International Journal of Business and Management Tomorrow

Vol. 2 No. 3

A Study on the Performance of Non-Performing Assets (NPAs) of Indian Banking During Post Millennium Period
Siraj. K.K*, Research Scholar, School of Management Studies, CUSAT, Cochin Prof. (Dr). P. Sudarsanan Pillai, Research Guide, School of Management Studies, CUSAT, Cochin

Abstract
NPA is a virus affecting banking sector. It affects liquidity and profitability, in addition posing threat on quality of asset and survival of banks. This 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 utilized bank-group wise performance statistics for post-millennium period up to the period ended 31st December 2011. The study utilized growth rate calculating using AAG rate, correlation and regression study to analyze the movement and significance of NPA indicators during the period. The effect global financial crisis on the NPA indicators as well is explained. 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, Total Advances, Total Deposits, AAG Rate.

1. Introduction
The economic progress of a nation and development of banking is invariably interrelated. The Banking sector is an indispensable financial service sector supporting development plans through channelizing funds for productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of government. The importance of banks stability in a developing economy is noteworthy as any distress affects the development plans (Rajaraman and Vasishtha, 2002) thereby the economic progress (Thiagarajan, et al, 2011). 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. ISSN: 2249-9962 March|2012 www.ijbmt.com Page | 1

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The stability of banking hence is a pre-requisite for economic development and resilience against financial crisis. Like any other business, success of banking is assessed based on profit and quality of asset it possesses. 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). NPA represent bad loans, the borrowers of which failed to satisfy their repayment obligations. Michael et al (2006) emphasized that NPA in loan portfolio affect operational efficiency which in turn affects profitability, liquidity and solvency position of banks. Batra, S (2003) noted that in addition to the influence on profitability, liquidity and competitive functioning, NPA also affect the psychology of bankers in respect of their disposition of funds towards credit delivery and credit expansion. NPA generate a vicious effect on banking survival and growth, and if not managed properly leads to banking failures. Many researches including Chijoriga, MM (2000) and Dash et al (2010) showed the relationship bank failures and higher NPA worldwide. In this study, we provide empirical evidence that explain how NPA performed in Indian banking, based on statistics during post-millennium period. We undertook the study on Indian banking, classified based on ownership into SBI & Associates, Nationalized Banks, Private Sector Banks and Foreign Banks. We propose a unique approach, investigating the effect of NPA based growth rate based on absolute figures and its movement; than focusing on NPA ratios which often lead to wrong conclusion. This study appraise whether the reduction in NPA ratios really explain efficiency of Indian banking in post-liberalization period. The study is significant for several reasons. First and foremost, it explains NPA, which contributed to transformational changes in banking since liberation, i.e., 1991. Banking regulators and financial pundits focused their attention to curb the menace of NPA, but it still remains disturbing banking progress worldwide. Even though NPA ratios indicate significant improvements in NPA management, it may not clearly indicate the clear picture on NPA trends. This study is useful since it provide an understanding on whether Indian banking could manage its NPA during post-millennium period. We extend our study to include NPA from bank-group wise that provide understanding on management of NPA by different bank groups.

2. Literature Review
Non Performing Assets engender negative impact on banking stability and growth. Issue 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. The accounting treatment also failed to project the problem of NPA, as interest on loan accounts were accounted on accrual basis. The accumulated and enormous level of NPA in post-liberalization period forced policy makers to reform banking sector. A Committee on Banking Sector Reforms known as Narasimham Committee was set up by RBI to study the problems faced by Indian banking sector and to suggest measures revitalize the sector. The committee identified NPA as a major threat and recommended prudential measures for income recognition, asset classification and provisioning requirements. These measures embarked on transformation of the Indian banking sector into a viable, competitive and vibrant sector. The committee recommended measures to improve operational flexibility and functional autonomy so as to enhance efficiency, productivity and profitability (Chaudhary and Singh, 2012). NPA may be classified into Gross NPA and Net NPA. Gross NPA is the total of substandard advances, doubtful assets and loss assets. Net NPA is calculated by deducting the total of; (1) balance in interest suspense account, (2) DICGC/ECGC claims received and held for pending adjustment, (3) part payment received and kept in suspense account, and (4) total provisions held from the Gross NPA. Literature focused on post-liberalization period mainly focused on trends in movement of NPA, its major reasons, impact and effectiveness of various NPA management measures. Most of these studies utilized NPA ratios to derive conclusions on NPA in postliberalization period.

