…….

IMPACT OF NPA IN THE

BANKING SECTOR

NAME : ZOYA AHMED

ENROLLMENT NO : A90904618089
SEMESTER : 5TH
COURSE CODE : MSMN100
PROGRAM : BCOM HONS
 ACKNOWLEDGEMENT

During this quarantine period, I was amazed to research and work so closely of
working closely about IMPACT OF NPA IN THE BANKING SECTOR and I would
like to thank all the people and friends who shared helped me in completion of my
research.

I express my sincere thanks to my institute faculty for guiding me.

Lastly I am grateful to my parents who have been my mentors and motivators. I am

also thankful to all my batch mate who have been directly or indirectly involved in
successful completion of this project.
…….

INTRODUCTION

A country’s development can be better perceived through economic growth which

is influenced by the prevailing financial system. The ‘Financial System’ plays a
crucial role and it intermediates between the flow of funds belonging to those who
save a part of their income and those who invest in productive assets. A strong
financial system is crucial to fulfill the objective of strengthening the real economy
and for its healthy and orderly growth.

Financial Institutions are intermediaries that mobilize savings and facilitate the
allocation of funds from surplus units to deficit unit in an efficient manner. Good
financial institutions are vital to the functioning of an economy. If finance were to
be described as the articulatory systems of the economy, financial institutions are
its brain. They make decisions that tell scarce capital where to go and ensure that
it is used most efficiently. The process of financial intermediaries support
increasing the capital accumulation though the institutionalization of savings and
investment and as such, fosters economic growth. The gains to the real sector of
the economy therefore depend on how effectively the financial sector performs this
basic function of financial intermediation.

The financial systems of most developing countries are characterized by

coexistence and co-operation between the formal and informal financial sectors.
The Indian financial system can also be broadly classified into formal (organized)
financial system and informal (unorganized) financial system. Banking institutions
are creators and purveyors of credit. While the liabilities of banks are part of the
money supply, this many not be true of non-banking financial institutions. There is
no hard and fast rule to distinguish between banking and non-banking institutions.

Banks play a very useful and dynamic role in the economic life of every modern
state: They are important constituents of the money market and their demand
deposits serve as money in the modern community. Banks can work as catalytic
agents of growth by following the right kind of policies in their working, depending
upon the socioeconomic conditions prevailing in a country. It is realized that since
banks have the required investment potentiality, they can make a significant
contribution in eradicating poverty, unemployment, and they can bring about
progressive reduction in inter-regional, interstate, and inter sectoral disparities
through rapid expansion of banking services.
 Commercial banks have come to play a significant role in the development of
countries. The two basic functions of commercial banks are: mobilization of the
savings of the people and disbursement of credit according to socio-economic
priorities, thus accelerating the pace of economic development in the desired
direction. The world over, banking system is the focal point in the financial set-up of
any developing country. In India too economic development has evolved around
the banking system.

NEED FOR THE BANKS

Before the establishment of banks, the financial activities were handled by money
lenders and individuals. At that time the interest rates were very high. The interest
rate charged by them is higher than the interest charged by other banking
institutions. Again there was no security of public savings and no uniformity
regarding loans. So as to overcome such problems the organized banking sector
was established, which was fully regulated by the government. The organized
banking sector works within the financial system to provide loans, accept deposits
and provide other services to their customers.

BANKING SYSTEM IN INDIA

Indian banking industry has been divided into two parts, organized and
unorganized sectors. The organized sector consists of Reserve Bank of India,
Commercial Banks and Co-operative Banks, and Specialized Financial Institutions
(IDBI, ICICI, IFC etc). The unorganized sector, which is not homogeneous, is
largely made up of money lenders and indigenous bankers.

The Indian banking system has the Reserve Bank of India at the apex. It is the
nerve centre of the Indian monetary system. The RBI is governed by a central
board (headed by a Governor) appointed by the central government of India. RBI
has 22 regional offices across India. The reserve bank of India was nationalized in
the year 1949. The bank was constituted to regulate the issues of banknotes,
maintain reserves with a view to securing monetary stability and to operate the
credit and currency system of the country to its advantage.
…….

With economic growth assuming a new urgency since independence, the range of
the Reserve Bank’s functions has steadily widened. The bank now performs a
variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking.

SCHEDULED COMMERCIAL BANKS

The commercial banking structure in India consists of scheduled commercial banks

and unscheduled banks. Scheduled Banks in India constitute those banks which
have been included in the second schedule of RBI act 1934. For the purpose of
assessment of performance of banks, the Reserve Bank of India categories those
banks as public sector banks, old private sector banks, new private sector banks
and foreign banks, i.e. private sector, public sector, and foreign banks come under
the umbrella of scheduled commercial banks. “Unscheduled Bank in India” means
a banking company as defined in clause © of section 5 of the Banking Regulation
Act, 1949 (10 of 1949), which is not a scheduled bank”.

NON PERFORMING ASSETS (NPAs)

Authentic history of banking tells that it deals with lending and collection of money.
However, it followed the basic law of demand and supply where persons having
excess money lent to persons who needed it for more productive purposes and
were willing to pay a price for this. The operations were limited to the money
lender knowing every person he lent money to.

