBs should adopt some strategies
for reducing NPAs.

39
Krishnamurthy, N.S. (1994), Financial Disintermediation, IBA Bulletin, Vol. XIV, no. 3, March,
1994, pp. 12-14
40
Kumar, R. (2000), NPA Management for Better Banking, Proceedings of the Bank Economist
Conference, 2000, pp. 68-73
41
Kumar, Sanjay (2000), Non-performing Assets in Regional Rural Banks: Impact and
Management, The Management Accountant, Vol. 35, no. 11, November, 2000, pp. 855-860
42
Lall, S.B. (2011), NPA: An Iceberg, New Trends in Financial Management (Edited Book), RBSA
Publishers, Jaipur, pp. 314-320

96
Makwana, Minal (2010)43 threw a light on the NPA management in banks. She has
under taken a comparative research on public sector and private sector banks in India,
as a part of her M. Phil. Degree. She analysed the financial performance, situation of
NPAs for the period from 2005 to 2009.

Mehta, Sangita (2011)44 reviewed that the finance ministry is driving the capital-
strapped public sector banks to hasten recovery of bad loans to improve their health.
The finance minister has established DRT across the nation for the recovery of bad
loans. But these DRTs are not efficient at the recovery of loans because of several
reasons such as lack of presiding officers and recovery officers. Also judges are
taking longer than six months to dispose of cases even as the DRT Act stipulates them
to do so within six months. So, the amount of bad loans in PSBs is the matter of
serious concern.

Menon, Shailesh (2012)45 stated that slower growth and high interest rates have taken
a toll on many mid-sized companies. Close to 188 companies rated by CRISIL have
failed to either service interest on borrowings or repay the principal amount on time.
More than a dozen of these are listed companies. Most of these companies have not
been able to repay funds in the range of Rs.50 crores to Rs.300 crores. Even leading
micro finance institutions like Spandana Sphoorty and Ashmita Microfin also failed to
meet their repayment commitments last year. These companies rated by CRISIL,
Indias largest credit rating agency, have a combined debt outstanding of Rs.20,000
crores.

Muniappan, G.P. (2002)46 studied paradigm shift in banks from a regulator point of
view. He concluded the positive effect of banking sector reforms on the performance
of banks. He suggested many effective measures to strengthen the Indian banking
system. The reduction of NPAs, more provisions for standards of the banks, IT, sound

43
Makwana, Minal (2010), A Comparative Analysis of Selected Public Sector and Private Sector
Banks in India, M. Phil. Dissertation, Saurashtra University
44
Mehta, Sangita (2011), State Owened Banks Told To Fast-Track Bad Loan Recovery, The
Economic Times, Dec. 12, 2011, p. 1
45
Menon, Shailesh (2012), Around 188 companies default on Loans, The Economic Times, April,
17 2012, p.1
46
Muniappan, G.P. (2002), Indian Banking: Paradigm Shift- A Regular Point of View, IBA
Bulletin, Vol. XXIV, no. 3 (March), pp. 151-155

97
capital bare are the positive measures for a paradigm shift. A regulatory change is
required in the Indian banking system.

Murli, S. and Sadasivan, B. (2001)47 described that the skill of managing the credit
risk is very important for the effective and efficient functioning of any financial
institution. With the adoption of international norms of income recognition, and assets
classification many public sector banks in India find themselves burdened with huge
loads of NPAs.

Pacha, M. and Sirisha, S. (2011)48 examined the state of affairs of the NPAs of
public and private sector banks in India with special reference to weaker section. It
examined the trend of NPAs in weaker sections in both public sector and private
sector. The study observed that the public sector banks have achieved a greater
penetration in the weaker section as compared to the private sector banks but this has
resulted into the increase of NPAs in PSBs.

Pal, V. and Malik, N.S. (2007)49 examined the difference in financial characteristics
in public, private and foreign sector banks based on factors such as profitability,
liquidity, risk and efficiency. The analysis reflected that foreign banks proved to be a
high performer in generating business with a given level of resources and they are
better equipped with managerial practices and in terms of skills and technology. The
public sector banks emerged as the next best performer after foreign banks.

Pathrose, P.P. (1998)50 holds the view that the introduction of straight NPA norms
and the standardization of provisioning requirements changed the situation of NPAs
of Indian banks. Revised disclosure norms and new accounting standards along with
the mounting provisions for NPA is a cause of reduction in the profitability of the
banks.

47
Murli, S. and Sadasivan, B. (2001), Indian Banking Industry: A Paradigm Shift, The Management
Accountant, Vol. 36, no. 5, May, 2001, pp. 338-341
48
Pacha, M. and Sirisha, S. (2011), A Comparative Study of Non Performing Assets in Indian
Banking Industry, International Journal of Economic Practices and Theories, Vol. 1, no. 2, October,
2011, pp. 77-87
49
Pal, V. and Malik, N.S. (2007), A Multivariate Analysis of the Financial Characteristics of
Commercial Banks in India, The ICFAI Journal of Bank Management, Vol. VI, no.3
50
Pathrose, P.P. (1998), Profit Planning by Banks, IBA Bulletin, Vol. XX, no. 12, December, 1998,
pp. 28-32

98
Poongavanam, S. (2011)51 highlighted that in recent times the banks have become
very cautious in extending loans, this is due to mounting non-performing assets.
Therefore an NPA accounts not only reduces profitability of banks by provisioning in
the profit and loss account, but their carrying cost is also increased which result in
excess and avoidable management attention. A high level of NPA also put strain on
the banks net worth because banks are under pressure to maintain a desired level of
capital adequacy and in the absence of comfortable profit level, banks eventually look
towards their internal financial strength to fulfill the norms, thereby slowly eroding
the net worth.

