Today the Indian banking system has undergone significant transformation following financial sector reforms, adopting international best practices. Several prudential payments, integrating and provisioning norms have been introduced and these are shaping up the banks to improve efficiency and trimming down NPAs to improve the financial health in the banking system. Non- performing assets are a major issue and challenge for banking industry in India. Non -performing Assets threaten the stability and impact bank's profitability through a loss of interest income, write-off the principal loan amount. RBI had issued guidelines in 1993 based on recommendations of the Narasimham Committee that mandated the identification and reduction of NPAs to be treated as a national priority because NPA are directly linked towards the credit risk that a bank faces and it impact its efficiency in allocating resources. Apart from this, NPAs affect profitability as well. Since higher NPAs require higher provisioning, which means a large part of the profits needs to be kept aside as provision against bad loans. Therefore, the problem of NPAs is not the concern of the lenders alone but is, indeed, a concern for policy makers as well involved in accelerating the economic growth. In recent years financial reforms led by RBI have helped to bring down the level of NPAs and have achieved little success in terms of recovery and up gradation of the existing NPAs. The present study highlights that the problems of NPAs are more serious in Public Sector Banks than Private Sector Banks. Reduction of NPAs in banking sector should be treated as a national priority to make the Indian banking system more strong and resilient.
Keywords
NPA, Public Sector Banks, Private Sector Banks, Financial reforms.
Introduction
NPAs in banking Sectors
NPAs the three letters create terror in banking sector and business circle . NPA stands for "Non Performing Asset". The NPA simply indicates that: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns into a non performing asset. The recovery of loan has always been giant problem for banks and financial institution. We need to find the ways to decrease NPAs and categories the factors responsible for NPA and then find way outs.
The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it transferred funds for the productive purposes resulting into economic growth. The debtor take the funds from the bank in the form of credit and pays back the principle amount with the interest to the creditor as a result the creditor (Bank) gets the profit in the form of interest and again this profit is reinvested leading economic growth. However lending also carries credit risk, arising from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. Due to Non performance of the fund the financial institutions become bankrupt and reflect a degree of risk that many investors could neither anticipate nor welcome.
The Financial companies and institutions are now a day's facing a challenge of managing the Non Performing Assets (NPA) as these assets prove to become a major setback for the growth of the economy. Undoubtedly, the world economy is undergoing recession. Globally stock markets have tumbled and business itself is getting harder to do with the simple reason that the banks (creditor) money in the form of funds gets blocked. Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn.
Narasimhan Committee Recommendation for NPAs
Narasimhan Committee found NPAs as one of the possible cause for the mal-functioning of the Public Sector Banks It mandated for the banks to develop their branch network after nationalization to raise the savings and extend their credit facility to the agricultural, priority sectors and SSI sectors. This system has been achieved very well. While the before 1990's and focus has altered in the direction of improving quality of assets and better risk management. The focused lending approach has given way to market focused exercises. It suggested prudential norms on income recognition, asset classification and provisioning. Narasimhan Committee mandated it for the banks publish the NPAs magnitude such as advances, overdrafts and cash credit etc. every year in their Balance sheet for any amount due for 180 days.
Impact of NPAs on Banks
Profitability
NPA means money getting blocked and turning into a bad debt, which occurred due to wrong choice of client. The profitability of the bank is generally affected by NPAs as banks have to keep some amount to cover up for the loss caused by NPA. It is because of this provision for NPAs the bank write off the bad debts or NPAs account from the current profit earned. It has an adverse impact on returns on investments along with the opportunity cost that if the same money would be invested in other assets would give the banks attractive returns. So NPA doesn't affect only the current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), adversely affecting current earning of banks.
Liquidity
Money getting blocked decreases profit leading to lack of sufficient cash at hand which lead to borrowing money for short period of time.
Statement of the problem
Credit is like taking the paste out of a tooth paste tube, but its recovery is as difficult as putting that paste back in to the tube. That is the reason why good money lent, sometimes becomes bad and doubtful, in the banking terminology it is called as Non-Performing Asset. NPA are like burden, which causes in convenience to the Banking sector. Ever increasing NPAs have a direct impact on profitability, liquidity and solvency. Since Indian banking industry is largely dominated by Public sector banks with almost two third shares of total advances in the economy. It is facing an acute problem with regard to NPAs. There is a need to manage the ever increasing level of NPAs. Keeping this issue in view the present Study has been undertaken.
