A Study on NPA of Public Sector Banks in India

ASSIGNMENT

DONE BY:
RENI JACKSON RA2252006010004
SURYA BALA RA2252006010018
ARAVINDHAN SK RA2252006010029
INTRODUCTION:
In the starting when the financial reforms were undertaken by the Government of India based
on the Narasimham Committee report I and II, Reserve Bank of India introduced some
prudential norms to address the credit monitoring policy, which were being pursued by the
banks and other NBFCs. To strengthen the recovery of loans and dues by the banks and the
other financial institutions, Government of India in the year 1993, promulgated the „recovery
of debts due to banks and other financial institutions act‟ and the „securitisation and
reconstruction of financial assets and enforcement of security interest act‟ in the year
2002.But statistics shows NPA level is ever increasing day by day, and the said act, which
was introduced by the Government of India, is not serving the purpose, they were actually
formed. The reason behind it can be the bank’s approach and attitude towards financing and
recovery of loans especially from the small and medium enterprises and also the lack of
knowledge about the law and its practice in banking and also violations of the RBI
directives/circulars, which are essential to follow by every bank and financial
institutions.(Non-Performing Assets, n. d.) In the financial year 2013, the non-performing
assets had gone up to Rs. 95825 crores, according to the CRISIL report, the gross NPA will
increase from 3.3% on 03.2013, to 4% by 03.2014. An important question is to be answered
by the banks and other financial institutions about the recovery of the dues, and banks
approach towards focusing on the „efficiency and fairness‟ and also become understanding
when dealing genuine difficulties in managing the fraud. A strong banking and financial
sector are important for a developing economy and the failure of which may have adverse
effect on all the sectors. (RBI website, n. d.)

Non-Performing Asset:
Today non-performing assets are the subject of major concerns to the banking sector and the
other non-banking financial institutions. A loan or lease that does not meet the stated
principal amount and the interest amount payments is termed as non-performing assets.

Types of loans and its characters:

Nature of Facility - Parameters
Term Loan - Interest and/or instalment of principal remain overdue beyond 90 days
Overdraft/Cash Credit - Remains „out of order “as indicated above
Bill Purchased/discounted - Remains overdue beyond 90 days
Crop Loans (short duration crops) - Instalment of principal or interest thereon remains
overdue for 2 crop seasons
Crop Loans (Long duration crops) - of principal or interest thereon remains overdue for 1
crop season
Securitization transactions - Amount of liquidity facility remains outstanding beyond 90 days
Derivative transactions - Overdue receivables representing positive mark-to-market value of a
derivative contract which remains unpaid beyond 90 days from specified due date for
Payment
Securitisation transaction - Liquidity facility remains outstanding for more than 90 days.

Definitions of NPA by RBI:

a) An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank.
b) A non-performing asset (NPA) is a loan or an advance where;
I. Interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii. The account remains „out of order‟ as indicated at paragraph 2.2 below, in respect of an
Overdraft /Cash Credit (OD/CC),

c) Banks should, classify an account as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
d) ‘Out of Order’ statuses: An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned limit/drawing power. In cases
where the outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90 days as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same period,
these accounts should be treated as 'out of order'.
e) ‘Overdue’: Any amount due to the bank under any credit facility is „overdue‟ if it is not
paid on the due date fixed by the bank.

Classification of Assets:
Non-performing assets are further classified into three categories based on the span for which
the asset has remained non-performing and the recovery of the dues:
I. Substandard Assets
With effect from March 31, 2005, a substandard asset would be the one, which has remained
as a nonperforming asset for a period of less than or equal to 12 months. Substandard assets
have credit weaknesses that jeopardise the liquidation of the debt and there are also
possibility of incurring and sustaining some losses if the deficiencies are not corrected.
ii. Doubtful Assets
With effect from March 31, 2005, an asset is classified as doubtful if it has remained as a sub-
standard asset for a period of 12 months. A loan classified under the doubtful category has all
the weakness characteristics as defined for the sub-standard assets; also it has added
characteristics that the weakness makes full liquidation or collection, on the basis of the
currently known conditions, facts, and values that are highly doubtful and questionable.
iii. Loss Assets
A loss asset is one where loss has been identified by the bank’s internal auditors and RBI‟s
external auditors, but the amount has not been written off fully. These kinds of assets are also
considered as uncollectible, and of little value that its continuance or maintenance as a
bankable asset is not warranted or acceptable though there may be some salvage or recovery
value.

