Asia Pacific Journal of Research ISSN (Print) : 2320-5504

ISSN (Online) : 2347-4793

A COMPARATIVE STUDY OF NON PERFORMING ASSETS (NPA) BANKS

IN INDIA BY USING CORRELATION

Ms.V.Subhamathi
Assistant Professor
Sree Vidyanikethan Institute of Management
Sree sainath nagar, Rangampet, Tirupathi.

ABSTRACT

Banks in India are facing a problem with Non Performing Assets (NPA) in present days. When NPAs’ increase banks’ financial health
decreases. Banks financial health is very important for banks and Indian economy too. The present study is based on secondary data
for past five year from 2011-2015. Correlation is used to analyze the results. This study examines the NPA of public sector banks
having higher NPA than that of the private sector banks. And also finds that there is relationship between public sector bank and
private sector bank NPA and Net Profit.

Keywords: Non Performing Assets (NPA), Net Profit, Bank, Correlation

Introduction
The word of Bank is derived from French word “Bancus” or Banque” i.e., a bench. The modern banking system started with the
opening of Bank of England in 1694. Bank of Hindustan was the first bank to establish in India, in 1770. The earliest institutions that
undertook banking business under the British regime were agency houses which carried on banking business in addition to their
trading activities. Most of these agency houses were closed down during the period of 1929-32. Three Presidency banks respectively
at Calcutta, Bombat and Madras. These were later merged into the Imperial bank of India in 1919 following a banking crisis.

Indian banking system is dominated by nationalized banks. The main objective of nationalization was to ensure big banking as against
class banking with banking infrastructure aimed at hilly tracts and terrains of the country. Before to 1969, State Bank of India was the
only public sector bank in India.

Private Banks have been playing a crucial role in enhancing customer oriented products with no choice left with the public sector
banks except to innovate and compete in the process. Reserve Bank of India has come out on clear cut term guidelines on ownership
and governance in private sector banks.

Non Performing Assets (NPAs)

Non Performing Assets or a problem loan can be defined as “a loan where the lender has some doubts or is experiencing difficulties in
obtaining repayments and, irrespective of the time frame, the outcome could be a loss of capital. Generally NPAs do not generate the
income, reduces profitability substantially and affects the morale of the employees and decision making for freash loans suffers.

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Identification of NPAs

 The guiding factor is Income Recognition and Asset Classification(IRAC) norms prescribed by RBI
 An asset, including a leased asset becomes non performing when it ceases to generate income for the bank
 As from 01.04.2004, it shall be an advance where
 Interest and/or installment of principal remain over due for a period of more than 90 days in respect of term loan
 The account remains out of order for a period of 90 days in respect of overdraft and cash credit accounts
 The bill remains overdue for more than 90 days in respect of bills purchased/discounted
 Any amount to be recovered remains overdue for 90 days in respect of other accounts
 Exhibiting potential credit risk

Gross NPA
Gross NPA is advance which is considered irrecoverable, for which bank has made provisions, and which is still held in banks' books
of account.

Net NPA
Net NPA is obtained by deducting items like interest due but not recovered, part payment received and kept in suspense account from
Gross NPA.

Review of Literature
Satpal (2014) mentioned that the NPAs replicate the bank performance. A high level of NPAs suggests high probability of a large
number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. NPAs affect the
liquidity and profitability, in addition to posing threat on quality of asset and survival of banks. The Indian banking sector has been
facing serious problems of raising Non- Performing Assets (NPAs). The NPAs growth has a direct impact on profitability of banks.
The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is
nothing but a reflection of the state of health of the industry and trade. It is necessary to trim down NPAs to improve the financial
health in the banking system.

Selvarajan & Vadivalagan (2013) stated that the growth of Indian Bank‟s lending to Priority sector is more than that of the Public
Sector Banks as a whole. Indian Bank has slippages in controlling of NPAs in the early years of the decade. Therefore, the
management of banks must pay special attention towards the NPA management and take appropriate steps to arrest the creation of
new NPAs, besides making recoveries of the existing NPAs. Timely action is essential to ensure future growth of the Bank.

