NON-PERFORMING ASSETS

AIM:
1. To study the relation between the GDP and Net NPA of banking sector.
2. Percentage of Priority sector NPA and Non Priority Sector NPA and correlation with
the nationalized, SBI and public sector banks for year 2003- 2017.
3. The correlation between the Net NPA and Net profits of banks.

Abstract: Non-performing Asset is a vital factor in the examination of financial performance

of a bank. Non Performing Asset is the key term for the banking corporations. Non
Performing Assets show the competence of the performance of the banks. Non Performing
Assets means which amount is not received by the bank in return of loans disbursed. Non
Performing Assets affect not only the finance institution but the total financial system. Thus a
selective study has been done on public sector banks in India to evaluate the effect of Non
Performing Assets on the profitability of banks. Banks today are not judged only on the basis
of number of branches and volume of deposits but also on the basis of standard of assets.
NPAs negatively affect on the profitability, liquidity and solvency of the banks. In this paper
we tries fond correlation between GDP and Net NPA for the year 20013-2017. This paper
also analyses the circumstances of NPA in priority sector and non priority sector and
analyses the circumstances of NPAs in selected banks namely State Bank of India (SBI). It
also highlights the policies followed by the banks to tackle the NPAs and suggests a multi-
pronged strategy for speedy recovery of NPAs in banking sector. The result shows that
except for SBI and PNB all the other banks exhibit a negative correlation between their gross
Non Performing Assets and net profits. But SBI is increased the net profit every year not
affected by Gross Non Performing Assets. Banks are paying attention towards their NPA to
recover their pending loans. The results of relation between GDP and NPA show a negative
correlation i.e if NPA decreases the GDP will Increase. The study is based upon secondary
data recovered from Report of Progress of banking in India, Websites, Journals and Articles.
The scope of the study is limited to analysis of nonperforming assets of public sector banks
covering the period of 2007-2016.
1. Introduction
With the introduction of financial sector reforms 1991 the faces of Indian Banking sector
have extremely changed. The problems arising in the banking sector will affect the Indian
economy. When the economy collapsed also affected the banking sector. Function as an
intermediary bank is not running normally. The banking sector also has a very important role
in the recovery process of the country's economy as a whole. The banking industry has
moved step by step from a synchronized environment to a decontrolled market based
economy. In 1991-1992 India was adopted the open economy. The beginning of liberalization
and globalization in market development there has been tremendous changed in the
transitional role of banks in India. The problem of swelling non-performing asset is catching
attention and addition of huge NPA has assumed great importance in terms of risk
management. The incidence of non-performing assets (NPAs) is affecting the performance of
the credit institutions financially. NPA is a disorder resulting in non-performance of a portion
of loan portfolio leading to no recovery or less recovery income to the lender. NPAs represent
the quantify “Credit Risk”. Bankers have realized to have effective NPA management on
their priority list.
NPA broadly defined as non-repayment of interest and installment of principal amount (Das
& Ghosh, 2006). According to the “Narasimham Committee Report (1991), those assets
(overdraft/ cash credit) for which the interest remains due for a period of four quarters (180
days) should be considered as NPAs”. After, this period had reduced and from March 1995
onwards assets for which interest and principle remains unpaid for a period of 90 days were
considered as NPAs. Thus, NPA constitutes an important factor in the banking system as it
seriously affects the profitability of the banks. The NPA can broadly be classified into Gross
NPA and Net NPA. Gross NPA reflects the quality of the loans made by banks whereas Net
NPA shows the actual burden of banks.