Review of Literature
In the context of banking sector, the issue of Non-performing assets has been studied and keenly observed by plenty of researchers, a synoptic review of the relevant literature on the topic of NPAs has been described as under.
Basavaraj.G.Bhavi, (1990), a teacher fellow, conducted a study on Assessment of Regional rural banks credit on target groups- A case study of Krishna Grameena Bank. The essential objective of the study is to Banks credit on target groups in terms, Formation of assets, and to examine the extent of repayment of loan and overdue position and reasons for over dues. Bhatacharya (2002), studied NPA management of banks and stated that surest way of containing NPAs is to prevent their occurrence. He offered suggestion on proper risk management, strong and effective credit monitoring, co-operative working relationship between banks and borrower etc should be tenets of NPA management policy. Ramkrishna and Bhargavi (2004), study on Non- performing asset management, found that the asset quality of commercial banks has improved considerably due to bringing in the reform packages. C.Chandrakant, (2007), conducted a study on Non -performing assets in Karnataka State financial Corporation - A case study of Gulbarga Division. The main objective of the study was to assess the impact of NPA. And he suggested that better credit risk management will be an effective tool in resolving the issue NPAs. Ashok Khurana and Mandeep Singh (2009) stated that issue of mounting NPAs is a challenging to public to public sector banks. The study found that the asset wise classification of PSBs is in right direction and there is significant variation in the recovery of NPAs in the different sector. The research observed that PSBs should not be loaded with the twin object of profitability and social welfare.
Objectives of the study
The banking sector is striving very hard to nullify NPAs, in fact it is the level of NPAs that to a great extent determines its financial health. Hence the following objectives have been set up for our study.
1. To study the trend of NPA level of Public sector banks and Private Sector banks in India.
2. To highlight the NPAs position of Public sector banks and Private Sector banks.
3. To focus on sector wise NPAs and determine depth of it.
4. To analyze the impact of non-performing assets on the profitability of banks.
5. To evaluate the impact of non-performing assets on profitability with other variables.
Hypothesis of the Study
H0: There is no significant relation between profits & NPAs of Public Sector banks for the last 5 years.
H1: There is significant relation between profits & NPAs of Public Sector banks for the last 5 years.
H0: There is no significant relation between profits & NPAs of Private Sector banks for the last 5 years.
H1: There is significant relation between profits & NPAs of Private Sector banks for the last 5 years.
Research Methodology
Period of study
The post- reform period of five years has been taken for measuring the impact of NPAs on banking sector. The years selected for analysis are 2007-2011.
Sample- size
The study is related to Public sector banks and Private Banks Group.
Data collection
The study is primarily based on secondary data. A major part of the database has been drawn from the published secondary sources, primarily the reports of Indian Bankers Association (IBA) and the Reserve Bank of India (RBI). The data relating to NPAs of the public sector banks and Private sector banks has been obtained from various sources like "Financial Analysis of Banks" brought by Indian Banker's Association, "Statistical Tables Relating to Banks of India". "Reserve Bank of India Monthly Bulletin", "Report on currency and Finance" and other publications of Reserve Bank of India.
Data Analysis
The following accounting, statistical and diagrammatic techniques are used:
(A) Accounting techniques-(1) Comparative statement analysis (2) Ratio analysis
(B) Statistical techniques- (1) Mean (x), (2) Standard Deviation (3) Coefficient of Variation (C.V.) (in percentage)
(C) Diagrammatic and Graphic Presentation of Data- Diagrams and graphs are exhibiting the data in sample, comprehensible and intelligible form.
Analysis and Discussion
1. Gross NPAs and Net NPAs
Gross NPAs are the sum total of all loans assets that are classified as NPAs as per RBI guidelines, as on Balance sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the Non- Standard assets like as Sub- Standard, Doubtful and Loss assets. It can be calculated with the help of the following ratio. Gross NPAs ratio = Gross NPAs/Gross Advances.
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs .Net NPAs show the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the RBI guidelines, are quite significant. That is why the difference between Gross and Net NPAs is quite high. It can be calculated by following. Net NPAs =Gross NPAs- Provisions/Gross Advances- Provisions
Table 1: Gross and Net NPAs of Public and Private Sector Banks
% of Gross NPAs to Gross Advances
% of Net NPAs to Net Advances
Years
Public Sector Bank
Private Sector Bank
Public Sector Bank
Private Sector Bank
2006-07
7.49
5.84
2.95
2.42
2007-08
5.46
4.44
2.03
2.20
2008-09
3.53
2.45
1.27
1.01
2009-10
2.61
0.41
0.71
0.44
2010-11
1.82
0.32
0.52
0.26
Average
4.182
2.692
1.496
1.266
Standard Dev.