Balasubramaniam (2001) studied Non-performing assets and profitability of commercial banks in India: assessment and emerging
issues and said that the level of NPAs is high with all banks currently and the banks would be expected to bring down their NPA. This
can be achieved by good credit appraisal procedures, effective internal control systems along with their efforts to improve asset quality
in their balance sheets. However, maintaining profitability is a challenge to commercial banks especially in a highly competitive era
and opening up of banking business to NBFC and foreign banks in general.

Chaudhary and Sharma (2011) in their research paper on Performance of Indian Public Sector Banks and Private Sector Banks: A
Comparative Study stated that it is right time to take suitable and stringent measures to get rid of NPA problem. An efficient
management information system should be developed. The bank staff involved in sanctioning the advances should be trained about the
proper documentation and charge of securities and motivated to take measures in preventing advances turning into NPA. Public banks
must pay attention on their functioning to compete with the private banks. Banks should be well versed in proper selection of
borrower/project and in analyzing the financial statement.

Samir and Deepa Kamra (2013) mentioned that now a day‟s banks were not decided based on branches of banks and volume of
deposits but also on the basis of assets. Non-performing assets constitute a major portfolio of the Banks portfolio and hence were an
inevitable burden on the banking industry. NPAs adversely affect the profitability, liquidity and solvency of the banks. This study
analysed the position of NPAs in selected banks namely State Bank of India (SBI), Punjab National Bank (PNB) and Central Bank of
India (CBI).It also highlights the policies pursued by the banks to tackle the NPAs and suggests a multi-pronged strategy for speedy
recovery of NPAs in banking sector.

Sikdar and Makkad (2013) provides an insight on the role of NPA in risk frame work of selected Indian commercial banks and tries
to put forward the means of interpreting credit risk from existing levels of bank NPAs. Further, research highlights the significant
steps taken and procedures implemented by major Indian commercial banks, within the public and private sector, towards recovery of
loans and advances falls into the NPA bracket. The research for the present paper is based on extensive study of annual publications

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on performance of public sector and private sector commercial banks by the Indian Banks Association (IBA). Further, annual reports
of commercial banks in focus for the year ending March 2012 have been studied. The study conclude that problem of NPAs can be
tackled only with proper credit assessment and risk management mechanism.

Arora and Ostwal (2014) conducted study on “Unearthing the Epidemic of Non-Performing Assets: A Study of Public and Private
Sector Banks” which deals with the concept of Non-performing assets and analyze the classification of loan assets of public and
private sector banks. It also explores the comparison of loan assets of Public sector and private sector banks. The study concluded that
private sectors improvement is due to decline in NPAs ratio compare with that of Public sector banks due to recovery management
done in NPAs and suggests that there is need to check the NPAs of public sector banks so that Indian banking system becomes
efficient.

Hosmani and Hudagi (2011) conducted study on “Unearthing the Epidemic of Non Performing Assets with Reference to Public
Sector Banks in India” an empirical and descriptive in nature which shows the magnitude and trend of Public Sector banks in India
and found that there is a slight improvement in the asset quality reflected by decline in the diverse NPA percentage. The study
concluded that NPA is an important parameter for assessing financial performance of banks in terms of profitability, liquidity and
economies of scale in operation and banks has to take timely action against degradation of good performing assets.

Meenakshi and Mahesh (2010) this exploratory paper examines the trends of NPAs at global level - One interesting observation is
that most of the countries that fall under the high “NPA/Total Loan‟ ratio Category are in the Asian region & Also examine India
from various magnitudes and also identification of the problem & recovery mechanism to a great extent. It also show that NPA in the
priority sector is higher than non – priority sector. The paper also discusses the role of joint liability groups (JLGs) or self help groups
(SHGs) in enhancing the loan recovery rate.

Research Methodology
The present study is both an Analytical and descriptive of Non Performing Assets of banks in India. This study is being analyzed by
various tools of statistics.

Research Objectives:

RO1: To compare the private and public sector banks of Non Performing assets.

