AJRBF

Volume2,Issue12(December,2012)ISSN:22497323


A Peer Reviewed International Journal of Asian
Research Consortium

AJRBF:
ASIAN JOURNAL OF
RESEARCH IN BANKING
AND FINANCE

STUDY ON PERFORMANCE OF NPAs OF INDIAN

COMMERCIAL BANKS

KAMINI RAI*

*Assistant Professor,
Department of Business Administration,
Soffpro Institute of IT & Management,
Preet Vihar, New Delhi, India.

ABSTRACT

Non Performing Assets is a threat to Indian Commercial banks. It affects liquidity

and profitability, in addition posing threat on quality of asset and survival of banks.
The Indian banking sector has been facing serious problems of raising Non-
Performing Assets (NPAs). The main reason of high percentage of NPAs is the
target-oriented approach, which deteriorates the qualitative aspect of lending. This
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study explored meaning of various NPA indicators; Gross NPA, Net NPA, Additions
to NPA, Reductions to NPA and Provisions towards NPA. It is necessary to trim

down NPAs to improve the financial health in the banking system.

In this paper, an effort has been made to evaluate the operational performance of
the selected commercial banks, NPAs Trends and issues , the measures required for
management of NPAs like reformulation of banks credit appraisal techniques,
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establishment of monitoring department, etc. The study concluded that NPA still
remains a major threat and the incremental component explained through additions
to NPA poses a great question mark on efficiency of credit risk management of banks
in India.

KEYWORDS: Gross NPA, Net NPA, Additions to NPA, commercial banks. Private
bank, foreign bank.
____________________________________________________________________________

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1. INTRODUCTION

The Indian Banking sector accounts a major portion of financial intermediation and
acknowledged as main vehicle for monetary policy signals, credit channel and facilitator for
payment systems. Commercial banks are the major player to develop the economy. In terms of
ownership, commercial banks can be grouped into nationalized banks, the State Bank of India
and its associate banks, regional rural banks and private sector banks (the old/new domestic and
foreign). Like any other business, success of banking is assessed based on profit and quality of
asset it possesses. Since nationalization of banks in 1969, Scheduled Commercial Banks have
been asked to extend credit to weaker sector, with a view to provide an opportunity to the poor
and underprivileged section of Indian society to improve their standard of living.

Even though bank serves social objective through its priority sector lending, mass branch
networks and employment generation, maintaining asset quality and profitability is critical for
banks survival and growth. A major threat to banking sector is prevalence of Non-Performing
Assets (NPAs). In present scenario NPAs are at the core of financial problem of the banks.
Concrete efforts have to be made to improve recovery performance. The main reasons of
increasing NPAs are the target-oriented approach, which deteriorates the qualitative aspect of
lending by banks and willful defaults, ineffective supervision of loan accounts, lack of
technical and managerial expertise on the part of borrowers. In this study, I provide empirical
evidence that explain how NPA performed in Indian banking and the steps that can be taken to
decrease the level of NPAs based on statistics during last few years.

WHAT IS NON PERFORMING ASSET (NPA)?

NPA (non performing assets) is related to banking and finance term. When bank or finance
company unable to recover its lent money from borrower in 90 days than that amount which
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have not been recovered will be treated as NPA. It represents bad loans, the borrowers of which
failed to satisfy their repayment obligations. NPA may be classified into Gross NPA and Net
NPA. Gross NPA is advance which is considered irrecoverable, for bank has made provisions,

and which is still held in banks' books of account. Net NPA is obtained by deducting items like
interest due but not recovered, part payment received and kept in suspense account from Gross
NPA. An asset is classified as non-performing asset (NPAs) if the borrower does not pay dues
in the form of principal and interest for a period of 180 days. However with effect from
March 2004, default status would be given to a borrower if dues are not paid for 90 days.
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CAUSES OF NPA

An asset leads to NPA when the borrower fails to repay the interest and/or principal on agreed
terms. ssue of NPA and its impact on erosion of profit and quality of asset was not seriously
considered in Indian banking prior to 1991. There are many reasons cited for the alarming level
of NPA in Indian banking sector. Asset quality was not prime concern in Indian banking sector
till 1991, but was mainly focused on performance objectives such as opening wide
networks/branches, development of rural areas, priority sector lending, higher employment
generation, etc. But, RBI issued guidelines in 1993 based on recommendations of the

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Narasimham Committee that mandated identification and reduction of NPAs to be treated as a
national priority because NPA direct toward credit risk that bank faces and its efficiency in
allocating resources. Profitability and earnings of banks are affected due to NPA numbers.