Reasons / Causes of NPA:

In the past articles, many authors have found out many reasons for NPA. Few are: Market
Failure, Wilful Defaults, Poor follow-up and Supervision, Non-cooperation from Banks, Poor
Legal framework, Lack of Entrepreneurial Skills, Diversion of funds (Santanu Das, 2010)
Zahoor Ahmad, Dr. M. Jegadeeshwaran (2013) in their paper „Comparative Study On NPA
Management of Nationalised Banks‟ has analysed, improper selection of borrower’s
activities, weak credit appraisal system Industrial problem, inefficiency in management of
borrower, slackness in credit management and monitoring, lack of proper follow up by bank,
recession in the market, and natural calamities and other uncertainties, as the reasons for the
NPA. On the other hand (Ashly Lynn Joseph, 2014) in his paper „A Study on Analysing the
Trend of NPA Level in Private Sector Banks and Public Sector Banks “has identified few
external, internal and other factors that are involved in the formation of NPA and those are :
diversion of fund for expansion, diversification, modernization or for taking up new projects,
diversion of fund for assisting or promoting associate concerns, time or cost overrun during
the project implementation stage, business failure due to product failure, failure in marketing
etc, inefficiency in bank management, slackness in credit management and monitoring, and
inappropriate technology or problems related to modern technology.

Review of Literature:
NPA is a burning topic for the banking sector and many authors tried to study the reasons of
NPA, the problems created by NPA and the impact of NPA on the banking sector, and
moreover came to a solution or remedies of the growing problem of NPA. A number of
papers have been written and gone through, and this part of this paper is attempting to present
a review of all those are available in the same area of non-performing assets of the public
sector banks, private sector banks and other banks. This survey has conducted a study on the
existing papers, articles, journals, and reports provided by different authors, groups and
committees from time to time.
Dutta. A (2014): This paper studied the growth of NPA in the public and private sector banks
in India, and analysed sector wise non-performing assets of the commercial banks. For the
purpose of the study data has been collected from secondary sources such as report on Trend
and Progress of Banking in India, RBI, Report on Currency and Finance, RBI Economic
Surveys of India.
Das, S. (2010): In this paper the author has tried to analyse the parameters which are actually
the reasons of NPAs, and those are, market failure, wilful defaults, poor follow-up and
supervision, non-cooperation from banks, poor Legal framework, lack of entrepreneurial
skills, and diversion of funds
Ahmad, Z., Jegadeeshwaran, M. (2013): The current paper is written on the NPA, and causes
for NPA.
Secondary data was collected for a period of five years and analysed by mean, CAGR,
ANOVA and ranking banks. The banks were ranked as per their performance in managing the
NPA‟s. The efficiency in managing the NPA by the nationalised banks was tested.
Ranjan, R., Dhal, S.C. (2013): This paper explores an empirical approach to the analysis of
the Indian commercial banks' nonperforming loans by regression analysis. The empirical
analysis evaluates as to how the NPLs are influenced by three major sets of economic and
financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic
shocks
Joseph, A. L. (2014): This paper basically deals with the trends of NPA in banking industry,
the internal, external and other factors that mainly contribute to NPA rising in the banking
industry and also provides some suggestions for overcoming the burden of NPA.
Kamra, S. D. (2013): This paper analyses the position of NPAs in the selected nationalised
banks namely State
Bank of India (SBI), Punjab National Bank (PNB) and Central Bank of India (CBI). It also
focuses on the policies pursued by the banks to manage the NPAs and suggests a strategy for
the speedy recovery of NPAs.
Patidar, S., Kataria, A. (2012): The study analysed the percentage share of NPA as
components of priority sector lending, the comparative study was conducted between SBI
and Associates, Old Private Banks and New
Private Banks and Nationalized Banks of the benchmark category, to find out the significant
difference of the NPA and also find out the significant impact of Priority Sector Lending on
the Total NPA of Banks using statistical tools like regression analysis and ratio analysis.
Arora, N., Ostwal, N. (2014): The present paper analyses the classification and comparison of
loan assets of public and private sector banks. The study concluded that NPAs are still a
threat for the banks and financial institutions and public sector banks have higher level of
NPAs in comparison to Private sector banks.
Patnaik, B.C.M., Satpathy, I. (2012): The present paper made an attempt to analyse the causes
of NPAs in working capital loans of Urban Co-operative banks. For the study purpose
borrowers were surveyed through questionnaires, causes were analysed and suggestions made
to overcome the problem.
Patnaik, B.C.M., Satpathy, I. (2011): The present paper tries to analyze the quantitative trend
and pattern in growth of NPA with reference to the education loan scheme, in Odisha. An
effort was made to find the cause, by questionnaire survey of the defaulters, who are students
of different colleges, suggestions to overcome this problem was also given by the author.
Bhatia, B.S., Waraich, S., Gautam, V. (2013): This study was made on District Central
Cooperative Bank of Punjab, the study tried to analyse the impact of some new product lines
on non performing advances in cooperative banks and trends in NPA against loan schemes.
Lastly a comparative analysis was made between bank wise and component wise to find out
the lacunas and suggest measures for improvement in managing NPA.

