‘A study on Bank NPAs and its impact on

Bank Profitability’

Industry Oriented Project

Submitted in partial fulfilment of the requirements for

Post Graduate Diploma in Management
Academic Year: 2023-2024

Submitted By
Name: Swaroop Pandit
Roll No: 153

PGDM Batch: 2022-2024

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 Declaration

I hereby declare that this project report titled ‘A study on Bank NPAs and its impact on
Bank Profitability’ submitted in partial fulfilment of the requirement of Post Graduate
Diploma in Management to Chetana’s Institute of Management and Research is my
original work and not submitted for the award of any degree or diploma fellowship or
similar title or prize. References to work and related sources of information have been
duly acknowledged in the report.
The project has been carried out under the guidance of Prof. Akhilesh Kumar Yadav

I further declare that I have no objection and grant the rights to Chetana’s Institute of
Management and Research to publish any chapter/project or use it for future reference if
they deem fit.

Place : Mumbai

Date : 21-04-2024

Name : Swaroop M Pandit

Division : F2

Roll No. : 153

Digital Signature :

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 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to the Chetana’s Institute of Management &
Research. They gave me the opportunity to complete my Industry Oriented Project and
gave me insight into the Public Sector Banks in India and to Evaluate the performance of
Public Sector Banks in India

I would also like to thank Prof. Akhilesh Yadav who has always been by my side,
answered all my questions, always supervised me and gave me the feedback I needed to
go in the right direction. His invaluable guidance, constructive suggestions,
encouragement, and time were instrumental in producing this report.

Signature of the student:

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 Table of Contents

1. Introduction ..................................................................................................... 6
2. Abstract ......................................................................................................... 32
3. Literature Review: ........................................................................................... 33
4. Limitations ..................................................................................................... 35
5. Objective:....................................................................................................... 35
6. Reearch Methodology ..................................................................................... 36
7. Data Analysis And Findings .............................................................................. 37
8. Conclusion………………………………………………………………………………………………49

9. Recommendations……………………………………………………………………………………51

10. References………………………………………………………………………………………………52

11. Turnitin Report……………………………………………………………………………………………53

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 “CHAPTER 1: Introduction

“Since the banking sector's digitalization, there has been a high demand for Real Time Gross
Settlement (RTGS) and National Electronic Funds Transfer (NEFT). This is the only reason
why the government wants to transition and make the economy more digital. It is more
convenient, saves time, and reduces costs.
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized and
well-regulated. The financial and economic conditions in the country are far superior to any
other country in the world. Credit, market and liquidity risk studies suggest that Indian banks
are generally resilient and have withstood the global downturn well.

The Indian banking industry has recently witnessed the rollout of innovative banking models
like payments and small finance banks. In recent years India has also focused on increasing
its banking sector reach, through various schemes like the Pradhan Mantri Jan Dhan Yojana
and Post payment banks. Schemes like these coupled with major banking sector reforms like
digital payments, neo-banking, a rise of Indian NBFCs and fintech have significantly
enhanced India’s financial inclusion and helped fuel the credit cycle in the country.

➢ The digital payments system in India has evolved the most among 25 countries with India’s
Immediate Payment Service (IMPS) being the only system at level five in the Faster Payments
Innovation Index (FPII). India’s Unified Payments Interface (UPI) has also revolutionized real-
time payments and strived to increase its global reach in recent years.
➢ In 2021-2023, bank assets across sectors increased. Total assets across the banking sector
(including public and private sector banks) increased to US$ 2.67 trillion in 2022.
➢ According to India Ratings & Research (Ind-Ra), credit growth is expected to hit 10% in 2023-
24 which will be a double-digit growth in eight years.

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Market Size:

The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46
foreign banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural
cooperative banks in addition to cooperative credit institutions As of September 2021, the
total number of ATMs in India reached 213,145 out of which 47.5% are in rural and semi
urban areas.

In 2020-2022, bank assets across sectors increased. Total assets across the banking sector
(including public and private sector banks) increased to US$ 2.67 trillion in 2022.

In 2022, total assets in the public and private banking sectors were US$ 1,594.51 billion and
US$ 925.05 billion, respectively.

During FY16-FY22, bank credit increased at a CAGR of 0.62%. As of FY22, total credit
extended surged to US$ 1,532.31 billion. During FY16-FY22, deposits grew at a CAGR of
10.92% and reached US$ 2.12 trillion by FY22. Bank deposits stood at Rs. 173.70 trillion
(US$ 2.12 trillion) as of November 4, 2022.

According to India Ratings & Research (Ind-Ra), credit growth is expected to hit 10% in
2022-23 which will be a double digit growth in eight years. As of November 4, 2022 bank
credit stood at Rs. 129.26 lakh crore (US$ 1,585.09 billion).

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 As of November 4, 2022 credit to non-food industries stood at Rs. 128.87 lakh crore (1.58 trillion).

“The Indian banking system includes 12 public sector banks, 22 private sector banks, 46 foreign banks,
56 regional rural banks, 1485 urban cooperative banks, and 96,000 rural cooperative banks, in addition to
cooperative credit institutions. As of October 2023, India had a total of 15,30,287 micro-ATMs. In
addition, 1,25,969 ATMs and Cash Recycling Machines (CRMs) are on-site, with another 93,771 ATMs
and CRMs located elsewhere.”

“In the first four months of fiscal year 23, banks installed 2,796 ATMs, up from 1,486 in fiscal year 22
and 2,815 in fiscal year 21. In rural India, 100% of new bank account openings take place online. BCG
expects that the proportion of digital payments will reach 65% by 2026.”

“In 2023 (until December 1st, 2023), total assets in the public and private banking sectors were US$
1688.15 billion and US$ 1017.26 billion, respectively. In 2023 (till December 1st, 2023), public sector
banks accounted for 58.32% of total banking assets (public, private, and international banks combined)”.

“In 2023 (till December 1st, 2023), public sector banks generated more than 57.48% of total interest
income. Public banks earned US$ 102.51 billion in interest income in 2023 (as of December 1st). In 2023
(till December 1st, 2023), interest income in the private banking sector was $ 70.07 billion”.

Investments/Developments

Key investments and developments in India’s banking industry include:

• On June, 2022, the number of bank accounts—opened under the government’s

flagship financial inclusion drive ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’—
reached 45.60 crore and deposits in the Jan Dhan bank accounts totaled Rs. 1.68
trillion (US$ 21.56 billion).

• In April 2022, India’s largest private bank HDFC Bank announced a transformational
merger with HDFC Limited.

• On November 09, 2021, RBI announced the launch of its first global hackathon
'HARBINGER 2021 – Innovation for Transformation' with the theme ‘Smarter
Digital Payments’.

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• In November 2021, Kotak Mahindra Bank announced that it has completed the
acquisition of a 9.98% stake in K Fin Technologies for Rs. 310 crore (US$
41.62million).

• In July 2021, Google Pay for Business has enabled small merchants to access credit
through tie-up with the digital lending platform for MSMEs—Flexi Loans.

• In December 2020, in response to the RBI’s cautionary message, the Digital Lenders’
Association issued a revised code of conduct for digital lending.