Prajapati, Pradip (2003)52 has stressed that the NPAs are the menace to the co-
operative banks in India. According to him government policies are responsible for it.
He has emphasized the internal audit and external audit in co-operative banks to
control NPAs. He has warranted some urgent steps to be taken by the government as
well as co-operative banks to control the mounting NPAs.

Prasad, M., Sinha, K.K. and Prasad, K.M. (2004)53 examined that NPAs has direct
relation to the behavior of the economy as a whole. The increase in quantum of NPAs
should not cause a panic, since every year more than Rs.10,000 crore is realized in
NPA accounts. The government of India and the RBI has taken various steps in
strengthening the functioning of DRTs and evolving a comprehensive settlement
policy, which will certainly speed up the recovery in NPA accounts.

Raghavan, R.S. (2003)54 said that Indian banking system was working in a regulated
environment and hence, the banks were not exposed to the risks. But especially after
deregulation, the Indian banks are exposed to various types of financial and non
financial risks. The researcher has considered main three categories of risks viz.
Credit Risk, Market Risk and Operational Risk. Besides that the researcher has

51
Poongavanam, S. (2011), Non-performing Assets: Issues, Causes and Remedial Solutions, Asian
Journal of Management Research, Vol. 2, no. 1, pp. 123-132
52
Prajapati, Pradip (2003), Sahakari Banko No Suryasta?, Arthasankalan, issue no. 4, April, 2003,
pp. 111-114
53
Prasad, M., Sinha, K.K. and Prasad, K.M. (2004), Post-reform Performance of Public Sector
Banks with Special Reference to Non-performing Assets, Edited Book Banking in the New
Millennium, pp. 259-267
54
Raghavan, R.S. (2003), Risk Management in Banks, The Chartered Accountant, February, 2003,
pp. 841-851

99
developed some other categories of risk such as Regulatory Risks and Environmental
Risk. The researcher has presented various tools and techniques to manage credit risk,
market risk and operational risk. The author has also checked effects of Basels New
Capital Accord and Role of Capital Adequacy, risk aggregation and capital allocation
and risk based supervision in managing risks in banking sector.

Raiyani, J.R. (2011)55 investigated the technical efficiency of Indian banks,

segmented in terms of ownership. For this purpose, the data envelopment analysis
(DEA) model was used with five input variables and four output variables and the
efficiency scores were calculated for a sample of 49 major banks operating in India.
The result of the study showed that foreign banks were slightly more efficient than
public and private banks and that there was not much of the difference in the
efficiency of the public and private banks.

Rajender, K. (2009)56 stated that the issue of mounting NPA is a tough challenge to
public sector banks. The study found that the asset wise classification of PSBs is in
right direction and there is significant variation in the recovery of NPAs in different
sectors. The research observed that the PSBs should not be burdened with the twin
objectives of profitability and social welfare.

Rajesham, C.H. and Rajender, K. (2007)57 described that NPAs is a characteristic of

developing economy. They have focused on causes and consequences of NPAs. They
have described RBI guidelines to recover NPAs. The initiatives by selected countries
to recover NPAs are also described. They have stressed that it will be better if the
government does not use PSBs as a means of accomplishing its political objectives by
lending to unviable projects announcing loan melas and loan waiver schemes etc.

Ramchandran, N. (1997)58 concludes his article on NPAs with the argument that the
quality of advances can be improved through introducing new tools and techniques

55
Raiyani, J.R. (2011), Analysis of Operational Efficiency in Indian Banks: A Comparative Study,
Journal of Commerce & Trade, Vol. VI, no. 2, October, 2011, pp. 80-88
56
Rajender, K. (2009), Management of Non-performing Assets in Public Sector Banks, The Indian
Journal of Commerce, Vol. 62, no. 1, pp. 45-54
57
Rajesham, C.H. and Rajender, K. (2007), Management of NPAs in Indian Scheduled Commercial
Banks, The Chartered Accountant, June, 2007, pp. 1953-1960
58
Ramchandran, N. (1997), Non Performing Assets, Banking Finance Vo. XIX, no. 7, July, 1997,
pp. 27-28

100
for appraisal. Banks have to discard their traditional approach of overdependence on
ratios to appraise projects. They should focus on their ability to foresee problems
which might crop up with the borrowers.

Ram Mohan, K. (1995)59 argues that the system of roll-over credit will be replaced by
loans of fixed maturity and by the deregulation of interest rates so that this will
facilitates the matching of assets with liabilities depending upon their maturity profile.

Ramu, N. (2009)60 indicates that the UCBs are unit banks of the American model
rather than branch banks of the British model. With the tightening prudential norms,
the banking sector has been consistently confirming to and adopting international
prudential norms and accounting practices. Such strengthening of prudential norms
has resulted in increased levels of NPAs for the UCBs. As per CAMELS rating
model, the highest weight is given to asset quality components. He has made an
attempt to study the position of NPAs in UCBs of Tamil Nadu.

Ranjan, R. and Dhal, S.C. (2003)61 discussed that the non-performing loans are
influenced by three major sets of economic and financial factors, i.e. terms of credit,
bank size induced risk preferences and macro economic shocks. They have suggested
that the banks should consider all these factors before providing loans.