One of the main causes of NPAs in the banking sector is the Directed loans system under which
commercial banks are required to supply 40% percentage of their credit to priority sectors. Most
significant sources of NPAs are directed loans supplied to the micro sector are problematic of
recoveries especially when some of its units become sick or weak. The major cause for the NPA
can be attributed to:

faulty lending policy and making compulsion lending to priority sector by banks.

faulty credit management like defective credit in recovery mechanism, lack of

professionalism in the work force.

improper selection of borrowers/activities.

unscientific repayment schedule and mis-utilision of loans by user.

untimely communication to the borrowers regarding their due date and lack of sponge
legal mechanism.

Weak credit appraisal system, Industrial problems and recession in market etc.

Legal impediments and time consuming nature of asset disposal process.

Political tool - Directed Credit to SSI and Rural sectors.

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Manipulation by the debtors using political influence has been a cause for industrial bad
debt being so high.

IMPACT OF NPA

NPA impact the performance and profitability of banks. The most notable impact of NPA is
change in bankers sentiments which may hinder credit expansion to productive purpose. Banks
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may incline towards more risk-free investments to avoid and reduce riskiness, which is not
conducive for the growth of economy. If the level of NPAs is not controlled timely they will:-

Reduce the earning capacity of assets and badly affect the ROI.

The cost of capital will go up.

The assets and liability mismatch will widen.

Higher provisioning requirement on mounting NPAs adversely affect capital adequacy

ratio and banks profitability.

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The economic value additions (EVA) by banks gets upset because EVA is equal to the
net operating profit minus cost of capital.

NPAs causes to decrease the value of share sometimes even below their book value in the
capital market.

NPAs affect the risk facing ability of banks.

OBJECTIVES OF THE STUDY

The study aims to gain insights into the position of Non Performing Assets of all commercial
banks categories in public sector, private sector, scheduled commercial banks and foreign banks
.The following broad objectives are laid down for the purpose of the study.

Find out trends in NPA Level.

To study the trends in Gross Advances, Gross NPAs and NET NPAs by various bank
groups during the study period.

To study the impact of NPAs in profitability, liquidity, and solvency position of the
banks.

To offer suitable strategies to avoid the Non Performing Assets of all commercial banks.

Assess the variation of NPA ratio in selected PSBs & Private bank and foreign banks.

RESEARCH METHODOLOGY
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The present study has focused on the performance of NPAs on Indian commercial banks i.e.,
public sector banks, old and new private sector banks and foreign banks etc. by collecting data of

last few years. The study is based on secondary data. The RBI publications like, Report on
Trend and Progress of Banking in India, Annual Report of RBI, and Reports on Currency
and Finance are the major sources for this study. Articles and papers relating to NPA published
in different business journals, magazines, newspaper, periodicals were studied and data available
on internet and other sources has also been used.
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The data collected has been analyzed and interpreted by various statistical tools ratio,
Averages, percentages, ratio analysis, Measure of central tendency, frequency distribution,
Standard Deviations, coefficient of variation, t test and ANOVA test. The study is confined to a
period of 8 years i.e., from 2004-05 to 2011-12.

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RESULTS AND DISCUSSION

NPA INDICATORS DURING 2005- 2012

TABLE 1: BANK GROUPS WISE NPAS TO TOTAL ADVANCES (RS. IN CRORS.)

All Commercial Banks Public Sector Banks Private Sector Banks Foreign Bank
Total Total NPAs Total Total NPAs Total Total NPAs Total Total NPAs
Advances Amt % to Advances Amt % to Advances Amt % to Advances Amt % to
Year Total Total Total Total
Adv. Adv. Adv. Adv.

