An Analysis of Non Performing Assets of Indian Banks: February 2018
An Analysis of Non Performing Assets of Indian Banks: February 2018
An Analysis of Non Performing Assets of Indian Banks: February 2018
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OMBIR
ASST. PROFESSOR
UNIVERSITY COLLEGE
KURUKSHETRA UNIVERSITY
KURUKSHETRA
SANJEEV BANSAL
PROFESSOR
DEPARTMENT OF ECONOMICS
KURUKSHETRA UNIVERSITY
KURUKSHETRA
ABSTRACT
The paper analyses the recent trends in non-performing assets (NPAs) of different categories of Indian banks viz., public sector banks, private sector banks and
foreign banks. It is found that NPAs of Indian banking industry as a whole are continuously increasing during the period 2008-09 to 2013-14 followed by the global
financial crisis. Further, the impact of ownership pattern in deciding the level of NPAs is also investigated against the perception that public sector banks have
relatively larger level of NPAs. However, no strong empirical evidence is found in support of this perception. The relationship between profitability, ownership
pattern and level of NPAs is also examined. The empirical findings suggest that public sector banks are as good or as bad as their private counterparts, however,
foreign banks have relatively higher profitability then domestic public and private banks. It is also found that the higher level of NPAs negatively affect the profita-
bility of a bank.
KEYWORDS
NPAs, banks.
JEL CODES
G21, G28
1. INTRODUCTION
I t has been argued by a number of economists that a well-developed financial system enables smooth flow of savings and investments and hence, supports
economic growth (see King and Levine, 1993, Goldsmith, 1969). A healthy financial system can help in achieving efficient allocation of resources across time
and space by reducing inefficiencies arising out of market frictions and other socio-economic factors. Amongst the various desirable characteristics of a well-
functioning financial system, the maintenance of a few non-performing assets (NPA) is an important one. NPAs beyond a certain level are indeed cause for concern
for everyone involved because credit is essential for economic growth and NPAs affect the smooth flow of credit. Banks raise resources not just on fresh deposits,
but also by recycling the funds received from the borrowers. Thus, when a loan becomes non-performing, it affects recycling of credit and credit creation. 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 who are involved in
putting economic growth on the fast track. In India due to the social banking motto, the problem of bad loans did not receive priority from policy makers initially.
However, with the reform of the financial sector and the adoption of international banking practices the issue of NPAs received due focus. Thus, in India, the
concept of NPA came into the reckoning after reforms in the financial sector were introduced on the recommendations of the Report of the Committee on the
Financial System (Narasimham, 1991) and an appropriate accounting system was put in place.
Broadly speaking, NPA is defined as an advance where payment of interest or repayment of instalment of principal (in case of term loans) or both remains unpaid
for a certain period2. In India, the definition of NPAs has changed over time. According to the Narasimham Committee Report (1991), those assets (advances, bills
discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of four quarters (180 days) should be considered as NPAs. Subsequently,
this period was reduced, and from March 1995 onwards the assets for which the interest has remained unpaid for 90 days were considered as NPAs. Though the
NPA issue has received considerable attention in the post reform period, academic work on the subject is not adequate (Ghosh, 2005, Mor and Sharma, 2003,
Rajaraman et al, 1999). This paper attempts to provide an overview of the NPA problem in India concentrating on the various dimensions involved.
2. NPA NORMS
Though the issue of NPA was given more importance after the Narasimham Committee Report (1991) and highlighted its impact on the financial health of the
commercial banks and, subsequently, various asset classification norms were introduced, the concept of classifying bank assets based on its quality began during
1985-86. A critical analysis to monitor credit comprehensively and uniformly was introduced in 1985-86 by the RBI by way of the Health Code System in banks.
This system, inter alia, provided information regarding the health of individual advances, the quality of the credit portfolio and the extent of advances causing
concern in relation to total advances. It was considered that such information would be of immense use to banks for control purposes. The RBI advised all com-
mercial banks (excluding foreign banks, most of which had similar coding system) on November 7, 1985, to introduce the Health Code System indicating the quality
(or health) of individual advances under the following eight categories, with a health code assigned to each borrowal account (source: RBI):
1. Satisfactory - conduct is satisfactory; all terms and conditions are complied with; all accounts are in order and safety of the advance is not in doubt.
2. Irregular- the safety of the advance is not suspected, though there may be occasional irregularities, which may be considered as a short term phenomenon.
3. Sick, viable - advances to units that are sick but viable - under nursing and units for which nursing/revival programmes are taken up.