Proper regulation and organization of these activities was necessitated, over a

period of time, as the operations began to grow because of increase in the number
of clients. Gradually, simple banking transformed itself into commercial banking
and the commercial banking itself has undergone numerous changes all over the
world, during the last five decades. In the regard, India is not an exception and in
fact, the changes that have taken place in India have been far more significant and
much more radical in some regards, than elsewhere in the world.
The concept of Non-Performing Assets (NPAs) was introduced for the first time in
the Narasimham Committee on “Financial System Reforms” that was tabled in
Parliament on December 17th 1991. The Committee studied the prevailing financial
system, identified its short comings and weaknesses and made with ranging
suggestions and recommendations in line with internationally accepted norms.
Based on the recommendations of the Committee on “Financial System Reforms”,
the RBI evolved prudential norms on Income recognition ,Asset classification and
Provisioning and issued revised instructions to banks in April 1992. While
conveying non-performing category and their anxiety to present rosy picture of their
affairs the above instructions to banks also advised them that as per practice
followed internationally, income on NPAs is not to be recognized on accrual basis
but is to be looked only when it is actually realized because an asset becomes
non-performing when it ceases to generate income. The above instructions of RBI
have since been implemented by banks from the financial year ended March 1998.

The problem of NPAs is linked to the function of lending money. The lending of
money collected from the public, for interest, instead of one’s own money, was the
beginning of banking. Though the present day banking does not restrict itself to
traditional deposit collection and money lending, encompassing a wide sphere of
financial activity, lending still remains the prime activity connected with banking.
Most credit needs of the society, for carrying, commercial activities are fulfilled by
the banks. The conventional credit from the banking system to the Commercial
sector comprises bank loans and advances in the form of term loans, demand
loans, cash credit, overdrafts, inland and foreign bills purchased and discounted as
well as investments in instruments issued by non-government sector.

Non-performing assets (NPAs) constitute integral part of banks’ operations. A bank

gives out money upfront and earns income over a time on the promise of a
borrower to repay. When loans are not repaid, the bank loses both its income
stream, as well as its capital. Lending is always accompanied by the credit risk
arising out of the borrower’s default in repaying the money. The level of non-
performing loans is recognized as a critical indicator for assessing banks’ credit
risk, asset quality and efficiency in allocation of resources to productive sectors.
The most calamitous problem facing commercial banks all over the world in recent
times is spiraling non-performing assets which are affecting their viability and
solvency and thus posing challenge to their ultimate survival. So the problem of
NPAs should be nipped in the bud. It is possible only if the check is placed on
NPAs from the very beginning.

The lack of preparedness and structural weakness of our banking system led to
the emerging scenario and trying to switch over to globalization were only
aggravating the crisis. The major reason for this situation was that the threat of
NPAs was being surveyed and summarized by Reserve Bank of India (RBI) and
…….

Government of India with a bird’s eye-view of the banking industry, independent

from the rest of the economy.

Advantages of NPA :

 The initiative will strike a fear in the hearts of promoters from defaulting as
they might end up losing their companies. Such promoters might start
bringing in funds from their other ventures to keep this company from
slipping away.

 Banks will be able to clean up their books rapidly and still hold on to the
asset. Banks will move the company from their lending books as loans get
converted to equity. Such a conversion has also been exempted from
calculation of capital market exposure and will not attract mark-to-market
provisioning.
 Change in ownership will help banks recover their money fast if the change
in management brings in the desired results.
 RBI, through this announcement, has made it clear on how the company
will be valued. Since most of these companies are sick and do not have
any net worth; valuation was a tricky issue. RBI said that the conversion of
debt to equity will be at a fair value and should not exceed the lowest of
‘market value’ or break-up’ value.
Market value is the average closing price of the company in the last 10 days
preceding the reference date for conversion. Break-up value is the book value per
share to be calculated from the company’s latest audited balance sheet, adjusted
for cash flows and financials after the earlier restructuring.

 Selling such sick companies would not only help banks increase lending
but also increase the output from the affected companies, thus adding to
the overall growth of the economy.

DISADVANTAGES OF NPA :

