Article

A Comparative Study of Arthaniti: Journal of Economic

Theory and Practice
Non-performing Assets 22(2) 228­–250, 2023
© 2021 Department of Economics,
Using Non-parametric University of Calcutta
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Bhabani Mishra1 and S. S. Rath1

Abstract
Galloping levels of impaired assets slowly destroy the economy by throwing
it into a major financial crisis. The current article studies recent trends and
compositions of stressed assets among 45 selected Indian commercial banks. The
non-parametric test (Kruskal–Wallis) is applied to know whether there exists
any difference in the movement of gross non-performing assets ratios and net
non-performing assets ratios (NNPAs) among bank groups and individual banks.
The group-wise comparative study shows that a significant difference exists in the
movement of NNPA ratio only between foreign banks and public sector banks
and between private banks and public sector banks. Significant differences also
exist among the individual banks in foreign and private bank groups. The Games–
Howell post-hoc test finds that some pairs of banks have significant differences.
The current financial downswing attributed to pandemic has increased the chances
of fraudulency and sporadic default events and enhanced the problem of bad
loans. Amalgamations of State Bank of India with its associates in 2017 and Bank
of Baroda with Dena Bank and Vijaya Bank in 2019 have shown falls in stressed
assets that possibly foreshow the future furtherance in asset quality of other four
anchor banks that are merged with six banks, with effect from April 2020.

Keywords
Non-performing assets, bank groups, amalgamations, Kruskal–Wallis test,
Games–Howell test

JEL: G21, G34

1Department of Economics, Sambalpur University, Burla, Odisha, India

Corresponding author:
Bhabani Mishra, PhD Research Scholar, Department of Economics, Sambalpur University, Jyoti
Vihar, Burla 768019, Odisha 768019, India.
E-mail: [email protected]
Mishra and Rath 229

I. Introduction
The banking sector is the most vital part of an emerging economy, playing a
catalytic role by passing through various challenges. Banks with strong positive
externalities, improved information and technology, developed communication
skills and lower intermediate costs enhance the investment; accelerate the trade
and socio-economic developmental activities; and push the agricultural, industrial
and service sector productivity in the long run. Non-performing asset (NPA) as an
undesirable feature of the Indian banking system disrupts the financial stability by
contracting the capital and reducing the profit earning.
Towards the end of the 2020s, the entire world economy had experienced a
structural slowdown, heightened volatilities in money and capital markets, debt-
ridden economies, intense financial vulnerabilities, impaired macroeconomic
prospects and uncertain geopolitical and trade conditions mostly caused due by
natural calamities and region-specific factors that spilled over the entire global
market even to financial markets.
‘The health of the banking sector hinges around a turnaround in macroeconomic
conditions’ (RBI Annual Report, 2018–2019). The economic downswing has
caused an elevation in financial fragilities; unanticipated rise in debt and prices,
high delinquencies, increase in the risk of credit disbursement, higher fraudulency
and sporadic default events have frozen the capital movements among financial
institutions and exacerbated the financial hardship, ‘which has resulted in a heavy
blow to the profitability of entire financial sector’.
The real global GDP growth rate has fallen from 3.5% in 2017–2018 and 2.8%
in 2018–2019 to −4.4% in 2019–2020 as per World Economic Outlook (October
2020), whereas the real GDP growth of India has declined to 4.2% in 2019–2020
from 6.1% in 2018–2019 and 7% in 2017–2018. A huge depletion in the annual
growth of aggregate deposit for scheduled commercial banks (SCBs) from 10% in
2018–2019 to 7.9% in 2019–2020 and growth in total credit from 13.3% in 2018–
2019 to 6.1% in 2019–2020 reflect that the economic disturbances have a
tremendous negative impact on deposit rate and credit growth.
Advanced countries like Canada, the UK, the USA and Japan have reflected the
lowest NPA ratios during the last 3 consecutive years. Among emerging markets,
India has shown the highest but declining impaired loan ratio (with an average of
9.4% in the last 3 years), whereas China, Malaysia and Philippines have maintained
the lowest (below 2%) but a rising NPA ratio from 2016–2017 to 2018–2019 Q1.1
Improvement in the asset quality of SCBs in terms of gross non-performing assets
ratio (GNPA) and net non-performing assets ratio (NNPA) was observed in the last
year due to a reduction in slippage ratio, in outstanding and boost in recovery
amount by The Insolvency and Bankruptcy Code (IBC) in 2018–2019, even though
the recovery rate has declined to 45.5% in 2019–2020 from 45.7% in the previous
year. The Debt Recovery Tribunals (DRTs) and the Securitisation and Reconstruction
230 Arthaniti: Journal of Economic Theory and Practice 22(2)

of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI

Act), had higher amounts of stressed assets involved, but their recovery rates were
only 4.1% and 26.7% in 2019–2020, which were 3.9% for DRTs and 15% for
SARFAESI Act in 2018–2019, respectively.
The current article is structured into four sections as follows: the first section
includes the introduction part; the second section explains the data and
methodology followed by results and discussion in the third section; the fourth
section concludes the article.

Objectives
1. To study the trend and composition of NPAs in various groups of banks in
India.
2. To conduct a comparative analysis of the GNPA ratio and NNPA ratio
among selected public sector banks (PSBs), private sector banks (PRBs)
and foreign banks (FBs) in India.
3. To study how the merger is a solution to the resolution of NPA in banks.

