A PROJECT REPORT ON

“IMPACT OF NPA ON PROFITABILITY: EMPIRICAL STUDY OFPRIVATE

SECTOR BANKS IN INDIA

INTRODUCTION

It's a known fact that the banks and financial institutions in India face the problem
ofswelling non-

performing assets (NPA‟s) and the issue is becoming more and more

unmanageable. In order to bring the situation under control, some steps have
beentaken recently. The Securitization and Reconstruction of Financial Assets
andEnforcement of Security Interest Act, 2002 was passed by Parliament, which is
an

important step towards elimination or reduction of NPA‟s.

MEANING OF NPA’s:

An asset is classified as non-performing asset (NPA‟s) if dues in the form of

principal and interest are not paid by the borrower 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. If any advance or credit facilities granted by bank
to a borrower become non-performing, then the bank will have to treat all the
advances/credit facilities granted to that borrower as non-performing without
having any regard to the fact that there may still exist certain advances / credit
facility.
REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPA’S IN THE
INDIAN BANKING SYSTEM (IBS):

The origin of the problem of increasing NPA‟s lies in the quality of managing
credit risk by the banks concerned. What is needed is having adequate preventive
measures in place namely, fixing pre-sanctioning appraisal responsibility and
having an effective post-disbursement supervision. Banks concerned should
continuously monitor loans to identify accounts that have potential to become non-
performing.

To start with, performance in terms of profitability is a benchmark for any business

enterprise including the banking industry. However, increasing NPA‟s has a direct
impact on banks profitability as legally banks are not allowed to book income on
such accounts and at the same time banks are forced to make provision on such
assets as per the Reserve Bank of India (RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the
banking industry cannot afford defaults by borrowers since NPA‟s affects the
repayment

capacity of banks. Further, Reserve Bank of India (RBI) successfully creates

excess liquidity in the system through various rate cuts and banks fail to utilize this
benefit to its advantage due to the fear of burgeoning non-performing assets.

Some of the other reasons NPA’s were:

1. After the nationalization of banks sector wise allocation of credit

disbursements became compulsory.

2. Banks were compelled to give credit to even those sectors, which were not
considered to be very profitable, keeping in mind the federal policy.
 3. People in the agricultural sector were hardly interested in returning the
loans as they were confident that the loans with the interest would be written
off by the successive governments.

4. The small scale industries also availed credit even though they were not
sure of performing to the extent of returning the loans.

5. Free distribution done during “loan mails” (congress regime) also contribute
to the heavy increase in NPA‟s.
Ratio of NPAs to Gross Loans
STATE BANK OF BIKANER AND JAIPUR
PUNJAB AND SIND BANK
INDIAN OVERSEAS BANK
IDBI BANK LIMITED
CORPORATION BANK
CANARA BANK
BANK OF MAHARASHTRA
BANK OF BARODA
ALLAHABAD BANK

Gross NPAs - 31/03/2017 Gross NPAs - 31/03/2018

Source: data.gov.in