• On November 6, 2020, WhatsApp started UPI payments service in India on receiving

the National Payments Corporation of India (NPCI) approval to ‘Go Live’ on UPI in a
graded manner.

• In October 2020, HDFC Bank and Apollo Hospitals partnered to launch the ‘Healthy
Life Programme’, a holistic healthcare solution that makes healthy living accessible
and affordable on Apollo’s digital platform.

• In 2019, banking and financial services witnessed 32 M&A (merger and acquisition)
activities worth US$ 1.72 billion.

• In March 2020, State Bank of India (SBI), India’s largest lender, raised US$ 100
million in green bonds through private placement.

• In February 2020, the Cabinet Committee on Economic Affairs gave its approval for
continuation of the process of recapitalization of Regional Rural Banks (RRBs) by
providing minimum regulatory capital to RRBs for another year beyond 2019-20 - till
2020-21 to those RRBs which are unable to maintain minimum Capital to Risk
weighted Assets Ratio (CRAR) of 9% as per the regulatory norms prescribed by RBI.

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• Commercial Banks:
• “Commercial banks are supervised by the Banking Regulation Act of 1949, and their
business plans are designed to create profits. Their primary responsibility is to accept deposits
and issue loans to the public, corporations, and governments. Commercial banks can be
classified as:”

• Public Sector Banks: “These are the nationalised banks, which account for more than
75% of the total banking activity in the country. The government owns the majority of these
banks. In terms of volume, SBI is India's largest public sector bank, and after merging with
its five associate banks (as of April 1, 2017), it is currently listed among the top 50 banks
worldwide”.

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• Private Sector Banks: “Private sector banks are those that are owned and operated by
individuals, corporations, or groups of shareholders. In contrast to public sector banks, they
are not government controlled. All the RBI's banking laws and regulations will apply to
private-sector banks. The following is a list of private-sector banks in India”:

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• Foreign Banks: “A foreign bank is one that has its headquarters outside of India yet
functions as a private business there. These banks must comply with the regulations of both
their home nation and the country in which they operate. The following is a list of
international banks operating in India”:

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Government Initiative
• National Asset reconstruction company (NARCL) will take over, 15 non-performing
loans (NPLs) worth Rs. 50,000 crores (US$ 6.70 billion) from the banks.

• National payments corporation India (NPCI) has plans to launch UPI lite this will
provide offline UPI services for digital payments. Payments of up to Rs. 200 (US$
2.67) can be made using this.

• In the Union budget of 2022-23 India has announced plans for a central bank digital
currency (CBDC) which will be possibly know as Digital Rupee.

• National Asset reconstruction company (NARCL) will take over, 15 Nonperforming

loans (NPLs) worth Rs. 50,000 crores (US$ 6.70 billion) from the banks.

• In November 2021, RBI launched the ‘RBI Retail Direct Scheme’ for retail investors
to increase retail participation in government securities.

• The RBI introduced new auto debit rules with a mandatory additional factor of
authentication (AFA), effective from October 01, 2021, to improve the safety and
security of card transactions, as part of its risk mitigation measures.

• In September 2021, Central Banks of India and Singapore announced to link their
digital payment systems by July 2022 to initiate instant and low-cost fund transfers.

• In August 2021, Prime Minister Mr. Narendra Modi launched e-RUPI, a person and
purpose-specific digital payment solution. e-RUPI is a QR code or SMS string-based
e-voucher that is sent to the beneficiary’s cell phone. Users of this one-time payment
mechanism will be able to redeem the voucher at the service provider without the
usage of a card, digital payments app, or internet banking access.
• “Beneficiaries of bank accounts opened under the GOI Pradhan Mantri Jan Dhan Yojana have
deposited over ~US$25.13 billion. Beneficiaries have deposited 51.11 crores until December
15th, 2023”.
• “In September 2023, IREDA joined with banks to support renewable energy projects in
India”.
• “In March 2023, India Post Payments Bank (IPPB) and Airtel announced the launch of
WhatsApp Banking Services for IPPB users in Delhi”.
• “In October 2022, Prime Minister Narendra Modi launched 75 Digital Banking Units (DBUs)
in 75 districts of India”.
• “In the Union Budget 2023, a national financial information registry will be built to act as a
central repository for financial and other data”.
• “In the Union Budget 2023, the KYC process will be simplified by adopting a 'risk-based'
strategy rather than a 'one size fits all' approach”.
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 • “The National Asset Reconstruction Company (NARCL) will take up 15 non-performing
loans (NPLs) totalling Rs. 50,000 crore (US$ 6.70 billion) from banks”.
• “National Payments Corporation India (NPCI) intends to create UPI lite, which will offer
offline UPI capabilities for digital payments. This allows you to make payments of up to Rs.
200 (US$2.67)”.
• “In the 2022-23 Union Budget, India unveiled plans for a central bank digital currency
(CBDC), likely named as the Digital Rupee”.

Investments/Developments:

• In December 2023, ICICI Prudential Life Insurance and Ujjivan Small Finance Bank formed the
Bancassurance Partnership.
• “In October 2023, AU Small Finance Bank announced the acquisition of Fincare Small Finance
Bank in an all-share transaction and the merger with itself”.
• “According to data given by the National Payments Corporation of India (NPCI), UPI transactions
surpassed 10.241 billion by August 30th, 2023”.
• “Hitachi Payment Services and the NPCI collaborated to launch India's first UPI-ATM in
September 2023”.
• “In September 2023, the Reserve Bank of India is expected to introduce CBDC in the call money
market”.
• “In July 2023, Mahindra and Mahindra bought a minority share in RBL Bank”.
• “In July 2023, the State Bank of India paid US$ 85.25 million (Rs. 708 crore) for SBI Capital's
100% share in SBICAP Ventures”.
• “In June 2023, the State Bank of India bought SBI Capital Markets' full 20% ownership in SBI
Pension Funds”.
• “In April 2023, HDFC Bank plans to buy 20% or more of HDFC Investments' Griha Pte
subsidiary”.
• “In April 2022, IDFC will sell its mutual fund business to a Bandhan-Financial Holdings-led
consortium for US$ 550.23 million (Rs.4,500 crore)”.

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Growth Drivers:

1. Rising disposable income and increasing consumer demand:

India's young and growing population is increasing disposable incomes, resulting in increased
demand for credit products such as mortgages, personal loans, and auto loans. This is projected to
be a significant driver of growth in the banking industry in the coming years.

2. Government initiatives:
The Indian government has launched several measures to improve financial inclusion and
digitization, including the Pradhan Mantri Jan Dhan Yojana (PMJDY) and the Digital India
initiative. These programmes are intended to attract millions of new clients to the formal banking
system and open up new prospects for banks.

3. Digital Transformation:
The adoption of digital banking technologies enhances operational efficiency, expands reach, and
improves customer experience. For example, the implementation of Unified Payments Interface
(UPI), mobile banking apps, and internet banking services has revolutionized banking accessibility
and convenience for customers across India

4. Regulatory Reforms:
Regulatory measures aiming at increasing transparency, boosting governance, and strengthening
risk management techniques help the banking sector expand and remain stable. For example, the
implementation of Basel III criteria has strengthened the resilience of Indian banks by requiring
stronger capital adequacy and risk management standards.

