Cover Page for Academic Tasks

Course Code: QTT601 Course Title: Econometrics

Course Instructor: Dr. Gurpreet Kaur

Academic Task No.: CA 2 Academic Task Title: Assignment

Date of Allotment: Date of submission: 12-04-2021

Student’s Roll no: A11 Student’s Reg. no: 11918786

Evaluation Parameters: (Parameters on which student is to be evaluated- To be mentioned by
students as specified at the time of assigning the task by the instructor)

Learning Outcomes: I have come to know about the Non-Performing Assets of public and private sector
banks.
Declaration:
I declare that this Assignment is my individual work. I have not copied it from any other student‟s
work or from any other source except where due acknowledgement is made explicitly in the text, nor
has any part been written for me by any other person.
Student’s
Signature:

Evaluator’scomments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator‟s Signature and Date:

Marks Obtained…………………. Max Marks……………………………….
Introduction

The Indian banking sector has made significant progress in three areas since nationalisation: branch growth,
deposit mobilisation, and loan maximisation, but management and loan monitoring have taken a back seat
among the three. Banking began in India in the last decade of the 18th century, and both private and public
sector banks are vital components of the Indian banking system. Currently, the Indian banking system is not
only engaged in its traditional business of taking and lending money, but has also extended its operations
into advanced fields such as merchant banking, leasing, housing finance, mutual funds, and venture capital.
Banking institutions are now implementing and providing a wide variety of creative and ground breaking
deposit mobilisation schemes. In addition, financial institutions offer a variety of useful services to their
clients, such as issuing draughts, traveler's cheques, gift cheques, accepting valuables for safekeeping, and
modern banking facilities. Since 1991, when the process of financial sector liberalisation and reform began,
banking has undergone significant changes. The overarching goal of financial sector reforms and
improvements is to make the system more combative, capable, beneficial, and productive. A strong and
stable banking sector is essential for an economy to thrive. Non-performing assets (NPA) have recently
emerged as one of the most pressing issues for Indian banks. High NPAs in banking institutions indicate a
high likelihood of a large number of credit blunders, which affect banks' profitability and net worth, as well
as corrode asset value. A non-performing asset may be described as a credit facility on which the interest
and/or principal instalments have been „past due' for a period of time. It is a classification for loans on a
financial institution's books that have defaulted or are behind on scheduled principal or interest payments.

What are Non-Performing Assets?

Borrowers do not often repay money or assets given by banks as loans to businesses. Non-Performing Assets
are loans that are not paid on time or at all. They're also known as poor investments. The Reserve Bank of
India (RBI) governs the entire banking system in India, and if the interest or instalment balance is overdue
for more than 90 days, the loan account is listed as a Non-Performing Asset by the RBI. The rise in non-
performing assets in Indian banks is due to the banks' adoption of recognition criteria after the RBI raised the
issue in the Asset Quality Examination (AQR). The main cause, of course, is a lack of improvement in the
financial health of the firms.

From the year ending March 31, 2004, it was agreed to follow the "90 days" over dues standard for
recognising NPAs in order to step closer to international best practises and ensure greater transparency. As
of March 31, 2004, non-performing assets are a loan or advance that:

 In the case of a term loan, interest and/or principal instalments are past due for more than 90 days;
 In the case of an overdraft or cash credit, the account remains "out of order."
 In the case of bills purchased and discounted, the bill is past due for more than 90 days.
 For short-term crops, the instalment of theory or interest has been overdue for two crop seasons.
 For long-term crops, the concept or interest instalment is overdue for one crop season.
Types of Non-Performing Assets

Gross-NPA: - According to RBI guidelines, gross nonperforming assets (NPAs) are the sum of all loan
assets listed as NPAs as of the balance sheet date. The Gross NPA reflects the essence of the loans made by
banks. All non-standard properties, such as substandard, questionable, and loss assets, are included in this
group. The following ratio can be used to measure it:

Gross NPA = Gross NPAs /Gross Advances

Net NPA: - Net NPAs are those types of NPAs for which the bank has deducted the provision for NPAs.
The following formula can be used to measure it:

Net NPA = Gross NPAs – Provisions / Gross Advances – Provisions

Types of Assets

Standard Assets: - If a borrower pays his bills on time and in full, the bank considers the loan to be a
"Standard Asset." Standard Assets are all assets on which the bank receives interest and the principal amount
of the loan from the customer on a regular basis. These assets have a normal risk profile and are not NPAs in
the conventional sense.

