“A Study on Impact of NPA on Profitability and Liquidity In Public Sector Banks” Table of Contents Chapter - 1. INTRODUCTION TO TOPIC.............................2 What is an NPA?............................................ 2 Chapter – 2. LITERATURE REVIEW.................................5 Chapter – 3. INTRODUCTION OF BANKING INDUSTRY..................8 History of Banking In India................................8 Reserve Bank Of India (RBI)...............................11 Structure Of Indian Banking Industry......................12 Aggregate Performance of the Banking Industry:............18 Challenges facing by banking industry.....................20 Classification of Assets..................................23 Categories of NPAs........................................23 Reporting Format For NPA – Gross And Net Npa..............25 Types Of Npa:............................................. 26 Impact Of Npa:............................................ 26 Procedures for NPA Identification in India................27 Chapter – 4. RESEARCH METHODOLOGY.........................32 Scope of the study:-......................................32 Research objective:-......................................32 Methodology:-............................................. 32 Tools and techniques:.....................................32 Limitation................................................ 33 Tools and techniques:.....................................33 Chapter – 5. DATA BASE AND METHODOLOGY.....................35 S.K.Patel Institute of Management and Computer Studies (MBA) Page 1
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“A Study on Impact of NPA on Profitability and Liquidity In Public Sector Banks”
Table of Contents
Chapter - 1. INTRODUCTION TO TOPIC...............................................................................2
What is an NPA?.............................................................................................................................................2
Chapter – 2. LITERATURE REVIEW.......................................................................................5
Chapter – 3. INTRODUCTION OF BANKING INDUSTRY...................................................8
History of Banking In India.........................................................................................................................8
Reserve Bank Of India (RBI)...................................................................................................................11
Structure Of Indian Banking Industry...................................................................................................12
Aggregate Performance of the Banking Industry:.............................................................................18
Challenges facing by banking industry.................................................................................................20
Classification of Assets..............................................................................................................................23
Categories of NPAs.....................................................................................................................................23
Reporting Format For NPA – Gross And Net Npa...........................................................................25
Types Of Npa:...............................................................................................................................................26
Impact Of Npa:..............................................................................................................................................26
Procedures for NPA Identification in India.........................................................................................27
Chapter – 4. RESEARCH METHODOLOGY..............................................................32
Scope of the study:-.....................................................................................................................................32
Research objective:-....................................................................................................................................32
Tools and techniques:.................................................................................................................................32
Tools and techniques:.................................................................................................................................33
Chapter – 5. DATA BASE AND METHODOLOGY.....................................................35
Hypothesis of the Study.............................................................................................................................35
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Chapter - 1. INTRODUCTION TO TOPIC
What is an NPA?An asset becomes non-performing when it ceases to generate income to the Bank. Thus, a
non-performing asset (NPA) is defined as a credit facility in respect of which the interest and
or instalments of principal has remained ‘overdue’ for a ‘specified period’ of time. The
concept of ‘specified period’ is reduced in a phased manner. The shortening of the period is
from 4 quarters in 1993 when the concept of IRAC norms was first introduced in India to the
present level of 90 days.
Thus from 31.3.2004 an advance or loan (other than direct agricultural advance) shall be
classified as an NPA where -
Interest and / or instalment of principal remain overdue for a period of more than 90 days
in respect of a term loan.
The account remains out of order in respect of an overdraft / cash credit for more than 90
days.
The bills remain overdue for a period of more than 90 days in the case of bills purchased
and discounted.
Any amount to be received remains overdue for a period more than 90 days in respect of
any other accounts.
In case of direct agricultural advances, w.e.f. 30.9.2004, a loan granted for short duration
crops will be treated as NPA, if the instalment of principal or interest thereon remains
overdue for 2 crop seasons. In the case of long duration crops, the loan will be treated as NPA
if the instalment of principal or interest thereon remains overdue for 1 crop season.
