MANAGEMENT OF NON-PERFORMING ASSETS (NPA):
A CASE STUDY OF INDIAN COMMERCIAL BANKS
IN THE POST REFORM PERIOD
ABSTRACT
OF THE THESIS SUBMITTED TO BERHAMPUR UNIVERSITY
FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY
IN
COMMERCE
Submitted By
Annapurna Sahoo
Regd. No. 76/2013
Under the Guidance and Supervision of
Prof. Kishore Chandra Raut
Retd. Prof., Dept. of Commerce, Berhampur University
POST GRADUATE DEPARTMENT OF COMMERCE
BERHAMPUR UNIVERSITY, BHANJA BIHAR
BERHAMPUR - 760007 (ODISHA) INDIA
2020
ABSTRACT ON
MANAGEMENT OF NON-PERFORMING ASSETS (NPA):
A CASE STUDY OF INDIAN COMMERCIAL BANKS
IN THE POST REFORM PERIOD
INTRODUCTION
The issue of NPA in the Indian banking system has been the major area of concern and matter of
scrutiny within the industry circles, financial experts and policy makers. The mounting amount
of NPA not only erodes the profitability of the Banks but also weakens their lending power. RBI
(Reserve Bank of India) has been providing continuous guidelines to all the banks to control and
manage the rising NPA problem. On the basis of the payment made by the loanee, the assets are
categorized as: (i) a standard asset (a loan where the borrower is making regular repayments), or
(ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped
making interest or principal repayments for over 90 days.
As per the report of the RBI, the total volume of gross NPAs in the economy as on 31.03.2018,
stood at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public
sector banks. Though this amount has decreased to 9.26 lakks in the year 2019 still the relative
share of the public sector banks is remaining same. If we look into the growth rate of the GNPA
and NNPA of the banking sector is looked into, they are around 26% and 25% p.a. This
indicates the alarming rate of increase of the NPA burden on the banks. Under such a situation,
banks are forced to maintain higher provision to meet the future possible losses caused due to
NPA. As a result, the profitability is decreasing and lending power of the banks is also reducing.
In this whole process, we can find out three major parties involved such as (i) the banks, (ii) the
government and its economic policies and (iii) the corporates or individuals who have borrowed
loan. All these three parties have their individual role in increasing the NPA burden on the banks.
The role of the government and the borrowers is not the area of focus of this thesis. In this thesis
we are concerned about the management practices adopted by the banks to manage the
increasing NPAs and secondly, the impact of this NPA on the profitability of the banks. This is
so because banks generally have no control over the external and firm specific factors that leads
to NPAs. However, banks can take adequate measure at their point to keep the NPA volume
under control.
In this context another area comes into picture and that is the efficient management of the loan
assets so that they will not come in the category of NPA. In this aspect so many strategies and
options are available for the banks. The strategy may vary from the simplest aging analysis of
the outstanding loan amount to sophisticated asset restructuring as per the guidelines of the
SARFASSAI Act. Various legal means such as NCLT, insolvency and bankruptcy code are
available for debt recovery and minimizing the loss in the form of NPA.
Having all this in the backdrop, the present thesis tries to access the trend in the NPA of the
Indian banking sector. At the same time, it tries to study the impact of the NPA on the
profitability of the firm and most importantly what are the NPA management practices being
adopted by the various banks in current time.
SIGNIFICANCE OF THE STUDY
Non-performing assets (NPAs) have remained the single largest cause of worry for the Indian
banking sector in recent years. Narsimham Committee (I) had broadly concluded that the main
reason for the declining profitability/ losses of the commercial banking in India was the priority
sector lending which contributed to the built up of NPAs of the banks. Subsequently, Narsimham
Committee (II) highlighted the need for ‘Zero’ non-performing assets for all the Indian banks in
a phased manner. The 1998 Report further blamed poor credit decisions, behest lending and
cyclical economic factors among other reasons for the built up of the NPAs of banks to
uncomfortably high levels. The Committee went on the recommend for the creation of Asset
Reconstruction Funds or Asset Reconstruction Companies to take over the bad debts of banks,
allowing them to start on a clean slate. The option of recapitalization of public sector banks
through budgetary provisions was ruled out. Overall, the Committee wanted a proper system to
indentify and classify NPAs and an independent loan review mechanism for improved
management of loan portfolios. Thus, the importance of a study of this kind aiming to examine
the NPA of Indian banks and the factor contributing to such a malady is crucial and carry a lot of
significance.