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 What is NPA:

regardless of what stream or industry we operate in. This is the most crucial phrase that influences how
banks and the economy as a whole function. It represents the economy's financial stability and liquidity.
If liquidity in the economy is disrupted, we may witness an increase in unemployment, inflation, and other
economic issues.

Whatever is claimed is implied by the term resource. For banks, advances are resources since the premium
we pay on them is one of the bank's primary sources of revenue. When clients, whether retail or corporate,
are unable to pay the premium, the resource is deemed 'non-performing' by the bank because it is not
generating any revenue. As a result, the RBI defines NPAs as resources that no longer generate revenue.

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Classification of NPA

1. Standard assets:
It is a performing asset that generates continuous income and pays off loans before the due date.
As a result, these assets have an acceptable risk and are not classed as NPAs.

2. Sub – Standard assets:

Sub-standard assets are non-performing assets (NPAs) that have not paid their interest or principal
for at least one year.

3. Doubtful assets:
Non-performing assets are classified as questionable debts since they have not paid interest or
principal for more than 12 to 36 months. Lenders usually have reservations about whether the
borrower will repay the entire loan or not. As a result, this non-performing asset will have a
negative impact on the bank's profile.

4. Loss assets:
These are non-performing assets that have not paid any interest or principal in at least three years.
With this class, banks are unable to recoup funds. Finally, banks will record the loan as a loss on
their balance sheets. The entire loan amount will be closed completely.
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Types of NPA:

1. GNPA:
GNPA stands for Gross Non-Performing Assets. Gross NPAs are the total of all mortgage assets
that may be classified as NPAs as per RBI guidelines as of the balance sheet date. Gross NPA
indicates real NPAs as well as the quality of bank loans. It contains all nonstandard assets such as
sub-fashionable, doubtful, and lost assets. It can be determined using the following ratio.

Gross NPAs Ratio = Gross NPAs /Gross Advances × 100

2. NNPA:
NNPA stands for Net Non-Performing Assets. It refers to the amount of money lost owing to non-
performing assets. It is determined by subtracting the value of any recoveries from the GNPA. The
NNPA ratio is the ratio of NNPA to total outstanding loans at a bank. It measures the actual impact
of nonperforming assets (NPAs) on a bank's financial position. A greater NNPA ratio shows that a
bank is losing money because of non-performing assets. It can be determined using the following
ratio.

NNPA Ratio: NNPA/Advances × 100

Provisions of NPA:

In India, the Reserve Bank of India (RBI) issues guidelines to banks and other financial institutions
governing the classification and provisioning of non-performing assets (NPAs). These standards promote
consistent NPA recognition and provisioning, fostering financial stability and transparency.

Leaving aside the technical term, provisioning refers to a sum that banks set aside or pay in a certain
quarter for nonperforming assets, which may later turn into losses. It is a mechanism that allows banks to
handle poor resources while maintaining a clean book of records.

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Provisioning is the practice of setting aside funds from a bank's profits to offset potential losses caused by
poor loans or non-performing assets (NPAs). The primary purpose of provisioning is to improve bank
balance sheets by detecting and managing credit risk. The RBI's provisioning guidelines ensure that banks
hold enough reserves to offset any losses while maintaining financial stability.

Based on classification of assets:

Based on standard advances:

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Other relevant norms:

• Country-based risk provision should range from 0.25% to 100%.

• Banks may make voluntary provisions for advances at rates greater than the statutory regulations
with the agreement of their board of directors.
• Assume the npa balance value exceeds Rs. 5 crores or more. In that situation, the financial
institution must develop a policy for an external agency to conduct an annual stock audit of
immovable property valuations once every three years based on approved values.
• The provisioning coverage ratio (PCR) represents the amount of funds set aside by a bank to cover
losses resulting from asset loss.

Reasons for the rising NPA in banking sector:

1. Credit boom:
During the credit boom of 2003-2004, it was discovered that the problem of growing NPAs was
rapidly progressing. During this time, the global and Indian economies were thriving. Given this
backdrop, many Indian businesses borrowed enormous sums of money to seize chances and
expand their operations.

2. Tightened Monetary Policy:

During that time, the Reserve Bank of India tightened its monetary policy. It increased the repo
and reserve repo rates. Even after these measures were adopted, the number of NPAs continued to
rise.

3. Stalled Judiciary & Legislative Procedures:

India's courts ruled against businesses. The judgments had a significant impact on enterprises,
particularly the mining, power, and steel divisions. Furthermore, enterprises had to deal with land
acquisition issues, which caused many projects to stagnate and resulted in many current NPA
defaulters failing to repay.

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 4. Intentional Defaults:
It has also been discovered that many borrowers are perfectly capable of repaying their debt but
refuse to do so on purpose. Such individuals must be identified, and appropriate steps taken to
recover the monies lent to them.

5. Poor Credit Appraisal System:

Another factor influencing the development of non-performing assets is a lack of competent credit
appraisal. Because of a poor credit score, the bank may issue loans to persons who cannot repay
them.

6. Natural Calamities:
Natural disasters are also contributing to a concerning rise in NPAs in public sector banks. India is
periodically hit by one or more devastating natural catastrophes, leaving debtors unable to repay
their obligations. Farmers typically rely on rains to cultivate their crops. However, irregular rainfall
reduces the farmer's production, preventing him from repaying the debt.

Impact of NPA in banking sector:

1. Profitability:
The first and most important effect is a disruption in profitability. Many banks successfully manage
their primary sports, generating a decent or substantial income from net hobby margins. However,
as NPAs rise, net interest margins decline, resulting in lower bank earnings. Earnings are used to
assess the economic stability of banks.

2. Capital erosion:
The failure to recover outstanding loans depletes a bank's capital base, making it more vulnerable
to financial shocks and, potentially, collapse. This can set off a vicious cycle in which low capital
further limits lending, resulting in further NPAs.

3. Negative image:
High NPA levels harm banks' reputations, causing depositors to lose confidence and potentially
remove their funds. This may cause liquidity concerns for banks.

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4. Increased Operational Costs:
Recovering NPAs is costly, requiring legal action, loan restructuring, and debt auctions. This
diverts resources from essential banking functions, increasing operational costs.

5. Public self-belief:
Everyone understands that the customer is the king of the firm. Similarly, in the banking industry,
customers are the primary source of business for the bank. There are numerous banks in the market,
making it difficult for customers to choose one over another to use their services. Clients evaluate
the bank's profitability, NPAs, and other variables before using its services.

6. Credit Risk:
High numbers of NPAs imply that banks are not managing their credit risk effectively. This has an
impact on investors' confidence and credit ratings, making it more expensive for banks to raise
cash in the market. Furthermore, it decreases the appeal of the banking industry to investors,
affecting its general health.

7. Government Intervention:
Governments may intervene to remedy the NPA problem through policy changes, bank
recapitalization, or the formation of asset reconstruction firms. However, such interventions
frequently come at a cost to taxpayers and may not adequately address the underlying issues that
lead to NPAs.