2.294
2.44
1.002
0.995
C.V
.55
.91
.67
.79
Source: Data calculated from Statistical Tables Relating to Banks in India, R.B.I., and Mumbai Issues of relevant years.
Graphical Presentation of above findings
fIG. 1
Percentage of Gross NPAs to Gross Advances
Percentage of Gross NPAs to Gross Advances
An analysis of this ratio reveals that the Public sector Banks group varied between 7.49 per cent in 2006-2007 and 1.82 per cent in 2010 - 2011. The average of this ratio was worked out at 4.182 per cent over the period of study. Among Private sector group, this ratio was minimum (0.32 per cent) during 2010-2011 and maximum (5.84 per cent) during 2006-2007.The private banks group witnessed an average ratio of 2.69 per cent over the study period. The least variability in the ratio in terms of dispersion was found.
FIG. 2
Percentage of Net NPAs to Net Advances
Percentage of Net NPAs to Net Advances
An analysis of this ratio reveals that the Public sector bank's group varied between 2.95 per cent in 2006-2007 and 0.52 per cent in 2010 - 2011. The average of this ratio was worked out at 1.496 per cent over the period of study. Among this group, this ratio was minimum (0.52 per cent) during 2010-2011 and maximum (2.95 per cent) for during 2006-2007.
The Private Sector Banks group witnessed an average ratio of 1.266 per cent over the study period. This ratio varied between 2.42 per cent in 2006 - 2007 and 0.26 per cent in 2010-2011. The least variability in the ratio in terms of dispersion was found. Thus, it can be inferred that Public sector bank group & Private Bank group invested largely in Government securities during the period under study.
2. Assets Classification
All Advances should be classified into the following four categories.
Standard Assets: Standard Assets is one, which does not disclose any problem and which does not carry more than normal risks attached to the business. Such Asset are a Performing Assets. Substandard Assets: With effect from 31st March 2005, a substandard assets is one, which has remained NPA for a period less than or equal to 12 months. Doubtful Assets: With effect from 31st March 2005, an asset is to be classified as doubtful if it has remained NPA for a period exceeding 12 months. Loss Assets: A loss assets 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.
Table 2 (A): Classification of loan assets of Public Sector Banks
Years/Banks
Standard Assets
Sub-Standard Assets
Doubtful Assets
Loss Assets
Total Advances
Public Sector Banks
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
2006-07
1335175
97.19
14147
1.03
19944
1.45
4510
0.33
1373777
100
2007-08
1656585
97.66
16870
0.99
19167
1.13
3712
0.22
1696333
100
2008-09
2059725
97.91
19521
0.93
20715
0.98
3803
0.18
2103763
100
2009-10
2462030
97.73
27688
1.10
24685
0.98
4928
0.20
2519331
100
2010-11
3008757
97.90
33614
1.1
31919
1.0
5514
0.20
3079804
100
Average
2104454
22368
23286
4493
2154602
Standard Dev.
659546
8073
5273
761
672924
C.V
0.313
0.36
0.23
0.17
0.313
Source: Off-site returns (domestic) of banks, Department of Banking Supervision, RBI
Table 2 (B): Classification of loan assets of Private Sector Banks
Years/Banks
Standard Assets
Sub-Standard Assets
Doubtful Assets
Loss Assets
Total Advances
Private Sector Banks
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
2006-07
382630
97.64
4368
1.11
3930
1.00
941
0.24
391869
100
2007-08
459369
97.25
7280
1.54
4452
0.94
1244
0.26
472345
100
2008-09
502768
96.75
10526
2.03
5017
0.97
1345
0.26
519655
100
2009-10
567207
97.03
8676
1.48
6542
1.12
2166
0.97
584591
100
2010-11
714338
97.50
4398
0.6
10735
1.50
2839
0.40
732310
100
Average
525263
7050
6135
1707
540154
Standard Dev.
125201
2693
2751
779
128360
C.V
0.24
0.38
0.49
.46
0.24
Source: Off-site returns (domestic) of banks, Department of Banking Supervision, RBI
In Table 2 (A) & 2 (B) all Advances are classified into the four categories, taking into the degree of weakness and extent of dependence of security for realization of dues.