SCOPE OF THE STUDY
Commercial banks essentially are commercial organization and their primary objective is to
enhance the profitability and credibility. They generate adequate surpluses for ensuring growth
and increase shareholders value. In the present day competitive scenario, profit is the primary
index of efficiency of any commercial organization for its operation and existence. Thus the
efficiency of banks is decided on the basis of return on assets, return on equity and profit
generated per employee. Only profitable banks are perceived to be rewarded by the investors
with their funds.RBI emphasizes banks' profitability and suggest various methods to reduce the
NPAs which is a drag on profitability. With change in the social and economic objectives of
Indian commercial banks, it becomes essential to assess their profitability performance and find
remedial measures to reduce NPA in the wake of new banking philosophy. Standard assets are
treated as performing assets and remaining three categories, sub-standard, doubtful and loss
assets are classified as NPA. Therefore, it is essential to analyze the NPA management of
commercial banks.
OBJECTIVES OF THE STUDY
The objective of the study which has been clearly stated in the chapter -1. The objectives of the
study are:
To study the nature and causes of NPAs.
To analyze the extent and magnitude of NPAs of scheduled commercial banks in India.
To evaluate the impact of NPA on profitability.
To analyze the efficiency of the NPA management practices adopted by banks.
To develop measures for the efficient and effective management of NPA.
METHODOLOGY OF THE STUDY
Research can be defined in various ways based on the purpose and outcome of the research. As
per the objective of this study, this research is classified as exploratory and inferential or causal
research. The reason to be called as a causal research is that this thesis explores the NPA
management practices followed by various banks. This involves the trend analysis of NPA over
the study period, study of the tools and techniques adopted by the banks on controlling NPA and
their effectiveness.
This is also an inferential research in the sense that, we have tried to establish the relationship
between the NPA and the profitability of the selected banks in our study. It not only established
the relationship but also it tries to access the degree of influence of the NPA on the profitability
of the banks.
Sampling
A successful research work mostly depends on the problem identification. Once the problem is
identified then the next step is to select the population first from which the sample is drawn for
the research work. Sampling is the process of the defining the samples to be collected and the
methodology to be used for the collecting data from the sample for an appropriate sample size.
The first step of the sampling is to decide the sample frame.
Sample Frame:
As is pointed out by the title and objective of the study, all the banks operating in India could
have been taken as the sample frame. But, later depending on the availability of data both in the
individual website of the banks and the RBI website ,the sample frame has been confined to the
public sector and private sector banks in India. Therefore, the sample frame for this study is the
27 public sector banks before bank merger in 2019, 12 public sector banks after merger now and
22 private sector banks.
Sample Size and sampling method:
The samples for this study were collected on the basis of the market capitalization of all the
banks operating in public sector and private sector. The market capitalization refers to the market
value of the stocks of the company. This is chosen for the study because the market
capitalization reflects the performance of the company. The better the performance, the better is
the market capitalization. So, for the purpose of the present study, lists of the public sector and
private sector banks have been prepared on the basis of the market capitalization as on 31. 03.
2020. Out of that list, top 10 banks each from public and private sector banks have been selected.
Hence, the sample size comprise of 20 banks for the study out of the sample frame of 49 banks.
This size of the sample is thus adequate enough to represent the sample population.
HYPOTHESIS OF THE STUDY
The following hypothesis has been formed to fulfill the objective of the study.
H1: There is no sharp increase in the non-performing assets during the study period.
H2: The GNPA and NNPA of the public and private sector banks do not affect the profitability of
the banks.
H3: The NPA management practices have no impact on the profitability of the firm.
DATA ANALYSIS TOOLS
To accomplish the objective of trend analysis of the NPA both GNPA and NNPA, the trend
analysis for the period of the study have been used. In this regard, the trend line has been
estimated for all the companies under the study. We have taken three trend lines for our study i.e.
linear trend; exponential tend and quadratic trend. After fitting the trend line in three different
methods, we have try to find out which trend lines is the best fit trend for the particular bank.
This analysis helps to understand the accurate trend of the various NPA. This is reliable method
for forecasting of the NPA for the future years and help in managerial decision making. We have
studied the relationship between the various forms of NPA and the profitability of the banks.
The impacts of the NPA on profitability are studied. To fulfill this objective, correlation test,
regression test have been applied. To understand the practices of NPA management we have
studied the various techniques used by the bank throughout the year of study. We have accessed
the impact of the management practice on the profitability of the banks.
