Volume 4 - CiteSeerX

IRJMSH Volume 4 Issue 3 Online ISSN 2277 – 9809

International Research Journal of Management Sociology & Humanities http:www.irjmsh.com Page 628

A Comparative Study on Non-Performing Assets of Selected Public

and Private Sector Banks

Vikas Sharma, Asst. Professor, Dyal Singh College,

Delhi University,[email protected]

ABSTRACT

The NPAs have always been a big worry for the banks in India. It is just not a problem

for the banks; they are bad for the economy too. The money locked up in NPAs is not

available for productive use and adverse effect on banks' profitability is there. The Public

Sector Banks have shown very good performance over the private sector banks as far as

the financial operations are concerned. However the position of Public Sector Banks is

not so good in the area of Non-Performing Assets (NPAs) as compared to Private Sector

Banks. This paper examines the causes of NPAs and a comparative study is done

between Public Sector Banks and Private Sector Banks using mean, standard error,

covariance and t-test. The result showed the significant difference between NPAs of

Public and Private Sector Banks under study.

Keywords: NPA, Gross NPAs, PSBs, Private Banks, Gross Advances

Introduction

Banking Industry is one of the rapidly growing industries in India and it is expanding

very fast, needing larger workforce and better technological and infrastructure facilities.

The ownership is well diversified, which can be seen from the co-existence of private and

public sector in the country, on one hand and a large number of foreign banks, on the

other. Though there is a marked improvement on technological and infrastructure

grounds, the quality of asset is deteriorating day by day.



The accumulation of huge non-performing assets in banks has assumed great importance.

The depth of the problem of bad debts was first realized only in early 1990s. The non

performing assets impact drastically to the working of the banks. The efficiency of a bank

is not always reflected only by the size of its balance sheet but by the level of return on

its assets. NPAs do not generate interest income for the banks, but at the same time banks

are required to make provisions for such NPAs from their current profits.

The Public Sector Banks have shown very good performance over the private sector

banks as far as the financial operations are concerned. However, the main problem of the

Public Sector Banks these days are the increasing level of the non performing assets. The

non performing assets of the Public Sector Banks have been increasing regularly year by

year. If we look at the non performing assets of public sector banks, we may come to

know that in the year 1995 the NPAs were Rs. 38385 crore and reached to Rs.

44042crore in 2009 and comparatively in the year 2001 the NPAs were Rs. 6410 crore

and reached to Rs. 16887crore in 2009 in Private sector banks.

Significance of the study: Why is the present focus on NPAs?

To improve the asset quality and increase transparency in reporting to investors, The RBI

introduced new guidelines on restructured advances and non-performing assets (NPA).

As per the new norms, standard account on restructuring will be immediately classified as

NPA on restructuring from April, 2015, with certain exceptions. The RBI has said that

provisioning on old restructured accounts has to go up to 3.5% as on March 31, 2014,

4.25% as on March 31, 2015, and further to 5% as on March 31, 2016, from the current

2.75%.

Review of Research Literature:

Many scholars have conducted research in NPAs in banking industry and have found that

in the dynamic environment faced by a service organization like banks, it is very difficult

to control the defaulters.

Some of the important studies are as follows:



Prashanth K Reddy (2002) in his thesis titled, “A comparative study of Non Performing

Assets in India in the Global context - similarities and dissimilarities, remedial measures”

highlighted that financial sector reform in India has progressed rapidly on aspects like

interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential

norms and risk-based supervision. But progress on the structural-institutional aspects has

been much slower and is a cause for concern. The sheltering of weak institutions while

liberalizing operational rules of the game is making implementation of operational

changes difficult and ineffective. Changes required to tackle the NPA problem would

have to span the entire gamut of judiciary, polity and the bureaucracy to be truly

effective.

Bidani (2002) in his book titled, "Managing Non-Performing Assets in Banks,"

highlighted that banks are concerned with their heavy NPA portfolio which was

impairing their profitability and are taking all possible steps to contain the same. Banks

have achieved a reasonable degree of success to bring down their existing NPAs but due

to heavy slippage of standard accounts to NPA category the overall position continued to

deteriorate. The main reasons responsible for such a situation include - slow economic

and industrial growth, slump in capital market, financial indiscipline, Wilful defaults by

the borrowers, overburdened and slow judiciary, competition faced by local industries

from the multi-nationals, lack of support to the borrowers from the banks at the time of

the need, etc.