2004-05 902027 64898 7.19 661975 51541 7.78 177420 10344 5.83 62632 3013 4.81
2005-06 1124926 58023 5.15 817248 46817 5.44 230632 8851 4.57 77046 2355 4.81
2006-07 1473527 51242 3.47 1070872 41378 3.71 303793 7774 2.45 98862 2090 2.07
2007-08 1893513 50293 2.65 1373777 38602 2.81 391870 9239 2.36 127867 2452 1.92
2008-09 2331678 55842 2.39 1696333 39749 2.34 472345 12976 2.75 163000 3118 1.91
2009-10 2793133 68220 2.44 2103763 44039 2.09 519655 16888 3.25 169714 7294 4.30
2010-11 3271361 81813 2.50 2519331 57301 2.27 584591 17384 2.97 167439 7128 4.26

Source: Report on Trend and Progress of Banking in India 2005 -11, Reserve Bank of India, India.

Private sector banks reported higher growth rate in total advances. Their total advances grew by
an AAG rate of 25.97% during study period. The nationalized banks stood second, reporting an
average annual growth rate of 23.32% during study period. The total advances of SBI &
Associates grew by an AAG rate of 20.02%. Foreign banks reported the lowest growth in total
advances and increased by an AAG rate of 17.05. It is mainly attributed to the negative growth
of advances (-1.30% in 2010 and reduced growth 4.15% in 2009). It may be further observed
that the growth rate has affected since 2007, mainly attributed to the recessionary trends due to
global financial crisis. The overall AAG rate of advances of all SCBs in India was 20.499%
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during the period of 2005-2012.

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CHART: 1

TotallAdvances Ave
erageGrowthR
Rate

140

120

100

80

60

40

20

20
2004 2005
5 2006 2007 2008 2009 20
010 2011

SBI&Associates NatioanlizedBan
nks PrivateSectorBanks ForeignB
Bank
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BANK GROUPS
G WISE
W GROSS NPAS TO GROSS
S TOTAL ADVANCES
A S

Table 2 shows
s the Scheduled
S Coommercial Banks
B Grosss Advances and Gross NPAs
N durinng the
study peeriod. The gross
g advancce of Schedduled Comm mercial Bankks was Rs. 11,52,682 crore
during 20004-05, which was increease to Rs. 43,52,088
4 crrore during 2010-11.
2 The Gross NPA As of
Scheduleed Commerccial Banks have also beeen increasingg year after year. Gross Non Perforrming
Assets off the SCBs have increassed from Rss. 59,373 croore to Rs. 97,922 crore during the study
s
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period. The
T growth rate of the grross NPAs

during thhe study periiod is only 38%.Lookin

3 g the Gross NPAs to Grross Advancces ratio of SCBsS
declined from 5.2 % to 2.25% duringd the sttudy period. In case of public
p sectorr banks this ratio
decreasedd from 5.5 % at the endd of March, 2005 2 to 2.233% at the ennd of March,, 2011, in prrivate
the ratio decreased frrom 4.44 % to 2.25% annd in case off foreign bannks the ratio decelerated from
2.8 % to 2.54%. It cllearly indicaates that Grooss NPAs to Gross Advaances ratio were w higher in
i the
public seector banks while
w the leaast in foreignn banks durinng the beginnning of the study
s periodd. But
the trendd has changeed at the endd of the studdy period thhat Gross NP PAs ratio were
w higher in
i the
foreign banks
b while the
t least in the public sector banks.

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It shows that SCBs have taken effective steps to curb the NPAs. Among the SCBs, the public
sector banks have taken much effort to curtail the NPAs more than 5 times during the study
period of 8 years than private and foreign banks.

TABLE 2: BANK GROUP WISE GROSS NPAS TO GROSS ADVANCES

(RS. IN CRORE)
Public Sector Banks Private Sector Banks Foreign Bank Scheduled Commercial Bank
Gross Gross NPAs Gross Gross NPAs Gross Gross NPAs Gross Adv Gross NPAs
Adv. Amt % to Adv. Amt % to Adv. Amt % to Amt % to
Year Gross Gross Gross Gross
Adv. Adv. Adv. Adv.