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 Banking Structure of India

Banking Structure in India: The current Banking Structure in India has evolved over
several decades, is complex, and has been fulfilling the economy's credit and banking needs.
In today's Banking Structure in India, there are several layers to cater to the distinct and
varied needs of different customers and borrowers. The Banking Structure in India played a
critical role in mobilizing deposits and encouraging economic development. The performance
and strength of the banking structure improved noticeably after the financial sector reforms.
(1991)

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Banking

Classification of Banks based on the schedule of RBI Act 1934

All banks (Commercial Banks, RRB, Cooperative Banks) can be classified into scheduled
and non-scheduled banks.

1. Scheduled Banks

• Banks those are listed in the second schedule of RBI Act, 1934.
• Eligible for obtaining oans from RB on Bank Rate.

2. Non- Scheduled Banks

• Banks that are not listed in the second schedule of RBI Act, 1934.
• Generally, not eligible for obtaining loans from RBI.
• Keep CRR with itself, not with RBI.

Commercial Banks

• It is divided into two parts i.e. Public and Private Sector Banks.
• Regulated under Banking Regulation Act 1949.
• They can accept deposits, can provide loans and other financial services to earn a
profit

(a) Public Sector Banks

• In these banks, the majority of shares (more than 50%) are held by Government.
• Currently, in India, there are 21 Public sector banks after the merger of SBI with their
associate banks and Bhartiya Mahila Bank (BMB).
• The Nationalization of banks was done by the government in two stages:
The first stage of nationalization took place in July 1969, in which fourteen banks
were nationalized.

The second stage of nationalization of Banks took place in April 1980, in which
six banks were nationalized.

Objectives of Nationalization of Banks

1. Reducing Private Monopolies
2. Social Welfare
3. Expansion of Banking Facilities
4. Focus on Priority Sector Lending

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(b) Private Sector Banks

• In these banks, the majority parts of shares are not held by the government.
• Private sector banks consist of both Indian Banks as well as foreign banks.
• Private banks which were set up before 1990 (liberalization of the economy) are
categorized as Old Banks.
• Private banks which were set up after 1990 (liberalization of the economy) are
categorized as New Banks.
• Local Area Banks- Private Banks which are allowed to operate in the limited area are
called local area banks and registered under the companies act, 1956. The minimum
capital required for these banks is INR 5 crores.

Regional Rural Banks

• Established under RRB Act, 1976.

• Regional Rural Banks are set up by public sector banks.
• The objective of RRB's is to increase credit flow to rural areas.
• After the Kelkar committee’s recommendations in April 1987, no new RRBs have
been opened.

Cooperative Banks

• Established with the aim of funding agriculture, cottage industries, etc.

• Can perform both deposits and lending activities.
• NABARD (National Bank for Agriculture and Rural Development) is the apex body
of the cooperative sector in India.

Composition of Cooperative Banks

1. Rural Cooperative Credit Institutions

(a) Short Term Structure

• Lend up to one year.

• It is further divided into a three-tiered setup.

(i) State Cooperative Bank: Apex body for cooperative banks in the state.

(ii) Central or District Cooperative Banks: Operate at the district level.

(iii) Primary Agriculture Credit Societies: Operate at the village level.

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(b) Long-Term Structure

• Lend for more than one year to twenty-five years.

• It is divided into a two-tiered setup:
(i) State Cooperative Agriculture and Rural Development Banks and
(ii) Primary Cooperative Agriculture and Rural Developments Banks

2. Urban Cooperative Credit Institutions

• Set up in urban and semi-urban areas.

• Lend to small businesses and borrowers.

Non-Performing Assets

Definition by RBI:

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in
respect of which the interest and/ or instalment of principal has remained ‘past due’ for a
specified period. The specified period was reduced in a phased manner as under:

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 i. An amount due under any credit facility is treated as past due when it has not been
paid within 30 days from the due date. Due to the improvements in the payment and
settlement systems, recovery climate, upgradation of technology in the banking
system, etc., it was decided to dispense with ‘past due’ concept, with effect from
March 31, 2001. Accordingly,as from that date, a Non-performing Asset (NPA) shall
be an advance. Where, the account remains ‘out of order’ for a period of more than
180 days, in respect of anOverdraft/Cash Credit (OD/CC),
ii. the bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iii. interest and/or instalment of principal remains overdue for two harvest seasons but for
a period not exceeding two half years in the case of an advance granted for
agricultural purposes, and
iv. any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.

Later on with a view to moving towards international best practices and to ensure greater
transparency, it was decided to adopt the ‘90 days’ overdue’ norm for identification of NPAs,
from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-
performing asset (NPA) shall be a loan or an advance.

i. interest and/ or instalment of principal remain overdue for a period of more than 90
days in respect of a term loan,
ii. the account remains ‘out of order’ for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv. interest and/or instalment of principal remains overdue for two harvest seasons but for
a period not exceeding two half years in the case of an advance granted for
agricultural purposes, and
v. any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

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A. Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors
or the RBI inspection, but the amount has not been written off wholly. In other words, such
anasset is considered uncollectible and of such little value that its continuance as a bankable
asset is not warranted although there may be some salvage or recovery value.

Why Assets fall into Non-Performing Assets (NPA)??

The biggest reason behind NPA is not taking the assets seriously. If the lender lends money
to the borrower, the main scenario behind is to open a new loan account and the concept of
competition brings the companies or banks’ balance sheet into the black hole. In the same
way, the borrower does not bother in return and treats the loan as a liability, what would be
the credit rating if you fail to pay your instalment, this is out of the question. Not every
companyperformance is bad, it’s all about the economic condition and changing business
Environment.

Guidelines for classification of assets:

I. Broadly speaking, classification of assets into above categories should be done

considering the degree of well-defined credit weaknesses and the extent of
dependence on collateral security for realisation of dues.
II. Banks should establish appropriate internal systems to eliminate the tendency to delay
or postpone the identification of NPAs, especially in respect of high value accounts.
The banks may fix a minimum cut off point to decide what would constitute a high
value account depending upon their respective business levels. The cut off point
should be valid for the entire accounting year. Responsibility and validation levels for
ensuring proper asset classification may be fixed by the banks. The system should
ensure that doubts in asset classification due to any reason are settled through
specified internal channels within one month from the date on which the account
would have been classified as NPA as per extant guidelines.

28
Gross NPA:
Gross NPA is the term used by commercial banks that refers to the sum of any unpaid debt,
which is classified as non-performing loans. Commercial banks offer loans to their non-
honored customers, and financial institutions are required to classify them as non-
performing assets within ninety days because they do not receive the principal amount or net
payments.

Net NPA:
Net NPA is a term used by commercial banks to indicate less allowance for poor and
uncertain debts than the amount of non-performing loans. In order to cover unpaid debts,
commercial banks tend to offer a precautionary amount. Thus, if one deducts the provision
for unpaid loans from unpaid obligations, the resulting sum relates to the net non-performing
assets.

