ANALYSIS OF NON-PERFORMING ASSETS OF

NATIONALIZED AND PRIVATE BANKS

Or
Effect of NPA on Financial Performance of Commercial Banks of
India
1.0

INTRODUCTION

For any nation, banking system plays a vital role in the development of its sound
economy. Banking is an important segment of the tertiary sector and acts as a back bone
of economic progress. Banks are supposed to be more directly and positively related to
the performance of the economy. Banks act as a development agency and are the source
of hope and aspirations of the masses. Commercial banks are the major player to
develop the economy. A major threat to banking sector is prevalence of Non-Performing
Assets (NPAs). NPAs reflect the performance of banks. A high level of NPAs suggests
high probability of a large number of credit defaults that affect the profitability and networth of banks and also erodes the value of the asset. The NPA growth involves the
necessity of provisions, which reduces the overall profits and shareholders value (Parul
Khanna, 2012). 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
(Kamini Rai, 2012).
A well-built banking sector is significant for a prosperous economy. The crash of the
banking sector may have an unfavorable blow on other sectors. A banker shall be very
cautious in lending, because banker is not lending money out of his own capital. A
major portion of the money lent comes from the deposits received from the public and
government share. At present NPA in the banking sector is debate topic because NPA is
increasing year by year particularly in nationalized banks The Gross Non-Performing
Assets (GNPAs) of Nationalized Banks as on June 2012 were Rs.73,038 crore which
amount to 2.94% of Gross Advances. In this direction present paper is undertaken to
study the reasons for advances becoming NPA in the Indian Commercial banks Sector
and to give suitable suggestion to overcome the mentioned problem.
Banking in India originated in the first decade of the 19th century. The oldest bank in
existence in India is the State Bank of India, which originated from the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
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one of the three presidency banks, the other two being the Bank of Bombay and
the Bank of Madras. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India in 1955.
The Reserve Bank of India, India's central banking authority, was established in April
1935, but was nationalized on January 1, 1949. In 1949, the Banking Regulation Act
was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control,
and inspect the banks in India". The Banking Regulation Act also provided that no new
bank or branch of an existing bank could be opened without a license from the RBI, and
no two banks could have common directors.
Indira Gandhi, then Prime Minister of India, expressed the intention of the Government
of India in the annual conference of the All India Congress Meeting in a paper
entitled "Stray thoughts on Bank Nationalization."
Thereafter, the Government of India issued an ordinance and nationalized the 14 largest
commercial banks in July, 1969. These banks contained 85 percent of bank deposits in
the country. In 1980, 6 more commercial banks were nationalized.
In the early 1990s, the Narasimha Rao government embarked on a policy
of liberalization, licensing a small number of private banks. This move, along with the
rapid growth in the economy of India, revitalized the banking sector in India, which has
seen rapid growth with strong contribution from all the three sectors of banks, namely,
nationalized banks, private banks and foreign banks.
There are various problems for efficiency running the banks operation. One of the
major problems is related to Non-Performing Asset (NPA), which will be examining in
this proposed research.
2.0 NON- PERFORMING ASSETS
Indian banking has made a significant progress after nationalization especially in three
aspects: Branch expansion, deposit mobilization & loan maximization. Among these,
monitoring of loans took a back seat in an era of mass banking & social banking. In the
changing scenario of the operation of nationalized banks NPA is the most vexing
problem faced by nationalized banks. The RBI and government of India have initiated
various measures to curb NPA in the post financial sector reforms.

NPA is a classification used by financial institutions that refer to loans that are in
jeopardy of default. Once the borrower has failed to make interest or principal payments
for 90 days the loan is considered to be a non-performing asset.
NPA are problematic for financial institutions since they reduce interest payments or
income. Troublesome pressure from the economy can lead to a sharp increase in nonperforming loans and often results in massive write-downs.
Government of India introduced various measures time to time, which met with varying
degree of success. These measures are DRT (Debts Recovery Tribunals), CDRM
(Corporate Debt Restructing Mechanism), SICA (Sick Industrial Companies Act), BIFR
(Board for Industrial & Financial Reconstruction), SARFAESI Act (Securitization &
Reconstruction of Financial assets & Enforcement of Security interest Act, Loan) etc.
To handle the NPAs, capital risk, market risk and operational risk a set of agreements
set by the Basel Committee on Bank Supervision (BCBS), which provides
recommendations on banking regulations. The purpose of the accords is to ensure that
financial institutions have enough capital on account to meet obligations and absorb
unexpected losses.
The Basel accords are a series of recommendations on banking laws and regulations
issued by the Basel Committee on Banking Supervision (BSBS). The Basel committee
on Banking Supervision provides a forum for regular cooperation on banking
supervisory matters. Its objective is to enhance understanding of key supervisory issues
and improve the quality of banking supervision worldwide. With a view to moving
towards international best practices and to ensure greater transparency, it has been
decided to adopt the 90 days overdue norm for identification of NPA, from the year
ending March 31, 2004. Accordingly, with effect from March 31, 2004, NPA shall be a
loan or an advance where;