1) Many argue that RBI’s policy is utopian. The central

bank knows that commercial banks will not be able to
run companies, especially since they did not have the
foresight to avoid lending money to such companies that
were going to default. Further, running a manufacturing
or a services (non-financial) business is a completely
different ball-game than running a bank. They are on the
two opposite ends of the risk spectrum. That probably
explains why RBI has advised banks to sell the stake to
a new promoter ‘as soon as possible’.
2) Banks may also find it difficult to find buyers for such
companies. When banks convert debt to equity at low
prices (valuation), the equity capital will bloat, making it
dificult to service.
 3) RBI’s measures may work in cases where promoters are
wilful defaulters. But in cases where the entire sector is
in stress, there is nothing that existing promoters,
bankers or the new promoters can do unless the overall
economy picks up. Edelweiss, in a recent report, has
pointed out that major stress to the banking system
comes from iron and steel, infrastructure and textile
industry. Not only are the NPAs highest in these
segments but so are the slippages. Finding a brave
buyer for such assets will be a difficult task.
4) A wilful defaulter is one who knows that he can bypass
the system or generally has the muscle to take on the
system. Snatching away his company will not be as
easy as it seems. He can get bankers in a legal tangle
which will delay the entire process.
5) Consider a large corporate with deep pockets which is
willing to buy a company for its assets (say mines). The
value at which it will be buying these assets will be
ridiculously low. Share price of such defaulting
companies are generally beaten down and their break-
up value (which is the book value per share adjusted for
cash flows and financials) would also be very low. In
fact, RBI has said that if the latest balance sheet is not
available then the break-up value shall be Re 1. This
means that the buyer of the company will be able to get
the asset at a very low cost. Banks would barely be able
to recover their money, but the buyer, if he plays the
capital structuring game right (merge the sick company
at low valuations into its own company) would be a huge
beneficiary.

FACTORS RESPONSIBLE FOR NPAs

The following factors confronting the borrowers are responsible for incidence of
NPAs in the banks:-

(i) Diversion of funds for expansion/modernization/setting up new

projects/helping promoting sister concerns.

(ii) Time/cost overrun while implementing projects.

…….

(iii) External factors like raw-material shortage, raw-material/Input price

escalation, power shortage, industrial recession, excess capacity,
natural calamities like floods, accident etc.

(iv) Business failure like product failing to capture market, inefficient

management, strike/strained labour relations, wrong technology,
technical problem, product obsolescence, etc.

(v) Failure, non-payment/over dues in other countries, recession in other

countries, externalization problems, adverse exchange rate, etc.

(vi) Government policies like excise, import duty changes, deregulation,

pollution control orders, etc.

(vii) Wilful default, siphoning of funds, fraud, misappropriation,

promoters/management disputes etc.

Besides above, factors such as deficiencies on the part of the banks viz.

Deficiencies in credit appraisal, monitoring and follow-up; delay in release of limits;

delay in settlement of payments/subsidies by Government bodies, etc. are also
attributed for the incidence of NPAs .

Indian Banking and NPA regulations: until mid eighties, management of

NPAs was left to the banks and the auditors. In 1985, the first ever system of
classification of assets for the Indian banking system was introduced on the
recommendations of

A. Ghosh Committee on Final Accounts. This system, called the ‘Health Code
System’ (HCS) involved classification of bank advances into eight
categories ranging from 1 (satisfactory) to 8 (bad and doubtful debt) . In
 1991, the Narasimhan Committee on the financial system felt that the
classification of assets according to the HCS was not in accordance with
international standards and suggested that for the purpose of provision,
banks should classify their advances into four broad groups, viz. (i)
standard assets; (ii) substandard assets; (iii) doubtful assets; (iv) loss
assets. Following this, prudential norms relating to income recognition,
asset classification and provisioning were introduced in 1992 in a phased
manner. In 1998, the Narasimhan Committee on Banking Sector Reforms
recommended a further tightening of prudential standards in order to
strengthen the prevailing norms and bring them on par with evolving
international best practices . With the introduction of 90-days norms for
classification of NPAs in 2001, the NPA guidelines were brought as par
with international standards .

The NPAs can broadly be classified into (i) Gross NPAs, (ii) Net NPAs. Gross
NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on balance sheet date. It reflects the quality of loans made by banks.
(Gross NPAs Ratio = Gross NPAs/Gross Advances). Net NPAs are those type of
NPAs in which the banks deduct the provisions regarding NPAs. It shows the
actual burden of banks (Net NPAs = Gross NPAs-Provision/Gross Advances-
Provisions).

How much NPA do Banks hold?

Any asset which stops giving returns to its investors for a specified period of time is
known as Non-Performing Asset (NPA). Indian Banking industry is seriously
affected by Non-Performing Assets. More than Rs. 7 lakh crore worth loans are
classified as Non-Performing Loans in India. This is a huge amount. The figure
roughly translates to near 10% of all loans given. This means that about 10% of
loans are never paid back, resulting in substantial loss of money to the banks.
When restructured and unrecognised assets are added the total stress would be
15-20% of total loans. NPA crisis in India is set to worsen. Restructuring norms are
being misused.

This bad performance is not a good sign and can result in crashing of banks as
happened in the sub-prime crisis of 2008 in the United States of America. Also, the
NPA problem in India is worst when comparing other emerging BRICS Economies.
In India banking sector has played pivotal role in our nation building. After
Liberalisation of the economy the banking sector has faced severer challenges, but
due to its solid foundation and management it has withered all the subsequent
challenges including 2008 sub-prime crisis. But the recent problem has been
grave. In the case of public sector banks, the bad health of banks means a bad
return for a shareholder which means that government of India gets less money as
a dividend. Therefore it may impact easy deployment of money for social and
infrastructure development and results in social and political cost.NPAs related
cases add more pressure to already pending cases with the judiciary one. In this
paper it has been discussed in details with best possible solutions.
…….

Higher NPA impact the revenue strength of the banks and also lose the confidence
level of consumers and depositors, banks are back boon to the Financial economy
of every country.