29
Main Difference between the Gross NPA and Net NPA.

1. Gross NPA refers to the entire number of debts that an organization has not collected
or the individuals owing the organization has not fulfilled their contractual obligations
to pay both the amount of principal and interest. On the other side, net non-
performing loans is the amount resulting from the sum of the defaulted loans after
deducting provision for uncertain and unpaid debts. It is the real loss that the
organization incurs after defaulted loans.
2. Credit institutions have a grace period during which an individual is expected to start
paying for the loan and its related interests. When the term of the pay-out expires, the
institution is obliged to write off debts that are not paid. Whereas, after ninety days,
non-performing loans are classified as default and are accepted globally. Any
payment due after the grace period of ninety days is categorized as a default.
3. Gross NPA is the amount of all loans defaulted on by people who have received loans
from the banking institution. It means that all the defaulted loans are added together to
form gross NPA. The formula to calculate gross NPA is:

Gross NPA = (A1 + A2 + A3 ....................................+ An)/Gross Advances

Here A1 is the person who has taken the loans. On the other side, the net NPA is the
sum that is realized after the amount of the provision has been deducted from the
overall NPAs. The formula to calculate Net NPA is:

Net NPA = (Total Gross NPA) - (Provision for Unpaid Debts)/Gross Advances
4. Some major factors have been identified to be the significant causes of gross non-
performing assets, including weak government policies, willful defaults, the
unsuccessful recovery court, industrial disease, natural disasters, and many others.
While net NPAs are the main products of gross non-performing assets. There is a
major difference in the fact that the sum given by the financial institution to cover
unpaid debts plays a crucial role in deciding the amount of net non-performing assets.

30
Another difference between gross NPAs and net NPAs is what the corporation refersto as the
company's actual loss. Gross NPAs do not constitute actual losses to the organization. On the
other hand, Net NPAs reflect the company's real less following the debt defaults. Since the
financial institution has already issued unpaid loans, thegiven amount is deducted from the
default amount resulting in the organization's actual loss. Some of the major causes of gross
NPAs include a negative impact on the corporation's reputation and a negative impact on the
enterprise's equity valuation. Onthe other hand, net NPAs have a major impact on the
organization's profitability and liquidity. Low liquidity means that when they are due, the
organization does not havesufficient cash to satisfy its commitments, which means that the
organization may notafford to operate everyday operations.

31
Chapter 2: Abstract

The role of the banking sector in economic transformation is significant as banks play a vital role in
providing the desired financial resources to the needy sectors. The bank itself possesses the controlling
power of the economy. The flow of money person to person, business to business,country to country just
due to the banking system. Banks fuel the economical vehicle to run smoothly, and also said as the
backbone of the economy. NPA’s non-performing assets are the assets of the banks which are not
performing, banks to run the economy also provide short-term and long-term loans to the industries,
individuals, farmers, a bank also gives loan against the home, vehicles and many more. In some cases,
the borrower is unable to pay the interest amount on time as well as unable to return the principal
amount too, in that case, the bank declares that amount as nonperforming. The bank also runs the
recovery scenario for that amount, the impact of NPA on the profitability of banks brings a dent on the
balance sheet of the bank, but until then the amount is nonperforming. High Non-Performing Assets are
the foremost problem for the banking system for any economy, that shakes the whole banking system of
the country. The confidence level of the investor, Depositors, Stack holders also effects. This also causes
the rotation of money. Performing Assets not only reduces the profit of the Bank but also increases the
Loss. Also, banks also provide 25 % to30% additional provision on Non-Performing Assets which
directly impact the Profitability of the Bank. Not in the Banking sector, but shareholders need their
money in safe hands, Shareholders are interested in the enhancement of investment and market
capitalization. HighNon-Performing Assets reduces the confidence level of the investor which
significantly impact the Share price of the Bank in this situation, banks stop pay-out of dividend to the
shareholders, which was not in the interest of the investor. The poor performance of the Bankdue to
increases in Non-Performing Assets not only lower the sentiments of the investor but the bank also loses
the faith of Public, this directly affects the deposits into the bank.

32
 CHAPTER 3: REVIEW OF LITERARTURE

NPA is a hot topic in the banking sector, and various scholars have attempted to investigate its origins, the
challenges it provides, and the influence it has on the banking industry, as well as provide a solution or
answers to the rising problem of NPA. Several publications have been published and reviewed, and the
objective of this section of the article is to give an analysis of all accessible nonperforming asset data for
public and private sector banks, as well as other institutions. This survey assessed current papers,
publications, journals, and reviews submitted by various writers, organizations, and committees over time.

Dutta. A (2014): This study investigated the increase in non-performing assets in India's public and private
banks, as well as non-performing assets in commercial banks by industry. Secondary sources included the
Reserve Bank of India's Development and Growth in Banking in India report, the RBI's Currency and
Finance Report, and the RBI's Economic Surveys of India.

Ranjan, R., Dhal, S.C. (2013): This article employs regression analysis to investigate an analytical
approach to nonperforming loans in Indian commercial banks. The empirical study investigates how three
major sets of economic and financial variables influence NPAs: credit terms, bank size-induced risk
preferences, and macroeconomic shocks.

Patidar, S.,Kataria, A. (2012): The study examined the percentage share of nonperforming assets (NPAs)
as components of priority sector lending, comparing SBI and Collaborators, Old Private Lenders and New
Private Sector banks, and Nbfcs in the benchmark category to determine whether there was a significant
difference in NPAs, as well as the impact of NPAs. Statistical methods such as regression analysis and
ratio analysis were utilized to investigate the influence of priority sector lending on total bank
nonperforming assets.

Arora, N., Ostwal N. (2014): This article examines the classification and assessment of nonperforming
assets (NPAs) in public and personal area banks. This observation revealed that nonperforming assets
(NPAs) continue to pose a concern to personal area banks and financial institutions. Public sector banks
have lower non-performing assets (NPAs) than non-public sector banks.

Mehta. A (2014): This article attempts to analyze the rise of non-performing assets (NPAs) in India's
public, private, and international banks, as well as the smart non-performing assets of commercial banks.

33
Data for the analysis was acquired from secondary sources such as a file on the trend and growth of
banking in India, a report on currency and finance, and RBI economic surveys of India.

Kumar, M. Singh, G. (2012): The article focuses on the key characteristics that contribute to NPA issues
from the perspective of public sector banks and some foreign banks in India.

Satpathy, I, Patnaik, B.C.M. (2010): The purpose of this study paper is to better understand the causes
of nonperforming loans in industrial banks' domestic portfolios. To reach a decision, mortgage borrowers
were asked to complete questionnaires created specifically for this purpose.

Joseph, A. L. (2014): This study focuses on the patterns of nonperforming assets (NPAs) in the banking
sector, as well as the internal, external, and other aspects that contribute to the increase of NPAs, as well
as recommendations for dealing with the burden of rising NPAs.

M.S., Thangavelu, R. (2014): The purpose of this study is to analyze the idea of non-performing assets,
as well as the various components of loan assets advanced by public and private sector banks using
secondary data.

Kaur, H., Saddy, N.K. (2011): This research was conducted with the goal of understanding the notion
of NPA, identifying the primary elements contributing to the increase in NPAs, and determining the
causes of high NPAs and their influence on the Indian banking sector and its operations.

34
Chapter 4: Limitations:
This report assists in analysing the performance of public and private sector banks in handling NPAs.
However, constraints may affect the report: They are as follows.

