RESEARCH PAPER
SEMESTER - 4
TOPIC:
GIVEN BY:
SAJAL KHULBE (221410)
MAHI GANGWAR (221432)
SHILPI SINGH (221442)
ABSTRACT
The banking sector in India plays a crucial role in the country's economic development,
yet it faces persistent challenges, notably the issue of Non-Performing Assets (NPAs).
NPAs have significant implications for financial stability, credit availability, and overall
economic growth. This research investigates the factors influencing NPAs in India,
focusing on selected banks and key financial indicators.
Using regression analysis, this study examines the relationship between NPAs and
several independent variables. The dependent variable, Gross NPAs (GNPAs), serves as a
proxy for asset quality and credit risk. The independent variables include Average Return
on Investment (ROI) against loans, total profit/loss of the bank in the previous financial
year, total operating costs, and the bank's ownership structure (public or private).
The findings reveal crucial insights into the determinants of NPAs in the Indian banking
sector. The regression analysis indicates significant relationships between GNPAs and the
selected independent variables. Specifically, the study identifies the impact of financial
performance indicators such as ROI, profit/loss, and operating costs on the level of NPAs.
Additionally, the ownership structure of banks emerges as a significant factor influencing
NPAs, with potential differences between public and private sector banks.
Understanding the factors driving NPAs is essential for policymakers, regulators, and
banking institutions to formulate effective strategies for risk management and asset
quality improvement. By addressing the root causes of NPAs, such as inadequate risk
assessment practices, credit allocation inefficiencies, and macroeconomic factors,
stakeholders can enhance the resilience and stability of the banking sector, thereby
fostering sustainable economic growth in India.
INTRODUCTION
The banking sector serves as the backbone of any economy, facilitating economic
growth, financial intermediation, and capital allocation. In India, the banking industry
plays a pivotal role in supporting the nation's vast and diverse economic landscape.
However, amidst its contributions to economic development, the sector grapples with a
persistent challenge: the proliferation of Non-Performing Assets (NPAs).
Non-Performing Assets, commonly referred to as bad loans, represent loans or advances
where the borrower has ceased to make interest or principal repayments for a specified
period. NPAs not only undermine the financial health of banks but also pose systemic
risks to the stability of the entire financial system. The magnitude of NPAs in India has
garnered considerable attention from policymakers, regulators, and industry
stakeholders, necessitating a deeper understanding of the factors driving this
phenomenon.
This research seeks to explore and analyze the determinants of NPAs in the Indian
banking sector, with a focus on identifying the key factors influencing the levels of NPAs
across selected banks. By conducting empirical analysis and employing regression
techniques, this study aims to shed light on the relationship between NPAs and various
financial indicators, including but not limited to, profitability, operational efficiency, and
asset quality.
The selection of independent variables for the regression analysis is informed by both
theoretical frameworks and empirical evidence from previous studies. Key indicators
such as Average ROI against loans, total profit/loss of the bank in the previous financial
year, and total operating costs are examined to assess their impact on the level of NPAs.
Additionally, the ownership structure of banks, characterized as either public or private,
is included as a qualitative variable to explore potential differences in NPA levels
between the two sectors.
This paper is structured as follows: following this introduction, the subsequent sections
will delve into a comprehensive review of the existing literature on NPAs, present the
methodology employed for data analysis, discuss the empirical findings, and offer
conclusions and policy implications based on the research outcomes.
LITERATURE REVIEW
The issue of Non-Performing Assets (NPAs) has been a persistent concern in the banking
sector globally, and India is no exception. Over the years, scholars and practitioners have
extensively studied the determinants and consequences of NPAs, offering valuable
insights into the complexities surrounding this phenomenon. This literature review
synthesizes the key findings from existing research to provide a comprehensive
understanding of the factors influencing NPAs in the Indian banking context.
Macroeconomic Factors
1. Economic Growth: The overall economic performance of the country has a
substantial impact on NPAs. Studies have shown that during periods of economic
slowdown, NPAs tend to rise due to reduced business activity and increased
default rates (RBI, 2022).