Changes in Interest Rates

Higher NPA reflects the reduction of interest rate on the deposit into banks, only
poor public directly impact the consequences of Higher NPA’s of the bank.

Levies of charges for every operation

Looking at the above scenario, the bank is recovering their losses by levies
charges on those operations which were free of cost like –

• Withdrawal limit from ATM

• Withdrawal number of times

• Cash deposits in other branches

• Internet transaction charges

NPA Affects growth

As stated earlier the credit growth to the industrial sector was higher as compared
to the GDP growth and over credit growth during the period 2006-11. As a result,
the proportion of NPAs in industrial sector was much higher vis-à-vis other sectors.
Consequently, in the later phase, banks were reluctant to fund the needs of
industrial sector hampering its growth. In fact, in some cases like that of the Micro,
Small and Medium Enterprises (MSME) industry, credit actually shrank.The
slowdown in growth in post-demonetization period also resulted in reduced
profitability of the manufacturing sector which further prompted the banks to stall
the credit growth to the industrial sector. In the long term, the shortage of funds to
the industrial sector will affect the growth of the industrial sector.

After 2014-15, the credit growth to the industrial sector is least as compared to the
credit growth to the agriculture and service sector. The continuous shrinking of
credit to industrial sector is detrimental to not only industries but overall economy
as well.It is clear that infrastructure accounted for biggest chunk of NPAs. Because
of massive amount of NPA in infrastructure, the banks are now reluctant to fund
this sector. As the infrastructure is one of the most important sectors in economy
which fuels the growth of other sectors, draining of resources to infrastructure may
hamper the growth of
Indian economy.Among the other sectors, food processing also accounted for
5.3% of total NPAs. Food processing is one of the most employment intensive
industries and its growth also pushes the growth of agriculture. Any loss to the food
processing industry will ultimately percolate to the employment as well as
agriculture sector.Other sectors will also directly or indirectly affect the overall
economic scenario due to the exposure to the bad loans. Hence, the issue of NPA
must be resolved on urgent basis.

NPA & consumer sentiment

The problem of NPAs in the Indian banking system is one of the foremost and the
most formidable problems that had impact the entire banking system. Higher NPA
ratio trembles the confidence of investors, depositors, lenders etc. It also causes
poor recycling of funds, which in turn will have deleterious effect on the deployment
of credit. The non-recovery of loans effects not only further availability of credit but
also financial soundness of the banks.

Profitability: NPAs put detrimental impact on the profitability as banks stop to earn
income on one hand and attract higher provisioning compared to standard assets
on the other hand. On an average, banks are providing around 25% to 30%
additional provision on incremental NPAs which has direct bearing on the
profitability of the banks.

Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds
and reduces the ability of banks for lending more and thus results in lesser interest
income. It contracts the money stock which may lead to economic slowdown.

Liability Management: In the light of high NPAs, Banks tend to lower the interest
rates on deposits on one hand and likely to levy higher interest rates on advances
to sustain NIM. This may become hurdle in smooth financial intermediation process
and hampers banks’ business as well as economic growth.

Capital Adequacy: As per Basel norms, banks are required to maintain adequate
capital on risk-weighted assets on an ongoing basis. Every increase in NPA level
adds to risk weighted assets which warrant the banks to shore up their capital base
further. Capital has a price tag ranging from 12% to 18% since it is a scarce
resource.
…….

Shareholders’ confidence: Normally, shareholders are interested to enhance value

of their investments through higher dividends and market capitalization which is
possible only when the bank posts significant profits through improved business.
The increased NPA level is likely to have adverse impact on the bank business as
well as profitability thereby the shareholders do not receive a market return on their
capital and sometimes it may erode their value of investments. As per extant
guidelines, banks whose Net NPA level is 5% & above are required to take prior
permission from RBI to declare dividend and also stipulate cap on dividend payout.

Public confidence: Credibility of banking system is also affected greatly due to

higher level NPAs because it shakes the confidence of general public in the
soundness of the banking system. The increased NPAs may pose liquidity issues
which is likely to lead run on bank by depositors. Thus, the increased incidence of
NPAs not only affects the performance of the banks but also affect the economy as
a whole.

In a nutshell, the high incidence of NPA has cascading impact on all important
financial ratios of the banks viz., Net Interest Margin, Return on Assets,
Profitability, Dividend Payout, Provision coverage ratio, Credit contraction etc.,
which may likely to erode the value of all stakeholders including Shareholders,
Depositors, Borrowers, Employees and public at large.

Impacts of NPA
Unplanned expansion of corporate houses during boom period and loan taken at
low rates later being serviced at high rates, therefore, resulting into NPAs. The
problem of NPAs in the Indian banking system is one of the foremost and the most
formidable problems that had impact the entire banking system. Higher NPA ratio
trembles the confidence of investors, depositors, lenders etc.