Interest and/or installment of principal remain overdue for a period of more than
90 days in respect of a term loan,

The account remains out of order for a period of more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
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Interest and/or installment 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

Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

In the following paragraphs, three current NPA problems are discussed

Net NPA rises 51% for 39 listed banks in FY 2012-13 over previous year (Sangita
Mehta, ET Bureau May 24, 2013, 06.36PM IST)

Slowdown in the economy and higher cost of funds has resulted in listed commercial
banks showing a 51% rise in bad loans in the fiscal year 2012-13 over the previous
year. A study by npasources.com shows that bad loans after making provisions or net
NPA rose 51% to Rs 92825 crore for the fiscal year end March 2013 for 39 listed bank.
NPA clause of public sector banks likely to be changed
(Dheeraj Tiwari, ET Bureau Jun 28, 2013, 04.04AM IST)

The government will reconsider a clause that requires all state-run banks to treat a
borrower's account as non-performing if a loan to the company by any bank has become
a bad asset in the books of that bank. PSBs, which had a net NPA of 2.12% in
December 2012, have already in a representation to the finance ministry, sought to
delete this clause citing increase in the provisioning amount that has to be made towards
such accounts.
Rising NPA load to bring more pain for PSBs banks like Allahabad bank, Indian
Bank others (Biswajit Baruah, ET Bureau Jul 5, 2013, 04.00AM IST)
Shares of public sector banks (PSBs) such asAllahabad Bank, Indian Bank, Bank of
India among others have crashed up to 25% over the past one month on fears of
growing non-performing assets (NPAs) in sectors like chemicals, pharmaceuticals, steel
and textiles, as well as the spectre of a rising wage bill. The future also doesn't look
promising for these banks as they are expected to report disappointing results in the
coming earnings season.
3.0 LITERATURE REVIEW
Many published research papers are available in the area of Non Performing Assets.
Various studies undertaken by distinguished scholars have broadened the understanding
of related issues. Some of them are:4

Godse (1996) this article compares and contrasts the Indian and US banking systems to
assess the likely impact of the CAMEL procedure on Indian banks.
Panchamukhi (2001) this paper attempts to give an overview of various aspects of the
national experience of India in mobilizing domestic and external resources for
economic development. It attempts to present not only a statistical profile of the facts
about the mobilization and disbursement of resources, but also tries to provide
information about the institutional framework and the policy issues relating to the
problem of resource mobilization.
Huang et al. (2004) the paper analyze the way in which Taiwan handled the NPA
problem. Data analysis suggests that Taiwan was able to control and effectively reduce
the NPA percentage through a three pronged strategy involving fund infusion by the
government to absorb NPAs, sale of NPAs to Assets Management Companies (AMCs)
and also bringing about a strong discipline among financial institutions to recognize
NPAs and write off wherever necessary.
Terada et al. (2004) this paper examines the performance of Asian asset management
companies (AMCs). The analysis reveals that the AMCs vary in their design and
performance. The paper claims that AMCs can trigger moral hazard-induced bank
lending. Empirical examination of the Thai experience of AMCs reveals that moralhazard induced bank lending resulted in creating more new nonperforming loans (NPL)
in the case of public AMCs. On the other hand, the centralized Thai Asset Management
Company decreases the new NPL ratio, suggesting that this centralized AMC provokes
no adverse moral hazard effect on financial institutions.
Bodla and Verma (2006) the paper studies the performance of SBI and ICICI through
CAMEL Model for the period 2000-01 to 2004-05. It is found that SBI has an edge over
its counterpart ICICI in terms of Capital Adequacy. However, the vice versa is true
regarding assets quality, earning quality and management quality. The liquidity position
of both the banks is sound and does not differ significantly.
Chaudhari (2006) the paper explains the various aspects of the latest RBI guidelines
on income recognition, assets classification, provisioning and capital adequacy and how
they would help in improving transparency in the financial system. Paper also covers
why income recognition norms are necessary, why do banks have to provide for NPAs
and how does it effect capital adequacy.
Chaudhari (2006) the paper provides a state-resolution mapping framework where it is
shown that reasons behind assets turning NPA and its current state would determine the
asset resolution strategy.