Gap in Research:
From the above literature review it was found that no study has been conducted from the
period 2008 to 2013 in context of the objective stated earlier in the study. So, the present
scenario of Net NPA of banking sector was not depicted by the above researcher.

Statement of the Problem:

The study tries to discuss the reasons of the NPA in public sector banks and also analyses the
problems, with a suitable solution. The main subject matter of this paper is to understand the
significant difference of then NPA occurrence, and management of NPA in different
nationalized banks of India in respect to priority and non-priority sector lending.
Need of the Study:
The banking sector of India consists of public sector banks, private sector banks, co-operative
banks and foreign banks. But among these four types‟ public sector banks still dominate the
banking industry, with approximate 82% of the market share in total deposit and advances of
the industry. The public sector banks play a crucial role in the Indian economy, by
contributing directly to the GDP, and mobilizing savings and channelizing investments. But
after managing every challenge successfully and by giving standard services to the
customers, NPA becomes the biggest of all challenges and managing NPA is one of the
hardest tasks for these banks, as the increasing NPA have adverse impact upon the progress of
the Indian economy and the Indian financial system. On the other hand, NPA is efficiently
managed by the private sector banks, and it is controlled. The current paper tries to draw a
view on the status of the NPA in different public sector banks, including State Bank of India
and its Associates, and other public sector banks.

Objective of the study:

The objective of the study is to find out whether there is any difference in the NPA
occurrence between the various banks during the period of the study.

Scope:
The scope of the study is in between the financial year 2008-2013on the public sector banks,
which include the State Bank of India and its Associates, and the other Nationalised banks of
India.
Research Methodology:
The present study is done on the SBI Associate Banks and other public sector banks.
The SBI Associate Banks include: The State Bank of India, State Bank of Bikaner and
Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, and State
Bank of Travancore. The other public sector banks include Allahabad Bank, Andhra Bank ,
Bank of Baroda , Bank of India , Bank of Maharashtra , Canara Bank, Central Bank of India ,
Corporation Bank , Dena Bank , IDBI Bank Limited , Indian Bank , Indian Overseas Bank ,
Oriental Bank of Commerce, Punjab and Sind Bank , Punjab National Bank , Syndicate
Bank, UCO . Bank, Union Bank of India, United Bank of India, Vijaya Bank.
The Net Non-Performing Asset for six years, starting from 2008 to 2013, is analysed. The
study is done based on the secondary data, which is obtained from published report of RBI
and other articles and journals.
Net Non-Performing Assets = Gross NPA – (Balance in Interest Suspense account +
DICGC/ECGC claims received and held pending adjustment + Part payment received and
kept in suspense account + Total provisions
held)
NNPA Values of SBI and Associates:
2008 2009 2010 2011 2012 2013
State Bank 1.78 1.79 1.72 1.63 1.82 2.10
of India
State Bank 1.83 1.85 1.78 1.83 1.92 2.27
of Jaipur
State Bank 1.16 1.381 1.55 1.87 1.30 1.61
of
Hyderabad
State Bank 1.43 1.50 1.02 1.38 1.98 2.69
of Mysore
State Bank 1.60 1.60 1.04 1.21 1.35 1.62
of Patiala
State Bank 1.94 1.58 1.91 1.98 1.54 1.46
of
Travancore