Rao, C.H.V. (1999)62 remarks that lok adalat plays an important role as a forum for
the disputes settlement among the defaulters. Through this forum the banks can
recover their bad loans. The banks can adopt the principles of justice, equity, fair play
and other legal principles in recovering the loans through the Lok Adalat.

Rao, Prabhakara (2004)63 indicates that several experiments such as BIFR/SICA,

LOKADALATS, DRTS, OTS, SARFAESI etc. have been made to curb NPAs in

59
Ram Mohan, K. (1995), Credit Risk Management in Banks, PNB Monthly Review, Vol. 17, no.
12, December, 1995, pp. 643-656
60
Ramu, N. (2009), Dimensions of Non-performing Assets in Urban Cooperative Banks in Tamil
Nadu, Global Business Review, July-Dec., 2009, pp. 279-297
61
Ranjan, R. and Dhal, S.C. (2003), Non-Performing Loans and Terms of Credit of Public Sector
Banks in India: An Empirical Assessment, RBI Occasional Papers, Vol. 24, no. 3, winter, 2003 pp.
81-121
62
Rao, Hari Vithal C. (1999), Lok Adalat- An Effective Forum for NPA Reduction, IBA Bulletin,
Vol. XXI, no. 7, June, 1999, pp. 21-23
63
Rao, Prabhakara (2004), Indian Banking: 2010, IBA Bulletin, Special Issue, Vol. XXVI, No. 1
(January), pp. 170-173

101
Indian banking industry. But, nothing did a miracle in controlling NPA. There is a
need of adopting international standards for curbing NPAs in Indian banking industry.

Rao, Ramchandran B. (1997)64 strongly argues that the RBI should stop overplaying
the concept of NPA. The relevant factor is NRA (Non Recoverable Assets). The
banks should concentrate on this. It determines the quality of bank credit. Each bank
should decide carefully to what extent loan assets are uncovered and cannot be
realized due to losses and circumstances beyond the control of the borrowers.

Rathore, S.S. and Singh, Alka (2004)65 found out the relationship between NPAs and
Capital Adequacy considering the case of Avadh Gramin Bank, Lucknow. They
revealed that the main reason of NPAs was very poor receiving ratio. They have given
some suggestions for curbing the high level of NPAs.

Reddy, G.R. and Bhargavi, T.S. (2006)66 observed that even though NPA is not new
phenomenon, for the past few years, Indian banks have been weighed down by its
enormous amounts. It has caused banking crisis and sometimes even threatenedps the
very health of banking system. In spite of prudential norms framed by RBI, NPA in
PSBs is continuously increasing.

Reddy, N.P. and Panthulu N.K. (2006)67 stated that the high level of non-performing
assets in Indian banking sector is the matter of worry. According to them the
magnitude of NPAs in public sector, private sector and foreign banks is continuously
increasing. In their article they have emphasized on monitoring the signals in relation
to NPAs and to take appropriate measures to speed up the recoveries.

Saha, Gurudas (2007)68 has thrown the light on the main reasons of increasing NPAs
in Indian banking sector. According to him NPAs in Indian banking system are

64
Rao, Ramchandran B. (1997), Judge a Bank of its NRAs and Not on NPAs, The Banker, Vol. 44,
no. 2, February, 1997, pp. 23-24
65
Rathore, S.S. and Singh, Alka (2004), Non-performing Assets and Capital Adequacy, Indian
Journal of Accounting, Vol. XXXV(1), Dec., 2004, pp.78-81
66
Reddy, G.R. and Bhargavi, T.S. (2006), An Appraisal of Indian Banking from NPA Perspective,
New Trends in Corporate Reporting (Edited Book), RBSA Publishers, Jaipur, pp. 215-222
67
Reddy, N.P. and Panthulu N.K. (2006), The Menace of Non-performing Assets- Challenges and
Remedial Measures, Edited book Banking Sector and Human Resources (Changing Scenario), pp. 68-
75
68
Saha, Gurudas (2007), Management of Non-Performing Loans and Advances, The Chartered
Accountant, June, 2007, pp. 1949-1952

102
attributable to flaws in business models of the lenders, lending to certain identified
sectors etc. He has stated that socio-politico-economic environment is responsible for
mounting NPAs in India.

Samal, B. (2002)69 proposed a view that it is not possible to eliminate totally the non-
performing assets in the banking business but can only be minimized. It is always
wise to follow the proper policy appraisal, supervision and follow-up of advances to
avoid NPAs. For reduction of NPAs, though there is a greater need of political threat
and effective enactment of laws to recover NPAs, the bank should also take advantage
of DRT, Lok Adalat, the legislations enacted by the state government and one time
settlement scheme.

Sarda, D.P. (1998)70 states that the new guidelines issued by the RBI on income
recognition, asset classification and provisioning norms have forced Indian banks to
show the true financial picture in the balance sheet and the to take corrective steps for
improving their loan portfolio. With the adoption of this new guideline, the banks are
taking quality decisions of their assets and several steps are being taken by them to
reduce NPAs.

Sathye, Milind (2003)71 found that the public sector banks performed better than their
private sector counterparts with regards to their overall efficiency. The article raised
concern over the higher level of NPAs in the banking system and suggested that
policies should be implemented to reduce the bad loans.

Sathye, Milind (2005)72 examined the effect of privatization of banks on performance

and efficiency. The data taken was for five years i.e. 1998 to 2002. It was observed
that the privatization created a lot of effect on banking sector in India. It was
concluded that partially privatized banks have performed better as compared to fully
public sector banks in respect of financial performance and efficiency.