Priority Sector and Non Priority Sector

Priority sector lending is intended to provide institutional credit to those sectors and segments for
which it is difficult to get credit. Non-Priority Sector lending is the sector towards which financial
institutions are always ready to lend credit.
Categories under priority sector
(i) Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
 (iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy

1.1 Types of NPA

1.1.1 Gross NPA

Gross NPA is an advance which is considered written off, for bank has made provisions, and
which is still held in banks' books of account. Gross NPA (non-performing asset) refers to
overall quantity of loans that have gone bad debts. It consists of all the nonstandard assets
like as sub-standard, doubtful, and loss asset. “Gross NPAs Ratio = Gross NPAs / Gross
Advances”

1.1.2 Net NPA

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. “Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions”

1.2 Assets Classification

1.2.1 Standard Assets

Standard Asset means which assets are not facing the problem and not more risk towards
customer. Such assets are assumed to be performing asset. A general provision of 0.25% has
to be provided on global loan portfolio basis.

1.2.2 Sub-standard Assets

An asset would be classified as sub-standard if it remained NPA for a period less than or
equal to 12 months. Accordingly a general provision of 10% on outstanding has to be
provided on substandard assets.
1.2.3 Doubtful Assets
These are the assets which have remained NPAs for a period exceeding 12 months and which
are not considered as a loss advance. As per RBI instruction banks have to facilitate 100% of
unsecured amount of the outstanding loan.

1.3 Causes of NPA

1.3.1 Lending Practices of Banks: In 2008 the financial crisis has been happened because of
bad lending practices of banks. The banks should strictly follow rules and regulations while
lending loans. They should properly follow the credit policy of banks.

1.3.2 Business Risk: The organization may sometimes face problems with its own
operational environment which may result in losses for the company.

1.3.3 Environmental Risk: Sometimes there may be environmental problems like cyclones,
drought which does not give the required output to the farmers and Agri based businesses.

1.4 Impact of NPA

1.4.1 Liquidity
The Banks are facing the problem of NPAs. They are not recovering which lending money to
borrower. Those times money will be blocked. Banks don’t have enough cash in hand for
short period of time.

1.4.2 Credit loss

Banks lose their goodwill and brand equity in market when there is problem with their NPA
that further affect the value of the banks in terms of market credit.

1.4.3 Profitability
NPA not only affect on current profits but also profit of entire financial year.
2. Literature review
According to Reserve Bank of India (RBI) explains the definition of NPAs, “an asset makes
non-performing when it stops to generate income for the bank. Recently an asset was
measured as non-performing asset (NPA) stand on the concept of 'Past Due'. A non
performing asset was examined as credit in respect of which interest of principal has
remained ‘past due’ for a particular time”.
Siraj and Sudarsanan Pillai says that “NPA is a virus affecting banking sector. The study
concluded that NPA still remains a major threat and the incremental component explained
through additions to NPA poses a great question mark on efficiency of credit risk
management of banks in India”.
Debarsh and sukanya goyal (2012) emphasized “on management of non-performing assets in
the perspective of the public sector banks in India under strict asset classification norms, use
of latest technological platform based on core banking solution, recovery procedures and
other bank specific indicators in the context of stringent regulatory framework of the RBI”. In
the seminal study on ‘credit policy, systems, and culture’, Reddy (2004) raised various
critical issues pertaining to credit delivery mechanism of the Indian banking sector.
Reddy (2004) critically examined “various issues pertaining to terms of credit of Indian
banks. In this context, it was viewed that ‘the element of power has no bearing on the illegal
activity. A default is not entirely an irrational decision. Rather a defaulter takes into account
probabilistic assessment of various costs and benefits of his decision”. The problem of NPAs
is related to several internal and external factors facing the borrowers (Muniappan, 2002).
“The internal factors are diversion of funds for diversification taking up new projects,
helping/promoting associate concerns, time/cost overruns during the project implementation
stage, business (product, marketing, etc.) failure, inefficient management, strained labor
relations, inappropriate technology/technical problems, product obsolescence, etc., while
external factors are recession, non-payment in other countries, inputs/power shortage, price
escalation, accidents and natural calamities”.
3. Research Methodology
Aim of the present research paper is to analyze the trends in NPAs in terms of values, gross
NPAs and net profit. Several research studies on NPA in Indian banking sector are available,
the studies on a closer look validated NPA problem using secondary data. The primary
emphasis of this research is focused on analyzing nonperforming assets of nationalized
banks, public banks, SBI and its associates in India during the period 2003 to 2017.The
present study is a descriptive study which tries to establish the relationship between the non
performing assets and GDP of country. net profits of SBI. Also done a selective study on
SBI tried of establish relation between NPA and net profit and return on investment. The data
for the study has been sourced from Reserve Bank of India (RBI) bulletins, statistical tables
relating to banks in India, report on existing and progress of banking in India, issued by the
RBI. The study also suggests multi-pronged and diversified strategy for speedy recovery of
NPAs in banks in India. The final analysis is done by Correlation using MS Excel. The paper
consists of secondary data which has been collected from different publications such as the
Reserve Bank of India publications, the reports published by commercial banks, various
issues of the IBA journal etc. The empirical findings using observation method and statistical
tools like correlation and data representation techniques identifies that there is a negative
relationship between GDP and NPAs.
4. Table and Figures