Theoretical Background
Asymmetric information causes moral hazards and adverse selection, which lead
to market failure such as the subprime mortgage crisis in 2007–2008. In the
financial sector, asymmetric information problem occurs when borrowers wilfully
or unknowingly provide wrong information; promoters know more about their
product’s quality and project profit/loss from it, hide valuable data, indulge in
duplication of securities used as a guarantee and internally manipulate data; or
when bank employees fail to anticipate the future of the projects that could conceal
the fraud and systematic risk and can cause huge bad loans in the market.
Due to asymmetric information, difficulties occur in the detection of the hidden
attributes of a product, which end up in the deterioration of quality. Sometimes,
potential borrowers with lower risk and good investment opportunities are
discriminated against borrowers with higher risk and poor investment opportunities
when lenders settle with an average interest rate, which is costly for the former
one. The lender will be left with lemon only. Personal collaboration between
employees and borrowers, non-availability of financial data and uncertainty in
markets could lead to adverse selection which may end up in moral hazard. Moral
hazard is the hidden action or behaviour of borrowers or agents that can create
‘Agency Problem’ (Moneyandbanking, 2017) either through embezzlement or by
spending on perquisites. Government cannot let the big financial entities die
silently, which would create financial chaos, to maintain financial stability or to
ensure the too-big to fail practice, it always comes for the rescue which might
Mishra and Rath 231

encourage the proprietors to camouflage bank’s money. According to Mishkin

(1990), banks’ panics are predictable based on asymmetric information, as
depositors are unable to evaluate the risk in individual bank liabilities; hence, they
cannot screen out a good one from bad banks.

Fraudulency and Non-performing Asset in Banks

Public sector banks had 52.5% of share in the total number of fraud cases in 2018-
2019 which was declined to 44.31% in 2020-21 while the share of PRBs in the
same had increased from 33.6% in 2018-2019 to 46.19% in 2020-21 and the share
of foreign banks in no. fraud cases declined from 11.2% in 2018-19 to 7.63% in
2020-21.The share of public banks in the amount involved in fraud cases also
declined from 88.5% in 2018-2019 to 73.93% in 2020-21, similar trend for foreign
banks (1% in 2028-19 to 0.88% in 2020-21), while PRBs had faced huge rise in
the amount involved (9.4% in 2018-2019 to 24.05% in 2020-2021 (RBI Annual
Report, 2019–2020). Even though the share of PSBs is huge in terms of fraud
cases and amounts involved, the growing trend for PRBs (might be due to lesser
practice of identification of fraudulence in PSBs banks) triggers a red alert to
private entities. ‘On an average, every year, approximately 30% of gross NPAs,
around 2% of the total banking system loans are reported as willful defaulters’
(Jayadev & Padma 2020, p. 130). Even though the share of frauds in the GNPA
ratio is more, chances of resolution of NPA in case of scams and money laundering
are minimal.
Some of the major scams that shook the financial market in India are Neerav
Modi and Mehul Choksi’s scams in January 2018 amounting to `113.56 billion
(caused due to fraudulent letter of undertaking given by bank employees), Vijay
Mallya’s scam amounting to `94.32 billion from 13 banks (State Bank of India
[SBI] with the highest share followed by Punjab National Bank [PNB], IDBI,
Bank of Baroda) in February 2018, Allahabad Scam with an exposure of `23.63
billion in PNB fraud, Vikram Kothari misappropriated `29.19 billion from 7
PSBs, and Kanishka Gold with `8.24 billion fraud amount (Singh, 2018).
Recently, in July 2019, PNB had reported a fraud of `38.05 billion, conducted by
Bhusan Power and Steel Ltd; Allahabad bank (ALH) also detected its fund in the
same company as fraud worth `177.74 billion (Shukla, 2019). Again in September
2019, PNB declared `12.03 billion as fraud associated with Sintex Industries Ltd
(PTI, 2020).
Some major reasons for these multi-billion and homogeneous frauds are
deterioration in corporate governance standards, lack of financial expertise or
sleuths, lesser conviction rates, corrupt employees, poor legal system and fragile
and politically influenced banking system. Reports on fraudulency hiked in 2018–
2019 as government had issued a new framework that detects, reports and
scrutinises NPA accounts surpassing `500 million to reduce possible default or
fraud cases.
232 Arthaniti: Journal of Economic Theory and Practice 22(2)

Review of Literature
Many studies have been conducted to compare the NPA level among various
banks by taking different data sets for various periods. Bhardwaj and Chaudhary
(2018), Murugan et al. (2018), Rathore et al. (2016), Sikdar and Makkad (2013)
and Somisetti et al. (2015) had studied various causes, impacts of NPA and
measures (both preventive and curative) to reduce and to avoid the future
generation of bad assets. Recovery of assets through various channels, such as
the Lok Adalat, DRTs and the SAFRAESI Act, were discussed by Murugan et al.
(2018) and Bhardwaj and Chaudhary (2018). According to Jha (2019), Banerjee
et al. (2018), Rao and Patel (2015), Sikdar and Makkad (2013) and Somisetti et
al. (2015), PSBs possessed more NPA as compared to their counterparts, and
PRBs were performing better during the selected study periods. The growing
NPA harmed the profitability of the banks, as proved by Baput (2018), but
according to Kiran and Jones (2016), other banks except SBI and PNB were
facing huge losses due to NPA. Some studies such as; Sukul (2017), Rathore et
al. (2016) and Garg (2015) had concluded that some selected banks have shown
significant positive correlation between net profit and NPA reflecting better
performance of banks with huge NPAs. The reasons for these correlations might
be diversification of banking services, adequate gross advances and proper
management of NPA to a bearable level that had nullified the negative impact of
NPA on bank’s profitability. Chilukuri et al. (2016) had used geometric
progression ratio and percentage to check asset quality, and the results had
reflected consistency in the quality of assets due to increasing trends in advances
and decreasing trends of NPAs. Sengupta and Vardhan (2017) and Sikdar and
Makkad (2013) had analysed the growth of NPAs for a longer period during the
financial crisis that was felt by the country’s macroeconomy and studied its
degree and nature. Asian Banking crisis (2008–2009) gave rise to more non-
performing loans in the economy in terms of both absolute and percentage.
Chawla and Rani (2019) had analysed the trend in NPAs (gross, net, addition,
reduction, and provision) of PNB and conducted a comparative study by taking
data from 1997–1998 to 2016–2017. The result showed that significant
differences in GNPA ratio, NNPA ratio, addition to NPA, provision for NPA,
priority sector advances ratio, non-priority sector advance ratio and segment-
wise NPA ratio were observed in PNB across the three subperiods.
Nag (2015) had considered 30 selected Indian commercial banks to analyse
the sector-wise growth of NPAs during 2007–2008 to 2013–2014. No
significant difference was observed in the growth of NPA for various selected
categories. Thomas and Vyas (2019) compared the loan recovery strategies of
SCBs and their effectiveness by using McKinsey 7S model on GNPA of two
SBIs and their associates, seven PSBs, six PRBs and three FBs from 2004–
2005 to 2016–2017. The result of the Kruskal–Wallis test showed that a
significant difference in the movement of GNPA is observed between SBI and
its associate and PRB groups. Loan quality, recovery strategies and their
implementation are better in PRB group, while more prominent delinquencies
are seen in the PSB group.
Mishra and Rath 233