4. Sick: nonviable/sticky - the irregularities continue to persist and there are no immediate prospects of regularisation and the accounts could throw up some
of the usual signs of incipient sickness
5. Advances recalled - accounts where the repayment is highly doubtful and nursing is not considered worthwhile and where decision has been taken to recall
the advance.
6. Suit filed accounts - accounts where legal action or recovery proceedings have been initiated.
7. Decreed debts - where decrees (verdict) have been obtained.
8. Bad and Doubtful debts - where the recoverability of the bank's dues has become doubtful on account of short-fall in value of security, difficulty in enforcing
and realising the securities or inability/unwillingness of the borrowers to repay the bank's dues partly or wholly
TABLE 5: AVERAGE GROSS NPA AS THE PERCENTAGE OF GROSS ADVANCES; 2002-03 TO 2013-14
Banks N Mean Std. Deviation t-statistic
Public banks 12 4.0917 2.36353 0.215
Old private banks 11 3.8727 2.52511 (0.832)
Public banks 12 4.0917 2.36353 1.217
New private banks 12 3.0667 1.71217 (0.237)
Public banks 12 4.0917 2.36353 1.172
Foreign banks 12 3.2000 1.16697 (0.254)
Public banks 12 4.0917 2.36353 0.227
All banks 12 3.8833 2.11868 (0.822)
Note: the values in parenthesis indicate p-values
TABLE 6: AVERAGE GROSS NPA AS THE PERCENTAGE OF TOTAL ASSETS; 2002-03 TO 2013-14
Banks N Mean Std. Deviation t-statistic
Public banks 12 2.2167 0.95996 0.350
Old private banks 11 2.0636 1.13426 (0.730)
Public banks 12 2.2167 0.95996 1.730
New private banks 12 1.5917 0.80279 (0.098)
Public banks 12 2.2167 0.95996 2.671*
Foreign banks 12 1.3833 0.49696 (0.014)
Public banks 12 2.2167 0.95996 0.421
All banks 12 2.0583 0.88159 (0.678)
Note: the values in parenthesis indicate p-value.
*significant at 5 percent level
TABLE 7: AVERAGE NET NPA AS THE PERCENTAGE OF NET ADVANCES; 2002-03 TO 2013-14
Banks N Mean Std. Deviation t-statistic
Public banks 12 1.8667 1.07984 0.317
Old private banks 11 1.6909 1.55721 (0.754)
Public banks 12 1.8667 1.07984 2.355*
New private banks 12 1.0583 .49810 (0.028)
Public banks 12 1.8667 1.07984 2.254*
Foreign banks 12 1.1000 .47098 (0.040)
Public banks 12 1.8667 1.07984 0.408
All banks 12 1.7000 .91552 (0.687)
Note: the values in parenthesis indicate p-value.
*significant at 5 percent level
Where NPAit = gross (net) NPAs of ith bank category in year t as the percentage of its gross (net) advances. D2it = 1 if a particular observation belongs to old private
sector banks and 0 otherwise. D3it = 1 if a particular observation belongs to new private sector banks and 0 otherwise. Similarly, D 4it = 1 if a particular observation
belongs to foreign banks and 0 otherwise. α1 represents the mean level of NPAs of PSBs and α2 α3 and α4 are the deferential coefficients which show that by
which extent the mean NPAs levels of other categories of banks differ from the mean NPAs of public sector banks. The results of the above regression analysis are
given in table 9.
The results show that the intercept is statistically significant which refers the mean NPAs of the reference category which is public sector banks in our analysis.
The coefficients α2, α3 and α4 refer the differential coefficients, that is, by which extent the mean NPAs of the other categories of banks differ from mean NPAs
of the public sector banks. Though all the deferential coefficients are negative, but they are statistically insignificant. Therefore, the results of the regression
analysis show that the pattern of ownership does not matter in deciding the level of NPAs.
Where ROAit = is returns on assets for the ith bank group in year t. ROA is taken as a measure of profitability. D 2it = 1 if a particular observation belongs to (old
or new) sector private banks (Note: Due to the non-availability of data on ROA for Old and New private sector banks separately we consider them as a single
category.) D3it = 1 if a particular observation belongs to foreign banks and 0 otherwise. α1 refers the magnitude of the impact of public sector banks on profitability
whereas α2 and α3 are the differential coefficients and β refers the magnitude of the impact of NPAs on the profitability of a bank. The results of this regression
analysis are shown in table 10. The effect of public and private sector banks on profitability does not differ significantly. However foreign banks have significantly
higher profitability as compared to public and private sector banks. Further the level NPAs has negative impact on the profitability of a bank, since higher NPAs
require higher provisioning, which means a large part of the profits needs to be kept aside as provision against bad loans.
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