RO2: To study the impact of NPA on Net profit of banks in India

Research Hypothesis:

H0 1: There is no significant relationship between NPA and Net profit of Public sector banks

HA1: There is a significant relationship between NPA and Net profit of Public sector banks

H02: There is no significant relationship between NPA and Net profit of Private sector banks

HA2: There is a significant relationship between NPA and Net profit of Private sector banks

Data Collection:

This study is mainly based on secondary data collected from annual reports of banks, journals and books.

Scope of the study:

The present study is focused on NPA in banking industry. NPA was the biggest trouble in banking industry. The NPA can destroy the
current profit of the bank.

Period of the Study:

This study period covered the past five years i.e., 2011-2015. Tools used for this study is correlation and graphical representations.

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Data Analysis

Comparision of Public and

Private banks
10000

Net NPA 5000

Prive Sector
0 Public Sector
2015 2014 2013 2012 2011
Year

The above chart is the comparison chart of public sector banks and private sector banks Non Performing Assets of last five years i.e.,
2011-2015. The above chart indicated that the public sector banks of NPAs are higher than private sector banks of NPAs.

Private Sector banks

7000
6000
5000
Net NPA

4000
ICICI
3000
HDFC
2000
Axis bank
1000
0
2015 2014 2013 2012 2011
Year

The above chart shows that private sector banksof Non Performing Assets of last five years i.e., 2011-2015. The above chart indicated
that the private sector banks of NPAs are ICICI bank is higher than the HDFC and Axis bank.

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Public Sector banks

25000
20000

Net NPA
15000
SBI
10000
Indian
5000
Canara
0
2015 2014 2013 2012 2011
Year

The above chart shows that public sector banks of Non Performing Assets of last five years i.e., 2011-2015. The above chart indicated
that the public sector banks of NPAs are SBI bank is higher than the Indian bank and Canara bank.

Correlations

Private npa Private net profit

Pearson Correlation 1 .828

Privatenpa Sig. (2-tailed) .084
N 5 5
Pearson Correlation .828 1
Privatenetprofit Sig. (2-tailed) .084
N 5 5

The correlation between Z Score and H Score is r = 0.824 and significant values is 0.000. This indicates that Z Score and H Score are
not independent to each other. Here the value of r is 0.824 so it is considered to be strongly correlated. Hence there is a significant
correlation between Private Banks Net profit and Non performing assets.

Correlations

Public npa Public net profit

Pearson Correlation 1 .947*
Publicnpa Sig. (2-tailed) .015
N 5 5

Pearson Correlation .947* 1

Publicnetprofit Sig. (2-tailed) .015

N 5 5

The correlation between Z Score and H Score is r = 0.947 and significant values is 0.000. This indicates that Z
Score and H Score are not independent to each other. Here the value of r is 0.947 so it is considered to be
strongly correlated. Hence there is a significant correlation between Public Banks Net profit and Non performing
assets.

Conclusion
Banking industry plays a major role in country economic. Hence, recently credit management also became important for banking
industry. Likewise both private and public sector banks in India are extending their loans to customers. This study reveals that private
sector banks have higher Non Performing Assets (NPAs) than public sector banks. In addition that there is a strong correlation
between Net profit and Non Performing Assets (NPAs) both Public sectors and private sector banks.

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References

1. Arora, N., & Ostwal, N. (2014). Unearthing the Epidemic of Non-Performing Assets: A Study of Public and Private Sector
Banks. Management Insight, 10(1), 47-52, retrieved on February 3rd 2015

2. Balasubramaniam, C.S. (2001), „Non-performing assets and profitability of commercial banks in India: assessment and
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3. Chaudhary, K. & Sharma, M. (2011), „Performance of Indian Public Sector Banks and Private Sector Banks: A Comparative
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4. Hosmani, A.P., and Hudagi, J. (2011). Unearthing the Epidemic of Non-Performing Assets: A Study with reference to Public
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6. Meenakshi, R., and Mahesh, H. P. (2010). Banking Sector Reforms and NPA: A study of Indian Commercial Banks. Institute
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