2004-05 8,77,825 48,399 5.5 1,97,832 8,782 4.44 77,026 2,192 2.8 11,52,682 59,373 5.2
2005-06 11,34,724 41,358 3.6 3,17,690 7,811 2.46 98,965 1,928 1.9 15,51,378 51,097 3.3
2006-07 14,64,493 38,968 2.7 4,20,145 9,256 2.2 1,27,872 2,262 1.8 20,12,510 50,486 2.5
2007-08 18,19,074 40,595 2.2 5,25,845 12,983 2.47 1,62,966 2,857 1.8 25,07,885 56,435 2.3
2008-09 22,83,473 45,156 2.0 5,85,065 16,983 2.9 1,69,716 6,833 4.0 30,38,254 68,973 2.3
2009-10 27,36,347 59,926 2.19 6,44,517 17,639 2.74 1,67,365 7,180 4.29 35,45,899 84,747 2.39
2010-11 33,45,919 74,614 2.23 8,11,843 18,24 2.25 1,99,527 5,068 2.54 43,52,088 97,922 2.25

Source: Report on Trend and Progress of Banking in India 2005 -11, Reserve Bank of India, India.

The quality of bank asset portfolio is affected by as may be observed from the increased Gross
NPA ratio. The worst affected is the private sector banks which reported an average growth of
Gross NPA of 78.64% during 2008-11. SBI & Associates reported an average growth rate of
22.11% during 2008-11. It has been seen that gross NPAs are continuously growing from 2007.
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CHART 2

GrossAdvances AverageGrowthRate

200

150

100

50

0
2004 2005 2006 2007 2008 2009 2010 2011
50

100

SBI&Associates NatioanlizedBanks PrivateSectorBanks ForeignBank

In line with the growth of Gross NPA, Net NPA also grew significantly from 2008 onwards. All
bank groups made considerable progress in curtailing Net NPA in the first half of post-
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millennium period. It may also be observed that the growth rate has reduced in for the year ended
31st March 2011, attributed to recovery from recessionary pressures of global financial crisis.

GROSS AND NET NPA TO GROSS ADVANCES FROM 2010-12 A COMPARATIVE

STUDY

The deterioration is most pronounced in case of public sector banks, whose gross NPAs (as a
proportion to gross advances) registered an increase from 2.28 in 2010 to 3.17 in 2012 - in net
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terms, too, this ratio has gone up (Table 3).

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TABLE 3: COMMERCIAL BANKS GROSS AND NET NPAS TO GROSS ADVANCES
(A COMPARATIVE STUDY FROM 2010-12)

Bank Year Gross NPAs to Net NPSs to Net Restructured

Gross Advances Advances Standard Advance to
Total Standard
Advances
2010 2.28 1.09 5.07
Public Sector Banks 2011 2.32 1.04 4.30
2012 3.17 1.47 5.92
2010 4.26 1.82 0.54
Foreign Bank 2011 2.54 0.66 0.23
2012 2.68 0.61 0.14
2010 3.22 1.18 1.68
New Private Sector
2011 2.62 0.60 0.65
Banks
2012 2.18 0.44 1.08
Old Private Sector 2010 2.31 0.82 3.62
Banks
2011 1.97 0.53 2.95
2012 1.80 0.59 3.49
Source : RBI Annual Report, 2011-12

During the period of 2011-12 the Gross and Net NPA of public sector banks has been increased
in comparison to previous years whereas foreign banks and other private sector banks decreased.
The Restructured Standard Advance to Total Standard Advances of foreign bank has also been
decreased in 2012 in comparison to previous years but it has not so change in public sector bank.
In old private sector banks it was high in 2010, by taking corrective measure it decreased in 2011
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but again due to negligence it increases.

MEASURES TO CONTROL NPAS

The NPA of banks is an important criterion to assess the financial health of banking sector. It
reflects the asset quality, credit risk and efficiency in the allocation of resources to the productive
sectors. It has been noted that since the reform regime there has been various initiatives to
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contain growth of NPA to improve the asset quality of the banking sector. Commercial banks
have envisaged the greatest renovation in their operation with the introduction of new concepts
like income recognition, prudential accounting norms and capital adequacy ratio etc which have
placed them in new platform. Following measures can be taken to control NPAs:

There surely is a need to distinguish between willful and unwilling defaulters. In case of
the latter category of defaulters the law should not be as harsh as in case of willful
defaulters.

Their containment at a minimum level .