Kumar (2005) in his article, “Non-Performing Assets in Indian Banks” studied that the

Indian banking sector faced a serious problem of NPAs. The extent of NPAs has

comparatively higher in public sectors banks. To improve the efficiency and profitability,

the NPAs have to be scheduled. Various steps have been taken by government to reduce

the NPAs. It is highly impossible to have zero percentage NPAs. But at least Indian

banks can try competing with foreign banks to maintain international standard.

Sanjeev (2007) attempted to identify the critical factors, which are responsible for the

loans to go bad in the Indian commercial banking system. The study revealed that the

external factors have a higher influence compared to the internal factors.



Dr. Anindita Chakraborty (2012) in her research paper titled, ”Employees‟ Perception

towards NPAs: A Comparative Study of Public Sector and Private Sector Banks”,

revealed that that private bank employees as well as public bank employees both were

equivalent in their perception towards NPAs but have different reasons of incurring it.

Dr.T.R.Gurumoorthy and B.Sudha (2012) in their research paper titled, “Non-Performing

Assets (A Study With Reference To Public Sector Banks)” concluded that complete

elimination of NPA in PSBs is not possible because government business and

development schemes are mostly routed through the PSBs, but banks can always aim to

keep the losses at a low level. Non-Performing Assets may not turn banks into Non-

Performing Banks; instead steps should be taken to convert Non-Performing Assets into

Now-Performing Assets.

DR. Viplaw Kishore Pandey and Mrs. Harmeet Kaur (2012) in their research paper

titled, “NPA In Banking Sector: Some Correlational Evidence” highlighted that Causes of

nonperforming assets can be mis-utilization of funds, improper follow up by banks, under

or over financing and non availability of adequate security against funds.

Objectives

Some of the public sector lenders which announced their earnings for March 2013,

showed mixed bag on the asset quality front. However almost all the private sector

lenders reported better quality in assets as compared to PSBs.

The study would be aimed to provide an answer as to whether Private sector banks are

better placed as compared with PSBs in terms of NPAs. The objectives of present study

are:

1) To analyze the trend in NPA ratio of selected Public and private sector banks

2) To analyze the comparative position of NPAs in selected Public and private sector

banks



Hypothesis

Null hypothesis (H0): “there is no significant difference between NPAs of Public

and Private Banks”

Alternate Hypothesis (H1): “there is significant difference between NPAs of Public

and Private Banks”

Research Methodology

For the study, secondary data has been collected using annual report of Reserve

Bank of India, publications including “Trend & Progress of banking in India‟ ,

statistical tables related to banks in India and report on currency and finance.

Articles and papers relating to NPA published in different business journals,

magazines, newspaper, periodicals were studied and data available on internet and

other sources has also been used.

Sample Design

The banks selected for the study are leading banks in their respective sector and

includes:

State bank of India (SBI) & Punjab National Bank (PNB) from Public Sector

HDFC Bank & ICICI Banks from Private Sector

The study covers the period from 2003-04 to 2012-2013.

Data Analysis

This study analyzed the significant difference in NPA of SBI and PNB with ICICI

and HDFC banks. A quantitative evaluation has been done for this study on the basis

of collected substantive and relevant data.

Research Tools


International Research Journal of Management Sociology & Humanities http:www.irjmsh.com 33

Collected data has been analyzed by graphical representation and statistical tools like

frequency distribution, measure of central tendency, standard deviation, coefficient

of variation and „t-test‟ .

What is an NPA?

NPA is short form of “Non Performing Asset”

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank.

Categories of Assets:

1. Standard Assets: Standard assets generate continuous income and repayments as

and when they fall due. So a standard asset is a performing asset. Such assets carry a

normal risk and are not NPAs in the real sense. Hence, no special provisions are

required for Standard Assets.

2. Sub-Standard Assets: A sub-standard asset was one, which was considered as non-

performing for a period of 12 months.