69
Samal, B. (2002), The NPA Overhung: Magnitude, Solution and Legal Reforms, Vinimaya, Vol.
XXIII, no. 3, Oct.-Dec., pp. 12-17
70
Sarda, D.P. (1998), Strategies for Reducing Non-performing Assets, IBA Bulletin, Vol. XX, no.
12, December, 1998, pp. 11-15
71
Sathye, Milind (2003), Efficiency of Banks in a Developing Economy- The Case of India,
European Journal of Operational Research, Vol. 148, no. 3, pp. 662-671
72
Sathye, Milind (2005), Privatization, Performance and Efficiency: A Study of Indian Banks,
Vikalpa- The Journal of IIM-A, Vol. 30, no. 1, January-March, 2005, pp.23-28

103
Shah, Birju (2012)73 reveals that the NPAs of the public sector banks have increased
from 66,712 crores as on December, 2010 to 1,02,001 crores as on December, 2011.
There has been net rise of 53% in the NPAs of public sector banks. Whereas the
NPAs of private sector banks increased from 18,147 crores to 18,618 crores during
the same period. There has been an increase of 2.6% in NPAs of private sector banks.
The reason behind the increase in NPAs is governments policies for agriculture,
petroleum, telecom, aviation, textiles and mining. The government has prepared a
policy to give loans to these sectors but because of slowdown in the economy, these
loans have not been recovered.

Shar, A.H., Shah, M.A. and Jamali, H. (2010) 74 analysed the performance and
efficiency of banking sector of Pakistan using CLSA (Credit Leonas Securities Asia)
- Stress Test. The research covered the period of pre and post nationalization of state
owned and commercial banks of Pakistan. It was analysed that some of the banks of
Pakistan are under stress in regard to capital strength, assets quality, efficiency and
liquidity.

Sharma, S., Sharma, R., Didwania, M. and Mittal, S. (2010)75 studied that public
sector banks have enough capital in hand to deal with future contingencies. Gross
NPA and net NPA as percentage of advances are continuously declining which shows
the efficiency of the PSBs.

Shastri, F.C. (2007)76 explained the impact of NPAs at macro level and micro level.
At the macro level, NPAs have checked off the supply line of credit of the potential
lender and thereby having a deleterious effect on capital formulation and arresting the
economic activities in the country. At the micro level, unsuitable level of NPA has
eroded current profits of banks and financial institutions. The problem of NPA is not a
matter of concern for banks and financial institutions alone but it is a matter of

73
Shah, Birju (2012), Gujaratna Budgetne Bankoni NPA Vatavi Gai! (NPAs of the Banks
Crossed the Budget of Gujarat), Divya Bhaskar Daily, 27 February, 2012, pp. no.11
74
Shar, A.H., Shah, M.A. and Jamali, H. (2010), Performance Evaluation of Pre-post
Nationalization of Banking Sector in Pakistan: An Application of CLSA- Stress Test, International
Journal of Business and Management, Vol. 5, no. 11, November, 2010, pp. 128-139
75
Sharma, S., Sharma, R., Didwania, M. and Mittal, S. (2010), Performance of Indian Public Sector
Banks with Special Reference to Non-performing Assets, The Indian Journal of Commerce, Vol. 63,
no. 3, July-September, 2010, pp. 62-70
76
Shastri, F.C. (2007), Asset Quality and Management of NPAs, Restructuring of Indian Banks,
Book Enclave, Jaipur, pp. 60-83

104
concern for the entire public. The factors like unfavorable business cycle,
unanticipated shocks such as natural calamities, the RBI lending policy, bad
management by banks etc. influence the NPAs in banking sector.

Shukla, Jaya and Bajpai, Gaurav (2010)77 presented a mathematical model for
problem of stability of NPAs growth in banking sector. The various variables such as
liquidity, political interference and other external factors affect the stability of NPA.
All such variables are studied under this mathematical model. The model emphasized
on growth of NPAs at stable rate to improve banks asset portfolio and quality of
services assured by banks.

Sikider, Sujita (1997)78 points out in an article on NPA that the new RBI monitoring
system of banks performance has become crucially dependent on the recognition of
income and non-performing assets. The RBI guidelines issued for finalization of
banks accounts for the year ending March, 1996 has pushed up the level of NPA and
the subsequent provisioning requirements.

Singh, Balwinder (2011)79 is of the opinion that the problems of NPAs in central co-
operative banks have emerged only after liberalization and globalization of economy
and financial system. Some strict measures are required to recover the NPAs. The
awareness, efforts and prudential norms of NPA reporting and provisioning have
helped the central co-operative banks in Punjab to reduce their NPAs.

Singh, Rajender (1999)80 in an article related to NPA states that if we review the
composition of NPAs in many banks, it is found that the priority sector advances are
not necessarily the major cause of NPA. The percentage share of NPA in the poverty
eradication programmes seem to be higher.