2.1 Causes of NPA

Various reasons can be cited for an account becoming NPA. An asset leads to NPA when the borrower fails to repay the interest and/or principal on agreed terms. The reasons for NPA are classified differently; into systematic and situational causes (Istrate et al 2007) into overhand component and incremental component (Poongavanam, S. 2000; Kumar, BS. 2005), into internal and external factors (Misra and Dhal. 2011; ISSN: 2249-9962 March|2012 www.ijbmt.com Page | 2

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Muniappan. 2002), into random and non-random factors (Biswas and Deb, 2005) based on its effects (Islam, et al. 2005) and into bank-specific business and institutional environment factors (Boudriga et al, 2009). The reasons classified into internal factors and external factors are more common in literatures. With regard to the reasons for NPA, Reddy, PK (2002) opined that the problem of NPA is not mainly because of lack of strict prudential norms, but due to legal impediments, postponement of the problem by the banks to show higher returns and manipulation by the debtors using political influence. Dash et al (2010) briefed that macrofactors that includes real effective exchange rate and growth in real GDP affect the level of NPAs. With regard to the bank specific variables, the authors found that banks which charges relatively higher real interest rates and have a penchant for taking on risk tends to experience greater non-performing loans. Gopalakrishnan, TV (2005) classified the causes for NPA into political, economic, social and technological. The author opined that neglect of proper credit appraisal, lack of follow-up and supervision, recessional pressures in economy, change in government policies, infrastructural bottlenecks, and diversion of funds etc as the major cause for NPA. Aggarwal and Mittal (2012) pointed out that the major reasons for NPA includes improper selection of borrowers activities, weak credit appraisal system, industrial problems, inefficient management, slackness in credit management and monitoring, lack of proper follow-up, recessions and natural calamities and other uncertainties. Espinoza, R and Prasad, A (2010) emphasized that financial system shocks emanate from firm specific factors (idiosyncratic shocks) and from macroeconomic imbalances (systemic shocks). Fainstein, G (2011) classified reasons for NPA into macroeconomic, banking sector and also microeconomic level variables. Gopalakrishnan, TV (2005) has classified the factors leading to NPA into political, economic, social and technological reasons. The economic causes are further classified in internal and external causes. In a similar study on NPA, Collins, NJ and Wanjau, K (2011) explained a direct relationship between interest rate and NPA. The study noted that interest rate spread affect performing assets in banks as it increases the cost of loans charged on the borrowers, regulations on interest rates have far reaching effects on assets nonperformance, for such regulations determine the interest rate spread in banks and also help mitigate moral hazards incidental to NPAs. Some of the important reasons for NPA, mentioned in various literatures are summarized below: Willful defaults, siphoning of funds, fraud, disputes, management disputes, mismanagement, misappropriation of funds etc., Lack of proper pre-appraisal and follow up. Improper selection of borrowers/activities. Inadequate working capital leading to operational issues. Under financing/untimely financing. Delay in completing the project. Non-compliance of sanction terms and conditions. Poor debt management by the borrower, leading to financial crisis. Excess capacities created on non-economic costs. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. Business failures. Failures to identify problems in advance. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc., Time involved in the legal process and realization of securities.