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Ensuring minimum impact of NPAs on the financials.

So for preventive the fresh inflow of funds into the non-performing category, banks
should reformulate their credit appraisal techniques.

All kinds of lending involves three stages where discretion needs to be exercised
(a)Evaluation and assessment of the proposal (b) Timely monitoring and evaluation and
(c) Proper assessment of exit decision and modality.

Banks should inspect the progress of the project or the business. Separate monitoring
department should be established in large branches for periodical review of accounts,
comparative risk analysis and compliance of terms and conditions of sanction. Equal
emphasis should be given for monitoring of standard assets also.

Recovery competition system should be extended among the staff members. The
recovering highest amount should be felicitateCreation of a separate, Recovery
epartment with Special Recovery Officer.

The Narshimham Committee on financial system (1991) has recommended the

establishment of Debt Recovery Tribunals (DRT) for the speedy recovery of the assets
from NPAs category. On the basis of recommendations 22 DRTs were established by
passing the bill on Recovery of Debt due to Banks and Financial Institutions Act 1993.
But the performance of DTRs for the past years has not been found satisfactory or up to
the mark.

Position of overdue accounts is reviewed on a weekly basis to arrest slippage of fresh

account to NPA.
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In case of government sponsored schemes government should assist in recovery. It may

be noted that suggestions enumerated will go a long way in reducing the NPAs. This will
only considerably improve the profitability of the banks, improve the quality of assets,
but also make the Indian "Banking system stringent, resilient and geared to meet the
challenges of globalisation.
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CONCLUSION

The problem of NPAs is a live danger to the Indian Scheduled Commercial Banks, because it
destroys the healthy financial conditions of them. The recessionary pressures faced by the
banking sector is an important reason for the growth of NPA indicators, it should be managed to
maintain a healthy and viable banking environment. Recovery performance is better with respect
to individual small borrowers but it is slow in case of corporations and institutional borrowers.
The bank management may speed up recovery of good loans and bad loans through various
modes to decelerated growth of NPAs from the present level and also to prevent re-emergence of
NPAs over the minimum level. Till recent past, corporate borrowers even after defaulting
continuously never had the fear of bank taking action to recover their dues. This is because there

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was no legal framework to safeguard the real interest of banks. However with the introduction
of SARFAECI ACT banks can issue notices to defaulters to repay their loans. Also, the Supreme
Court has recently given the banks the freedom to sell mortgage assets of the borrowers, if they
do not respond to the legal proceedings initiated by lender. This enables banks to get rid of sticky
loans thereby improving their bottom lines.

REFERENCES

Management and resolution of NPAs legal and regulatory regime, [Online] Available at:
http:// www. mbaknol. com [Accessed 20th Dec 2011]

Ms. Kanika Goyal, 2010. Empirical Study of Non Performing Assets Management of
Indian Public Sector Banks, APJRBM Volume 1, Issue 1, October 2010.

Prashanth K Reddy (2002), A comparative study of Non Performing Assets in India in

the Global context - similarities and dissimilarities, remedial measures,Oct, IIM
Ahemadabad, India.

Ranjan, R. & Dhal S., 2003, Non-Performing Loans and Terms of Credit of Public
Sector Banks in India: An Empirical Assessment, Occasional Papers, Reserve Bank of
India Publication, Mumbai, winter, Vol. 24, No. 3, Pp. 81-121.

Rajaraman, I., & Vasishtha, G. (2002). Non-Performing Loans of PSU Banks, Some
Panel Results, Economic and Political Weekly, Vol.37(5), 2-8.

Reserve Bank of India (2010), Trend and Progress of Banking in India

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Paper published by SPIRI in International journal of Business and Management

tomorrow.

Sethi, J., & Bhatia, N. (2007). Elements of Banking and Insurance, 2nd Edition, Prentice
Hall India Publications

Thiagarajan, S., Ayyappan, S., & Ramachandran, A. (2011). Credit Risk Determinants of
Public and Private Sector Banks in India, European Journal of Economics, Finance and
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Administrative Sciences, Issue 34.

Rajaraman Indira, Garima Vasishtha (2002), Non-performing Loans of PSU Banks-

Some Panel Results, Economic and Political Weekly, Vol.27, pp.429-435.