3. Doubtful Assets: All those assets which are considered as non-performing for period

of more than 12 months are called as Doubtful assets.

4. Loss Assets: A loss asset 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. In other words, such an asset is considered uncollectible and of

such little value that its continuance as a bankable asset is not warranted although

there may be some salvage or recovery value.

The asset under the last three categories is treated as Non-Performing Asset.

A „non-performing asset‟ (NPA) was defined as a credit facility in respect of which the

interest and/ or installment of principal has remained „past due‟ for a specified period of

time. With a view to moving towards international best practices and to ensure greater

transparency, it was decided to adopt the „90 days‟ overdue‟ norm for identification of

NPAs, from the year ending March 31, 2004.



Accordingly, a non-performing asset (NPA) is 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,

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.

TYPES OF NPA:

1. Gross NPA: Gross NPAs are the sum total of all loan 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 nonstandard assets like as sub-

standard, doubtful, and loss assets

2. Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the

provision regarding NPAs. Net NPA shows 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 central bank guidelines, are quite significant.

That is why the difference between gross and net NPA is quite high. While gross NPA

reflects the quality of the loans made by banks, net NPA shows the actual burden of

banks.

Findings and Discussions

From the research literature, discussions with present employees and my own experience

it can be opined that inefficient credit appraisal and inappropriate credit management are



the prime reasons for existence of NPAs in banking sector, apart from that some other

major causes of NPA are :-

1. Investing in risky assets to earn high income.

2. Unsecured Advances (without security, guarantee or references etc.)

3. Diversion of funds by management

4. Unplanned expansion and diversification of business.

5. Willful default by the borrowers.

6. Fraudulent practices by bank‟s staff like advancing loans to ineligible persons who

are friends or relatives,

7. Borrowers Internal factors like inefficient management, inappropriate technology,

labour problems, marketing failure

8. External factors like recession, natural calamities, infrastructural difficulties, delay in

release of sanctioned limits by banks, inflation, delay in settlement of payments by

clients, debtors, government etc.

Let us have a look at last 10 years Gross NPA ratio of selected banks:-

Table A- Ratio of NPAs (Non performing asset to total asset ratio) of selected banks

Years SBI PNB ICICI HDFC

2003-04 7.75 9.35 4.70 1.86

2004-05 5.96 5.96 4.27 1.69

2005-06 3.61 4.10 1.51 1.44

2006-07 2.96 3.50 2.08 1.90

2007-08 3.00 2.70 3.30 1.40

2008-09 2.98 1.77 4.30 1.98

2009-10 3.28 1.71 6.52 1.44

2010-11 3.50 1.79 5.80 1.06

2011-12 4.90 3.15 4.83 0.95

2012-13 4.99 4.27 3.97 0.97



From the above table it is clear that ratio of NPAs of SBI, PNB and HDFC banks have

reduced by approximately 50% in the time period of ten years i.e. from 2003-04 to 2012-

13 while the performance of ICICI is worst as it has more or less the same ratio of NPAs

during the same period. In PSBs performance of PNB in controlling NPAs was better

than SBI till 2010-11 but in the next 2 years the performance of PNB and SBI is not

much different as NPA ratio has increased for both the banks more so for the PNB.

In private sector banks HDFC is clearly ahead of ICICI not only in absolute terms but

also in the controlling and keeping NPA ratio low year by year. Table 1.1 both types of

banks showed a declining trend in gross and net NPAs over the period of the study but

public sector banks have higher ratio as compared to private sector banks.

0

1

2

3

4

5

6

7

8

9

10

% g

ross

NP

A

Financial Years

Bankwise Gross NPA ratio

SBI

PNB

ICICI

HDFC



Let‟s have a close look with the following statistical analysis:-

Table B. Statistical Analysis of NPA Ratio

Banks Mean S.D. Coeff.Var.

SBI 4.29 1.59 0.37

PNB 3.83 2.36 0.62

ICICI 4.13 1.53 0.37

HDFC 1.47 0.39 0.26

From the above table HDFC bank appears to be the best bank in terms of NPA

management with lowest mean of 1.47%, standard deviation of 0.39 and coefficient of

variation of 0.26, which implies that not only the NPA ratio is minimal but also the bank

is consistent in keeping it low year by year.