Very few papers from the existing literature have considered individual banks
from each group for their comparative analysis. The current article has cross-
checked the assumption of parametric test and adopted a non-parametric test
(Kruskal–Wallis) when the violation is observed. Only the GNPA ratio is used for
comparison due to the non-availability of data. The study could help banks and
the government to implement new strategies to manage existing and avoid future
NPAs by observing the best performer banks in the same bank group and follow
their strategies. The article will also enlighten shareholders, investors, bankers
and academicians about the NPA status of individual banks.

II. Data and Methodology

The secondary data are collected from the RBI website and used for comparative
analysis (groups-wise and individual bank-wise) among three categories of banks
by conducting the non-parametric test in SPSS and EViews. Variables such as
GNPA ratio and NNPA ratio are taken for PSBs, PRBs and FBs on an aggregate
basis from 2004–2005 to 2019–2020. In Table 1, 45 individual banks (15 banks
from each group) based on total assets are taken for the study.

Table 1. Names of the Selected Banks.

Banks Public Sector Banks Private Sector Banks Foreign Banks
1 State Bank of India (SBI) HDFC Bank (HDFC) CITI Bank N.A. (CITI)
2 Bank of Baroda (BOB) ICICI Bank (ICICI) Hong Kong and
Shanghai Banking
Corporation (HSB)
3 Punjab National Bank AXIS Bank (AXIS) Standard Chartered
(PNB) Bank (SCB)
4 Canara Bank (CAN) YES Bank (YES) Deutsche Bank (DEU)
5 Bank of India (BOI) Kotak Mahindra DBS Bank (DBS)
Bank (KOT)
6 Union Bank of India IndusInd Banks BNP Paribas (BNP)
(UBI) (INDUS)
7 Syndicate Bank (SYN) Federal Bank (FED) Barclays Bank (BAR)
8 Central Bank of India Jammu and Kashmir Mizuho Bank (MIZ)
(CBI Bank (J&K)
9 Indian Bank (IND) South Indian Bank Credit Agricole Cor-
(SOU) porate and Investment
Bank (CACIB)
10 Oriented Bank of RBL Bank (RBL) Bank of Nova Scotia
Commerce (OBC) (BNS)
11 Indian Overseas Bank Karnataka Bank (KAR) Bank of Bahrain (BBK)
(IOB)
(Table 1 continued)
234 Arthaniti: Journal of Economic Theory and Practice 22(2)

(Table 1 continued)

Banks Public Sector Banks Private Sector Banks Foreign Banks

12 Andhra Bank (AND) Karur Vysya Bank Abu Dhabi Commercial
(KARUR) Bank (ADCB)
13 Allahabad Bank (ALH) City Union Bank (CITY) SBM Bank (SBM)
14 UCO Bank (UCO) Tamilnad Mercantile CTBC Bank (CTBC)
Bank (TAM)
15 Corporation Bank DCB Bank (DCB) Bank of Ceylon (BOC)
(COR)
Source: RBI website.