77
Shukla, Jaya and Bajpai, Gaurav (2010), Mathematical Criteria for Stability of NPA Growth
Improving Quality of Service for Banks, International Journal of Trade, Economics and Finance, Vol.
1, no. 2, August, 2010, pp. 211-214
78
Sikider, Sujita (1997), Computation of NPA, Income Recognition and Impact on Reporting of
Bank Accounts, The Management Accountant, Vol. 32, no. 11, November, 1997, pp. 811-815
79
Singh, Balwinder (2011), Profitability of The Central Co-operative Banks in Punjab- A
Decomposition Analysis, The Indian Journal of Finance, Vol.5, no.8, August, 2011, pp. 16-22
80
Singh, Rajender (1999), Reduction of NPA Through Legal Methods, IBA Bulletin, Vol. XXI, no.
7, July, 1999, pp. 19-24

105
Suchak, N.V. (2006)81 observed that the genesis of NPA is the new economic reforms
in banking sector. Higher level of loans to the priority sector has created the problem
of NPAs in the public sector banks. It is the prime time for PSBs to unearth hidden
bad loans and write them off once for all and then strictly control the recurrence
thereof to avoid the further cost of running many unviable projects.

Sudhakar, V.K. (1998)82 in a study on policies and perspectives of NPA reduction in

banks points out that a banker can minimize risk by taking informal decisions with the
help of technical expertise and market information. In the consideration of Indian
banks, the risk assessment models are inadequate or underdeveloped and in such a
scenario, unknown risks can enhance creation of more NPAs.

Swamy, B.N.A. (2001)83 studied the comparative performance of different banks since
1995-96 to 1999-2000. An attempt was made by the researcher to identify factors
which could have led to changes in the position of individual banks in terms of their
share in the overall banking industry. He concluded that in many respects nationalized
public sector banks are better than private banks and foreign banks.

Thiruttani, Munivelu (2000)84 points out that the NPA adversely affect banks
earnings. The recovery of NPA is the key to increase profit and profitability of banks.
Banks are required to accelerate recovery of loans for recycling of funds and this will
improve the position of banks.

Tiwari, Dheeraj (2011)85 expresses his worry that a spike in bad loans could derail
lending by state run banks. The finance ministry has urgently sought their company
wise exposure to four stressed sectors- aviation, telecom, commercial real estate and
power utilities. His worry is proved by the figures of NPAs in commercial banks. The
NPAs of commercial banks have risen over Rs.25,000 crores in the first six months of

81
Suchak, N.V. (2006), Management of NPAs in India, New Trends in Corporate Reporting (Edited
Book), RBSA Publishers, Jaipur, pp. 85-92
82
Sudhakar, V.K. (1998), Policies and Perspectives of NPA Reduction in Banks, IBA Bulletin, Vol.
XX, no. 11, November, 1998, pp. 8-16
83
Swamy, B.N.A. (2001), New Competition, Deregulation and Emerging Changes in Indian
Banking, Bank Quest, The Journal of Indian Institute of Bankers, Vol. 729, no. 3, pp. 3-22
84
Thiruttani, Munivelu (2000), Bank Balance Sheet Management, IBA Bulletin, Vol. XXII, no.4 &
5, April-May, 2000, pp. 12-21
85
Tiwari, Dheeraj (2011),Lens on Bank Loans to Stressed Sector, The Economic Times, December
17, 2011, pp. 1

106
the current fiscal. State run banks wrote-off Rs.17,300 crores in 2010-11 against
11,000 crores in the year before.

Unnikrishnan, D. and Roy A. (2012)86 state that bad assets of Indias banks are
expanding at a fast pace at a time growth in Asias third largest economy is slowing.
The gross NPAs of 34 listed banks that have announced December quarter earnings
escalated to 76,644 crores, posting a growth of 30.51% year on year. The NPAs of
these banks are constantly increasing. For the March quarter, the NPAs were 17.81%,
for the June quarter, the NPAs were 19.14% and for the September quarters the
NPAs were 28.28%.

Upadhyay, Suresh (2007)87 considered the problem of NPAs as the one of the most
severe problems faced by banking all over the world. NPAs affect the profitability,
productivity and credibility of banks adversely. NPAs affect the growth of banking
sector adversely. According to him banks need to take some strict measures to reduce
NPAs and to improve the profitability.

Velayudham, T.K. (2001)88 is of the opinion that though the banking reforms
introduced by the Narasimham Committee have been proceeding in a phased manner
in the country, they have not been much effective to reduce NPAs. The high level of
NPAs poses serious hurdles.

Vijayaragavan, G. (2009)89 prepared a special chapter in his book to explain the

basics of NPAs in banks in India. He has explained various aspects of NPAs in details
to develop the understanding of readers, e.g. meaning of NPA, trend, classification,
RBIs guidelines on asset classification and provisioning, how, why and when NPA
occurs, impact and consequences of NPA as well as RBIs definition on willful
defaulters.

86
Unnikrishnan, D. and Roy A. (2012), Bad Loans Rise at a Faster Clip, Mint Daily, 6 February,
2012, Vol. 6, no. 30, pp. 1-2
87
Upadhyay, Suresh (2007), Vargikrut Vepari Bankoni Bin-Labhdayak Askyamato , Yojana
(Gujarati edition), issue no. 8, cont. issue no. 683, pp. no 22-25
88
Velayudham, T.K. (2001), Budget: Indirect Implication on Banks, The Hindu (Chennai), May, 3,
pp. 1 (BS)
89
Vijayaragavan, G. (2009), Bank Credit Management: Text and Cases, Himalaya Publishing House
Pvt. Ltd. Chapter no. 4.2, pp. 430-438

107
Yadav, M.S. (2011)90 reviewed that 1/4th credit of total advances was in the form of
doubtful assets in the initial year of 1990s and has an adverse impact on profitability
of public banks at aggregate or sectoral level indicating high degree of riskiness in
credit portfolio and raising question mark on the credit appraisal. The profitability of
all public sector banks affected at very large extent when NPAs work with other
banking strategic variables and also affect productivity and efficiency.