Sub- Standard Assets: - Sub-standard assets are loans or advances that have been non-performing for more
than a year.

Doubtful Asset: - With affect from March 31, 2005, any asset that has been listed as NPA for more than 12
months will be classified as doubtful.

Loss Assets: - Loss assets are any assets that are unable to be recovered.

Causes of NPA

Internal Factors

Inappropriate Technology: - Banks lack a proper management information system and financial
accounting system, resulting in low credit processing. As a result, the number of NPAs rises.

Managerial Deficiencies: - When choosing borrowers, a thorough investigation should be carried out, and
tangible assets should be used as collateral to protect the company's interests.

Absence of Regular Industrial Visits: - NPAs are also increased by anomalies in spot visits.

Re-loaning Process: - The smooth running of the credit cycle has already been harmed by the non-
remittance of recoveries to higher financing agencies and the re-loaning of the same. NPA is rising day by
day as a result of re-loans to defaulters and others who do not repay.

External Factors
Ineffective Recovery Tribunals: - The Indian government has a large number of recovery tribunals tasked
with recovering loans and advances, but the country suffers the effects of non-recovery due to their
incompetence and ineffectiveness.

Natural Calamities: - Natural disasters are causing an unprecedented increase in NPAs. Natural disasters
strike India regularly, allowing borrowers to repay their loans.

Industrial Sickness: - Industrial sickness is caused by poor project management, inefficient management, a
lack of sufficient personnel, a lack of modern technologies, and constantly evolving government policies. As
a result, the banks that fund those industries end up with a poor loan recovery rate.

Lack of Demand: - Entrepreneurs in India lack the ability to predict demand for their products, so they
begin production, which piles up their product, leaving them unable to repay the money they borrowed to
run their manufacturing operations.

Impact of Non-performing Assets on Operations of Bank

Profitability: - NPAs, or non-performing assets, arise when banks are unable to verify the legitimacy of the
borrower. As a result of this, the money borrowed by banks never returns to the banks, resulting in a drop in
earnings.

Liquidity: - As a result of increasing NPAs, the bank is experiencing a significant shortage of cash to lend to
honest borrowers, which is reducing the bank's overall income.

Involvement of Management: - A significant amount of management time is spent overseeing and

recovering NPAs, time that could otherwise be spent on more profitable activities. Furthermore, the bank
would need to employ specialist personnel to handle the NPA, which will cost a significant sum of money.

Credit loss: - A bank with a large amount of nonperforming assets (NPA) loses market value, brand
reputation, and credibility, and has a negative effect on the minds of customers who keep their money in the
bank.

Recent Developments and ways to Tackle NPA

Insolvency and Bankruptcy Code: - The resolution process is expected to speed up as a result of the RBI's
drive for the IBC, while maintaining control over asset quality. The provision criteria would change, with the
requirement for a higher proportion of provisions helping to improve the books.

Credit Risk Management: - This entails credit evaluation and tracking accountability and credit through
various benefit and loss account evaluations. Banks should perform a sensitivity analysis and develop
protections against external factors when performing these studies.
Tightening Credit Monitoring: - To keep track of alerts, a correct and efficient Management Information
System (MIS) must be enforced. In an ideal world, the MIS will identify problems and send timely warnings
to management, allowing them to take appropriate action.

Amendments to Banking Law to give RBI more power: - The RBI's current authority only requires them
to audit a lender; they do not have the authority to establish an oversight committee. The RBI will be able to
track vast accounts and establish oversight committees as a result of the law change.

More “Haircuts” for Banks: - For a long time, PSU lenders have set aside a significant portion of their
earnings for provisions and losses due to nonperforming assets (NPAs). The situation is so bad that the RBI
can order them to create a larger reserve and report lower income as a result.