III. Results and Discussion

Table 2 shows the trend of GNPA amount, ratio and growth for all three groups
from 2004–2005 to 2019–2020. In 2004–2005, the GNPA amount of PSBs
was `465.99 billion; after some fall and rise, it ended with a decline to
`6,783.17 billion in 2019–2020. A similar trend is observed for GNPA ratio
and annual growth of GNPA in PSBs. PRB group had a fall in GNPA from
`87.82 billion to `78.1 billion after 2005–2006, it started increasing up to
2019–2020 (`2,095.68 billion). GNPA ratio and annual growth (of amount)
had mixed trend for PRBs. Mixed trends were observed for FBs in terms of
GNPA throughout the study period. In the beginning year, the GNPA amount
was `21.91 billion which later increased to `102.08 billion in 2019–2020. The
average GNPA amount for PSBs was way higher than PRBs and FBs even
with a higher standard deviation.
In Table 3, It is observed that NNPA amount of the PSBs had increased from
₹145.66 billion in 2005–2006 up to ₹ 4544.73 billion in 2017–2018,showing an
increasing trend, then reduced to ₹ 2309.17 billion in 2019–2020. A similar trend
was observed in the case of NNPA ratio but with a huge variation in the case of
annual growth in NNPA for PSBs. After a fall in 2005–2006, NNPA in PRBs had
started increasing up to `74.12 billion in 2008–2009. Then with some declines for
3 years, it again started rising to `557.45 billion in 2019–2020. In 2004–2005, the
NNPA amount of FBs was `6.39 billion, and then it increased to `29.96 billion in
2008–2009. After a huge decline over 2 years, again, it started rising. From 2014–
2015 onwards, a fluctuation in trend was observed till 2018–2019. Mixed trends
in ratio and annual growth of NNPA amount were observed for PRBs and FBs
during these 16 years.
Figure 1 shows the Compound Annual Growth rate (CAGR) of GNPA ratio
and NNPA ratio for all bank groups during the study period from 2004-2005 to
2019-2020.The CAGR of GNPA ratio is 4.4% and NNPA ratio is 3.85% for PSBs;
for PRBs the GNPA ratio is only 2.23% and NNPA ratio is −2.52% and for FBs,
negative growths are observed in the GNPA ratio (−1.76%) and in the NNPA ratio
(−3.08% ).
Table 2. GNPA Ratio of PSB, PRB and FB.
PSB PRB FB
Amount Amount Amount
(in billion Annual (in billion Annual (in billion Annual
Years rupees) % GNPA Growth % rupees) % GNPA Growth % rupees) % GNPA Growth (%)
2004–2005 465.99 5.4 87.82 3.9 21.91 3
2005–2006 421.17 3.7 −9.62 78.1 2.5 −11.07 19.27 2.1 −12.05
2006–2007 389.68 2.7 −7.48 92.55 2.2 18.5 22.62 1.9 17.38
2007–2008 406 2.2 4.19 129.97 2.5 40.43 28.59 1.9 26.39
2008–2009 459.18 2.0 13.1 169.26 2.9 30.23 64.44 4.3 125.39
2009–2010 573.01 2.2 24.79 176.39 2.7 4.21 71.11 4.3 10.35
2010–2011 710.42 2.2 23.98 182.4 2.2 3.41 50.45 2.5 −29.05
2011–2012 1124.88 3.0 58.34 187.67 1.9 2.89 62.68 2.7 24.24
2012–2013 1644.61 3.6 46.2 201.7 1.8 7.48 79.25 3.0 26.44
2013–2014 2272.64 4.4 38.19 245.42 1.8 21.68 115.65 3.9 45.93
2014–2015 2784.68 5.0 22.53 341.06 2.1 38.97 107.61 3.2 −6.95
2015–2016 5399.56 9.3 93.9 561.87 2.8 64.74 157.98 4.2 46.81
2016–2017 6847.33 11.7 26.81 932.09 4.1 65.89 136.21 4.0 −13.78
2017–2018 8956.01 14.6 30.8 1293.35 4.6 38.76 138.29 3.8 1.53
2018–2019 7395.41 11.6 −17.43 1836.03 5.3 41.96 121.42 3.0 −12.2
2019–2020 6783.17 10.3 −8.28 2095.68 5.5 14.14 102.08 2.3 −15.93
Source: RBI Website and author’s calculation.
Note: 1. A fter 2018–2019, IDBI bank has been recognised as PRB; until then, it was known as a PSB.
2. Bank of Baroda merged with Vijaya Bank and Dena Bank in 2018; the gross merged value reflected in the year 2019–2020.
Table 3. Net NPA Ratio of PSB, PRB and FB.
PSB PRB FB
Amount Amount Amount
(in billion Annual (in billion Annual (in billion Annual
YEAR rupees) % NNPA Growth % rupees) % NNPA growth % rupees) % NNPA Growth %
2004–2005 169.04 2.1 42.12 2.2 6.39 0.8
2005–2006 145.66 1.3 −13.83 31.7 1.01 −24.74 8.08 0.8 26.45
2006–2007 153.25 1.1 5.21 40.28 0.9 27.07 9.27 0.7 14.73
2007–2008 178.36 1 16.38 56.47 1.08 40.19 12.47 0.8 34.52
2008–2009 211.55 0.9 18.61 74.12 1.28 31.26 29.96 1.8 140.26
2009–2010 296.43 1.1 40.12 65.06 1.02 −12.22 29.77 1.8 −0.63
2010–2011 360.55 1.1 21.63 44.32 0.5 −31.88 13.13 0.7 −55.9
2011–2012 593.91 1.5 64.72 44.01 0.4 −0.7 14.12 0.6 7.54
2012–2013 900.37 2 51.6 59.94 0.5 36.2 26.63 1 88.6
2013–2014 1306.35 2.6 45.09 88.62 0.7 47.85 31.6 1.1 18.66
2014–2015 1599.51 2.9 22.44 141.28 0.9 59.42 17.62 0.5 −44.24
2015–2016 3203.76 5.7 100.3 266.77 1.4 88.82 27.67 0.8 57.04
2016–2017 3830.89 6.9 19.57 477.8 2.2 79.11 21.41 0.6 −22.62
2017–2018 4544.73 8 18.63 643.8 2.4 34.74 15.48 0.4 −27.7
2018–2019 2851.22 4.8 −37.26 673.08 2.02 4.55 20.5 0.5 32.43
2019–2020 2309.17 3.7 −19.01 557.45 1.5 −17.17 20.84 0.5 1.66
Source: RBI Website and author’s calculation.
Note: 1. After 2018–2019, IDBI bank has been recognised as PRB; until then, it was known as a PSB.
2. Bank of Baroda merged with Vijaya Bank and Dena Bank in 2018; the gross merged value reflected in the year 2019–2020.
Mishra and Rath 237

5.00%
%GNPA
0.00%
PSB PRB FB %NNPA
-5.00%

Figure 1. CAGR of GNPA Ratio and NNPA Ratio in terms of ratio for PSBs, PRBs and
FBs from 2004–2005 to 2019–2020
Source: The authors.
Note: CAGR = (NPA ratio of current year/NPA ratio of last year)(1/n − 1) − 1
where n = number of years taken for the study (for bank groups, n = 16 and for individual selected
banks, n = 10).