Explanation of some terms used in NPA management
Security Interest:
Security Interest means right, title and interest of any kind whatsoever upon property, created
in favour of any secured creditor and includes mortgage, charge, hypothecation and
assignment
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Wilful defaulters:
"A Wilful Default” would be deemed to have occurred if any of the following events is noted
The unit has defaulted in meeting its payment / repayment obligations to the lender even
when it has the capacity to honour the said obligations.
The unit has defaulted in meeting its payment / repayment obligations to the lender and
has not utilised the finance from the lender for the specific purposes for which finance
was availed of but has diverted the funds for other purposes.
The unit has defaulted in meeting its payment/repayment obligations to the lender and has
siphoned off the funds so that the funds have not been utilised for the specific purpose for
which finance was availed of, nor are the funds available with the unit in the form of
other assets.”
Factors contributing to NPAs:
According to a recent study conducted by the RBI, the underlying reasons for NPAs in India
can be classified into two heads, namely:
1. Internal Factors
2. External Factors
Internal Factors:
Diversion of funds for expansion/diversification/modernisation or for taking up new
projects
Diversion of funds for assisting or promoting associate concerns
Time or cost overrun during the project implementation stage
Business failures due to product failure, failure in marketing, etc
Inefficiency in management
Slackness in credit management & monitoring
Inappropriate technology or problems related to modern technology
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External Factors:
Recession in the economy as a whole
Input or power shortage
Price escalation of inputs
Exchange rate fluctuation
Accidents & natural calamities
Changes in government policies relating to excise & import duties, pollution control
orders, etc
Government loan waiver scheme
Other Factors:
Apart from the above factors, there are certain other factors which are responsible for
standard assets becoming NPAs. They are :
Liberalisation of the economy & the consequent pressures from liberalisation like
severe competition, reduction of tariffs, removal of restrictions
Poor monitoring of credits & the failure to recognise early warning signals shown by
standard assets
Promoters’ over-optimism in setting up large projects
Sudden crashing of capital markets & the failure to raise adequate funds
Granting of loans to certain sectors on the basis of the Government’s directives rather
than commercial imperatives
Mismatch of funding i.e. using loans granted for short term for long term transactions
High leveraging & high cost of borrowing
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Chapter – 2. LITERATURE REVIEW
There is several research paper studies for carried out or find out the impact of NPA on
profitability and liquidity in public sector banks.
Dr. A. Shyamala (June -2012), “NPAs in Indian banking sector: impact on profitability”
using secondary data for years 10 year, The data has been analyzed using ratio. Like Gross
NPA to Gross Advances, Net NPA to Net Advances, Gross NPA to Total Assets, Net NPA to
Total Assets and covered Area under study of SBI Group, Nationalized Banks Group and
Private Banks Group and
Shahbaz Haneef, Tabassum Riaz, Muhammad Ramzan, “Impact of Risk Management on
Non-Performing Loans and Profitability of Banking Sector of Pakistan” (April 2012,)using
secondary data for the years 10 year and covered Area under study 5 banks.
Mahipal Singh Yadav, ( June, 2011) “Impact of Non Performing Assets on Profitability and
Productvity of Public Sector Banks in India” has conclude that non-performing assets in
public sector banks affects fifty percent profitability.
Siraj K.K Prof. (Dr). P. Sudarsanan Pillai, (March|2012) “A Study on the Performance of
Non-Performing Assets (NPAs) of Indian Banking During Post Millennium Period” has
conclude that NPA remained as an area of concern as it indicates the real efficiency of credit
risk management)
Anshu bansal (January 15, 2012 “A study on recent trends in risk management of
nonperforming assets (npas) by public sector banks in india” Types of data: Primary and
secondary data years :2007-2011 Area under study: all Public Sector Banks in India. Scope:
30% banks as sample, based at Dehradun and nearby surrounding towns and cities The
research work has been divided into three major steps, (1)namely: Theoretical study of NPAs;
(2)Historical study of NPAs and (3)analyzing the recent trends of NPAs. (4)Mathematical
and statistical tools such as percentage, trend analysis conclude that NPA shows the actual
burden of banks.