3.3 Research Gap and Research Problem Statement:

This study will fill the gap in the literature by focusing on the analysis of
NPAs of the nationalized banks in India. There is wide gap between previous studies
done on this subjects and the research done by the researcher.

It shows that existing studies in most of the cases considered limited units in
their study but the researcher has studied 6 nationalized banks to widen the scope of
the study. Further, the existing literature shows that majority of the study is done in
RRBs, but the present situation shows that there are maximum chances of NPAs in
nationalized banks. So, the study of NPAs of nationalized banks is very important.
This study will be guiding in that direction.

In most of the existing literature, the research work is limited up to the

calculation of various ratios, which does not provide clear picture of performance of
banks. While in this research, the researcher has made scale-wise analysis of the
sampled units, which gives clear idea related to the capacity of bank for managing
NPAs.

Most existing literature talks about the impact of NPAs on the profitability of
financial institutions, but nobody has made technically proved. In this research, the
researcher has made analysis of the impact of NPAs on profitability using appropriate
statistical tools.

90
Yadav, M.S. (2011), Impact of Non-Performing Assets on Profitability and Productivity of Public
Sector Banks in India, AFBE Journal, Vol. 4, no. 1, June, 2011, pp. 232-241

108
3.4 Research Methodology:
For the solution of any problem a systematically established method is
required. Same as in case of solution of the research problem scientifically, a
systematic method is required which is known Research Methodology. The research
methodology of the selected topic follows in these dimensions:

3.4.1 Research Title:

An Analytical Study of Non-Performing Assets of Nationalized Banks
in India

3.4.2 Population of the Study:

In this study, all banks working in India are the census for the study. The
population of the study focused on banking sector in India, which may be classified in
to four groups viz. public sector banks, private sector banks, foreign banks and co-
operative banks. As on 31 st March, 2012 there are 237 scheduled banks reported in
India. (SBI & its associates 6, Nationalized banks including IDBI 20, Old private
sector banks 13, New private sector banks 7 Foreign banks 41, Regional Rural Banks
82, Scheduled State co-operative banks 16 and Scheduled Urban co-operative banks
52).

3.4.3 Samples for the Study:

As the banking sector in India has very wider scope, the researcher has
focused on the study of the non-performing assets of nationalized banks in India. To
justify the research without any bias, out of the 19 nationalized banks, the researcher
has selected a random sample of 6 using lottery method. The selected banks under
sample are as mentioned below:
1. Bank of Baroda (BOB)
2. Bank of India (BOI)
3. Bank of Maharashtra (BOM)
4. Central Bank of India (CBI)
5. Dena Bank
6. Punjab National Bank (PNB)

109
3.4.4 The Period of the Study:
The present study is focused on the analysis of the data for the period of 10
years i.e. from 2002-03 to 2011-12. This period is selected by the researcher for the
study because this period covers the major fluctuations in the Indian capital market,
Indian financial market and Indian economy as a whole. As banking sector is part of
it, so the researcher selected this period with a view to study the current scenario of
the NPAs of the nationalized banks in India

3.4.5 Type of the Study:

The present research is empirical in nature. It provides basis for external
validation. The empirical study is based on observation or experience alone; it is also
known as data based research. It is capable of being verified by observation or
experiment. The researcher has made an attempt to answer the questions raised in
quantitative investigation. So, the present research may be defined as quantitative and
analytical research. It is a functional study by nature and it focuses on the functional
aspects of the banking sector with special reference to NPAs.

3.4.6 Scope of the Study:

The present research study is based on census of entire banking sector of India
for the period of the 10 years from 2002-03 to 2011-12. It covers the analysis,
evaluation and comparison of non-performing assets of nationalized banks, covered
under the sample, viz. Bank of Baroda (BOB), Bank of India (BOI), Bank of
Maharashtra (BOM), Central Bank of India (CBI), Dena Bank and Punjab National
Bank (PNB). The present study is limited for analysis of non-performing assets with
various aspects.
The scope of the study is still very wide. The presented study encompasses
data on non-performing assets of nationalized banks, covered under sample. In the
case of nationalized banks, selected under sample, the study has been conducted for
the period of 10 years from 2002-03 to 2011-12. This study is aimed at an analysis of
non-performing assets of selected nationalized banks in India. Furthermore, the
researcher also made efforts to check impact of NPAs on profitability of the banks
using statistical analysis.

110
3.4.7 Objectives of the Study:
The broader objectives of the present research are as listed below:
1) To find out the relationship between different variables, such as Gross
NPAs and Advances, Gross NPAs and Total Assets, Net NPAs and
Advances, Net NPAs and Total Assets, Unsecured Advances and
Advances, Priority Sector Advances and Advances, Gross NPAs
Recovered/Write-off/ Reduced and Gross NPAs, Gross NPAs
Recovered/Write-off/ Reduced and Advances over the period of study.
2) To make comparative analysis of performance of sampled units over
the period of study.
3) To analyze the efficiency of the banks to maintain the NPAs.
4) To analyze the performance of the banks on the basis of their
efficiency of maintaining the NPAs.
5) To measure the impact of NPAs on profitability of the sampled units.
6) To suggest some precautionary steps to reduce risk of NPAs in future
lending.
7) To suggest the banks in the way to increase profitability through
adopting a better strategy to curb the NPAs.