4.1. Figure

NPA
7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00

Nationalised Banks SBI and its Associates Public Sector Banks

Figure 1: Gross NPA in Banks

This is the trend of GDP of the country from years 2003 –2017.

GDP growth Rate

12.00

10.00

8.00

6.00
GDP growth Rate
4.00

2.00

0.00
2006

2011

2016
2003
2004
2005

2007
2008
2009
2010

2012
2013
2014
2015

2017

Figure 2: GDP of INDIA

4.2. Table

Table 1:
Non-Priority
(in billion Rs) Priority Sector Total
Sector
Gross NPA Per cent Gross NPA
Per cent share Amount
Amount share Amount
Nationalised
Banks
2003 168.86 47.10 184.02 51.33 358.49
2004 167.05 47.74 178.95 51.14 349.90
2005 163.80 49.81 162.25 49.33 328.88
2006 151.24 53.66 122.53 43.48 281.85
2007 157.79 61.28 96.68 37.55 257.49
2008 163.85 67.21 77.93 31.96 243.80
2009 157.21 60.09 101.44 38.77 261.62
2010 199.06 56.13 152.77 43.08 354.63
2011 257.21 59.90 169.47 39.47 429.41
2012 322.90 48.34 334.87 50.13 659.69
2013 405.00 42.2 554 57.8 959.00
2014 530.44 37.70 876.66 62.30 1407.09
2015 679.61 35.40 1239.25 64.60 1918.86
2016 988.69 25.50 2890.16 74.50 3878.84
2017 1241.83 26.40 3458.57 73.60 4700.40

(in billion Rs) Priority Sector Non-Priority Sector Total

Gross NPA Per cent Gross NPA Per cent
Amount
Amount share Amount share
SBI and its
Associates
2003 80.53 47.49 83.79 49.41 169.58
2004 71.36 47.07 78.03 51.47 151.59
2005 70.17 47.39 76.24 51.49 148.09
2006 72.50 54.95 58.19 44.11 131.94
2007 71.75 57.14 51.93 41.36 125.56
2008 89.02 58.49 62.22 40.88 152.21
2009 84.47 47.26 92.50 51.75 178.74
2010 109.40 50.11 106.46 48.77 218.30
2011 155.67 55.32 125.67 44.66 281.40
2012 239.11 52.33 217.59 47.62 456.95
2013 264.00 44.10 335.00 55.90 599
2014 261.49 34.40 498.91 65.60 760.30
2015 257.24 36.30 451.35 63.70 708.59
2016 292.47 25.6 849.36 74.4 1141.83
2017 300.93 17.6 1409.23 82.4 1710.16
 Non-Priority
(in billion Rs) Priority Sector Total
Sector
Gross NPA Per cent Gross NPA Per cent
Amount
Amount share Amount share
Public Sector
Banks
2003 249.39 47.23 267.81 50.71 528.07
2004 238.41 47.54 256.98 51.24 501.49
2005 233.97 49.05 238.49 50.00 476.97
2006 223.74 54.07 180.72 43.68 413.79
2007 229.54 59.92 148.61 38.80 383.05
2008 252.87 63.86 140.15 35.39 369.01
2009 241.68 54.88 193.94 44.04 440.36
2010 308.46 53.84 259.23 45.25 572.93
2011 412.88 58.09 295.14 41.52 710.81
2012 562.01 49.96 552.46 49.11 1116.64
2013 669.00 42.90 890.00 57.10 1559.00
2014 791.92 36.50 1375.47 63.50 2167.39
2015 936.85 35.70 1690.60 64.30 2627.45
2016 1281.16 25.50 3739.52 74.50 5020.68
2017 1542.76 24.10 4867.80 75.90 6410.56