2.2. Impact of NPA

Batra, S (2003) mentioned that the most important business implication of the NPAs is that it leads to the credit risk management assuming priority over other aspects of banks functioning. The banks whole machinery would thus be pre-occupied with recovery procedures rather than concentrating on expanding business. RBI, through various circulars, stipulated guidelines to manage NPA. This view was supported by Yadav, MS (2011) and stated that higher NPA engage banking staff on NPA recovery measures that includes filing suits to recover loan amount instead of devoting time for planning to mobilization of funds. Thus 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 may incline towards more risk-free investments to avoid and reduce riskiness, which is not conducive for the growth of economy. Sethi, J and Bhatia, N (2007), clarified on implications of NPA accounts that Banks cannot credit income to their profit and loss account to the debit of loan account unless recovery thereof takes place. Interest or other charges already debited but not recovered have to be provided for and provision on the amount of gross NPAs ISSN: 2249-9962 March|2012 www.ijbmt.com Page | 3

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also to be made. All the loan accounts of the borrower would be treated as NPA, if one account is NPA. Many authors emphasized the straddling impact of NPA and stressed its impact on loan growth. A higher NPA force banks to invest in risk-free investments, thus directly affect the flow of funds for productive purpose. (Tracey and Leon, 2011; Heid and Kruger, 2011 and OBrien, 1992) Bloem et al (2001) remarked that issues relating to NPA affect all sectors (in particular if parallel issues with defaulting trade credit is also considered). The most serious impact, however, is on the financial institutions, which tend to own large portfolios, indirectly; the customers of these financial intermediaries are also implicated; deposit holders, share holders and so forth. Add to this, NPA is not only affecting the banks and its intermediaries, it is having impact on the development of the nation as well. For a bank, NPA means unsettled loan, for which they have to incur financial losses. The cost for recovering NPA is as well considerable. There are banking failures on account of the mounting NPA since it is affecting the profitability and long run survival of the bank. Karunakar, M et al (2008) explained that NPA results in deleterious impact on the return on assets. It happens in the following ways; The interest income of banks will fall and it is to be accounted only on receipt basis. Banks profitability is affected adversely because of the provision of doubtful debts and consequent write off as bad debts. Return on Investment (ROI) is reduced. The capital adequacy ratio is disturbed as NPAS are entering into the calculation. The cost of capital will go up. The assets and liability mismatch will widen. The economic value additions (EVA) by banks gets upset because EVA is equal to the net operating profit minus cost of capital, and It limits recycling of the funds.

2.3. Management of NPA

Ranjan and Dhal (2003) opined that horizon of maturity of credit, better credit culture, favorable macroeconomic and business conditions lead to lowering of NPAs. In its annual report (2010) RBI noted that management of NPA by banks remains an area of concern, particularly, due to the likelihood of deterioration of the quality of restructured advances. 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. Ahmed, JU (2010) noted that since the reform regime there has been various initiatives to 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. The growing competition from internal and external constituents and sluggish growth in economy coupled with poor credit-deposit ratio, the large volume of NPAs in the balance sheet and lack of automation and professionalization in the operation have been affecting the banking situation in the country. Murinde, V and Yaseen, H (2004) on management of NPA made it clear that the traditional approaches to bank regulation are not conducive for management of NPA. These approaches emphasized the view that the existence of capital adequacy regulation plays a crucial role in the long-term financing and solvency position of banks, especially in helping the banks to avoid bankruptcies and their negative externalities on the financial system. In general, capital or net worth serves as a buffer against losses and hence failure. Rather than accommodating measures to combat the NPA issues, the traditional measures tried to protect the interests of deposits through maintaining adequate capital in liquid form. This has impacted the availability of funds for productive purpose, since banks were not able to lend it, rather forced to keep as reserves. Strengthening financial systems has been one of the central issues facing emerging markets and developing economies. This is because sound financial systems serve as an important channel for achieving economic growth through the mobilization of financial savings, putting them to productive use and transforming various risks. Borbora, RR (2007) emphasized that the essential components of sound NPA management are i) quick identification of NPAs, ii) their containment at a minimum level and iii) ensuring minimum impact of NPAs on the financials. Panta, R (2007) noted that 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.

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3.0 Research Methodology

3.1 Variables Used
The performance of non-performing assets in post-millennium period is assessed here. The variable used in the study includes; Gross Advances (XGD) Total Deposits, (XTD), Gross NPA (XGNPA), Net NPA (XNNPA), Additions to NPA (XANPA), Reductions to NPA (XRNPA) and Provisions towards NPA (XPNPA) /

3.2 Population of the Study

The Indian Scheduled Commercial Banks is composed of State Bank of India & Associates, Nationalized Banks, Private Sector Banks and Foreign Banks.