Research Design:
Statistical Method Used
For the purpose of the study analysis of variance (ANOVA) one way has been used.
The linear mathematical model as given below has been used.
Xij = μ + αi +εij …………………….. Equation (1)
Were,
Xij = The yield from the jth row, (j = 1, 2… ni) fed on the ith ration (I = 1,2,…..,k)
μ = General mean effect given by
k
μ = ∑ ni μ/ n
i=1
αi = The effect of the ith ration given by
αi= μi
- μ, (i = 1,2,….k)
εij = The error effect due to chance.
Assumption of the model.
i. All the observations Xij are independent and Xij ~ N (μij , σe2)
ii. Difference effects are additive in nature
iiii. εij are i.i.d, N (0, σe2)

Hypothesis:
H0: There is no significant difference in mean variation between the NPAs of the banks
H1: There is significant difference in mean variation between the NPAs of the banks

Limitations:
The study is concerned with all the published NPA by the Reserve Bank of India. It doesn’t
probe into the NPA management nor does it try to find causation for these factors.

Analysis and Interpretation:

The whole study and the analysis are done on these banks, there are 26 banks, and each bank
is given a number, from 1 to 26. The NNPA of Allahabad Bank is written under variable 2
column, and number „1‟ for Allahabad Bank id written under, variable1, or VAR00001,
NNPA of Andhra Bank for the 6 years (2008-2013) is written under variable 2, or VAR00002,
and number „2‟ is written for Andhra Bank, a series of 6, twos (2) are written under
VAR00001 column, it continues and like this way, the each of the 26banks, are given a
number of 1-26, and are written under VAR00001 column, and the values of NNPA for 6
years, per bank is written under the VAR00002 column. Number 1 is for Allahabad Bank, and
number 26 is used for State Bank of Travancore. Each number has a group data of NNPA, for
a single bank, for 6 years. Univariate test is done for these 26 banks to find if there is any
significant mean variation between the NNPAs of the banks. Variable 1 or VAR00001 is
considered as dependent factor, and Variable 2 or VAR00002 is considered as fixed factor for
the analysis purpose.
It is known that if F-statistics is greater than P then null hypothesis will be rejected, and
alternate
hypothesis will be accepted, but if F-statistics is less than p, then null hypothesis will be
accepted and alternate hypothesis will be rejected. So, If F>P, there will be significant
difference in mean variation of the NPAs of the public sector banks but if and therefore H0
will be rejected, and H1 will be accepted, on the other hand if F<P, there will be no
significant difference in mean variation, and therefore H0 will be accepted and H1 will be
rejected.

Results after analysis:

Tests of Between-Subjects Effects
source Sum of Df Mean F sig Partial Eta
square square squared
Corrected 6159.97 110 55.99 .964 .573 .702
model
Intercept 24084.764 1 24084.764 414.477 .000 .902
VAR00002 6159.917 110 55.99 .964 .573 .702
Error 2615.083 45 58.113
Total 37206.000 156
Corrected total = 8775.000
We can see that the F-statistics corresponding VAR0002 is .964, which is significant at
P<.573, now as
F=.964 > P .573, it can be said that, there is significant mean variation between the NPAs of
the public sector
banks. There null hypothesis is rejected and alternate hypothesis is accepted.

Conclusion:
NPA or Non-Performing Assets are the types of assets which are the subject of major
concerns to the banking sector and the other non-banking financial institutions. A loan or
lease that does not meet the stated principal amount and the interest amount payments is
termed as non-performing assets. The current study deals with the types of NPA and its
causes as well as its impact on the banking sector and the economy as a whole. A study was
done on the State Bank of India and its associates, and the other public sector banks, based on
the secondary data, from the annual reports, of 6 years starting from 2008 to 2013. An
attempt is made to analyse the data, through statistical tool, ANOVA.
The main objective of the study was to find out whether there is any difference in the NPA
occurrence between the various banks during the period of the study. The study finds out that
there is no significant deference between the means of NPA of the banks at five percent level
of significance. Hence one can safely conclude that banks irrespective of their operations
have similar NPAs in the recent years.
Reference:
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