Hypotheses Testing
H0: There is no significant difference in the movement of GNPA ratio of
PSB, PRB and FB groups during the study period from 2004–2005 to
2019–2020.
H1: There is a significant difference in the movement of GNPA ratio of PSB,
PRB and FB groups during the study period from 2004–2005 to
2019–2020.
H0: There is no significant difference in the movement of the NNPA ratio of
PSB, PRB and FB groups during the study period from 2004–2005 to
2019–2020.
H1: There is a significant difference in the movement of NNPA ratio of PSB,
PRB and FB groups during the study period from 2004–2005 to
2019–2020.
All three bank groups have reflected non-homogeneity, as per Bartlett’s test
and Levene’s test (p-value is less than 0.05), in their GNPA and NNPA ratios
during the selected study period. Only PSBs and PRBs groups have shown
non-normality in both GNPA ratios and NNPA ratios as per the Shapiro–Wilk
test. Hence, the non-parametric test is considered for this analysis. The p-value
of the Kruskal–Wallis test is 0.08 for the GNPA ratio, which means we cannot
reject the null hypothesis. We accept that there is no significant difference in
the movement of the GNPA ratio of PSBs, PRBs and FBs groups during the
study period,whereas for the NNPA ratio, the p-value is 0.000, which means
we reject the null hypothesis. There is a significant difference in the movement
of the NNPA ratio across the three selected groups. The Games–Howell post-
hoc test shows significant differences in the movement of NNPA ratio between
FBs and PSBs (p-value is 0.006) and also between PRBs and PSBs groups
(p-value is 0.02).
Table 4. GNPA Ratio of 15 Selected Public Sector Banks from 2010–2011 to 2019–2020.
2010– 2011– 2012– 2013– 2014– 2015– 2016– 2017– 2018– 2019– Aver- Std. CAGR
PSB/Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 age Dev. (%)
SBI 3.12 4.36 4.42 4.96 4.28 6.38 9.11 10.9 7.53 6.15 6.12 2.4 7.02
BOB 1.62 1.89 2.4 2.94 3.72 9.99 10.4 12.2 9.61 9.4 6.43 4.2 19.2
PNB 1.79 3.15 4.27 5.25 6.55 12.9 12.5 18.3 15.5 14.2 9.45 5.8 23.0
CAN 1.47 1.75 2.57 2.49 3.89 9.4 9.63 11.8 8.83 8.04 5.99 3.9 18.5
BOI 2.64 2.91 2.99 3.15 5.39 13.0 13.2 16.5 15.8 14.7 9.06 6.0 18.8
UBI 2.37 3.16 2.98 4.08 4.96 8.7 11.1 15.7 14.9 14.1 8.23 5.3 19.5
CBI 1.82 4.83 4.8 6.27 6.09 11.9 17.8 21.4 19.2 18.9 11.3 7.4 26.3
SYN 2.65 2.75 1.99 2.62 3.13 6.7 8.5 11.5 11.3 12.0 6.33 4.2 16.3
IND 0.99 1.94 3.33 3.67 4.4 6.66 7.47 7.37 7.11 6.87 4.98 2.4 21.3
OBC 1.98 3.17 3.21 3.99 5.18 9.57 13.7 17.6 12.6 12.6 8.38 5.5 20.4
IOB 2.71 2.79 4.02 4.98 8.33 17.4 22.3 25.2 21.9 14.7 12.4 8.9 18.4
AND 1.38 2.12 3.71 5.29 5.31 8.39 12.2 17.0 16.2 16.0 8.78 6.1 27.8
ALH 1.8 1.91 3.92 5.73 5.46 9.76 13.0 15.9 17.5 17.1 9.23 6.2 25.2
UCO 3.31 3.73 5.42 4.32 6.76 16.0 17.1 24.6 25 16.7 12.3 8.6 17.6
COR 0.91 1.26 1.72 3.42 4.81 9.98 11.7 17.3 15.3 13.8 8.03 6.3 31.2
Source: RBI website and author’s computation.
Mishra and Rath 239

Hypotheses Testing
H0: There is no significant difference in the movement of GNPA ratio across
the selected banks in PSB, PRB and FB groups during the selected study
period from 2010–2011 to 2019–2020.
H1: There is a significant difference in the movement of GNPA ratio across
selected banks in PSB, PRB and FB groups during the selected study period
from 2010–2011 to 2019–2020.
During the initial periods of the study, as shown in Table 4, it is observed that all
the selected banks in the government-owned banks group have grappled with
burgeoning stressed assets, which could be attributed to the aftermath of the
global financial crisis of 2007–2008 followed by the adverse impact on markets
(both consumption and production) along with economic slowdown. PSBs were
worst affected as they acquired a larger chunk of corporate loans, which can be
explained by the theory of reflexivity proposed by George Soros (Kaul, 2015).
This theory states that overoptimism, irrational exuberance behaviour and easy
money attract highly risky and leveraged projects that would end up with more
future slippages into NPA. Most of the PSBs obtain more than 50% of their NPA
from the industrial sector, such as; Andhra Bank obtains 86%, United Bank of
India acquires 78%, Indian Bank (IND) has 74% and SBI obtains 73% (Nair,
2019). The change in the recognition process of NPA from manual to system-
based (August 2011), declaration of more stringent norms regarding asset
evaluation by RBI in 2015, cancellation of coal blocks association by Supreme
Court in 2015, aggressive lending during the boom (lagged effect), demand
reduction and distress in agricultural loans caused huge bad loans to pile up during
2017–2018.
Except for UCO Bank and ALH, all other banks have shown a decreasing trend
in the GNPA ratios in 2018–2019; this decreasing trend can be attributed to
improvement in the performances, which can be observed through a decline in the
stressed advances ratio (from 16.3% in March 2018 to 14.4% in December 2018),
growth in overall credit (6.3% in March 2018 to 9.6% in March 2019), growth in
provision coverage ratio (from 47.1% in 2018 to 60.8% in 2019), improvement in
the operating profit of PSBs, etc. Diversion in credit advancement (towards more
non-food sectors bank credit), various comprehensive reforms in underwriting,
upgradation in technology and speedy recoveries through various channels have
furtherance in assets quality, and banks have achieved drops in impaired loans.
During 2015–2019, PSBs have been recapitalised with around `3.82 trillion
(Mohanty, 2019) to smoothen the credit flows, maintain the liquidity and
strengthen the capital base.
The average GNPA ratio (in percentage) from 2010–2011 to 2019–2020 is least
for IND (4.98) with even minimum fluctuation and it is highest for Indian Overseas
Bank (IOB) (12.47) with the highest variation in the GNPA ratio, followed by UCO
Bank (12.32) and Central Bank of India (CBI) (11.33). Corporation Bank shows
the highest (31.3%) CAGR. The standard deviation of SBI and its associates (2.44)
240 Arthaniti: Journal of Economic Theory and Practice 22(2)

Figure 2. Box-plot of Kruskal–Wallis Test for 15 Selected PSBs.