It also causes poor recycling of funds, which in turn will have deleterious effect on
the deployment of credit. The nonrecovery of loans effects not only further
availability of credit but also financial soundness of the banks. Profitability: NPAs
put detrimental impact on the profitability as banks stop to earn income on one
hand and attract higher provisioning compared to standard assets on the other
hand. On an average, banks are providing around 25% to 30% additional provision
on incremental NPAs which has direct bearing on the profitability of the banks.
Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds
and reduces the ability of banks for lending more and thus results in lesser interest
income. It contracts the money stock which may lead to economic slowdown.
Liability Management: In the light of high NPAs, Banks tend to lower the interest
rates on deposits on one hand and likely to levy higher interest rates on advances
to sustain NIM.
RBI noted that the recognition of past bad loans has “neared completion” in the
reported fiscal year on the back of the asset quality review exercise undertaken by
the central bank in 2015 and the subsequent implementation of the framework for
resolution of stressed assets in February 2016.

The framework that had made it mandatory for banks to identify signs of incipient
stress in loan accounts and classify these assets as Special Mention Account
(SMA), immediately on default, was revised in June 2016 to provide banks a
window to resolve these toxic accounts without taking them into administration.

OBJECTIVES OF THE STUDY

The present study has been taken up with the following objectives:

1. To understand the performance of the public and private sector banks

during the last decade.

2. To make a comparative study of the magnitude and dimensions of NPAs in

the Public and private sector banks.

3. To examine the causes for incidence and trends of NPAs in the public and
private sector banks.

4. To examine the recovery measures and strategies followed for reducing

the burden of NPAs by the public and private sector banks.
…….

5. To make suitable suggestions for the public and private sector banks to
effectively handle the challenge posed by the NPAs.

HYPOTHESES

1. The financial health and credibility of Banks is not similar in public and
private sectors.

2. There has been a steady improvement in the management of NPA’s in

Banks with considerable variation between the public and private sector
banks.

3. The recovery measures are better followed in private sector banks

compared when to the public sector banks.

STUDY DESIGN

The present study is designed to be a narrative study with appropriate analytical

discussions presented in tune with the proposed objectives. For the present
purpose, two banks from public sector and two from the private sector have been
selected purely considering the bank’s profitability based on the recent
performance figures of the banks. In each sector, one bank from the high
performing group and the other from the low performing group has been picked up
on random basis. Accordingly, State Bank of India and Canara Bank from the
public sector, while HDFC Bank and Karur Vysya Bank from the private sector
have been selected and performance figures of these four banks have been used
for the comparative analysis.
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 public sector banks in India during the period
2007 to 2016.The present study is a descriptive study which tries to establish the
relationship between the non performing assets and net profits. This is selective
study. 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 commercial banks in India. The
final analysis is done by Correlation and Regression 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, regression and data
representation techniques identifies that there is a negative relationship between
profitability measure and NPAs.
…….

4. Table and Fig

Trends in net profit of the banking sector of India

20000
State Bank
15000 of India
Bank of
India
10000
Rupees in corer

United Bank
of India
5000 Bank of
Baroda

0 Indian Overseas
Bank
2006 2008 2010 2012 2014 2016 2018
Panjab National
-5000 Bank
Central Bank
-10000 India
Year

ures

4.1. Figure

Figure 1: Net profit of Seven Banks for Ten year

Source: Prepared by Author

This is the trend of Net Profit for the different banks for the years 2007 –2016.
Almost all the banks have experienced a negative growth in the year 2016.

Trends in Gross Non-performing Assets of the banking sector in India

120000.00

100000.00
State Bank
of India
80000.00 Bank of
India
R upe e s in core r

United Bank
60000.00 of India
Bank of
Baroda
40000.00
Indian Overseas
Bank
20000.00 Panjab National
Bank
Central Bank
0.00
India
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-20000.00
Year

Figure 2: Non-performing assets of seven banks

Source: Prepared by Author
The gross NPA have been continuously increasing for all he banks for he specified
period. As the business operations of the bank increasing the amount of NPAs
have also increased.

4.2. Table

Table 1:
Net Profit ( Rupees in corer)
State United Indian Panjab Central
Bank of Bank of
Year Bank Bank Overseas National Bank
India Baroda
of India of India Bank Bank India
200
4541.31 1125.95 267.28 1026.46 1008.43 1540.08 498.01
7
200
6729.12 1960.28 318.95 1435.52 1202.34 2048.76 550.16
8
200
9121.23 3009.41 184.71 2227.20 1325.79 3090.88 571.24
9
201
9166.05 1738.56 322.96 3058.33 706.96 3905.36 1058.23
0
201
7370.35 2488.71 523.97 4241.68 1072.54 4433.50 1252.41
1
201
11707.29 2674.62 632.53 5006.96 1050.13 4884.20 533.04
2
201
14104.98 2741.91 391.90 4480.72 567.23 4747.67 1014.96
3
201
10891.17 2732.65 -1213.44 4541.08 601.74 3342.58 -1262.84
4
201
13101.57 1748.32 255.99 3398.44 -454.33 3061.58 606.45
5
201
9950.65 -6334.98 -281.96 -5395.54 -2897.33 3944.40 -1117.67
6
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.
 