Table 2 (A) Classification of loan assets of Public Sector Banks shows that the percentage of Standard Assets is more in total Advances nearly about 97%.In Public Sector Banks the Average of Doubtful Assets is more than the Average of Sub-Standard Assets & Loss Assets. It tells that Public Sector Banks have characteristic by the weaknesses in collection or liquidation of outstanding dues in full on the basis of currently known facts, conditions and values- highly questionable and improbable.
Table2 (B): Classification of loan assets of Private Sector Banks shows that Average of Sub-Standard Assets in Total Advances is more i.e.7050 crore followed by the Average of Doubtful Assets 6135.2 crore. It shows the credit weaknesses of Private Sector Banks that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Banks will sustain some loss, if deficiencies are not corrected.
3. Sector - wise composition of NPAs of banks
Distribution of Gross NPAs of Banks should be classified into different sectors i.e. Priority sector, Public sector and Non- Priority sector for the period 2007-2011.So far the focus of attention of the Indian banking industry has largely been extending finance to agriculture and manufacturing sectors covering small, medium and large industries. But now banks should capture services sector also. Through IT, banks therefore, have to sharpen their credit assessment skills and lay more emphasis in providing finance to the wide range of activities in the services sector.
Table 3 (A): Composition of NPAs of Public Sector Banks
Years/Banks
Priority Sector
Non-Priority Sector
Public Sector
Total Amount
Public Sector Banks
Amount
%
Amount
%
Amount
%
Amount
%
2006-07
22954
59.46
15158
39.27
490
1.27
38602
100
2007-08
25287
63.62
14163
35.63
299
0.75
39749
100
2008-09
24318
55.21
19251
43.71
474
1.08
44042
100
2009-10
30848
53.83
25929
45.25
524
0.91
57301
100
2010-11
41245
58.05
29524
41.56
278
0.390
71047
100
Average
28930
20850
413
50148
Standard Dev.
7510
6721
115
13844
C.V
0.26
0.32
0.28
0.28
Sources: Off- Site returns (domestic)-Latest updated database, Division of banking Supervision, RBI
It is visible from the Table 3(A) that major chunk of NPAs came from priority-sector as well as Non-Priority Sector. In priority sector Gross NPAs showed a declining trend from 2007 onwards but it started increasing again 2008 &2011. This may be due to the implementation of the one-time settlement scheme for small and marginal farmers. In Non-Priority Sector Gross NPAs showed an increasing trend during study period. The share of Public sector with regard to NPAs has been negligible and declined from 1.27% in 2007 to 0.390% in 2011.
Table 3 (B): Composition of NPAs of Private Sector Banks
Years/Banks
Priority Sector
Non-Priority Sector
Public Sector
Total Amount
Private Sector Banks
Amount
%
Amount
%
Amount
%
Amount
%
2006-07
2284
29.17
5541
.71
4
.0005
7829
100
2007-08
2884
.313
6321.51
.69
2.79
.0003
9208.3
100
2008-09
3419
.26
9557
.74
.01
-----
12976.01
100
2009-10
3640
0.22
13172
.78
.75
----
16812.75
100
2010-11
4120
.21
15416
.79
.55
-----
19536.55
100
Average
3270
10002
1.62
13273
Standard Dev.
708
4272
1.7
4950
C.V
0.22
0.43
1.05
0.37
Sources: Off- Site returns (domestic)-Latest updated database, Division of banking Supervision, RBI.
Table 3 (B) shows the sector wise distribution of Gross NPAs in Private sector banks. It is visible from the table that the share of non-priority sector has been much higher as compared to other two sectors i.e. priority sector and public sector. On the other hand, public sector contributed very negligible proportion ranging between 0 to 2% in total NPAs. The proportion of non-priority sector increased significantly from 70.8% in 2007 to 82% in 2011. The proportion of priority sector in gross NPAs has been declining in Private sector banks and has also been lesser as compared to Public sector banks.
Hypothesis Testing (T-Test)
t- Test is used to identify the relations between two variables. The variables in our study are Net NPA and Net Profit.
Hypothesis Testing of Public sector banks
NPA
Profits
Year
X
Y
2007
15145
20152
2008
17836
26592
2009
21155
34392
2010
29644
39257
2011
36071
44901
Total
119851
165294
mean
23970
33058
S.D
8689.92
9859.48
C.V
36.25
29.82
Degrees of Freedom= (n1+n2-2) =5+5-2=10
As H0 is two sided, we shall apply a two- tailed test for determining the rejection regions at 5 percent level which come to as under, using table of t-distribution for 10 degrees of freedom the value is 2.228.