Stricter NPA recovery: - It is also discussed that instead of playing the "wait-and-see" game, the
government should amend the laws and allows banks more power to recover NPAs.

Corporate Governance issues: - Banks, especially those in the public sector, must establish proper
guidelines and processes for senior-level appointments.

Accountability: - Today, lower-level executives are frequently kept accountable; nevertheless, senior-level
executives make big decisions. As a result, if Indian banks are to address the issue of nonperforming assets
(NPAs), senior executives must be held accountable.

Literature Review

 Girnara Mona Rameshbahi (2020) discovered a substantial gap in non-performing assets between
public and private sector banks after analysing data. In fact, she discovered that non-performing
assets in public sector banks are far higher than in private sector banks. In public sector banks, the
ratios of gross nonperforming assets and net nonperforming assets are higher than in private sector
banks. In comparison to private sector banks, the amount of gross and net nonperforming assets
(NPA) in public sector banks is higher. She discovered that a higher level of nonperforming assets
(NPA) has a detrimental effect on a bank's profitability.
 Mr AbidHusain G Kadiwala and Dr, Rasikbhai I Prajapati (2020) revealed that all of the selected
private sector banks' average nonperforming assets (NPAs) were less than 5%. For the study period,
the average NPAs of all the selected public sector banks were more than 5%. Public sector banks had
higher nonperforming assets (NPAs) than private sector banks. The results of the study indicate that
NPAs are higher in the public sector banks segment of business, both priority and non-priority. The
current study discovered that private sector banks' assets quality and debt coverage performance are
superior to public sector banks'. NPAs in the priority sector of agriculture and allied activities are
higher than other categories in private sector banks, while NPAs in the non-priority sector of industry
are higher than other categories. According to the findings, bank forms and sector-specific NPAs
have no combined impact on total bank NPAs. The current study discovered a distinction between
 private sector bank NPAs. There is also a distinction between public sector bank NPAs. ICICI bank
had the highest average nonperforming assets of all private sector banks, while BOI had the highest
average nonperforming assets of all public sector banks.
 Harani. B and Subramanyam Mutyala (2019) described that priority sector is a critical sector for the
country's development; it should receive adequate credit, which is critical for the nation's growth and
development, as reported. Banks are still willing to lend to the non-priority market, regardless of
whether the project is feasible or not. According to recent data, non-priority sector loans have
escalated NPAs, creating headaches for public sector banks. According to a business standard review
of the balance sheets of 10 PSBs, a whopping 23 percent of non-priority segment loans to industry
turned bad at the end of FY18, compared to 15.6 percent in FY17.
 Dr. Sakshi Arora and Kritika Goyal (2017) revealed in there study that in public sector banks, both
net and gross nonperforming assets are rising at a faster rate than in private sector banks. In
comparison to private sector banks, public sector banks are less effective at handling and controlling
their nonperforming assets (NPA). In contrast to Punjab National Bank, Axis Bank makes
significantly less provisions for contingencies. Despite the nonperforming assets (NPAs), both banks'
operating profits are steadily growing.
 N.A. Kavitha and M. Muthumeenakshi (2016) found that In contrast to private banks, the level of
nonperforming assets (NPA) in public sector banks is comparatively very high, according to this
report. Although the government has taken several steps to reduce NPAs, much more needs to be
done to address this problem. In public sector banks, the volume of nonperforming assets (NPAs) is
comparatively higher. NPAs must be planned in order to increase productivity and profitability, and
governments have taken a number of measures to minimise NPAs. Governments should also make
more arrangements for quicker resolution of pending cases, as well as reduce mandatory lending to
priority industries, which is a major source of problems.
 J.K. Das and Surojit Dey (2017) discovered that total NPAs rise alongside non-priority sector NPAs
in the banking sector, but priority sector NPAs rise at a slower pace than non-priority sector NPAs.
Corporate debt restructuring has increased rapidly in the banking sector, as well as in the non-priority
sector, since 2013, necessitating high provisioning, decreasing profitability, and eroding resources.
Complete NPAs are growing in tandem with non-priority sector NPAs at the State Bank of India, but
priority sector NPAs tend to be under control. The State Bank of India's corporate debt restructuring
is in a downward trajectory and is fully under supervision.
 Vishal Sarin, Sukhpreet Kaur, Pooja Verma etc. (2016) found that the ratio of net nonperforming
assets to net advances in public sector banks had been declining until 2009, when it started to rise
again. It suggests that public sector banks should handle nonperforming assets (NPAs) more closely
in terms of banking operations, credit valuation, and lending. In the case of private sector banks, the
ratio of net nonperforming assets to net advances has been declining. It suggests that during the study
period, private sector banks played a significant role in recouping loan amounts. The relationship
 between net advances and net NPAs of both public and private sector banks was investigated using
regression analysis.
 Dr. Krishna Murari (2014) found in their study that gross and net advances for both public and
private sector banks increased over the study period. The fall in the NPA ratio, on the other hand,
suggests that the asset quality of Indian public and private sector banks has improved. According to
the report, there has been a substantial improvement in the management of nonperforming assets by
India's public sector banks, with the ratio of gross nonperforming assets to total advances falling
from 12.4 percent to 2.1 percent between 2001 and 2013, and the Net NPA ratio falling from 6.7 to
1.0 percent during the same era.