PERIOD OF THE STUDY
The data required for this research are collected from the secondary sources. The sources are the
annual reports of the corresponding banks, the Statistical data published in the website of the
Reserve Bank of India (RBI). Few other websites were also accessed for collecting information
regarding the Indian banking sector.
The data so collected was collected for a period of 10 years from 2011 to 2020. The data was
collected on yearly basis for all the variables. The data collected were processed by using MS
Excel for further statistical analysis by using SPSS and E-views software.
LIMITATIONS OF THE STUDY
In this world no one is perfect. Therefore, some inherent limitations are there in this research.
The limitations didn’t affect the research in fulfillment of its objectives but it prevent in making a
generalization of the conclusions drawn.
The limitations of this study lie in the selection of the banks. We have selected only 10 banks
from the public sector and 10 banks from the private sector. Though these banks represent
maximum of the transaction happening in the banking sector, still to get a more generalized
inference, a large set of banks including foreign banks and cooperative banks could have been
chosen.
This study also does not focus on the product wise NPA and their impact on the profitability.
This would help the banks to find out the specific product which causes the NPA most and what
is the impact of these products directly on the profitability.
CHAPTER PLAN OF THE STUDY
The present study has been divided into the following seven chapters:
CHAPTER – I
Introduction: This chapter includes the topic of research and the scope, importance, objectives,
data source and limitation of the study.
CHAPTER – II
Review of literature: This chapter deals with brief review of existing literature and highlights
the research gap and justification of the present study.
CHAPTER – III
Methodology of the study: This chapter includes research design and methodology of the study.
CHAPTER-IV
Indian banking system: a synoptic view: This chapter covers the growth and development of
the Indian Banking system in various phases.
CHAPTER – V
Management of NPA: A Theoretical Framework: This chapter covers the theoretical
background of NPA and its management which includes the concept of NPA, types of NPA,
income recognition, provisioning for NPA, causes of NPA, adverse impact on NPA and various
measures taken to tackle NPA .
CHAPTER–VI:
Data analysis and interpretation of the NPA management of sample commercial banks:
This chapter deals with the analysis of sample data of both public sector banks and private sector
banks during the period from 2011-2020.
CHAPTER–VII
Summary of the findings and conclusion: This chapter reflects the summary of the research
paper, suggestions and findings of the study.
MAJOR FINDINGS
GNPA Trend Summary of Public Sector Bank
Name of the Bank Linear Trend Quadratic Exponential Trend
trend
Bank of Baroda
Bank of India
Central Bank of India
IDBI Bank
Indian Overseas Bank
Punjab National Bank
State Bank of India
UCO Bank
UNION Bank
CANARA Bank
Out of the 10 public sector banks, seven banks have shown exponential growth trend in their
GNPA amount. Only two banks showed quadratic trend. This leads to the conclusion that the
GNPA of the public sector banks are growing at an exponential rate.
Table- 82
NNPA Trend Summary of Public Sector Bank
Name of the Bank Linear Trend Quadratic Exponential Trend
trend
Bank of Baroda
Bank of India
Central Bank of India
IDBI Bank
Indian Overseas Bank
Punjab National Bank
State Bank of India
UCO Bank
UNION Bank
CANARA Bank
In case of the growth of the NNPA, five banks showed exponential trend and four banks showed
the quadratic trend. Only Indian overseas bank has no particular trend.
From both the GNPA and NNPA trend analysis it is clear that all the banks have shown either
quadratic trend or exponential trend, with exponential trends as the common trend. This gives an
alarming indication of increase in the non-performing assets of the banks during the study
period. This is so because the exponential growth rate is highest growth rate.
Table- 83
GNPA Trend Summary of Private Sector Bank
Name of the Bank Linear Trend Quadratic Exponential Trend
trend
Axis Bank
Federal Bank
HDFC Bank
ICICI Bank
IndusInd Bank
Kotak Mahindra Bank
Yes Bank
AU Small Finance Bank
Bandhan Bank
IDFC Fast Bank
The summary of growth trends of GNPA of the private sector banks suggest that the more
prominent trend is the exponential trend as shown by five banks and next prominent trend is the
quadratic trend displayed by three banks. Two of the private sector banks didn’t show any trend
as their data are more scattered and they are also younger banks with few years of operations.