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Dr.Hosmani ,Mr.Jagadish Hudagi (December 2011,) “Unearthing the epidemic of non-per
forming assets -a study with reference to public sector banks in india” Types of data:
secondary data years : 2005-2010. Area under study: Nonperforming assets in Commercial
banks operating in India wise public sector banks has been taken in to account Scope: Indian
banking sector for 5 year The study conducted on the topic unearthing the epidemic of non
performing assets with reference to public sector banks in India, found that there is a slight
improvement in the asset quality reflected by decline in the diverse NPA percentage.
Neha Kalra, Shaveta Gupta ,Rajesh Bagga “Non-Performing Assets: A Brunt on Financial
Performance of Banks” Types of data: secondary data years : (1998-2009 Area under study:
public sector: private sector: foreign banks: Scope: Indian & foreign banking sector for 10
year The money locked up in NPAs is not available for productive use and adverse effect on
banks' profitability is there)
Dr. Dhirajjain Ms. Nasreen Sheikh (September 2012, ) “A comparative study of loan
performance, npa and Net profit in selected indian private banks” Types of data: secondary
years : 2001-2011. Area under study: Axis, ICICI Bank, IDBI Bank, HDFC Bank, Induslnd
Bank, Kotak Mahindra Bank,Yes Bank,South Indian Bank, ING Vysya Bank, CITI Union
Bank Scope: Indian banking sector for 10 year The overall performance shows that it is the
moderately correlated.
P.Malyadri2.S.Sirisha“Asset Quality and Non Performing Assets of Indian Commercial
Banks” Types of data: secondary data years : 1996-2010, Area under study: NPA’s of Indian
Scheduled Commercial Banks. Scope: Indian banking sector for 14 year The asset quality of
banks in India has been improving over the past few years as reflected in the declining NPA
to advances ratio.
Ms. Rajni Saluja, Dr. Roshan Lal (NOVEMBER-2007) “Comparative Analysis On Non‐Performing Assets NPAS Of Public Sector, Private Sector And Foreign Banks In India”
Types of data: secondary data years: 2004‐2009 Area under study: public sector, private
sector and foreign banks are selected Scope: Indian banking sector for 5 year It can be
concluded that NPAs are not confined to PSBs alone but are present in private banks and
foreign banks as well. There is more of NPAs in non‐priority sector than priority sector.
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Chandan Chatterjee Jeet Mukherjee 3.Dr. Ratan Das (November 2012,) Management Of
Non Performing Assets - A Current Scenario” Types of data: secondary data years :2005-
2011 Area under study: study of NPA‟s of public sector banks, private sector banks and
foreign sector banks Scope: Indian banking sector for 6 year The NPAs have a negative
influence on the achievement of capital adequacy level, funds mobilization and deployment
policy, banking system credibility, productivity and overall economy.
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Chapter – 3. INTRODUCTION OF BANKING INDUSTRY
Definition of Bank
“An organization, usually a corporation, chartered by a state or federal government, which
does most or all of the following: receives demand deposits and time deposits, honors
instruments drawn on them, and pays interest on them; discounts notes, makes loans, and
invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues
drafts and cashier's checks.”
Definition of banking
In general terms, “The business activity of accepting and safeguarding money owned by other
individuals and entities, and then lending out this money in order to earn a profit” So we can
say that Banking is a company, which transacts the business of banking. The Banking
Regulations Acts defines the business as banking by stating the essential function of a banker.
The term banking is defined as “Accepting for the purpose of leading or investment, deposits
of money from the public, repayable on demand or otherwise and withdrawal by cheque,
draft, order or otherwise.”