Source: The authors.

reflects proper maintenance of bad assets. We cannot conclude that banks with
more assets or those large in size are the best in the resolution of NPA, as some of
the banks with higher total assets such as PNB, CBI, Bank of Baroda acquire
higher CAGR in NPA as compared to the banks with lower assets.
The non-parametric test has a p-value greater than the significant level for only
PSBs, which means there is no significant difference in the movement of GNPA
ratios of 15 PSBs during the study years, as shown in Figure 2.
Table 5 displays the GNPA ratio of 15 PRBs from 2010–2011 to 2019–2020.
The average GNPA ratio (in percentage) from 2010–2011 to 2019–2020 is
minimum for HDFC bank and maximum for Jammu and Kashmir Bank, which
reflects size or total assets do not have any influence on the NPA management. In
the case of DCB Bank (−8.31) and Federal Bank (−2.04), the negative values of
the CAGR (in percentage) show that they have achieved better NPA management
strategies. YES Bank has maximum growth in its stressed assets, especially in the
last year (16.8%), which can be attributed to the falls in corporate governance
standards, consistent withdrawals by the depositors, banks’ exposure to distressed
shadow banks (DHFL and IL & FS), Anil Ambani-led Reliance group and several
Table 5. GNPA Ratio of 15 Selected Private Sector Banks from 2010–2011 to 2019–2020.
2010– 2011– 2012– 2013– 2014– 2015– 2016– 2017– 2018– 2019– Std. CAGR
Years/PRB 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Average Dev. (%)
HDFC 1.06 0.95 0.85 0.91 0.89 0.92 1.04 1.28 1.35 1.25 1.05 0.18 1.66
ICICI 5.8 4.83 3.22 3.03 3.78 5.82 8.74 9.9 7.38 6.04 5.85 2.29 0.41
AXIS 1.28 1.18 1.19 1.19 1.36 1.71 5.21 6.79 5.31 4.52 2.97 2.21 13.4
YES 0.23 0.22 0.2 0.31 0.41 0.76 1.52 1.28 3.22 16.8 2.50 5.11 53.5
KOT 2.03 1.56 1.55 1.98 1.85 2.36 2.59 2.22 2.14 2.25 2.05 0.33 1.03
INDUS 1.01 0.98 1.03 1.12 0.81 0.87 0.93 3.31 2.43 2.45 1.49 0.89 9.27
FED 3.49 3.35 3.44 2.46 2.04 2.84 2.33 3 2.92 2.84 2.87 0.48 −2.04
J&K 1.95 1.54 1.62 1.66 5.97 8.32 11.2 9.96 8.97 10.97 6.22 4.16 18.8
SOU 1.11 0.97 1.36 1.19 1.71 3.77 2.45 3.59 4.92 4.98 2.61 1.59 16.2
RBL 1.12 0.8 0.4 0.79 0.77 0.98 1.2 1.4 1.38 3.62 1.25 0.89 12.4
KAR 3.97 3.27 2.51 2.92 2.95 3.44 4.21 4.92 4.41 4.82 3.74 0.84 1.96
KARUR 1.26 1.33 0.96 0.82 1.85 1.29 3.58 6.56 8.79 8.68 3.51 3.25 21.2
CITY 1.21 1.01 1.13 1.81 1.86 2.41 2.83 3.03 2.95 4.09 2.23 1.00 12.9
TAM 1.3 1.28 1.31 2.46 1.63 1.84 2.91 3.6 4.32 3.62 2.43 1.13 10.7
DCB 5.86 4.4 3.18 1.69 1.76 1.51 1.59 1.74 1.84 2.46 2.60 1.46 −8.31
Source: RBI Website and author’s computation.
242 Arthaniti: Journal of Economic Theory and Practice 22(2)

Figure 3. Box-plot of Kruskal–Wallis Test Among 15 PRBs.

Source: The authors.
Note: Bank pairs in Private Sector Banks category with significant differences as per Games–
Howell test and Kruskal–Wallis pair-wise comparisons are as follows:
1. IndusInd Bank and Jammu and Kashmir Bank
2. IndusInd Bank and Federal Bank
3. IndusInd Bank and Karnataka Bank
4. HDFC Bank and Jammu and Kashmir Bank
5. HDFC Bank and Karnataka Bank
6. HDFC Bank and Kotak Mahindra Bank
7. HDFC Bank and ICICI Bank
8. HDFC Bank and Federal Bank
9. ICICI Bank and RBL Bank
10. ICICI Bank and Kotak Mahindra Bank
11. ICICI Bank and City Union Bank
12. ICICI Bank and IndusInd Bank
13. ICICI Bank and Yes Bank
14. Yes Bank and Karnataka Bank
15. Karnataka Bank and RBL Bank
16. Federal Bank and RBL Bank
17. Yes Bank and Jammu and Kashmir Bank
18. Karnataka Bank and Kotak Mahindra Bank
19. Jammu and Kashmir Bank and RBL Bank
Table 6. GNPA Ratio of 15 Selected Foreign Banks.
2010– 2011– 2012– 2013– 2014– 2015– 2016– 2017– 2018– 2019– Aver- Std.
Years/FB 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 age Dev. CAGR (%)
CITI 2.05 1.78 2.58 2.59 1.27 1.39 1.53 1.54 1.37 1.43 1.75 0.49 −3.54
HSB 3.54 2 1.77 1.65 1.68 1.5 1.91 1.77 0.89 0.87 1.76 0.74 −13.09
SCB 2.29 5.5 5.98 7.82 8.9 14.1 10.4 11.6 9.13 6.38 8.23 3.41 10.7
DEU 1.24 1.06 0.69 0.57 0.33 0.46 2.78 2.56 2.91 2.91 1.55 1.10 8.9
DBS 1.1 1.65 4.12 13.4 7.79 8.81 3.77 5.04 3.13 2.6 5.15 3.82 8.98
BNP 0.21 0.44 0.21 0.13 0.09 0.06 0.04 0.04 0.05 0.05 0.13 0.13 −13.37
BAR 8.71 6.03 6.24 5.47 2.28 1.1 0.75 0.67 1.89 3.19 3.63 2.79 −9.56
MIZ 0.25 0.18 2.26 2.09 2.01 0.07 0.08 0.07 0.06 0.07 0.71 0.97 −11.9
CACIB 5.72 0.05 0.02 0.66 0.01 4.18 6.16 9.1 0.06 0.06 2.60 3.39 −36.6
BNS 0.15 0.15 0.74 4.07 3.08 6.69 5.92 2.35 2.83 4.77 3.08 2.31 41.3
BBK 3.51 4.79 7.25 10.3 4.05 7.5 4.81 1.15 4.61 4.76 5.28 2.53 3.09
ADCB 6.79 1.06 0.01 2.03 1.3 1.14 0.99 1.13 3.47 1.99 2.03 −6.49
SBM 2.99 2.54 4.17 16.6 11.5 10.7 16.1 15.0 13.2 8.59 10.1 5.38 11.1
CTBC 1.23 5.59 17.2 2.46 1.79 10.1 9.72 1.59 0.42 0.21 5.04 5.64 −16.2
BOC 2.67 1.82 1.49 0.89 0.64 0.54 0.35 0.28 1.14 5.83 1.57 1.67 8.12
Source: RBI website and author’s computation.
244 Arthaniti: Journal of Economic Theory and Practice 22(2)