Table -84
GNPA Trend Summary of Public Sector Bank
Name of the Bank Linear Trend Quadratic Exponential Trend
trend
Axis Bank
Federal Bank
HDFC Bank
ICICI Bank
IndusInd Bank
Kotak Mahindra Bank
Yes Bank
AU Small Finance Bank
Bandhan Bank
IDFC Fast Bank
With two new banks not showing any prominent trend, the growth of NNPA of private sector
banks evenly shows quadratic trend and exponential trend.
From the analysis of all the growth trends, we come to the conclusion that the growth trend of
the non-performing assets of both private sector and the public sector banks have exponential
growth. This means that the non-performing assets of the sample banks are increasing in an
enhanced rate. This is an area of concern for the banks.
Regarding the impact study of the non-performing asset on the profitability of the banks, this
study considers the profitability ratios such as return on capital employed (ROCE), Net profit/
loss, return on equity (ROE) and Return on asset (ROA). Both regression and correlation
analysis is done to study the impact.
From the correlation analysis it is clear that all the correlations between GNPA and NNPA are
highly positive both in private and public sector banks. This leads to conclusion that the increase
in the GNPA leads to simultaneous increase in the NNPA of all the banks.
So far, the correlation of GNPA and NNPA with the profitability ratios are concern, we have
observed that these variables are negatively correlated to profitability ratios. The degree of
negative correlations ranges from -0.500 to -0.98, almost in maximum cases. This leads to the
conclusion that the increase in the non-performing assets will cause a decreasing trend in the
profitability of the banks.
The regression equations with GNPA and NNPA as independent variable and all the profitability
ratios of banks resulted 8 equations for each bank. The in-depth observations of theses equations
of all the banks leads to the conclusion that in maximum cases there is a significant impact of
these two variants of NPA on the profitability ratios. This supported by the fact that in maximum
cases the p-values are less than 0.05. When we look into the r-square values to study the degree
of influence of the independent variable on the dependent variable, it is observed that except few
private sector banks such as AU Small finance Bank, Bandhan Bank, ICICI Bank, the r-square
values are considerable high. This leads to the conclusion that the variability of profitability is
well explained (on an average of 75%) by the variability in the non-performing assets of the
banks.
SUGGESTIONS
Banks are the backbone of the economic development of any nation. At present, a majority of
banks are over burdened with huge amount of bad loans or NPA in their loan portfolio. The
present study is a case study on commercial banks with reference to management of NPA. There
are clear cut indications of high degree of growth of non-performing assets of all the banks.
Under these conditions we have to review the steps and precautions taken by the banks to curb
down the galloping non-performing assets. For this purpose, following suggestion and
recommendations are given.
Adequate staffs should be there in the bank to monitor and follow-up the bad loans and
also to recover the NPA amount.
Latest project appraisal mechanism should be followed by the bank to protect the bank
funds becoming bad loans and minimize insolvency risks which ultimately helps in
reducing NPA.
Prior to the sanction of the credit to the client, strict evaluation of the credit worthiness of
the client has to be made.
Once the credit is sanctioned, regular follow-up and guidance is to be provided to the
client. This will facilitate the smooth returning of the loan amount.
The strength, weakness, opportunities and threats of all the defaulting units may be
analysed to identify whether it is genuine defaulting unit or willful defaulting unit.
Adequate collateral securities should be pledged from borrower against the loan.
Willful defaulter should be identified as soon as possible so that the due amount can be
recovered by putting pressure on borrower by adapting various methods such as one time
settlement (OTS) method, Compromise write off proposal etc..
The bank may take the help of various measures as implemented by the Government of
India and RBI viz. (DRT-1993, LOK ADALAT, SARFAESI ACT-2002, ARC-2002,
CDR-2005, SDR-2015 etc.) to recover dues from NPA accounts.
SCOPE FOR FURTHER RESEARCH
This study may be further enhanced in the area of asset management and profitability as the NPA
affects the asset quality of the banks. Though this research is a case study of NPA management
of commercial banks but we have taken only 10 private and public sector banks each. After
analysing and interpreting the data collected from secondary sources it has been concluded that
NPA of public sector banks have been more as compare to private sector bank. This research
also provides a strong foundation for future research on NPA management.
The major scope for further research that has been explored during the conduct of this research
are summarised below:
a. Extent the period of study.
b. Expand the sector of banks such as foreign and cooperative banks.
c. Study NPA and its impact on profitability of banks on the basis of priority sector and
non-priority sector lending.
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