Gopinath (2006) the paper also explains that all banks were advised to undertake a
self-assessment of the various risk management techniques they had adopted, with
specific reference to the three major risks covered under Basel II and initiate necessary
remedial measures
Reddy et al. (2006) the study reveals that the gross and net NPAs have gone down
gradually from 23.2% and 14.5% from 1993-94 to 7.8% and 3.0% in the year 2003-04,
showing the strong commitment of PSBs towards reduction and management of NPAs.
The quality of portfolio of the PSBs has improved quite impressively over the period. In
a nutshell, NPAs have been reducing in the PSBs as a whole due to the effectiveness of
various measures initiated by RBI and GoI.
Karunakar et al. (2008) In this paper an attempt is made that what is NPA? The factors
contributing to NPA, the magnitude of NPA, reasons for high NPA and their impact on
Indian banking operations. The lasting solution to the problem of NPAs can be achieved
only with proper credit assessment and risk management mechanism. It is better to
avoid NPAs at the market stage of credit consolidation by putting in place of rigorous
and appropriate credit appraisal mechanisms.
Rajeev and Mahesh (2010) the paper examines the trends of NPAs in India from
various dimensions and explains how mere recognition of the problem and selfmonitoring has been able to reduce it to a great extent.
Singh (2010) the paper has made an attempt to map the reforms in the Indian banking
system in its defining background. the paper has made an attempt to identify the impact
of reforms in terms of achievements and failures of the Indian banking system in the
post 1990 period.
Ghosh and Ghosh (2011) this study traces the movement of the nonperforming assets
present in public sector banks of India by analyzing the financial performance of the
banks with respect to key performance indicators and management of the nonperforming assets under the purview of new policy actions and regulatory compliance
of the Reserve Bank of India.
Kaur and Singh (2011): The extent of NPAs is comparatively higher in public sectors
banks. To improve the efficiency and profitability, the NPAs have to be scheduled. The
problem of losses and lower profitability of Non-Performing Assets (NPAs) and liability
mismatch in banks and financial sector depend on how various risks are managed in
their business. An attempt is made in the paper that what is NPAs? The factors
contributing to NPAs,
Malyadri and Sirisha (2011): this study strives to examine the state of affair of the
Non performing Assets (NPAs) of the public sector banks and private sector banks in
6

India with special reference to weaker sections. The scope of the study is limited to the
analysis of NPAs of the public sector banks and private sector banks NPAs pertaining to
only weaker sections for the period seven (7) years i.e. from 2004-2010.
Poongavanam (2011) the primary function of banks is to lend funds as loans to various
sectors such as agriculture, industry, personal loans, housing loans etc., in recent times
the banks have become very cautious in extending loans and this is due to mounting
non-performing assets (NPAs). Therefore, an NPA account not only reduces
profitability of banks by provisioning in the profit and loss account, but their carrying
cost is also increased which results in excess & avoidable management attention.
Considering all the above facts banking industry has to give more importance to NPA
and to structure proper remedial solutions.
Yadav (2011) the paper deals with the concept of non-performing assets, its magnitude
and impact. One fourth credit of total advances was in the form of doubtful asset in the
initial year of the nineties and has an adverse impact on profitability of public banks.
The profitability of all public sector banks affected at very large extent when nonperforming assets (NPAs) work with other banking strategic variables and also affect
productivity and efficiency.
Shyamal (2012) the level of NPA acts as an indicator viewing the bankers credit risks
and competence of allocation of resource. Non-performing Asset is an important factor
in the analysis of financial performance of a bank as it results in decreasing boundary
and higher provisioning requirement for doubtful debts. The Narasimha Committee has
suggested prudential norms on income recognition, asset classification and
provisioning.
Siraj and Sudarshan (2012) the study explored movement of various NPA indicators;
Gross NPA, Net NPA, Additions to NPA, Reductions to NPA and Provisions towards
NPA and compare it with Total Advances and Total Deposits of banks. 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.
Veerakumar (2012) the paper attempts to study the priority sector advances by the
public, private and foreign bank group-wise, target achieved by them and a comparative
study on priority and non-priority sector NPAs over the period of 10 years between
2001-02 and 2010-11. This paper also aims to find out the categories of priority sector
advances which contribute to the growth of total priority sector NPAs during the period
under study.
4.0 JUSTIFICATION AND LIKELY BENEFITS
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Since the policies to deal with NPAs are different in nationalized and private banks,
normally it has been observed that problem of NPAs is not so significant in some
private banks. However, some of the nationalized banks have huge NPA. After
examining private sector banks & nationalized banks, better policies to deal with NPAs
will be identified. Next it will be examined that how these points can implement in both
banks.
Keeping in view above literature review, it can be observed that so far no research work
has been presented on NPA for nationalized and private banks. So, one of the proposed
objectives is analysis of nationalized & private banks based on NPA & to formulate a
model which will be helpful to control the NPA.
Numerical technique like ratios, percentage methods, SPSS mathematical models are
being considered for the purpose of meaningful comparison and the analysis to derive
concrete conclusions. For this, respective calculated parameters of cost/ revenue are
selected. This has given a direction to derive interference about the degree of efficiency
attended by the banks.
5.0 OBJECTIVES OF THE STUDY
Following are the major objectives of this study
1. To understand the concept of Non-performing assets (NPA).
2.