• NPAs are evolving. The research is carried out in the present tense, with no regard for future
developments.
• The study relies on secondary data from many RBI papers and other investigations. These values
are based on a historical accounting principle that prevents inflation.
• A total of 33 banks, 12 from the public sector and 21 from the private sector, are included for the
analysis, which may not be totally reliable due to the limited sample size; therefore, the results
cannot be used to estimate the performance of such a large market.
• The study is restricted to a few selected and limited indications. The study is limited to 10 years.

Chapter 5: Objectives:
1. To study the concept, types, causes of Non-Performing Assets (NPA) in Banks

2. To analyze the trends and patterns of NPAs in the banking sector over the past decade.

3. To assess the impact of NPAs on the profitability and financial stability of banks.

4. To understand the recovery measures undertaken to improve the level of NPAs by banks.

35
 CHAPTER 6: RESEARCH METHODOLOGY

The data used to prepare this report is secondary in nature. This study used a quantitative research
approach. I examined the non-performing assets in commercial banks, including public and private
sector institutions mentioned in the Second Schedule of the Reserve Bank of India Act, 1934. The
secondary data used for analysis was mostly obtained from bank annual reports, RBI publications,
papers, periodicals, and NPA investigations. The study is descriptive in nature. This research work
is based on secondary data of privatesector banks and public sector banks and has been selected as
samples for the study. The data has been taken in this study for the last 10 years (2014 to 2023). The
secondary datahas been used in this study from online sources like money control, RBI websites,
and RBI reports.

Sources of Data:
This research work is based on secondary data and the data has been taken from the online sources like
Annual Reports of the Banks, RBI Publications, RBI Websites and RBI Reports, etc.

Tools and Techniques:

Regression Analysis is the statistical tool and method utilised in this study. This study considers various
ratios like GNPA %, NNPA%, ROA, Capital Adequacy Ratio, Non-Interest Income, Loans to Sensitive
Sectors etc to analyse the data.

Sample Size:
Data of 21 private sector banks and 12 public sector banks have been collected to
examine the situation of credit management in the banks for the period of 10 years i.e.
2014 – 2023.

36
 CHAPTER 7: Data ANALYSIS & FINDINGS

Performance measure used in the study:

1. Capital Adequacy Ratio:

Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities
and other risks such as credit risk, operational risk etc. In the most simple formulation, a bank's
capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders.
CAR = Tier 1 Capital + Tier 2 Capital / Risk Weighted Assets

2. NNPA%:
NNPA stands for Net Non-Performing Assets. It refers to the amount of money lost because of
nonperforming assets. It is determined by subtracting the value of any recoveries from the GNPA.
The NNPA ratio is the ratio of NNPA to total outstanding loans at a bank. It measures the actual
impact of NPAs on a bank's financial condition. A greater NNPA ratio shows that a bank is losing
money because of non-performing assets.
NNPA% = NNPA / Advances

3. Non-Interest Income:
The non-interest income is the revenue earned through fees other than interest income on loans.
Examples of non-interest income include origination fees on mortgages, penalties on late payments
and overdraft fees, bank-issued cards swap fees, and the monthly maintenance fees on accounts.

4. Return on Asset:
Return on assets (ROA) measures a company's profitability relative to its total assets. ROA informs
a manager, investor, or analyst about how well a company's management uses its assets to generate
profits. Return on assets is shown as a percentage. Higher ROA suggests greater asset efficiency.
When NPAs increase, interest earned decreases, and hence ROA falls. Thus, NPAs and ROA have
a negative relationship.

Return on Asset = Net Income / Total Asset

37
5. Operating Efficiency
Operating efficiency is a measurement of resource allocation and can be defined as the ratio
between an output gained from the business and an input to run a business operation. When
improving operational efficiency, the output to input ratio improves.

Operating expenses / Total Revenue

6. Interest Income
Interest income is money earned by an individual or company for lending their funds, either by
putting them into a deposit account in a bank or by purchasing certificates of deposits. Interest
expense, on the other hand, is the opposite of interest income.

EBIT / Interest Expense

38
 Data

1) Gross NPA:

Particular 2018 2019 2020 2021 2022

SBI 223427.46 172750.36 149091.85 126389.02 112023.37
Bank of Baroda 56480.38 48232.76 69381.43 66670.99 54059.39
PNB 86620.05 78472.70 73478.76 104423.42 92448.04
Bank of
18,433.23 15,324.49 12,152.15 7,779.68 5,327.21
Maharashtra
Canara Bank 47,468.47 39,224.12 37,041.15 60,287.84 55,651.58
Union Bank of
49,369.93 48,729.15 49,085.30 89,788.20 79,587.07
India
HDFC Bank 8606.97 11224.16 12649.97 15086 16140.96
ICICI Bank 54062.51 46291.63 41409.16 41373.42 33919.52
Yes Bank 2626.80 7882.56 32877.59 28609.53 27975.98

Interpretation:

1. HDFC Bank consistently has the lowest gross NPA among the banks listed. This indicates strong
risk management and loan quality control practices within the bank.
2. ICICI Bank and Yes Bank have experienced fluctuations in their gross NPA levels over the years.
ICICI Bank's gross NPA decreased from 2018 to 2019 but then increased in subsequent years. Yes
Bank saw a significant increase in gross NPA from 2018 to 2019, followed by a decrease in 2020
and then a slight increase again in 2021.
3. State Bank of India (SBI) had the highest gross NPA in 2018, but it has shown a decreasing trend
over the years. This suggests that SBI has been successful in managing and reducing its non-
performing assets.
4. Bank of Baroda and Punjab National Bank (PNB) have also experienced fluctuations in their gross
NPA levels. Both banks saw a decrease in gross NPA from 2018 to 2019, followed by an increase
in subsequent years.
5. In terms of managing Gross NPA effectively, HDFC Bank and Bank of Baroda stand out. They
have shown a consistent decrease or relatively low levels of Gross NPA over the years, indicating
robust risk management practices. SBI also deserves recognition for gradually reducing its Gross
NPA despite its large size and loan portfolio.

39
 2) Net NPA:

Particular 2018 2019 2020 2021 2022

SBI 223427.46 172750.36 149091.85 126389.02 112023.37
Bank of
56480.38 48232.76 69381.43 66670.99 54059.39
Baroda
PNB 86620.05 78472.70 73478.76 104423.42 92448.04
Bank of
18,433.23 15,324.49 12,152.15 7,779.68 5,327.21
Maharashtra
Canara
47,468.47 39,224.12 37,041.15 60,287.84 55,651.58
Bank
Union Bank
49,369.93 48,729.15 49,085.30 89,788.20 79,587.07
of India
HDFC Bank 8606.97 11224.16 12649.97 15086 16140.96
ICICI Bank 54062.51 46291.63 41409.16 41373.42 33919.52
Yes Bank 2626.80 7882.56 32877.59 28609.53 27975.98

Interpretation:

1. From the above data, several interesting trends emerge. Firstly, HDFC Bank consistently maintains
the lowest Net NPA across all years, indicating its strong asset quality and risk management
practices.
2. On the other hand, Yes Bank shows a significant increase in Net NPA from 2018 to 2020, but then
starts to decline gradually from 2021 onwards, possibly due to efforts to clean up its balance sheet
after facing financial troubles in 2019.
3. ICICI Bank's Net NPA fluctuates but generally remains at moderate levels throughout the period.
State Bank of India (SBI) and Punjab National Bank (PNB) show a declining trend in Net NPA
over the years, indicating improvements in their asset quality and risk management practices.
4. However, Bank of Baroda's Net NPA initially decreases from 2018 to 2019 but then increases from
2020 onwards, suggesting some challenges in managing non-performing assets during this period.
5. Overall, HDFC Bank emerges as the top performer in terms of maintaining low Net NPA, while
other banks show varying levels of performance and trends over the years.