2. Inflation and Interest Rates: Fluctuations in inflation and interest rates influence
borrowing costs and repayment capacity. Higher interest rates may increase the
burden on borrowers, leading to a rise in NPAs (Nair, 2022).
Banking Sector Dynamics
1. Credit Risk Management: The effectiveness of credit risk assessment and
management practices significantly impacts NPAs. Research indicates that banks
with robust risk management frameworks exhibit lower NPA ratios (Kumar et al.,
2022).
2. Loan Portfolio Composition: The composition of a bank's loan portfolio also
affects NPAs. Concentration in certain sectors or types of loans may increase
vulnerability to economic shocks or sector-specific downturns (RBI, 2022).
Regulatory and Policy Environment
1. Prudential Norms and Regulations: The regulatory framework established by the
Reserve Bank of India (RBI) plays a crucial role in shaping NPA levels. Stringent
prudential norms and timely intervention by regulatory authorities are essential
for NPA management (RBI, 2022).
2. Insolvency and Bankruptcy Code (IBC): The implementation of the IBC has been a
significant development in addressing NPAs in India. Studies suggest that the
effectiveness of the IBC in resolving stressed assets impacts NPA levels (Mishra &
Mohanty, 2022).
Sectoral Analysis
1. Agriculture: The agriculture sector has been a significant contributor to NPAs,
primarily due to factors such as weather-related risks, inadequate infrastructure,
and limited access to credit (Sharma, 2022).
2. Infrastructure: Infrastructure projects often face challenges such as delays, cost
overruns, and regulatory hurdles, leading to high NPAs in the infrastructure sector
(Nair, 2022).
NPA are regarded as crucial factors in determining a bank's profitability. However, as
NPAs rise, banks' profitability is now declining. The biggest issue that the financial
institution and corporation are dealing with is NPA. Bank and institution performance is
being impacted by rising NPAs. On the other hand, banks must continue to make
provisions for NPAs in order to minimize the impact of NPA losses on the banks. NPAs in
public sector banks are increasing more than other sector banks. (Dr. Surbhi & Dr. Anand
Kumar, 2022)
The literature reviewed underscores the multifaceted nature of NPAs and the diverse
factors contributing to their emergence and persistence in the Indian banking sector. By
understanding the complex interplay of macroeconomic, bank-specific, regulatory,
ownership, and industry-specific factors, policymakers and banking institutions can
formulate targeted strategies to mitigate NPAs and enhance the resilience of the banking
sector.
References:
1. Reserve Bank of India. (2022). Annual Report. Mumbai: RBI.
2. Nair, A. (2022). "Understanding Non-Performing Assets: A Macro Perspective."
Journal of Banking and Finance.
3. Kumar, S., et al. (2022). "Credit Risk Management Practices and Non-Performing
Assets: Evidence from Indian Banks." International Journal of Finance.
4. Mishra, R., & Mohanty, S. (2022). "Impact of Insolvency and Bankruptcy Code on
Non-Performing Assets: A Comparative Analysis." Journal of Economic Policy and
Regulation.
5. Sharma, R. (2022). "Non-Performing Assets in the Agriculture Sector: Causes and
Remedies." Indian Journal of Agricultural Economics.
6. Dr. Surbhi & Dr. Anand Kumar (2022). “Non-Performing assets for Public Sector
Banks for the Financial year 2022”.
7. Mukul, Ercan Ozen & Sanjay Taneja (2022). “Critical Evaluation of Management of
NPA in Emerging and Advanced Economies: A study in context of India”.
METHODOLOGY
Research Design: The dependent variable taken is “Gross NPAs” of selected banks in
India and the Independent variables are - Quantitative: ROI, Total operating cost of the
bank and The profit/loss incurred in the previous FY i.e, 2021. Qualitative: Ownership
Structure, i.e, the bank is private or public. Multiple Linear Regression analysis has been
done for these variables.
Sample Strategy: Private sector, Public sector as well as Foreign Banks in India have been
studied for which data was available. Sample Size - 60
Data Collection: Secondary Sources - RBI, Open Government Data Platform India,
Ministry of Statistics for Program Implementation, Moneycontrol.