To identify the Non-performing assets at selected public sector bank as well as

private sector banks.

3.

To study the general reasons for assets to become Non-performing assets in

selected public sector bank as well as private sector banks.

4. To compare the NPA trend of selected public sector bank as well as private sector
banks.
5. To identify the short comings related to NPAs and offer suggestions based on
findings of the study.
6.
6.0 RESEARCH METHODOLOGY
Data Collection:
Data will be gathered from the secondary sources to achieve the aforesaid
objectives.
Secondary data: RBI bulletins, research papers etc.
Tools of Data Analysis

The data collected from the secondary sources relating to NPAs will be
analyzed and tabulated and appropriate tables will be drawn. Interpretations
will be based on table made.
7.0 PLACE OF WORK AND FACILITIES AVAILABLE
To complete the proposed research I required few softwares like SPSS, DPL etc. The
research work will be undertaken at COER, Roorkee where the resources & facilities
required for doing the research are available.

8.0 CHAPTER SCHEME

An Introduction to the study

Performance of Public and Private sector bank in India
Management of Non Performing Assets in Public as well as Private sector banks
Review of Related Literature
Objectives of the Study and Research Methodology
Analysis and Discussion
Conclusions and Suggestions

Bibliography:

REFERENCES

Bodla, B. S., Verma, R. (2007). Evaluating Performance of Banks through CAMEL

Model: A case Study of SBI and ICICI, Management of NPAs (Country Experience),
Tamal Datta Chaudhari, Icfai University Press, Agartala, pp. 10-33.
Chaudhari,T. D. (2007). An Interpretation of Reserve bank of India Guidelines on
Prudential Norms, Management of NPAs (Country Experience), Tamal Datta
Chaudhari, Icfai University Press, Agartala, pp. 50-74.
Chaudhari, T. D. (2007). Resolution Strategies for Maximizing Value of nonPerforming Assets (NPAs), Management of NPAs (Country Experience, Tamal Datta
Chaudhari, Icfai University Press, Agartala, pp. 77-92.
Ghosh, D., Ghosh, S. (2011). Management of Non-Performing Assets in Public Sector
Banks: Evidence from India, International Conference on Management, pp. 750-760.
Godse, V.T. (1996). CAMEL for Evaluating Performance of Banks, Indian Banks
Association IBA Bulletin, Vol. 18, Issue 8, pp. 8-11.
Gopinath, S. (2007). Approach to Basel II, Management of NPAs (Country
Experience), Tamal Datta Chaudhari, Icfai University Press, Agartala, pp. 127-138.
Hagiwara, A.T., Pasadilla, G. (2007). Experience of Asian- Assets Management
Companies (AMCs): Do they Increase Moral Hazards? - Evidence from Thailand,
Management of NPAs (Country Experience), Tamal Datta Chaudhari, Icfai University
Press, Agartala, pp. 155-192.
Huang.W. J., Huang.W. C and Liu. C. Y. (2007). Dealing With the Non-Performing
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Tamal Datta Chaudhari, Icfai University Press, Agartala, pp. 193-217.
Karunakar M., Vasuki, K. and Saravanan, S. (2008). Are Non-Performing Assets
Gloomy or Greedy from Indian Perspective? Research Journal of Social Sciences, Vol.
3, pp. 4-12.
Kaur, K., Singh, B. (2011). Non-Performing Assets of Public and Private Sector Banks
(A Comparative Study), South Asian Journal of Marketing & Management Research,
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Malyadri, P., Sirisha, S. (2011). A Comparative Study of Non Performing Assets in

Indian Banking Industry, International Journal of Economic Practices and Theories,
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Panchamukhi, R. V. (2001). Lessons from the National Experience of India in
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WEBSITES
www.google.com
www.rbi.org.in
www.moneycontrol.com

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