Percentage of NPA

Public Sector Banks 0.5

SBI and its Associates 0.13

Nationalised Banks 0.37

Fig. Percentage of priority sector and Non priority sector NPA of total NPA
In table 1, show how the NPA is distributed among the priority sector and non- priority
sector. As we can see that in the initial year the Gross NPA is in priority sector but now in
2016-2017 the percentage the gross NPA in Non-Priority sector is around 75% in in all
banks. This shows the growth of Non-Priority sector in India and their dependence on the
banking sector. The last table shows that the 50% of NPA is on public sector banks in India.
So they have to focus on their working and recover the assets form sectors.

Table: 2 Net Profits of banks in India

Net Profit ( Rupees in corer)

United
State Indian Panjab Central
Bank of Bank Bank of
Year Bank Overseas National Bank
India of Baroda
of India Bank Bank India
India
2007 4541.31 1125.95 267.28 1026.46 1008.43 1540.08 498.01
2008 6729.12 1960.28 318.95 1435.52 1202.34 2048.76 550.16
2009 9121.23 3009.41 184.71 2227.20 1325.79 3090.88 571.24
2010 9166.05 1738.56 322.96 3058.33 706.96 3905.36 1058.23
2011 7370.35 2488.71 523.97 4241.68 1072.54 4433.50 1252.41
2012 11707.29 2674.62 632.53 5006.96 1050.13 4884.20 533.04
2013 14104.98 2741.91 391.90 4480.72 567.23 4747.67 1014.96
- -
10891.17 2732.65 4541.08 601.74 3342.58
2014 1213.44 1262.84
2015 13101.57 1748.32 255.99 3398.44 -454.33 3061.58 606.45
- - -
9950.65 -281.96 -2897.33 3944.40
2016 6334.98 5395.54 1117.67
Source: Financial results of different seven banks of ten years

A remarkable difference in the financial status of the banks was observed in the year 2016.
All the banks except SBI and PNB went through a severe loss in the year. The loss percents
of the banks- BOI, BOB, IOB, CBI and UBI in the year 2016 as compared to 2015 were
462.32, 258.77, 537.71, 284.30, and 210.14 respectively (Table- ….). Among the banks, only
SBI and PNB could achieve profit consistently in all the years.

s
Table 3:
Gross NPA ( Rupees in corer)
United
State Indian Panjab Central
Bank of Bank Bank of
Year Bank Overseas National Bank
India of Baroda
of India Bank Bank India
India
2007 9998.00 0.00 744.30 0.00 1120.00 3390.72 2572.00
2008 12837.34 0.00 817.00 2400.69 997.00 3319.30 2350.00
2009 15588.6 0.00 761.00 1842.92 1923.40 2767.46 2316.50
2010 19534.89 0.00 1019.60 1981.38 3611.00 3214.41 2457.90
2011 25326.29 4811.55 1355.78 3152.50 3089.00 4379.39 2394.53
2012 39676.46 5893.97 2176.42 4464.75 3920.00 8719.62 7273.46
2013 51189.39 8765.25 2963.83 7982.58 6607.00 13465.79 8456.18
2014 61605.35 11868.80 7118.01 11875.90 9020.00 18880.06 11500.01
2015 56725.34 22193.24 6552.91 16261.45 14922.00 25694.86 11873.06
2016 98172.80 49879.12 9471.01 40521.04 30048.00 55818.33 22720.88
Source: Financial results of different seven banks of ten years