other troubled borrowers (Business Standard). The Kruskal–Wallis test shows the
rejection of the null hypothesis. Hence, there is a significant difference in the
movement of GNPA ratio across the 15 PRBs selected during the study period, as
shown in Figure 3.
The Games–Howell post-hoc test and pair-wise comparison in Kruskal–Wallis
test show the pairs consisting of the banks with comparatively higher GNPA ratios
such as ICICI Bank, Karnataka Bank, Jammu and Kashmir Bank and Federal
Bank, and banks with lower GNPA ratios such as HDFC Bank, RBL Bank,
IndusInd Bank and Yes bank (except the last year) are reflecting differences
among them during the study period.
In Table 6, the GNPA ratios of 15 FBs from 2010–2011 to 2019–2020 are
shown. BNP Paribas bank shows a minimum (0.13) average and very little
deviation in GNPA ratios, whereas SBM bank reflects the highest average (10.1)
and the highest standard deviation (5.38). Many banks have reflected negative
growth as CAGR which means FBs are better at managing NPA. Among these
FBs, a huge fall in GNPA ratio was observed in Credit Agricole Corporate and
Investment Bank, especially in 2018–2019, followed by Barclays bank, BNP
Paribas, Mizuho Bank, Hongkong and Shanghai Banking Corporation.
The null hypothesis is rejected; this implies that there is a statistically significant
difference in the movement of GNPA ratios across the selected FBs. The GNPA
ratios are higher in SBM Bank followed by Standard Chartered Bank; both are
significantly different from the banks with lower GNPA ratios, such as Deutsche
Bank, BNP Paribas, Mizuho Bank, Bank of Ceylon, Credit Agricole Corporate
and Investment Bank, Hong Kong and Shanghai Banking Corporation. Other
pairs are BNP Paribas (lowest GNPA) with banks such as Barclays Bank, CTBC
Bank, DBS Bank, and Bank of Bahrain & Kuwait B.S.C. (comparatively higher
GNPA ratio). Except for these pairs, others have maintained the propinquity in the
movement of the GNPA ratio among themselves during the study period. We can
find the difference in the movement of GNPA ratio among various FBs by
observing the boxplot in Figure 4.

Merger of Banks and Its Impact on Asset Quality

Merger ensures large capital base, improvement in service deliveries, lower
recapitalisation burden on the government, diversification in business,
technological up-gradation, branch network expansions, improvement in capital
to risk-weighted assets ratio that would help the weak banks to revive after the
association with strong anchor banks. There are only 12 PSBs remaining after
megamergers. SBI which is the largest developmental bank in India had acquired
five other associate banks and Bhartiya Mahila Bank in 2017. After the mega
acquisition, a reduction in NPA, both in the form of GNPA and NNPA ratio, was
observed in the SBI consolidated balance sheet (fall in GNPA ratio from 7.53% in
2018–2019 to 6.15% in 2019–2020 and NNPA ratio from 3.01% in 2018–2019 to
Mishra and Rath 245

Figure 4. Box-plot of Kruskal–Wallis Test Among 15 FBs.

Source: The authors.
Note: Bank pairs in Foreign Banks category with significant differences as per Games–Howell test
and Kruskal–Wallis pair-wise comparisons are as follows:
1. BNP Paribas and Barclays Bank
2. BNP Paribas and CTBC Bank
3. BNP Paribas and DBS Bank
4. BNP Paribas and Bank of Bahrain
5. BNP Paribas and Standard Chartered Bank
6. BNP Paribas and SBM Bank
7. Standard Chartered Bank and Bank of Ceylon
8. Standard Chartered Bank and Deutsche Bank
9. Standard Chartered and Bank Mizuho Bank
10. Standard Chartered Bank and Abu Dhabi Commercial Bank
11. Standard Chartered Bank and CITI Bank N.A.
12. Standard Chartered Bank and Bank of Ceylon
13. Abu Dhabi Commercial Bank and SBM Bank
14. Credit Agricole Corporate and Investment Bank and Standard Chartered Bank
15. Credit Agricole Corporate and Investment Bank and SBM Bank
16. Hong Kong and Shanghai Banking Corporation and SBM Bank
17. Hong Kong and Shanghai Banking Corporation and BNP Paribas
18. Hong Kong and Shanghai Banking Corporation and Standard Chartered Bank
19. CITI Bank N.A. and SBM Bank
20. Bank of Ceylon and SBM Bank
21. Deutsche Bank and SBM Bank
22. Mizuho Bank and SBM Bank
23. Mizuho Bank and Bank of Bahrain
24. Deutsche Bank and Bank of Bahrain
246 Arthaniti: Journal of Economic Theory and Practice 22(2)