The observed value of t is-2500 which falls in the rejection region and thus, we reject H0 and concluded that there is a significant relationship between Net Profits and NPAs of Public Sector Banks.
Hypothesis Testing of Private sector banks
NPA
Profits
Year
X
Y
2007
4028
6468
2008
5647
9521
2009
7411
10865
2010
6505
13111
2011
4431
17712
Total
28022
57677
mean
5604.4
11535
S.D
1408.77
4207.69
C.V
25.14
36.48
Degrees of Freedom= (n1+n2-2) =5+5-2=10
As H0 is two sided, we shall apply a two- tailed test for determining the rejection regions at 5 percent level which come to as under, using table of t-distribution for 10 degrees of freedom the value is 2.228.
The observed value of t= -1690.59 is which falls in the rejection region and thus, we reject H0 and concluded that there is a significant relationship between Net Profits and NPAs of Private Sector Banks.
Interpretation
There is significant relation between Net profit and Net NPA of Public Sector banks and Private sector banks.
Net Profit consists of income earned by the banks. Income is divided into two parts interest income & other income. Interest income includes interest/Discount on advances/bill, income on investments, interest on balances with RBI and other interbank funds. While non- interest income includes fee income components such as commission, brokerage and exchange transactions, sale of investments, corporate finance transactions and any other income other than the interest income generated by the bank. But in interest income, income from interest/Discount on advances/ bill is the major contributor towards NPA.
Public sector banks depend excessively on their interest income as compared to their peers in the Private sector and their fee- based earnings from services remain quite low.
Factors for rise in NPAs
The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks.
Ineffective recovery tribunal
The Govt. has set up numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recovery, reducing their profitability and liquidity.
Willful Defaults
There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
Natural calamities
This is a major factor, creating alarming rise in NPAs of the PSBs. even now and then India is hit by major natural calamities thus making the borrowers unable to pay back their loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal deficit with a reduced profit. Indian agriculture depends on monsoon. Due to irregularities of rain fall the framers may or may not achieve the production level thus they may or may not be able for repayment of the loans.
Industrial Sickness
Improper project handling, ineffective management, lack of adequate resources, lack of advance technology, day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up inventory thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling off their assets, which covers a minimum label. Thus the banks record the none recovered part as NPAs and has to make provision for it.
Changing Govt. policies
With every new Govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fall out of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt. to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs
Suggestions for Reduction of NPAs
It is the onus on the concerned bank which has given the loan to tackle the problem of NPA. Therefore the recommendations of Narasimham Committee which suggested that the asset management companies or asset reconstruction fund must redress the NPAs to be reviewed.
A strong Banker-Borrower relationship should be improved. Forceful recovery by the banks, which is against corporate. Debt recovery will be much easier in a friendly atmosphere.
Supporting the borrowers in developing his entrepreneurial skills will establish a good relation between the borrowers and the banks. But also help the bankers to maintain a track of their resources.
Commercial Banks should be allowed to come up with their own method to address the problem of NPAs. It includes surrendering and reducing the principle and interest on such loans, extending the loans, or settling the loan accounts. They should be fully authorized to apply all the privileged policies granted to the asset management companies.
Another way to manage the NPAs by the banks is Compromise Settlement Schemes or One Time Settlement Schemes. Under these situations, it is necessary to bring more simplicity in such deals so that any mistake could be removed.
Conclusion
Banking Sector is the back-bone of the Indian Economy and it is being adversely impacted by the levels of NPAs. It impacts Indian Economy as well. The reasons found in the study are industrial challenges, responsibilities of Govt. towards the priority sector being a welfare state and operational costs of the banks. Non -performance of recovery procedure has also boosted the issue. It can be concluded that a dynamic frame work is much needed to find the solution. A more vibrant approach is required while distributing loans. Public & Employee Forums can be established to find the ways for more effective recovery procedures because if Non- performing Assets go beyond control it may turn the whole bank into a Non- performing Bank. It is high time to take stringent measures to curb NPAs and see that the Non-Performing Assets may not turn banks into Non-Performing Banks; instead above steps should be taken to covert Non-Performing Assets into Now-Performing Assets.