SBI and ICICI are more or less at the same level in NPA management if we consider the

above statistics but SBI has been successful in reducing NPA ratio by almost 50% in last

10 years. While PNB appears to be the worst performer if we look at the Coefficient of

variation of 0.62 % but like SBI, PNB too has managed to bring NPA ratio down by 50 %

(appx.).Thus ICICI appears to be at the bottom due to keeping more or less same level of

NPA ratio in the 10 years of the study.

Now let us compare the consolidated performance of selected public sector bank

vis-à-vis private sector banks.

Table C- Public vs Private Sector Banks

Banks

Mean S.D. S.Error Coeff.Var.

SBI & PNB 4.06 1.93 0.61 0.49

ICICI & HDFC 2.80 0.74 0.23 0.62



From the above table we can say that private sector banks are better in keeping the NPA

level low with a mean of 2.80% while PSBs are having high average NPA ratio of 4.06

%.

But when we talk about controlling NPAs and consistency in reducing NPA ratio PSBs

are better placed with coefficient of variation of 0.49 % while private banks under study

have the same at 0.62%.

For testing our hypothesis we used student t test and the value of p arrived at was 0.0694

which is higher than 0.05 thus we have no sufficient evidence to reject null hypothesis.

That implies there is no significant difference between the NPA ratio of Public and

private sector banks.

Table D - Descriptive Statistics

Descriptive Statistics

Mean Standard Deviation n

Group A 4.061 1.9317 10

Group B 2.7985 0.7378 10

Independent Samples t-Test

t-Statistic 1.9307 Result

Degrees of Freedom 18 Do not reject the null hypothesis.

Critical Value 2.1009 Conclusion

95% Confidence [-0.1113, 2.6363] Group A is not significantly different from



Interval Group B, t(18) = 1.9307, p > .05.

Over the period of the study public sector banks have higher NPA ratio as compared to

private sector banks reason behind this is that private sector banks have a secured loan

policy as compared to public sector banks. Public sector and nationalized banks are

subjected to provide more loans to priority sector, which results in higher non-

performing assets. These banks are more exposed to political interference; they are not

allowed to act in a professional manner, which results in high level of non- performing

assets. PSBs have high gross NPA ratio because government business and development

schemes are mostly routed through the PSBs.

Reason behind the good performance of HDFC bank is that majority of its loans are

secured housing loans and housing loans have low probability of default as compared to

corporate and other loans as people put a price on their homes and moreover housing

prices are rising thus nobody wants to lose this inflating asset.

Conclusion

NPA means blocking of money in terms of bad asset, which occurred due to wrong

choice of client. NPA does not affect 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), which adversely affect current earning

of bank. Money is getting blocked, decreased profit lead to lack of enough cash at hand

which lead to borrowing money for shortest period of time which lead to additional cost

to the company. Time and efforts of management in handling and managing NPA would

have diverted to some fruitful activities, which would have given good returns. Now a



day‟s banks have special employees to deal and handle NPAs, which is additional cost to

the bank.

To improve the efficiency and profitability, the NPAs have to be scheduled. Various

steps have been taken by government and BOD of all banks to reduce the NPAs. This has

led to decline in the level of NPAs of the Indian banking sector. But a lot more needs to

be done. The NPAs level of our banks is still high as compared to the international

standards.

Though the performance of Private sector bank is considered better then PSBs but we did

not find enough evidence to suggest that the performance of Private sector bank is good

vis-a-vis Public Sector Banks in controlling NPAs.

Following suggestions may contribute towards reduction in the mounting non-performing

assets in banks;

• Improving the recovery practices and procedures -Sound functioning of banks

depends on timely recovery of credit, hence, banks should develop suitable recovery

programs for assessing and classifying the over dues, monitoring stressed accounts

,keeping regular contact with borrowers ,fixing recovery targets for staff

• Upgrading Technology regarding information on stressed accounts- Computer

based banking system has helped the bank management to solve some of the inherent

problems. Computerization can further help the management in getting required

information on stressed accounts with some triggers for indication on bad assets.