3.3 Time Period

The study is conducted using statistical data available- bank group wise from the year ended 31st March 2001 to 31st March 2011 is included.

3.3 Statistical Techniques Used

The trend in movement of the selected variables is addressed using AAG (Average Annual Growth Rate). The study used regression equation to explain the impact of Gross Advances (XGD) and Total Deposits (XTD) Additions to NPA (XANPA). We consider additions to NPA as significant indicator explaining the efficiency of NPA management. As explained, the incremental component of NPA is reflected in the additions to NPA.

4.0 Results
4.1. Movement of NPA Indicators during 2001-2011
4.1.1 Movement of Total Advances Among Different Bank Groups The post-millennium period witnessed significant improvement in the total advances. Private sector banks reported higher growth rate in total advances. Their total advances grew by an AAG rate of 26.67% during 2001-2011. The nationalized banks stood second, reporting an average annual growth rate of 23.21% during 2001-2011. The total advances of SBI & Associates grew by an AAG rate of 19.62%. Foreign banks reported the lowest growth in total advances and increased by an AAG rate of 16.86. It is mainly attributed to the negative growth of advances (-1.34% in 2010 and reduced growth 4.12% 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 21.49% during the period 2001-2011. Figure No. 1: Growth Rate of Total Advances (2001-2011)
Total Advances - Growth Rate
1 40

1 20

1 00

Growth Rate

80

60

40

20

0 2001 -20 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1

Year SBI & Associates Natioanlized Banks Private Sector Banks Foreign Banks

4.1.2 Movement of Gross NPA among Different Bank Groups A unique trend seen in the movement of Gross NPA is the notable progress made by all bank groups to curtail Gross NPA till 2007. It may be observed that Gross NPA reduced since 2000 due to the prudential measures adopted and recovery management measures initiated by bank groups. The effect of recessionary pressures and ISSN: 2249-9962 March|2012 www.ijbmt.com Page | 5

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global financial crisis put a dent on this recovery, which may be noted in the growth rate of Gross NPA since 2007. 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. During the period 2001-11, private sector banks reported highest AAG rate of Gross NPA, i.e., 27.61 and followed by foreign banks, i.e., 10.19 and SBI & Associates, i.e., 4.24 Figure No. 2: Gross NPA Growth Rate (2001-2011)
Gross NPA - Growth Rate
200

1 50

1 00

Growth Rate

50

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1

-50

-1 00

Year SBI & Associates Natioanlized Banks Private Sector Banks Foreign Banks

4.1.3 Movement of Net NPA among Different Bank Groups 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-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. The following table illustrates the average annual growth rate of Net NPA, divided into (1) pre-crisis period (2000-07) and (2) post-crisis period (2008-11) Table No. 1: Growth Rate of Net NPA Bank Group SBI & Nationalized Associates Banks 2000-07 -3.84 2008-11 23.70 Figure No. 3: Net NPA Growth Rate
250

Public Sector -6.53 24.17

Private Sector 3.88 30.07

Foreign Banks 10.15 7.21

All SCBs -4.32 20.20

-7.94 26.09

Net NPA - Growth Rate

200

150

Growth Rate

100

50

0 2001 -50 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-100

-150

Year SBI & Associates Natioanlized Banks Private Sector Banks Foreign Banks

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4.1.4 Movement of Additions to NPA among Different Bank Groups Addition to NPA is a significant indicator of efficiency of credit risk management. Additions to NPA cannot be avoided since it grew along with the growth in advances, but it should be brought down to minimum levels to improve the quality of asset portfolio of the bank. Private sector banks reported higher average annual growth rate of additions to NPA and stood at 28.85% during 2001-11. Foreign banks stand second in terms of growth of additions to NPA during the period, i.e., 28.10%. In line with trends in Gross NPA and Net NPA, the additions to NPA was reduced during the first half of last decade, but increased significantly mainly due to the pressures of global financial crisis. A table is given below indicating the growth of additions to NPA before and after the global financial crisis. Table No. 2: Additions to NPA Bank SBI & Group Associates 2000-07 2.19 2008-11 38.70