Research Methodology

Research Scope

The study focuses on the comparison of the Non-performing assets of both private sector banks and public
sectors banks.

Objective

 To compare public and private sector banks' net nonperforming assets (NPAs);
 To compare public and private sector banks' NPAs by sector.

Sample

Gross Non-performing assets and Net Non-performing assets are taken for last ten years to present the
comparison between Public and private sector banks.

Sampling Technique

Under this study, convenience sampling technique is used for collecting data from Statistical Tables Relating
to Banks in India.

Methods of Data Collection

The study involves secondary data which includes the Non-performing assets of private and public sector
banks for last ten years. Moreover, various articles and previous years‟ literature reviews are also considered
under this study.
Statistical Tools used

In this study Microsoft Excel is used as statistical tool.

Data Analysis

The following table represent the Gross and net Non-performing Assets of both public and private banks
from year 2011 to 2020.
 Public Sectors Private Sector

Gross NPA (in Net NPA (in Gross NPA (in Net NPA (in
Year
Crores) Crores) Crores) Crores)
2010-2011 44271.10 21263.96 18240.58 4432.16
2011-2012 69624.51 39154.62 18767.81 4401.21
2012-2013 102227.23 61936.20 21070.52 5994.37
2013-2014 148457.21 88819.73 24542.42 8861.54
2014-2015 204959.47 122673.35 34106.23 14128.32
2015-2016 417987.79 251480.76 56185.69 26677.41
2016-2017 506921.66 286156.54 93209.22 47780.22
2017-2018 895601.26 454472.66 129335.24 64380.47
2018-2019 739541.00 285122.17 183603.66 67308.89
2019-2020 678317.00 230917.59 209568.14 55745.87

Gross Non-Performing Assets

1000000.00
895601.26
900000.00

800000.00
739541.00

700000.00 678317.00

600000.00
506921.66
500000.00 Public Sector
417987.79
Private Sector
400000.00

300000.00
204959.47 209568.14
183603.66
200000.00 148457.21 129335.24
102227.23 93209.22
100000.00 44271.1069624.51 56185.69
18240.5818767.8121070.5224542.4234106.23
0.00
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The above graph shows the Gross non-performing assets of both public and private sector banks from year
2011 to year 2020. It shows that in the starting of the decade both public and private sector banks had low
gross NPAs as comparing to the end of the decade. It also shows that in year 2018 the Gross NPA of public
sector banks were higher in whole decade. Whereas, comparing both the sectors. The public sector banks
had always more Gross NPA values than private sector banks which shows that the private sector banks are
doing well comparing to public sector banks in case on Gross Non-Performing assets.
 Net Non-Performing Assets
500000.00