40
Comparison Between NPA of Public and private Sector Banks

10

0
FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 23

Public Sector Banks Private Sector Banks

41
Statistical Data:

As on March 31

PRIORITY NON-PRIORITY
Bank PUBLIC SECTOR TOTAL
SECTOR SECTOR
Group/Years
Amount Percentage Amount Percentage Amount Percentage Amount

Public Sector banks

2022 243655 45 297304 55 21908 4 540958

2021 257858 42 358757 58 32439 5 616616
2020 236212 35 442105 65 28517 4 678317
2019 197334 27 542207 73 13395 2 739541
2018 187511 21 708090 79 17388 2 895601
2017 160942 24 523791 77 15466 2 684732
2016 125809 23 414148 77 3482 1 539957
2015 96611 35 181598 65 259 0 278468
2014 79899 35 147235 65 130 0 227264
2013 67276 41 96031 58 1155 1 164461
2012 55780 48 58826 50 2656 2 117262
2011 40186 54 34235 46 243 0 74664
2010 30496 51 29114 49 314 1 59924
2009 24201 54 20528 46 297 1 45026
2008 24874 61 15007 37 574 1 40456
2007 22519 58 15603 40 732 2 38854
2006 22236 54 18279 44 855 2 41370
2005 21536 45 25494 54 592 1 47622
2004 23841 48 25698 51 610 1 50149
2003 24939 47 26781 51 1087 2 52807

42
8. Reasons for the rising Non-Performing Assets in the Indianbanking
sector.

1. Credit boom:

At the time of the credit boom in the year 2003-2004, it was seen that the problem of rising
NPA was increasing rapidly. During this period, the world economy and the Indian economy
were flourishing. Seeing this scenario, many Indian firms borrowed huge amounts to take
advantage of the opportunities and grow their businesses.

2.Tightened Monetary Policy:

During that time, the Reserve Bank of India tightened the monetary policy in the country. It
increased the repo rate and reserve repo rate. Rising cases of NPAs were still prevalent even
after those steps were taken.

3. Stalled Judiciary & Legislative Procedures:

The courts in India gave judgements that were not in favour of businesses. The judgements
negatively affected businesses, specifically the mining, power and steel divisions.
Furthermore, the businesses had to face problems regarding the acquisition of land because of
which many projects got stalled due to which the repayments have been not done by many
current NPA defaulters.

4. Intentional Defaults:

It is also observed that many borrowers are totally competent to pay the loan, but they are
deliberately not paying. Such people must be identified, and appropriate measures should be
taken to recover the money lent to them.

5. Poor Credit Appraisal System:

The lack of proper credit appraisal is another factor for the rise in NPAs. Because of poor
credit appraisal, sometimes the bank gives loans to those who cannot pay back the loan.
43
 6. Natural Calamities:

Natural calamities are also a factor creating an alarming rise in NPAs in public sector banks.
India is hit by one or the other major natural calamity very often that causes failure of
repayment of loans by the borrowers. Generally, the farmers are dependent on rainfall for
their crops. However, the irregularity in rainfall reduces the production level of the farmer,
and as a result, he is unable to repay the loan.

10. Impact on banking sector:

Profitability:

NPAs put detrimental impact on the profitability as banks stop to earn income on one hand
and attract higher provisioning compared to standard assets on the other hand. On an average,
banks are providing around 25% to 30% additional provision on incremental NPAs which has
direct bearing on the profitability of the banks.

Asset (Credit) contraction:

The increased NPAs put pressure on recycling of funds and reduces the ability of banks for
lending more and thus results in lesser interest income. It contracts the money stock which
may lead to economic slowdown.

Liability Management:

In the light of high NPAs, Banks tend to lower the interest rates on deposits on one hand and
likely to levy higher interest rates on advances to sustain NIM. This may become hurdle in
smooth financial intermediation process and hampers banks’ business as well as economic
growth.

Capital Adequacy:

As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets
on an ongoing basis. Every increase in NPA level adds to risk weighted assets which warrant
the banks to shore up their capital base further. Capital has a price tag ranging from 12% to
18% since it is a scarce resource.

44
Shareholders’ confidence:
Normally, shareholders are interested in enhancing the value of their investments through higher
dividends and market capitalization, which is possible only when the bank posts significant profits
through improved business. The increased NPA level is likely to have adverse impacton the bank
business as well as profitability thereby the shareholders do not receive a market return on their
capital and sometimes it may erode their value of investments. As per extant guidelines, banks
who’s Net NPA level is 5% & above are required to take prior permission from RBI to declare
dividends and also stipulate a cap on dividend pay-out.

Public confidence:
The credibility of the banking system is also affected greatly due to higher level NPAs because it
shakes the confidence of the public in the soundness of the banking system. The increased NPAs
may pose liquidity issues which is likely to lead to a run-on bank by depositors Thus, the increased
incidence of NPAs not only affects the performance of the banks but also affects the economy. In
a nutshell, the high incidence of NPA has cascading impact on all important financial ratiosof the
banks viz., Net Interest Margin, Return on Assets, Profitability, Dividend Pay-out, Provision
coverage ratio, Credit contraction etc., which may likely to erode the value of all
stakeholders including Shareholders, Depositors, Borrowers, Employees and public at large.

45
 REGRESSION:

R Square 0.9402
Adjusted R Square 0.9125
Standard Error 0.0046
Observations 20

ANOVA
Significance
df SS MS F F
Regression 6 0.004 0 34.04331 0
Residual 13 3E-04 0
Total 19 0.005

Standard t Upper Lower Upper

Coefficients Error Stat P-value Lower 95% 95% 95.0% 95.0%
Intercept 0.0541 0.015 3.61 0.00319 0.02 0.09 0.02 0.09
Capital Adequacy
Ratio 0.1931 0.109 1.77 0.09956 -0 0.43 -0 0.43
Non-Interest
Income 0.2516 0.628 0.4 0.69519 -1.1 1.61 -1.1 1.61
-
operating efficiency -0.068 0.028 2.43 0.03027 -0.1 -0 -0.1 -0
-
Interest Income -0.022 0.054 0.41 0.69048 -0.1 0.1 -0.1 0.1
-
ROA -3.903 0.69 5.66 0.00008 -5.4 -2.4 -5.4 -2.4
Loans to Sensitive -
Sectors -0.04 0.026 1.55 0.14615 -0.1 0.02 -0.1 0.02

46
ANALYSIS:
The regression analysis indicates a strong overall fit of the model, with an R-squared value of
0.94, suggesting that 94% of the variance in the dependent variable is explained by the
independent variables. The model is statistically significant, as indicated by the low p-value
(3.21726E-07) in the ANOVA table. Among the independent variables, Return on Assets
(ROA) stands out as highly significant (p-value = 0.00008), suggesting that it has a substantial
impact on the dependent variable. Operating Efficiency also shows significance (p-value =
0.03027), indicating that it affects the dependent variable as well. Other variables, such as
Capital Adequacy Ratio, Non-Interest Income, Interest Income, and Loans to Sensitive Sectors,
do not appear to have a statistically significant impact. However, these interpretations should
be made cautiously, considering the specific context and limitations of the dataset and analysis.
The regression model has a high overall fit, with an R-squared value of 0.94, indicating that
94% of the variance in the dependent variable is explained by the independent variables.