•Strong and effective legal system - Government of India/RBI had initiated many legal

measures to bring down NPA in banks like Debt Recovery Tribunals and the SARFASEI

Act. However, there are some flaws in them which need improvement in order to bring

down NPA in banks.



• Improving the credit Management- Management of credit is essential for proper

functioning of banks. Preparation of credit planning, appraisal of credit proposals, timely

sanction and disbursements, post sanction follow-up and need based credit are the some

areas of credit management that needs improvement in order to reduce the NPAs.

• Banks should focus more on non- interest income- Indian banks are largely

dependent on the lending and investment as in comparison to developed countries. Indian

banks should look for sources (income) from fee based services and products.

• Maximum sharing of Credit Information- The institutionalization of information

sharing arrangement will prevent those who take advantage of lack of system of

information sharing amongst leading institutions to borrow large amount against same

assets. RBI periodically circulates details of wilful defaulters of banks and financial

institutions. RBI also publishes a list of borrowers against whom banks and financial

institutions have filed suits as on 31st March every year. Credit information Bureau of

India Limited (CIBIL) also is useful institution for information on credit history of the

borrowers. These reports should be taken into consideration while lending to customers.

• As far as old NPAs are concerned, a bank can remove it on its own or sell the assets to

Asset Management Companies (AMCs) to clean up its balance sheet.

References

1. Saxena, K.S. (1989), “Management of Non-performing Asset”, Journal of Banking

and Finance, Vol.13, No. 6.

2. Shajahan, K.M. (1998), “Non-performing Assets of Banks- Have they Really

Declined and on Whose Accounts”, Economic and political Weekly, Vol.33, pp.

671-674.

3. GOI (1999), Report on Non- performing Assets of Public Sector Banks, Ministry

of Finance, New Delhi.



4. Bhattacharya, H (2001), “Banking Strategy, Credit Appraisal & Lending

Decisions”, Oxford University Press, New Delhi.

5. Rajaraman, I & Vashistha, G (2002): “Non-Performing Loans of Indian Public

Sector Banks Some Panel Results”, Economic & Political Weekly, February.

6. Bhasin, N. (2008), “Banking Developments in India 1947 to 2007”, Century

Publications, New Delhi.

7. Mukherjee, A, Nath, P & Pal, MN (2002), “Performance Benchmarking and

Strategic Homogeneity of Indian Banks”, International Journal of Bank Marketing,

20(3), pp: 122-139.

8. Kaur, Harpreet and Pasricha, J. S (2004), “Management of NPAs in PSBs”, the

Indian Journal of Commerce, April-June, Vol. 57, No. 2, pp. 14-21

9. Muniappan, G.P (2002), “Indian Banking Paradigm Shift-A Regulatory point of

View” Address at the Bank Economist Conference, Kolkata, January 12, 2002.

10. Reddy, K. Prashanth (2002). “A comparative study of Non Performing Assets in

India in the Global context – Similarities, Dissimilarities and Remedial Measures”,

http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan0 13132.pdf,

May 27, 2010.

11. Sanjeev, M. Gunjan (2007), “Bankers Perceptions on Causes of Bad Loans in

Banks” Journal of Management Research, Vol. 7, No. 1, pp. 39.

12. Vallabh, Gourav (2007), “Non-Performing Assets of Indian Public, Private and

Foreign Sector Banks: An Empirical Assessment”, The ICFAI Journal of Bank

Management, Vol. 6, No. 3, pp. 7-28.

13. Dr. Anindita Chakraborty(2012) ”Employees‟ Perception towards NPAs: A

Comparative Study of Public Sector and Private Sector Banks”, Business Spectrum

Vol .I, No.-3, January -- June 2012

14. Rajaraman, Indira, and G. Vasistha, (2002), “Nonperforming Loans of Public

Sector Banks-Some Panel results”, Economic and Political weekly, February, 2002

15. Samir, Deepa Kamra,(2013),” A Comparative Analysis of Non- Performing Assets

(NPAs) of Selected Commercial Banks in India”, Opinion: International Journal of

Management, Vol. 3,No.1,pp.68-80.

Volume 4 - CiteSeerX

Documents

Transcript of Volume 4 - CiteSeerX