History of Banking In India
Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans
or cosmopolitans in India. In fact, Indian banking system has reached even to the remote
corners of the country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividends with the
nationalization of 14 major private banks of India. Not long ago, an account holder had to
wait for hours at the bank counters for getting a draft or for withdrawing his own money.
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Today, he has a choice. Gone are days when the most efficient bank transferred money from
one branch to other in two days. Now it is simple as instant messaging or dials a pizza.
Money has become the order of the day. The first bank in India, though conservative, was
established in 1786. From 1786 till today, the journey of Indian Banking System can be
segregated into three distinct phases. They are as mentioned below:
PHASE I
The General Bank of India was set up in the year 1786. Next were Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small.
To streamline the functioning and activities of commercial banks, the Government of India
came up with The Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
PHASE IIGovernment took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and State Governments all over
the country.
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Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalization was carried out. It was the effort of the then City
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership. The following are the steps taken by the Government of India to Regulate
R-squared 0.922970 Mean dependent var 35144.20Adjusted R-squared 0.884455 S.D. dependent var 25332.07S.E. of regression 8610.854 Akaike info criterion 21.24861Sum squared resid 4.45E+08 Schwarz criterion 21.36964
Log likelihood -102.2430 Hannan-Quinn criter. 21.11583F-statistic 23.96392 Durbin-Watson stat 1.433864
Prob(F-statistic) 0.000970
Analysis:
The regression test on NPA of Priority sector, Non-Priority sector and Public sector and NET
PROFIT show the R squared is 0.922970 means the both variable in the test show the relation
between each other is very high and data will affect with each other. If the variable is more
than 2 the chances of getting R-square is 1 means High relationship between them, therefore
we can applied the test of Adjusted R-squared. Here the variable more than two does not
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affect with each other. And Adjusted R-square is 0.884455 it show high relationship between
NPA of Priority sector, Non- priority sector, public sector and PROFIT. If the NPA of
different sector increase the decrease in the PROFIT margin of public sector Banks
Table No-2.4: Pairwise Granger Causality Tests.
Null Hypothesis F-Statistic Probability Decision
NETPROFIT does not Granger Cause PRIORITY 11.9584 0.0372 Rejected
PRIORITY does not Granger Cause NETPROFIT 3.7898 0.1510 Accepted
NETPROFIT does not Granger Cause NONPRIORITY 1.87085 0.2968 Accepted
NONPRIORITY does not Granger Cause NETPROFIT 13.1264 0.0328 Rejected
NETPROFIT does not Granger Cause PUBLIC 1.57091 0.3414 Accepted
PUBLIC does not Granger Cause NETPROFIT 1.75564 0.3127 Accepted
Analysis:
Granger Causality test say if the probability is less than 0.05 reject the null hypothesis and if
more than 0.05 accepted the null hypothesis. Here in Net Profit to Priority Sector the
probability is 0.0372 means Rejected the null hypothesis and Net Profit to Non Priority sector
the probability is 0.2968 means Accepted the null hypothesis and Net Profit to Public Sector
the probability is 0.3414 means Accepted the null hypothesis and other like Priority to Net
profit is accepted, Non priority to Net profit Rejected and Public to Net profit Accepted. The
results show the accepted and rejection of null hypothesis, and will affected the each other,
here if Net Profit Decreases its means the affected by NPA.
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(3) To examine the impact of non-performing assets on efficiency and Liquidity.
Table No-3: Gross NPA to Gross Advance and Ratio of Gross NPA to Gross Advance. (Amount in Crores)
Year Gross NPA Gross AdvanceGross NPA To Gross
Advances
2002-03 56,473 577813 6.85
2003-04 54,090 661975 7.79
2004-05 52,880 877825 5.53
2005-06 41,358 1134724 3.64
2006-07 38,968 1464493 2.66
2007-08 40,595 1819074 2.23
2008-09 44,957 2282081 2.19
2009-10 59,926 2736347 2.23
2010-11 74,614 3265245 2.5
2011-12 117,200 3645235 3.1
(Source: Report On Trend And Progress of Banking In India from 2003 to 2012)
Table No-3.1: Descriptive Statistics of Public sector bank.