Nationalized Banks 6.06 29.06

Public Sector 4.55 31.46

Private Sector 6.09 62.98

Foreign Banks 33.63 19.81

All SCBs 6.80 29.02

Figure No. 4: Additions to NPA Growth Rate

Additions to NPA - Growth Rate
400 350 300 250 200 1 50 1 00 50 0 2001 -50 -1 00 -1 50 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1

Growth Rate

Year SBI & Associates Natioanlized Banks Private Sector Banks Foreign Banks

4.1.5 Movement of Reductions to NPA among Different Bank Groups Reductions to NPA show the effectiveness of recovery measures of bank. It relates to the overhang component of NPA and a higher reduction enable bank to recover NPA accounts. It may be noted that a mixed trend exists in Indian banking sector on recovery of NPA. Private sector banks reported a higher average annual growth rate of reductions to NPA, ie, 32.76%, while foreign bank stood second reporting an AAG rate of 25.68% during the period. Overall, the AAG rate of reductions to NPA was 12.97% for all scheduled commercial banks in India. Table No. 3: Reductions to NPA Bank SBI & Nationalized Group Associates Banks 2000-07 6.44 11.70 2008-11 19.38 13.97 Figure No. 5: Reductions to NPA Growth Rate
350

Public Sector 8.98 14.88

Private Sector 16.10 57.75

Foreign Banks 26.55 24.37

All SCBs 10.14 17.21

Reductions to NPA - Growth Rate

300

250

200

Growth Rate

1 50

1 00

50

0 2001 -50 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1

-1 00

Year SBI & Associates Natioanlized Banks Private Sector Banks Foreign Banks

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4.1.6 Movement of Provisions towards NPA among different bank groups Provisions towards NPA reduce the profitability of banks. Higher provisions towards NPA indicate poor quality of asset portfolio. Central Bank requires banks to provision towards NPA based on quality of assets. Private sector banks provided higher provisions towards NPA, as may be observed from the AAG rate of 52.85%, while foreign banks reported AAG rate of 39.70% and SBI & Associates reported an AAG rate of 30.38% during the period. In line with other NPA indicators, provisions towards NPA also showed higher trends from 2007 onwards. Table No. 4: Provision towards NPA Bank SBI & Nationalized Group Associates Banks 2000-07 11.44 10.22 2008-11 58.79 38.69 Figure No. 6: Provisions towards NPA Growth Rate
350

Public Sector 11.91 44.95

Private Sector 35.94 78.20

Foreign Banks 20.15 69.03

All SCBs 11.42 43.39

Provisions to NPA - Grow th Rate

300

250

200

Growth Rate

1 50

1 00

50

0 2001 -50 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1

-1 00

Year SBI & Associates Natioanlized Banks Private Sector Banks Foreign Banks

4.2 Summary Table

The table below indicates the movement of selected NPA indicators during the period of ten years. The selected indicators were taken from financial results for the year ended 31 st March 2000 to the financial year ended on 31st March 2011 is used for the study. The average growth of selected indicators during the period is calculated. Table No. 5: Average Annual Growth Rate of selected NPA indicators (2001-2011) SBI & Nationalized Public Private Associates Banks Sector Sector Total Advances 19.62 23.21 21.07 26.67 Total Deposits 16.04 18.12 17.42 16.17 Gross NPA 4.24 3.19 3.44 27.61 Net NPA 6.18 4.43 4.63 13.40 Additions to NPA 16.79 15.26 15.31 28.85 Reductions to NPA 11.62 12.61 11.34 32.76 Provisions towards NPA 30.38 21.61 25.13 52.85