3.4.8 Hypotheses:
A hypothesis is a proposition- a tentative assumption which a researcher wants
to test for its logical or empirical consequences. To justify the research title and
objectives, following null-hypothesis (H0) were formulated by the researcher:
3.4.8.1 Hypotheses to Analyze Various Ratios Suggesting NPAs:
1) There is no significant difference between Gross NPAs to Advances
ratio among selected nationalized banks during the period of study.
2) There is no significant difference between Net NPAs to Advances ratio
among selected nationalized banks during the period of study.
3) There is no significant difference between Unsecured Advances to
Advances ratio among selected nationalized banks during the period
of study.
4) There is no significant difference between Gross NPAs to Assets ratio
among selected nationalized banks during the period of study.

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 5) There is no significant difference between Net NPAs to Total Assets
ratio among selected nationalized banks during the period of study.
6) There is no significant difference between Priority Sector Advances to
Total Advances ratio among selected nationalized banks during the
period of study.
7) There is no significant difference between Gross NPAs
Recovered/Write-off/ Reduced to Gross NPAs Ratios among selected
nationalized banks during the period of study.
8) There is no significant difference between Gross NPAs
Recovered/Write-off/ Reduced to Advances Ratios among selected
nationalized banks during the period of study.
9) There is no significant difference between Gross NPAs per Branch
among selected nationalized banks during the period of study.
10) There is no significant difference between Net NPAs per Branch
among selected nationalized banks during the period of study.
3.4.8.2 Hypotheses to Measure the Impact of NPAs on Profitability:
11) There is significant impact of Gross NPAs to Advances Ratio on
Interest Spread As % to Total Assets.
12) There is significant impact of Gross NPAs to Advances Ratio on Net
Interest Margin.
13) There is significant impact of Gross NPAs to Advances Ratio on Net
Worth.
14) There is significant impact of Gross NPAs to Advances Ratio on Net
Profit to Total Fund Ratio.
15) There is significant impact of Gross NPAs to Advances Ratio on Net
Profit to Total Assets Ratio.
16) There is significant impact of Net NPAs to Advances Ratio on Interest
Spread as % to Total Assets.
17) There is significant impact of Net NPAs to Advances Ratio on Net
Interest Margin.
18) There is significant impact of Net NPAs to Advances Ratio on Return
on Net Worth.
19) There is significant impact of Net NPAs to Advances Ratio on
Net Profit to Total Fund Ratio.
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 20) There is significant impact of Net NPAs to Advances Ratio on Net
Profit to Total Assets Ratio.

3.4.9 Method of Data Collection:

The present research is mainly based on secondary source of data. The data
obtained from the published annual reports and statements of the banks have been
used. To supplement the data RBI circulars, IBA Bulletin, RBI Databank are to be
taken into consideration. As the data of public sector banks are public document, it is
available from the various sources.

3.4.10 Method of Analysis:

To justify the research title, the researcher has used various accounting and
statistical tools and techniques, listed as below:
For the analysis of financial matters, Ratio analysis is the most widely used
tool. The ratio analysis gives idea about the trends of various financial
matters. It is useful for comparing the financial data of various years. It is also
useful for comparison of financial condition of one unit with that of other
unit.
In this research work, the researcher has prepared various
accounting ratios to establish relationship between different variables. The
researcher has used these ratios to analyze NPAs in Nationalized banks of
India.
Sometimes, it becomes difficult to interpret the financial matters only through
the statistical figures. To make an easier understanding of the financial
matters, graphs and diagrams are often used. Generally, for the interpretation
of various trends, the line chart is more useful.
For the presentation of the trend of NPAs of the nationalized
banks, the researcher has presented various ratios on line chart.
For statistical analysis, condensation of data is useful to reduce the
complexities of the data. The condensation is also useful to make data more
comparable. This can be done by applying the measures of central tendencies
on the data.

113
 Here the researcher has used simple mean or arithmetic mean
for condensing the data of NPAs of sampled units to make it more comparable
and easily understandable.
The term dispersion refers to the variability of the size of items. Dispersion
explains the size of various items in a series are not uniform, rather, they vary.
There are various techniques of dispersion available. Here the researcher has
used the standard deviation and variance.
For the testing of formulated hypothesis, various statistical tests can be
applied. The researcher has used Two-way ANOVA using F-test because the
data NPAs of the sampled units is classified in two ways i.e. years and banks.
For the measurement of performance of the sampled units related to their
NPAs, if the hypothesis formulated by the researcher gets rejected, the
researcher has made Scale-wise analysis91 at 5% level of significance (at
95% Confidence Interval). The researcher has classified the performance of
the sampled units into four categories viz. Best, Good, Poor and Worst. This
approach of analyzing the data is generally known as Ordinal Analysis. If
the actual ratio falls below the lower bound, it is considered as the best
performance in case of negative performance indicators and vice-versa in case
of positive performance indicator. If the actual ratio falls between the lower
bound and the mean, it is considered as the good performance in case of
negative performance indicators and vice-versa in case of positive
performance indicators. If the actual ratio falls between the mean and the
upper bound, the performance is considered as poor for negative performance
indicators and vice-versa for positive performance indicator. If the actual ratio
is greater than the upper bound, the performance is considered as the worst in
case of negative performance indicator and vice-versa for positive
performance indicators.
Measurement Negative Positive
Performance Performance
Actual Ratio < Lower Bound Best Worst
Lower Bound < Actual Ratio < Mean Good Poor
Mean < Actual Ratio < Upper Bound Poor Good
Upper Bound < Actual Ratio Worst Best