2.23% in 2019–2020). Dena Bank and Vijaya Bank were merged with Bank of
Baroda in 2018–2019. PNB bank had absorbed OBC and United Bank of India;
Syndicate bank merged with Canara Bank; Andhra Bank and Corporation Bank
amalgamated with Union Bank of India; and ALH united with IND with effect
from 1 April 2020. PNB Bank became the second largest bank in India after the
merger with the other two banks.
Before merger, Dena bank had ₹127.67 billion GNPA and ₹41.66 billion
NNPA and Vijaya bank had ₹89.23 billion GNPA and ₹40.18 billion NNPA in
their bank accounts. After merger, the NPA size of anchor bank (BOB) had
bloomed up along with the assets size. Then, slowly BOB learnt to deal with
these huge bad assets. GNPA ratio of Bank of Baroda has shown a drop from
10.25% in Q2 2019–2020 to 9.14% in Q2 2020–2021 and NNPA ratio fell from
3.91% to 2.5%; slippage ratio fell from 3.95% to 0.54% during the same period;
and provision coverage ratio increased from 77.88% in Q2 FY 2020 to 85.35%
in Q2 2020–2021 (Bank of Baroda, 2021). Huge reductions were observed in the
GNPA and NNPA ratios of PNB, UBI and OBC during the last 3 years; that is,
GNPA ratio and NNPA ratio of PNB were 14.21% and 5.78% in 2019–2020,
whereas in 2017–2018, they were 18.38% and 11.24%. The GNPA ratio of UBI
had also reduced to 13.4% in 2019–2020 from 24.1% in 2017–2018. Similarly,
NNPA ratios also declined to 4.73% from 16.49%. In OBC bank, the GNPA and
NNPA ratios were 17.63% and 10.48% in 2017–2018, which declined to 12.67%
and 5.01%, respectively, in 2019–2020. Even though GNPA and NNPA in the
amount of Syndicate banks are lower, Syndicate banks had a higher GNPA ratio
(12.04%) and NNPA ratio 4.61% as compared to Canara Bank (8.04% GNPA and
4.22% NNPA ratios) in 2019–2020, which is similar for the previous year also.
In the case of ALH, GNPA ratio is found to be higher during the study periods
(see Table 3). GNPA and NNPA in terms of amounts are lower in both Corporation
Banks and Andhra Bank as compared to Union Bank of India; the GNPA ratio of
Corporation Bank was lower than UBI till 2014–2015, and then it was
continuously higher except 2019–2020. ‘Notwithstanding some initial hiccups,
factors like government ownership, similar pay structure and career progression
avenues for staff, and common core banking solutions helped smoothen the
operationalisation of the merger’ (RBI’s Reports on Trend and Progress of
Banking in India, 2019–2020). The real impact of the merger on the performance
of anchor banks will be reflected in the balance sheets of banks probably in the
next financial years. The amalgamations of SBI and BOB have shown
improvement in the quality of their assets which possibly foreshow the future
furtherance in the other four anchor banks.

IV. Conclusion
Indian banking system confronts NPA as a major challenge as it degrades the
credit rating and lowers the credibility of the bank suffering from huge stressed
Mishra and Rath 247

assets. The objective of the study is to throw light on the current trend and position
of bad assets in the Indian banking system. The non-parametric test (Kruskal–
Wallis) and Games–Howell post-hoc test are used to know whether there exists
any difference in the movement of GNPA ratios among bank groups and individual
banks by taking the secondary data from the RBI website during the period 2004–
2005 to 2019–2020. Many banks with higher total assets still face bad assets more
than banks with lower total assets. The Private Sector and FBs have reflected the
significant differences in GNPA ratios among themselves which is the opposite
for PSBs. The post-hoc test provides some pairs that have significant differences
in their GNPA ratio, which is in support of the results of Thomas and Vyas (2019)
but contrary to Nag (2015). Bank groups have a significant difference in NNPA
ratio but not in GNPA ratio among them. The PSB group is significantly different
from the other two groups, as banks in PSBs are grasped with huge bad loans and
hold inadequate provisioning. No bank from the public sector group and only two
private banks along with nine FBs have shown both negative growth and CGPA
percent in the GNPA ratios, which reflect domestic banks in India are far from
reaching their goal of NPA resolutions. The reasons for higher NNPA and GNPA
in PSBs could be the inappropriate lending process, improper monitoring,
asymmetric information, defaulter friendly management system, directed lending
to priority sector, etc. PSBs with the duty of social banking always get influenced
by political parties and government policies, high regulation and dual
administration, and priority sector lending causes a tremendous amount of bad
assets in PSBs. Delay in recognition process or replacing it by the restructuring of
assets either through increasing tenure or reducing rate of interest or ever-greening,
divergence in bank assets classification, provisioning from RBI assessments and
more dependence on third parties during loan advancements encourage more bad
assets. Merger has emerged as a solution by reducing the numbers of banks and
making the banking sector healthier and more competitive even at the global
level. Some earlier mergers have shown success in their NPA resolution and led to
better performances, which foreshow the future of the other four banks whose
merger will be effective from April 2020.
To combat the current macroeconomic uncertainties and instabilities, policies
should be implemented by giving focus to the resolution of stressed assets,
strengthening financial regular activities either through recapitalisation or market
accession, ensuring adequate liquidity, capital, and transparency in the financial
market and embracing new updated macro-prudential supervision and regulation
policies. Banks should strengthen their loan recovery process, tighten eligibility
criteria, appoint skilled and trained credit team, conduct periodic reviews and
update the financial status of borrowers and publish the default list for proper
management and maintenance of NPA.
The recent proposal of RBI of allowing domestic corporates to own and run
banks seems to be a good step but in a bad direction according to Kaushik Basu,
the former World Bank Chief Economist, as this would give a free pass to big
houses to capture the markets and wipe out the smaller players, lead to
248 Arthaniti: Journal of Economic Theory and Practice 22(2)

centralisation of economic and political powers, lead to misallocation of public

funds, heighten connected loans, bring the risk of moral hazards and contagion
and lead to ‘authoritarian cronyism’. Another announcement by Finance
Minister recently to privatise two PSBs in budget 2021–2022 might be good
from an economic perspective but not from social or developmental prospect,
especially after a sudden huge economic slowdown. Other developed countries
are not allowing the corporate sector to impose direct control on the banking
sector; India should learn from the past, as the government-owned banks played
a crucial role in the 2008 global crisis by sustaining the economy that was
falling into a downswing.
The current article is based on secondary data, and the aggregate values of all
variables of various types of banks and bank-level analysis can be future prospects.
The impact of the merger on the asset quality of banks can be analysed by taking
adequate time series data and appropriate tools.

Acknowledgement
The authors would like to thanks the Editor and the anonymous reviewer for their
constructive comments and suggestions on an earlier version of this article that have made
the paper more qualitative. However, all remaining errors(if any) are solely ours.

Declaration of Conflicting Interests

The authors declare that there is no conflict of interest regarding research, authorship and
any publication of this article. The paper is not presented in any of the conferences or
seminars earlier.

Funding
The authors received no financial support for the research, authorship and/or publication of
this article.

Note
1. RBI Annual Report, 2019–2020.

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