Foreign Banks 16.86 22.98 10.15 9.08 28.10 25.68 39.70

All SCBs 21.49 17.69 4.79 4.59 15.69 12.97 24.21

It may be observed from the analysis that: The total advances grew for all bank groups, with the maximum growth rate reported for Private sector Banks (26.67%) and Nationalized Banks (23.21%). Overall, the total advances grew by 21.49% for all scheduled commercial banks in India. The total deposits grew similarly but at a less pace compared to growth of total advances, except for foreign banks. In the case of foreign banks, total advances showed an AAG rate of 16.86% while the total deposits showed an AAG rate of 22.98%. The gap exists indicate the reduced trend in credit deployment. NPA composed of overhang component and incremental component. The incremental component is shown in the additions to NPA. Thus a higher growth of additions to NPA indicates less efficiency of credit risk management. It may be observed from the table that private sector banks and foreign banks reported a higher growth of additions to NPA, even more than the growth of total advances. Private sector banks showed higher AAG rate of additions to NPA, ie, 28.85% followed by foreign banks, ie, 28.10%. Overall, ISSN: 2249-9962 March|2012 www.ijbmt.com Page | 8

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the total additions to NPA grew by 15.69% for all scheduled commercial banks in India. Additions to NPA should be managed in order to maintain asset quality and improved profitability. Gross NPA shows the quality of asset portfolio of bank. A higher Gross NPA indicates lower asset quality. Gross NPA is composed of substandard assets, doubtful asset and loss assets. It may be observed that private sector banks showed higher increase in Gross NPA, i.e., 27.61% during 2000-10. Foreign banks reported second largest growth rate of Gross NPA ie, 10.15%. Private sector banks reported higher AAG rate of reductions to NPA, ie, 32.76%, followed by foreign banks, ie, 25.69%. The overall reductions to NPA by all scheduled commercial banks showed an AAG rate of 12.97%. Provision towards NPA is another major indicator that highlights impact of NPA on profitability of banks. Private sector banks reported increase in provisions towards NPA as may be observed from the AAG rate of 52.85%. Foreign banks Associates stood second in terms of growth on provisions towards NPA, i.e., 439.70%, followed by SBI & Associates, i.e., 30.38%. A higher growth rate of additions to NPA than its reduction indicates increased NPA every year. For all bank groups except private sector banks, additions stood at a higher rate than reductions to NPA. The additions to NPA of SBI & Associates showed AAG rate of 16.79, while reductions to NPA showed an AAG rate of 11.62%. Private sector banks showed higher growth rate of Net NPA. It grew by an AAG rate of 13.40% during 2000-10. Foreign banks stood second and showed an AAG rate of 9.08%, followed by SBI & Associates, i.e., 6.18%.

It may be observed from the analysis that Non Performing Assets showed increased trend during 2000-10, but at a less pace than increase in total advances. It may be inferred from the above analysis that even though there were many measures taken by regulatory authorities and banks to curb the alarming level of NPA in banking sector, it still pose severe threat to the quality of asset portfolio, thereby liquidity and profitability of scheduled commercial banks in India.

4.3. Regression Study

4.3.1 SBI & Associates A multiple regression equation taking additions to NPA as dependent variable and Total Deposits and total advances as independent variable is formed to examine the total effect of these variables on additions to NPA. The equation fitted is: XANPA = -4139.325 + (-0.73)*XGD + (0.46)*XTD Table No. 6: Explained Relationship between the Variables R .965 R Square 0.932 Adjusted R Square 0.915 Std. Error of the Estimate 1625.081 The R2 value indicates that 93.2% of the variability in additions to NPA can be explained by the independent variable, ie XGD and XTD. Table No. 7: Significance of Regression Equation Sum of Squares

df

2.89E+08 2 54.702 .000(a) Regression 21127102 8 Residual 3.1E+08 10 Total The F test (F =54.702, Sig.=0.000) shows that the regression equation is reliable to explained the relationship between the dependent and independent variable. Table No. 8: Significance of Regression Equation Beta (Constant) -2.183 Total Advances

Mean Square 1.44E+08 2640888

Sig.

t -3.079 -2.919

Sig 0.015 0.019

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4.3.2. Nationalized Banks

A multiple regression equation taking additions to NPA as dependent variable and Total Deposits and total advances as independent variable is formed to examine the total effect of these variables on additions to NPA. The equation fitted is: XANPA = -6638.587 + (-0.43)*XGD + (0.53)*XTD Table No. 9: Explained Relationship between the Variables R 0.987 R Square 0.974 Adjusted R Square 0.963 Std. Error of the Estimate 1571.329 2 The R value indicates that 97.4% of the variability in additions to NPA can be explained by the independent variable, i.e. XGD and XTD. Table No. 10: Significance of Regression Equation Sum of Squares Df

Mean Square

Sig.