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Gupta S.L. and Gupta, H. (2011), Research Methodology-Text and Cases with SPSS Applications,
International Book House Pvt. Ltd., New Delhi, pp.146-152

114
 The above given category-wise performance analysis is Ordinal Analysis
and hence it does not present accurate picture of the performance. So, the
researcher has converted the Ordinal Analysis into Cardinal Analysis by
giving scores or codes92 to the banks for each performance indicator viz. 1 for
Worst, 2 for Poor, 3 for Good and 4 for Best.
To make the analysis of the financial data more accurate and to check the
interrelationship of various ratios, multivariate analysis is used. Here the
researcher has used Centroid Factor93 method to analyze the data with the
application of Eigen Value.
After making the analysis of the data related to NPAs of the sampled units and
the analysis of the performance of them, it is necessary to check the impact of
NPAs on profitability of the sampled units. To check this impact, the
researcher has used the regression analysis. On the basis of this regression
analysis, the researcher has again formulated the hypotheses related to the
impact of NPAs on profitability of the sampled units. These hypotheses are
tested through studentt test.
To make this research work more accurate and meaningful, the researcher has
used the technology such as Micro Soft Excel and SPSS from IBM so that
there are least chances of errors in calculations.
3.4.11 Chapter Plan:
The present research work is divided in seven different chapters, mentioned as
below:
Chapter 1 An Introduction to Banking Sector
Chapter 2 Non-Performing Assets- An Overview
Chapter 3 Review of Related Literature & Research Methodology
Chapter 4 Analysis and Interpretation
Chapter 5 Comparison of Performance and Evaluation of Sampled Units
Chapter 6 Impact of Non-Performing Assets on Profitability of Sampled Banks
Chapter 7 Summary, Findings and Suggestions

92
Gupta S.L. and Gupta, H. (2011), Research Methodology-Text and Cases with SPSS Applications,
International Book House Pvt. Ltd., New Delhi, pp.222-224
93
Kothari, C.R. (2006), Research Methodology, New Age International Publishers, New Delhi, pp.
324-329

115
3.4.12 Contribution of the Study:
Mounting amounts of NPAs is a burning issue for the banks. In this situation,
it is very much useful to analyze the performance of banks on the basis of data related
to NPAs. This research work will be helpful for such analysis and it will be
contributory in various aspects. Below given are a few contributions of the present
research:
Guiding to the Banks:
This research will be a good guide to the banks which are going to allow loans
and advances to their customers. It will be helpful for making the analysis of
customers profile while sanctioning the loans. It will be guiding the banks for
taking due care while making investment in to the priority sector.
Useful for Performance Analysis:
This research will be providing information related to NPAs of the banks. It
discloses the financial strength of the banks. Therefore it will be useful to
measure the performance of the sampled banks in terms of recovery of loans
and advances.
Useful to Bank Managers and Loan Officers:
This research will be useful for bank managers and loan officers for taking the
decisions related to sanctioning the loans. The research will be guiding the
bank managers for proper selection of the borrowers, to take preventive steps
for curbing the NPAs, to take the legislative measures for recovering NPAs
etc.
Useful to Government Agencies:
This research work is useful to government agencies to alter the policies
related to NPAs and recovery of loans from the defaulter customers. It will
guide the government for the establishment of recovery cells or DRT for
speedy recovery of NPAs.
Establishment of Ethical System:
In most of the cases, the bank officials adopt unethical practices while
sanctioning the loans. This research will throw a light on the ethical system of
offering loans and advances to the customers. It will help in selection of
creditworthy customers while sanctioning the loans and advances.

116
 Guide to RBI:
This research will be a guide to RBI for formulating the policies for
controlling the NPAs in nationalized banks. Generally because of the rigid
policies of investment in priority sectors without considering the risk, creates
heavy NPAs in nationalized banks. This research will lead RBI to think in that
direction.
Useful for Future Research:
This research will be a base for further study on NPAs and various matters
related to NPAs such as policies of sanctioning the loans, policies of recovery
of loans, steps for recovery from defaulter customers etc. This research will be
useful for the students of the commerce, economics, banking and finance for
further studies in the matters concerned to the banking industry.

3.4.13 Limitations of the Study:

The researcher is aware of the limitations of the study, as it is
based on secondary sources of information and limited numbers of banks taken into
consideration.
I. The present study is related to only 6 nationalized banks of India only,
there is number of banks working in India, belong to different
segments.
II. The study is based on NPAs of some selected nationalized banks in
India; any generalization for universal application cannot be expected.
III. View of experts may be different for the purpose of the study, so it
may create some difference in understanding the topic of the study.
IV. This study is in the nature of exploratory and empirical research. It is
not being proposed to enter in the normative aspect and offer
suggestion for improvement in the condition of NPAs in banks.
V. This study suggests the banks to adopt international standards to
control NPAs but there are chances that the international standards
may not be suitable to Indian condition.
VI. This study is based on secondary data collected from the annual reports
of the banks, IBA Bulletin, RBI Databank, etc. so the quality of
research may be based on the quality of data.

117
VII. This study focuses on only the nationalized banks. It does not consider
the private sector banks and the foreign banks.
VIII. To study the impact on the profitability, only NPAs are considered as
independent variable, other variables are ignored while measuring the
impact.

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