NPA of the banks went on increasing in all the years but a drastic raise was observed in the
year 2016. The percentage raise of NPA of the banks in the year 2016 as compared to 2015
were SBI – 73.07, BOI- 124.75, UBI- 44.53, BOB- 149.18, IOB-101.37, PNB- 117 and CBI-
91.36

Table: 4 Correlation between Gross NPA of individual banks and Net NPA of Indian
Banking Sector

Correlation
GDP -0.234976
Nationalized banks 0.9982072
SBI & its associates 0.9835624
Public banks 0.9999983

In Table no 4 is showing that correlation between Net NPA and GDP of the country is -0.23.
It means that there is negative relation GDP and NPA means if Net NPA decreases, the GDP
of the country will increase
Table: 5 Correlation between NPA and Net profit of banks

Bank Correlation
State Bank of India 0.591125611
Bank of India -0.863792026
United Bank of India -0.654074198
Bank of Baroda -0.720973007
Indian Overseas Bank -0.985503809
Panjab National Bank 0.194168193
Central Bank India -0.73857971

In Table no 5 is showing that correlation for SBI and PNB are equal to 0.591 and 0.194
respectively. It means that there is a positive relation between Net Profits and NPA. It means
that as profits increase NPA also increase. NPA is directly related to Total Advances given by
bank and banks main source of income is interest earned by bank. But other banks are
negative correlation. NPAs are increasing in every year but net profit decrease.

6. Conclusions
NPAs affect the financial performance of Indian banks as well financial growth of economy.
Indian banking system is facing the NPAs problem. Every country’s economic growth
depends upon their financial system. The financial system mainly comprises banking sector.
Especially public sector banks should focus on their NPA Management to grow their
profitability. The financial institutions should develop new strategies planning to improve the
recovery of loan. Non-performing assets (NPAs) is affecting the performance of financial
institutions both financially and psychologically. The non-performing assets have become a
major cause of concern. Absorbing the credit management skills has become all the more
important for improving the bottom-line of the banking sector. The current NPAs status
continues to disturb Indian banking Sector. Several experiments have been tried toreduce
NPAs but nothing has hit the mark in tackling NPAs. The Indian banking sector faced a
serious problem of NPAs. A high level of NPAs suggests high probability of a large number
of credit defaults that affect the profitability and liquidity of banks. Most of the problem
related to NPA is faced by public sector banks. To improve the efficiency and profitability,
the NPAs have to be scheduled. Strict measures are needed to be taken up to combat these
NPAs crises. It is highly impossible to have zero percentage NPAs.
Improvement in recovery management properly functioning of banks depends on time
recovery of loan. Banks should develop a new recovery programs for over dues, monitoring
accounts, keeping regular contact with borrowers. However, many borrowers are defaulters
not because of low income but due to lack of ethics.
Improving the credit Management- Management of credit is essential for proper functioning
of banks. Preparation of credit planning, proper credit appraisals, disbursements, post
sanction follow-up and need based credit are the some areas of credit management that needs
improvement in order to reduce the NPAs. Banks should reduce dependence on interest
income- Indian banks are largely dependent on the lending and investment as in comparison
to developed countries. Indian banks should look for sources (income) from fee based
services and products. Credit Information Bureau India LTD (CIBIL) the institutionalization
of information sharing arrangement is now possible through the newly formed Credit
information Bureau of India Limited (CIBIL) it was set up in the year 2001, by SBI, HDFC,
and two foreign technology partners. This will prevent those who take advantage of lack of
system of information sharing amongst leading institutions to borrow large amount against
same assets and property, which has in no measures contributed to the incremental of NPAs
of banks.
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