7.5E+008 2 373072243 151.098 .000 Regression 19752596 8 2469074.542 Residual 7.7E+008 10 Total The F test (F =151.098, Sig.=0.000) shows that the regression equation is reliable to explained the relationship between the dependent and independent variable. Table No. 11: Significance of Regression Equation Beta (Constant) -3.584 Total Advances

t -2.386 -4.391

Sig .044 .002

4.531 5.550 .001 Total Deposits The t-test shows that the impact of independent variables is statistically significant. 4.3.3. Foreign Banks A multiple regression equation taking additions to NPA as dependent variable and Total Deposits and total advances as independent variable is formed to examine the total effect of these variables on additions to NPA. The equation fitted is: XANPA = -2149.626 + (-0.08)*XGD + (0.46)*XTD Table No. 12: Explained Relationship between the Variables R 0.857 R Square 0.734 Adjusted R Square 0.668 Std. Error of the Estimate 1731.188 The R2 value indicates that 73.4% of the variability in additions to NPA can be explained by the independent variable, i.e. XGD and XTD. Table No. 13: Significance of Regression Equation Sum of Squares Df

Mean Square

Sig.

66200469.752 2 33100234.876 11.044 .005 Regression 23976090.975 8 2997011.372 Residual 90176560.727 10 Total The F test (F =11.044, Sig.=0.005) shows that the regression equation is reliable to explained the relationship between the dependent and independent variable.

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International Journal of Business and Management Tomorrow Table No. 14: Significance of Regression Equation Beta -.502 Total Advances t -2.033 Sig .077

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1.112 4.498 .002 Total Deposits The t-test shows that the impact of total advances is statistically non-significant, while the impact of total deposits is statistically significant. 4.3.4. Private Sector Banks A multiple regression equation taking additions to NPA as dependent variable and Total Deposits and total advances as independent variable is formed to examine the total effect of these variables on additions to NPA. The equation fitted is: XANPA = 1908.945 + (0.007)*XGD + (0.05)*XTD Table No. 15: Explained Relationship between the Variables R 0.760 R Square 0.577 Adjusted R Square 0.472 Std. Error of the Estimate 2478.038 2 The R value indicates that 57.7% of the variability in additions to NPA can be explained by the independent variable, i.e. XGD and XTD. Table No. 16: Significance of Regression Equation Sum of Squares df Mean Square F Sig. 67069715.253 2 33534857.626 5.461 .032 Regression 49125390.383 8 6140673.798 Residual 116195105.636 10 Total The F test (F =5.461, Sig.=0.032) shows that the regression equation is reliable to explained the relationship between the dependent and independent variable. Table No. 17: Significance of Regression Equation Beta .368 Total Advances

t 1.156

Sig .281

.457 1.433 .190 Total Deposits The t-test shows that the impact of independent variables is statistically non-significant. This result is differing from the observed result of other bank groups.

5. 0. Conclusion
From the analysis, it is evident that NPA still remains a major concern for banks in India. Even though the NPA indicators showed recovery of NPA during the first half of last decade, it remained challenging in the second half of the period. 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. The increased level of additions to NPA remained as an area of concern as it indicates the real efficiency of credit risk management.
Siraj.K.K* Research Scholar, School of Management Studies, Cochin University of Science and Technology, Kalamassery, Cochin. Prof. (Dr). P. Sudarsanan Pillai, Research Guide, School of Management Studies, Cochin University of Science and Technology, Kalamassery, Cochin

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