GROSS ADVANCE GROSS NPAMean 1846481. 58106.10
Median 1641784. 53485.00Std. Dev. 1097176. 23429.14Skewness 0.393184 1.742166Kurtosis 1.780627 5.165252
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level* denotes rejection of the hypothesis at the 0.05 level**MacKinnon-Haug-Michelis (1999) p-values
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level* denotes rejection of the hypothesis at the 0.05 level**MacKinnon-Haug-Michelis (1999) p-values
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Ratio analysi between NET ADVANCES and GROSS NPA
On the basis of Ratio of last 10 year net advances and net NPA is average in 2002-03 to
2011-12 compare to Gross Advances to Gross Npa and approximately between heights in
2002-03 is 3.03 thereafter slowly decreases and low in year 2007-08 is 0.99. If we taken
average of all the ratio is 1.1612 is good than individual year ratio.
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Chapter – 6. FINDING
a. Form the Analysis we came to know that there is a positive relationship between NPA
and Profitability in public sector banks.
b. After analysis of impact of non-performing assets on profitability with other variables.
Like priority sector, non priority sector, and other variable, show high correlation ship
between NPA with Priority sector and average correlation ship between NPA and Non-
Priority sector and other public sector.
c. After analysis of the impact of non-performing assets on efficiency and Liquidity show
Average correlation ship.
d. The ratio of NPA and Advances of public sector banks is high.
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Chapter – 7. CONCLUSION
The NPAs of public sector banks in absolute terms has shown increasing trend till 2003-04 to
2011-12 and declined later on in 2004-05 to 2007-08, where as its test applied in the NET
NAP and NET ADVANCE also prove that’s the significant impact of NPA on profitability in
public sector banks. If the talk about profitability from applied all the test it’s null hypothesis
rejected and correlation is more than 0.8 and regression R-square is also good and Johansen
Cointegration Test give the result that null hypothesis is also rejected at 0.05 level.
Result of other variable of priority sector, non-priority sector and remaining public sector its
result of impact on profit is also more and other result for liquidity show there is not much
more but only average impact on liquidity. Indian banking sector is facing a serious problem
of NPA. The extent of NPA is comparatively higher in public sectors banks than the private
sector.
The impact of NPA on profitability them from applied a test we concluded that Correlation
result show the positive correlation between NET NPA and NET PROFIT its show
Correlation is 0.912 is more than 0.800 the indicate high correlation between them. Also
other tools analysis Granger Causality test says if Net Profit Decreases its means the affected
by NPA. The Correlation result show the positive correlation between PRIORITY and NET
PROFIT and Average relation between NON PRIORITY and NET PROFIT and no
correlation between PUBLIC SECTOR And NET PROFIT show the one of the objective to
know the impact of npa on profitability with other variable its clear in result the Correlation is
respectively like 0.94424, 0.6574 and -0.09704 is more than 0.800 the indicate high
correlation and between0 .8 to 0.5between them indicate average.
Correlation result show the positive correlation between GROSS NPA and GROSS
ADVANCE its show the one of the objective to know the liquidity impact of NPA in public
sector Banks, it’s clear in result the Correlation is 0.67952 if more than 0.800 the indicate
high correlation between them, but here the not more correlation between gross advance and
gross npa its result the npa does not affected greater to Liquidity. Correlation result show the
positive correlation between NET NPA and NET ADVANCE its show the one of the
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objective to know the impact of npa on liquidity its clear in result the Correlation is 0.7969 is
more than 0.800 the indicate high correlation between them.
Chapter – 8. REFERENCES
1. Anshu Bansal* (2012) " A Study On Recent Trends In Risk Management Of Non
Performing Assets (Npas) By Public Sector Banks In India”- Journal of Information and