Table 2:
Gross NPA ( Rupees in corer)
Indian
State United Panjab Central
Bank of Bank of Oversea
Year Bank Bank National Bank
India Baroda s
of India of India Bank India
Bank
200
7 9998.00 0.00 744.30 0.00 1120.00 3390.72 2572.00
200
8 12837.34 0.00 817.00 2400.69 997.00 3319.30 2350.00
200 15588.6 0.00 761.00 1842.92 1923.40 2767.46 2316.50
…….

9
201
0 19534.89 0.00 1019.60 1981.38 3611.00 3214.41 2457.90
201
1 25326.29 4811.55 1355.78 3152.50 3089.00 4379.39 2394.53
201
2 39676.46 5893.97 2176.42 4464.75 3920.00 8719.62 7273.46
201
3 51189.39 8765.25 2963.83 7982.58 6607.00 13465.79 8456.18
201 11868.8 11875.9
4 61605.35 0 7118.01 0 9020.00 18880.06 11500.01
201 22193.2 16261.4
5 56725.34 4 6552.91 5 14922.00 25694.86 11873.06
201 49879.1 40521.0
6 98172.80 2 9471.01 4 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: 3 Correlation between NPA and Net Profit of the selected 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
Source: Prepared by author

In Table no 3 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.

Result
The banks have expressed correlation between Gross NPA and the Net profit. SBI
and Punjab National Bank have shown positive correlation, and all the other banks
expressed negative correlation. Bank of Baroda increasing the NPA almost 249%
as compare with 2015.In this research paper applying the random method of panel
regression, the result is:
plm(formula = G.NPA ~ Net.Profit, data = npa_rp, model = "random",
R-Squared: 0.57082
R value is 57% that’s why this model is effective model. This model showed that
when the NPA is increasing that time net profit decreasing. The independent
variables is non-performing asset.
Normally the profitability of the banking sector depends on recovery of loans on
time which are disbursed to the different sectors. The performance of banking
sector depends on how effectively you manage the non performing assets. Except
SBI and Punjab National Bank all the banks are facing problems with respect to
NPAs. It does not indicate that the more NPAs the more profits for SBI but the
largest bank of India is able to receive more profits only because of its wide variety
of financial services and effective management of NPAs. But if NPAs continue in
the same manner then even large banks will also stumble like Lehman Brothers in
USA which resulted in International economic crisis.

Current Status of NPAs in Banking:

For years, Indian lenders, especially state-run banks, were engaged in volume
game to balloon their balance sheets and appease their promoter (the
government). That has been so ever since nationalisation of these banks
happened in two stages (beginning 1969). Governments often treated these banks
as their extended arms and used them for populist measures. There used to be
competition among sarkari banks to flag their total business number on front-pages
of national newspapers but very little attention was paid to the quality of assets.
Every outgoing chairman passed the buck to his successor.
“That was a time (2011-2013) when everyone rushed to give money to
corporations, no matter what the credit perception was. Everyone expected a
miraculous pick-up in the economy,” recalled a former banker with a nationalised
bank who now works as a consultant. First post takes a look at how the NPA
pictures of India’s government-owned banks have evolved so far:

the total loans, has grown from 2.11 per cent to 5.08 percent.
…….

From Rs 53,917 crore, Indian banks gross non-performing assets (GNPAs) in

September 2008 (just before the 2008 global financial crisis broke out following the
collapse of Lehman Brothers), the bad loans have now grown to Rs 3, 41,641 crore
in September 2015. In other words, the total GNPAs of banks, as a percentage of

Surprisingly, in the pre-crisis period, private banks topped the list of banks with
highest NPAs (see the chart). A quick look at the top ten NPA scorers in
September 2008 shows ICICI Bank at the top. This was followed by small and
medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas Bank,
Kotak Mahindra and IndusInd Bank. Among the few sarkari banks that figure in the
list are Central Bank, Uco Bank and Syndicate Bank.

By March 2009, a few months before the Congress-led UPA II assumed power, the
scene began changing gradually. More state-run banks began appearing in the
picture. The country’s largest lender by assets, State Bank of India (SBI) and
Indian Overseas Bank found place in the list of top NPA

Scorers. Still private sector lenders figured prominently in the list with ICICI and
DCB Bank leading the pack. To be sure, there is no direct link between the
ascension of UPA-II and the increase in the NPA picture, but this is when the state-
run banks began feeling the heat of NPAs.

Things had worsened to a great extent by March 2014, incidentally, months before
the Narendra Modi government assumed power at the Centre with a landslide
victory over the Congress-led UPA government. The bad loan troubles of
government banks began to hit hard despite the best efforts by banks to cover up
possible NPA stock to restructured loan category. The list now is dominated mostly
by public sector banks, with eight out of ten banks being government owned.
…….

Twenty months into the Modi government rule, it wouldn’t be an exaggeration to

say that state-run banks are on the verge of a crisis due to their high NPAs, which
constitute over 90 percent of the total bad loans of the industry. Many of them have
reported losses on account of huge NPAs in the December quarter, surprising
analysts. Investors are dumping shares of these banks while there is a sense of
uncertainty prevailing on the extent of troubles in the banking sector.