450000.00

400000.00

350000.00

300000.00
Axis Title

250000.00

200000.00

150000.00

100000.00

50000.00

0.00
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Public Sector 21263.96 39154.62 61936.20 88819.73 122673.3 251480.7 286156.5 454472.6 285122.1 230917.5
Private Sector 4432.16 4401.21 5994.37 8861.54 14128.32 26677.41 47780.22 64380.47 67308.89 55745.87

The above bar graph shows the Net Non-Performing Assets of private sectors banks and public sector banks
for a decade. In the bar graph, it can be seen clearly that from last ten years public sector banks were having
greater amount of Non-Performing assets. In year 2018, public sector banks were having greatest amount of
Net Non-Performing assets which shows that in that year they were not able to collect from there debtors.
Comparing it with private sector banks, they were having fewer amounts than public sector banks which
shows they were managing their work efficiently.

Regression Analysis

For the purpose of regression analysis, two independent variables have been chosen that are private sector
banks and public sector banks. The dependent variable used in this study is time period. The regression
results can be seen in following table.

Regression Statistics
Multiple R 0.929536
R Square 0.864037
Adjusted R Square 0.825191
Standard Error 1.265866
Observations 10

From the above table, adjusted R square shows that all the independent variables together have 82.5 percent
influence on the dependent variable that is time period. In other words, 82.5 percent of dependent variable is
explained by independent variable. The standard error for this regression analysis is 1.26.
Conclusion

The amount of nonperforming assets (NPAs) in public sector banks is higher than in private sector banks,
according to this empirical study. As a result, as a policy consequence, a cautious move is required when
lending loans with respect to valuation and legal formalities of the property; if there are any deviations, the
third party must be disciplined with severe penalties, which will encourage evaluators to value appropriately
and with care. Wilful defaulters should not be given a loan for more than 5 years; some banks may offer
loans to wilful defaulters (even if they do not have a CIBIL score) at the highest rate of interest; any
deviation from the specified policy should not be allowed. Internal bank corruption, political pressures, and
bank employee fraud all contribute to India's high nonperforming assets (NPA) levels. One of the reasons for
large NPAs is the announcement of subsidies.
References

 Girnara Mona Rameshbahi (2020) “Comparative Analysis of Non-Performing Assets in Public

Sector Bank and Private Sector Bank”, Making a Difference and Becoming the Agents of Change in
the Field of Management

 Mr AbidHusain G Kadiwala and Dr, Rasikbhai I Prajapati (2020) “ Sector-wise Comparative

Analysis of Non-Performing Assets of Selected Private Sector and Public Sector Banks of India”,
International Journal of Creative Research Thoughts, Volume 8, Issue 2, ISSN 2320-2882

 Harani. B and Subramanyam Mutyala (2019) “ A Comparative analysis of Non-performing Assets of

Public and Private Sector Banks in India- An Endless Battle”, International Journal of Scientific &
Technology Research ,Volume 8, Issue 12, ISSN 2277-8616

 Dr. Sakshi Arora and Kritika Goyal (2017) “NPA of Public and Private Banks: A Comparative
Study” Professional Panorama: An International Journal of Applied Management & Technology,
Volume 4, Issue: 2, ISSN(P) 2369-6919

 N.A. Kavitha and M. Muthumeenakshi (2016) “A Comparative Study of Non-Performing Assets of

Public and Private Sector Banks” International Journal for Modern Trends in Science and
Technology, Volume 2, Issue 03, ISSN: 2455-3778

 J.K. Das and Surojit Dey (2017) “ Non-Performing Assets of Public and Private Sector Banks in
India: An Empirical Study

 Vishal Sarin, Sukhpreet Kaur, Pooja Verma etc. (2016) “ Non-Performing Assets of Public and
Private Sector Banks in India – A Comparative Study” , International Journal of Services and
Operations Management, Volume 25, Issue 2

 Dr. Krishna Murari (2014) “Comparative Evaluation of Non-Performing Assets of Indian Banks: A
Study of Public and Private Sector Banks”, Asian Journal of Research in Banking and Finance,
Volume 4, Issue 5, PP- 232-247, ISSN 2249-7323