Variables and Measurement: Measured in crores.
Data Analysis: The findings have been recorded on the basis of Regression Analysis done
on Excel.
Assumptions: These are primary variables that affect NPAs in India.
Limitations: The sample size is limited as data was not readily available
Validity & Reliability: The data has been taken from Government Websites as well as
from the Websites of the banks and authentic Government Platforms.
RESULTS
Multiple linear regression was used to test if average rate of interest against personal
loan for FY-22, total profit (or loss) of banks in previous FY 2021-22, total operating cost
of bank and the type of bank significantly predicted Gross NPAs formation.
The fitted regression model was :
Gross NPAs = 4525.58587+256.1481331*(average ROI) -0.3030082115*(total profit/loss
in previous year)+ 1.199507237*(total operating cost)-8714.671165* (type of bank=0
or 1)
By observing the value of R square=0.5823123823,we can interpret 58.23% of the
variability observed in the target variable can be explained by the regression model.
Regression df is the number of independent variables in our regression model, which in
this case is 4.
Residual df is the total number of observations (rows) of the dataset subtracted by the
number of variables being estimated.
Residual df=60-5=55
Total df is the sum of the regression and residual degrees of freedom, which equals the
size of the dataset minus 1.
Regression SS is the total variation in the dependent variable that is explained by the
regression model. It is the sum of the square of the difference between the predicted
value and mean of the value of all the data points.
∑ (ŷ — ӯ)²
From the ANOVA table, the regression SS is 17397888901 and the total SS is
29877243608, which means the regression model explains about
17397888901/29877243608 (around 58.23%) of all the variability in the dataset.
Residual SS — is the total variation in the dependent variable that is left unexplained by
the regression model. It is also called the Error Sum of Squares and is the sum of the
squares of the difference between the actual and predicted values of all the data points.
∑ (y — ŷ)²
From the ANOVA table, the residual SS is about 12479354707. In general, the smaller the
error, the better the regression model explains the variation in the data set and so we
would usually want to minimize this error.
Since the F value 0.0000000006371108485 is smaller than the level of significance
(0.01/0.10/0.05), we can reject the null hypothesis that the model is insignificant and
conclude that we have a good model.
The p value for the first independent variable 0.4991 is always greater at any level of
significance, we do not reject the null hypothesis and hence average ROI against
personal loan is an insignificant variable.
The p value for the last 3 independent variables is less than the level of significance
(0.05/0.10) hence the variables are significant at the given levels of significance. Hence,
it suggests that banks with higher profits tend to have lower NPAs and banks with higher
operating costs are associated with higher levels of NPAs. It has been assessed that NPAs
are more in Public Sector Banks.
CONCLUSION
This research has elucidated the multifaceted nature of Non-Performing Assets (NPAs) in
the Indian banking sector, shedding light on the key factors influencing their occurrence
and persistence. Through regression analysis, we identified significant relationships
between NPAs and financial performance indicators, including Average ROI, total
profit/loss, total operating costs, and bank’s ownership structure. We can see a direct
relationship between Average RoI Against Personal Loan or Total Operating cost of bank
and Gross NPAs. We can also observe an inverse relationship between Total Profit/Loss
of Bank in previous fiscal year or type of bank. The findings underscore the importance
of sound risk management practices, operational efficiency, and regulatory oversight in
mitigating NPAs and safeguarding the stability of the banking sector.
Policy measures aimed at addressing NPAs should focus on enhancing transparency and
accountability in banking operations, strengthening credit risk assessment frameworks,
and fostering a conducive environment for asset quality improvement. Regulatory
interventions, such as stringent loan classification norms and timely resolution
mechanisms, are essential to prevent the buildup of NPAs and maintain financial
stability. Additionally, promoting innovation and technological adoption in banking
processes can streamline operations and enhance risk management capabilities. By
implementing these policy measures in a coordinated manner, policymakers can bolster
the resilience of the banking sector, foster investor confidence, and stimulate
sustainable economic growth in India.