Nine out of 10 most stressed banks in the sector are government banks. The RBI
has given a deadline of March 2017 for all banks to clean up their balance sheets,
which also require these lenders to set aside huge chunk of capital in the form of
provisions. RBI governor Raghuram Rajan has given a clear message to banks to
deal with the NPA problem upfront, instead of postponing it and worsening it. But,
there is also huge capital implication on these banks on account of high NPAs too.
Banks need to set aside money (known as provisions) to cover their bad loans.
The onus to keep government banks stay afloat lies with the government, which is
the owner of these banks that control 70 per cent of the banking industry assets.
Experts have opined that the government’s promised capital infusion in these
banks is inadequate. Finance minister, Arun Jaitley, has to work out ways to bring
in solutions in the long term. For now, all eyes are on the Union budget for a
roadmap.
 Views of RBI Governor (Dr. Raghuram Rajan):

• Regarding NPA recovery Rajan said, “We have to improve the efficiency of
the recovery system, especially at a time of economic uncertainty like the
present. Recovery should be focused on efficiency and fairness –
presenting the value of underlying assets and jobs where possible, even
while redeploying unviable assets to new uses and compensating fairly. All
this should be done while ensuring that contractual priorities are met. The
system has to be tolerant of genuine difficulties while coming down on

• A high level of non-performing assets compared to similar lenders may be

a sign of problems, as may a sudden increase. However this needs to be
looked at in the context of the type of lending being done. Some banks
lend to higher risk customers than others and therefore tend to have a
higher proportion of non-performing debt, but will make up for this by
charging borrowers higher interest rates, increasing spreads. A mortgage
lender will almost certainly have lower non-performing assets than a credit
card specialist, but the latter will have higher spreads and may well make a
bigger profit on the same assets, even if it eventually has to write off the
nonperforming loans

SIGNIFICANCE OF THE PRESENT STUDY

There are diversities among banks based on ownership, as among the 28 Public
Sector Banks (including IDBI Bank Limited), themselves, between different
geographical regions and between different customers using banks credit.
Similarly, NPAs concerns of individual banks summarized as a whole and
expressed as a mathematical average for the entire bank cannot convey a
dependable picture.

NPAs adversely affect lending activity of banks as non-recovery of loan

installments as also interest on the loan portfolio negates the effectiveness of
creditdispensation process. Non-recovery of loans also hurts the profitability of
banks. Besides, banks with high level of NPAs have to carry more owned funds by
way of capital and create reserves and provisions and to provide cushion for the
loan losses. NPAs, thus, make two-pronged attack on the bottom-lines of
commercial banks; one, interest applied on such assets is not taken into account
because such interest is to be taken, into account only on its realization unlike
interest on performing assets which is taken into account on accrual basis; two,
…….

banks have to make provisions on NPAs from out of the income earned by them on
performing assets.

Persistently high level of NPAs in loan portfolio of banks makes them fragile,
leading ultimately to their failure. This will shake the confidence both of domestic
and global investors in the banking system which will have multiplier effect,
bringing disaster in the economy. Thus, the most critical condition for bringing
about an improvement in the profitability of banks is reduction in the level of NPAs.
In fact, it is a pre-condition for the stability of the financial system. The NPA
concept presently in vogue was introduced by RBI for implementing in the banks,
in the year 1993 based on the recommendations of the committee on the financial
system in line with internationally accepted norms.

With the implementation of the revised norms on Asset classification, income

recognition and provisioning on NPA s in the 1993 while are well defined with little
scope for different interpretations, many banks went into the red in the first year.
Further, the remaining few which had shown marginal profits were also not quite
sure as to whether they could be able to sustain the profits in the years to come.
Naturally, such a situation shocked not only the banks but also those connected
with the banking industry.
In India, the magnitude of the problem of bad debts was first realized only in early
90s, subsequently, following the recommendations of Narsimham Committee
(1991, 1998) and Verma Committee (1999), some steps have been taken to solve
the problem of old NPAs. Though concern regarding the reduction of NPAs in the
balance sheets of the banks, particularly Public Sector Banks (PSBs), continues to
be expressed from every corner, there has hardly been any systematic evaluation
of the best way of tackling the problem. There seems to be no unanimity in the
proper policies to be followed in resolving this problem. There is also no
consistency in the application of NPA norms, ever since these have been
recognized.

Today the Indian banking system has undergone significant transformation

following financial sector reforms, adopting international best practices. Several
prudential, payment, integrating and provisioning norms have been introduced, and
these are pressurizing banks to improve efficiency and trim down NPAs to improve
the financial health of the banking system. It is among the best in the world
because Indian banks are favorable on growth, asset quality and profitability; RBI
and Government have made some notable changes in policies and regulations to
strengthen the sector. NPA involves the necessity of provisions, any increase in
which brings down the overall profitability of banks and is the indicator of banking
health in a country.