• The model is statistically significant, with a low p-value (3.21726E-07) in the ANOVA
table, suggesting that the independent variables collectively have a significant impact
on the dependent variable.

• Return on Assets (ROA) is highly significant (p-value = 0.00008), indicating a

substantial impact on the dependent variable.

• Operating Efficiency is also significant (p-value = 0.03027), suggesting an effect on the

dependent variable.

• Other variables like Capital Adequacy Ratio, Non-Interest Income, Interest Income, and
Loans to Sensitive Sectors do not appear to have a statistically significant impact on the
dependent variable. Interpretations should be made cautiously, considering the specific
context and limitations of the dataset and analysis.

47
Findings:
HDFC Bank is the best performer when it comes to NPAs. The level of NPA has been stable
throughout the years.

1. When it comes to non-performing assets, HDFC Bank performs the best. The level of
NPA has remained steady over the years.
2. Private sector banks outperform public sector banks in terms of non-performing assets
(NPAs).
3. It states that private sector banks make larger provisions in gross NPAs and gross
advances than public sector banks.
4. Rising NPA levels are affecting the profitability and liquidity of these institutions.
5. According to the research, all the banks mentioned above, both private and public, are
dealing with major NPA issues.
6. The public sector should put more emphasis on recovering questionable assets.
7. Private-sector banks should diversify their sources of income away from interest, as an
increase in non-performing assets (NPA) because of defaulted interest income might
have a significant impact on earnings.
8. The study found that public sector banks have lower operational efficiency than private
sector banks. Therefore, public sector banks should focus more on reducing their non-
performing assets as it may badly impact their operational efficiency.
9. The size and trend of NPAs indicate immediate reformatory developments so that the
issues with NPAs may be accommodated. Hence, besides the recovery of NPA’s, banks
should also focus on minimizing the level of NPAS especially public sector banks.
10. All banks must concentrate on proper borrower selection and follow-ups to obtain
timely payment steps.”

48
CHAPTER 8: CONCLUSION

 Private sector banks good at controlling npa compared to public sector banks.

 Yes Bank and PNB are the worst at handling npa

 Private sector banks are profitable compared to public sector banks.

 Both the private and public sector bank suffer from rising npa problem

Non-performing assets (NPAs) have been a serious issue in India's banking sector. This affects
not only India's banking industry, but also the Indian economy. Nonperforming loans are
becoming increasingly prevalent in both private and public sector banks. While private banks
cannot reduce this ratio, they are better at managing nonperforming assets (NPAs) than public
sector banks. When we compare all six banks, we can see that Yes Bank and Punjab National
Banks are the worst at managing nonperforming assets (NPAs), followed by the State Bank of
India. However, when comparing the performance of public and private sector banks, the study
suggests that private sector banks are better at dealing with nonperforming assets (NPAs) than
public sector banks, despite their lower success rate. Furthermore, unlike public sector banks,
which have lost thousands of crores of rupees due to rising NPAs, private banks have continued
to produce profits despite rising NPA trends.

49
This money is stuck in non-performing assets, which has a direct impact on bank
profitability because their income is typically based on the interest generated on the
amount of loans granted. This study found that public sector banks have a larger
proportion of non-performing assets than private sector banks. Although it is not
impossible for banks to have 0% nonperforming assets (NPAs), rising NPAs must be
managed to revitalize the banking industry and improve India's economic growth. Banks
will have to implement a quick process to counteract this scenario. The Reserve Bank of
India, India's Central Bank, should reform the existing credit assessments and monitoring
system, and banks should improve and reinforce the existing loan recovery processes, as
well as introduce new loan recovery methods.

Reduction in the level of NPAs is a primary task for the banks operating in India.
Simultaneously loan recovery methods have to be improved upon and strengthened.
Financialinclusion should be implemented in a sustainable way. For this suitable business
and deliverymodels will have to be developed. Competition among banks and with the
rest of the financial sector will increase. New banks are proposed to be licensed shortly.
There is a need for decisive changes in the banking structure to enable it to grow,
resources efficiency and inclusivity. The asset quality of banks is an important indicator
of their financial health. Italso reflects on the efficacy of their credit risk management and
recovery environment. Not surprisingly, the asset quality of banks decreased significantly
in last three to four years.
The level of stressed assets (both NPAs as well as restructured assets) went up. Banks
shouldstrengthen their due diligence and follow whatever guidelines the RBI and the
Government have formulated to mitigate this pressing problem. Credit appraisal and
post- loan monitoring are other crucial steps which need to be improved upon.
The report makes several suggestions to spruce up the loan recovery system. It should
focus on fairness and efficiency and try to preserve the value of underlying assets and
safeguard jobs. Credit data must be shared and large exposures across banks monitored
closely. There is an urgent need for accelerating the working of debt recovery tribunals
and assetreconstruction companies.

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CHAPTER 9: RECOMMENDATION

 The public sector banks should put more emphasis on recovering questionable assets.

 The public sector banks operational efficiency is less compared to private sector banks.
Therefore, public sector banks should focus more on reducing their non-performing
assets as it may badly impact their operational efficiency.

Continuously assessing the financial position by the lender of the borrower for timely
recovery or avoiding huge losses.
public sector should put more emphasis on recovering questionable assets.
Private-sector banks should diversify their sources of income away from interest, as an
increase in non-performing assets (NPA) because of defaulted interest income might
have a significant impact on earnings.

The study found that public sector banks have lower operational efficiency than private
sector banks. Therefore, public sector banks should focus more on reducing their non-
performing assets as it may badly impact their operational efficiency.

The size and trend of NPAs indicate immediate reformatory developments so that the
issues with NPAs may be accommodated. Hence, besides the recovery of NPA’s, banks
should also focus on minimizing the level of NPAS especially public sector banks.
All banks must concentrate on proper borrower selection and follow-ups to obtain
timely payment steps.

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 CHAPTER 10: REFERENCES

1. www.rbi.org.in

2. www.ibef.com

3. www.moneycontrol.com

4. www.livemint.com

5. https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Statistical%20Tables%
20Relating% 20to%20Banks%20in%20India
6. https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!4
7. https://dbie.rbi.org.in/BOE/OpenDocument/1608101729/OpenDocument/opend
oc/openDocu manfaces
8. https://www.ibef.org/industry/banking-india
www.rbi.org.in
9. https://www.statista.com/search/?q=non+performing+assets&qKat=newSearchFi
lter&sortMe
thod=idrelevance&isRegionPref=356&statistics=1&forecasts=1&infos=1&accu
racy=and&isregion=0&isocountrySearch=&category=0&interval=0&archive=1
10. https://www.careratings.com/

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