It is always important to have periodical assessment in order to have an idea of

the impact of different measures designed and implemented for improving the
situation. Such evaluation helps in better planning or in improvising the existing
mechanisms. Since the nature and magnitude of the problem of NPAs is likely to
differ in different types of banks, uniform measures or interventions may not yield
expected results. Hence, it sometimes necessitates case specific remedies in
different situations. This can be done only through periodical study of the problem
in different types of banks.

Many such studies have been taken up so far on the management of NPAs.
However, the main focus was laid only on identifying causes of NPAs and
extending suggestions in the form of some measures to be taken at micro level,
that too specific to some individual banks. Therefore, there is every need to
conduct a study management of NPA’s of Schedule Commercial Banks in both
Public and Private Sectors.

In this background, the present study has been proposed to make a comparative
study of public sector and private sector commercial banks with regard to their
NPA situation and management in terms of the operational performance of four
banks, two each selected from Public and Private Sectors.

FINDINGS :

Banks can take various measures to minimize future NPAs and be able to manage
the existing ones. Some of the measures are:

1. The Reserve Bank of India should revise the monitoring system as well as
the existing credit appraisal.

2. To ensure that customers do not divert their funds, the banks should
regularly follow-up on their customers.

3. At regular intervals, all the loan accounts should be reviewed.

4. To overcome the flaws of credit appraisal and monitoring, banks should

properly train their employees and staff.

5. Banks may resort to one-time settlement scheme/compromise settlement

scheme. DRT, Lok Adalats etc. are ways through which recovery can be
done. Nowadays banks are using the SARFAESI Act to manage the NPAs.

6. A proper process should be followed before giving credit.

7. Farmers often think that agricultural loans taken from banks will be waived
off. Hence, the agriculturalist who can repay the agricultural credit may not
come forward to repay the loans in time. Therefore the farmers in our
…….

country requires a lot of counselling and the bank officers engaged in this
activity should provide necessary advice and counselling

Suggestions and Recommendations:

1. Adequate Human Resources:

Generally the manpower provided to the banking branches for NPA management
is not adequate in relation to the task assigned to them. There is a need to give
proper and skilful manpower to the branches for NPA management. There is a
fallacy that NPA management is nothing but recovery of banks dues. However this
is not correct. NPA management needs involvement and understanding on the part
of staff on continuous basis so that there is focused attention on recovery. Further,
the employees looking after NPA management should be experienced, well
qualified and trained so that they can understand the problems of recovery and
deal with them effectively.

2. Awareness & Training Camps for Borrowers:

It is generally observed that the awareness at borrower’s level regarding non-

performing assets, its impact on banks profitability is very less. There is not much
of interaction with the bank officials also. The borrowers therefore have no
knowledge or information on many things which are in their interest. It is therefore
suggested that the branches should arrange training cum awareness camps at ¾
places in their area of operation once in a year and educate the borrowers on
various issues. This will help both the borrowers and the bank in improving
communication/interaction with the borrowers and simultaneously improve the
recovery atmosphere

3. Preference of Claims:

Banks should expeditiously and properly claim indemnity from organizations like
Deposit Insurance and Credit Guarantee Corporation called DICGC, Export Credit
Guarantee Corporation called ECGC, Credit Guarantee Fund Trust for small scale
industries, Insurance Companies etc and invoke Government/other personal
guarantees to recover loan dues and reduce nonperforming assets.

4. Technical Write Off:

Normally banks decide writing off small loans which have become bad and the
recovery is not at all possible in those accounts under any circumstances on
account of the facts that the borrower might have been expired; he has no means
to repay the loan at any cost and there may be huge losses in respect of the
properties etc.

5. One Time Settlement Scheme:

To reduce the absolute amount of nonperforming assets, Government of India

along with Reserve Bank of India are announcing one time settlement schemes
periodically for the past few years. When the borrowers are alive and when the
borrowers are farmers, small entrepreneurs etc and they find it very difficult to pay
their dues for various reasons like bad health and fall in their business ventures, ,
however, they have the inclination to repay their debts to the banks, this type of
practice is very much helpful to the borrowers and the lending institutions. Surely
the banks are in a position to lose certain portion of their loan amount when they
are conducting one time settlement schemes forming accounts.

6. Compromise Proposals:

Compromise routes are adopted by banks, where borrowers experience certain

genuine difficulties and where normal recovery is not possible. It involves certain
sacrifices on the part of the banks on the principle of “one bird at hand is worth two
in the bush”. Such proposals can be taken up considering the history of the
borrower account, security available, net worth of the borrower/guarantor, time
value of offer made etc.

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
thataffect 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.
BIBLIOGRAPHY :
1. “Trend and Progress of Banking in India’’ RBI Annual Published report
2015

2. The Indian Express article on December 18, 2013 .

3. Acharya et al.,: “State Ownership and Systemic Risk: Evidence from the
Indian(2010),

4. Financial Sector during 2007-09, Centre for Japan-U.S. Business and

Economic Studies, pp. 162.

5. Allen et al., (2007), “China’s Financial System: Past, Present, and future, in
China’s Great Economic Transformation”, eds. Raw ski & Brandt,
Cambridge University Press, Cambridge.Arpita, (2010): “Are Non-
Performing Assets Gloomy from Indian Perspective?” working paper.