Galloping Non-Performing Assets Bringing a Stress on India’s Banking Sector: An Empirical Study of an Asian Country

Author(s)

Dr. Madan Lal Bhasin ,

Download Full PDF Pages: 01-26 | Views: 315 | Downloads: 86 | DOI: 10.5281/zenodo.3468908

Volume 6 - March 2017 (03)

Abstract

A well-organized and efficient banking system is an essential pre-requisite for the economic growth of every country. Galloping levels of Non-performing assets (NPAs) is one of the biggest problems faced by the Indian banking industry. The “stressed balance-sheet and bad-loan accounts” that have been hidden till now, would keep the NPA levels rising spread over 3-5 years. As on March 2015, gross NPAs stood at 4.6% and 5.17% of advances, while the stressed assets (NPAs + restructured loans) were 13.2%. It is estimated that the total quantum of stressed assets is about Rs. 10,000 billion. Undoubtedly, mounting NPAs and bad loans in the banking sector have been the focus of media headlines, which is directly affecting their balance sheets (higher provisions), and impacting the economy as well. Concern about asset quality has been one of the biggest challenges for the Indian regulator too. The extent of the challenge for nationalized banks is that “non-action is no longer an option.” In fact, India is seeing a regulatory upheaval in the way the Government and RBI are addressing the present crisis. The efforts are visible, but the results may be achieved only on a medium- to long-term basis. We feel there is an urgent need to solve the rising levels of NPAs and put a roadmap to control the reasons which lead to creation of such high NPAs. Some estimates suggest that around 35-40% of the stressed assets will require being written-off, and hence, banks need to recapitalize to that extent. This research paper explores an empirical approach to the analysis of NPA of public, private, and foreign sector banks in India. As part of this study, we have considered NPAs in Scheduled Commercial Banks, which includes 26 public-sector (nationalized) banks (PSBs), 5 private-sector scheduled banks (PVBs) and 10 scheduled foreign-banks (FBs), which are listed in the Second Schedule of the Reserve Bank of India Act, 1934. This study is based on data for sampled banks in India for a period of 5 years, from the FY ended 2010-2011 to FY ended 2015-2016. Some statistical tools have been used for analyzing the trend of NPAs of all banks in India. The present study is primarily qualitative, analytical and descriptive, which is based on secondary sources of data. Findings of our study reveals that “extent of NPAs is very high, specifically in PSBs, as compared to PVB and FBs. Some banks have already started adopting predictive and pre-emptive strategies to improve asset quality to minimize NPA levels, but still a lot needs to be done to curb this vicious problem. We suggested all banks to adopt and implement the regulator policy measures of RBI in „true-spirit and substance‟; not just form.” Undoubtedly, the road to recovery is very long and winding, but bankers are optimistic that NPA situation will improve in the near future, albeit at a slow pace. 

Keywords

Banks, Non-performing assets, stressed assets, assets quality, bad loans, restructured loans, impaired loans, public, private and foreign sector banks, RBI. 

References

  1. Balasubramaniam, C.S. (2011), Non-Performing Assets and Profitability of Commercial Banks in India: Assessment and Emerging Issues, Journal of Research in Commerce & Management, 1(7), 41-57.
  2. BCBS (2016), Minimum capital requirements for market risk,‖ Basel Committee on Banking Supervision, Jan. https://www.bis.org/bcbs.
  3. Bhasin, (2015), Creative Accounting Practices in the Indian Corporate Sector: An Empirical Study, International Journal of Management Science and Business Research, 4(10), Oct. 35-52.
  4. Bhasin, M.L. (2013), Corporate Accounting Scandal at Satyam: A Case Study of India‘s Enron, European Journal of Business and Social Sciences, 1(12), March, 25-47.
  5. Bhasin, M.L. (2013a), An Empirical Investigation of the Relevant Skills of Forensic Accountants: Experience of a Developing Economy, European Journal of Accounting, Auditing and Finance Research, 1(2), June, European Centre for Training and Development, 11-52.
  6. Bhasin, M.L. (2015), Menace of Frauds in Banking Industry: Experience of a Developing Country, Australian Journal of Business and Management Research, 4(12), April, 21-33.
  7. Bhasin, M.L. (2016), Frauds in the Banking Sector: Experience of a Developing Country, Asian Journal of Social Sciences and Management Studies, 3(1), 8-16.
  8. Bhasin, M.L. (2016a), The Fight Against Bank Frauds: Current Scenario and Future Challenges, Cuenca e Technical Vitivinicola Journal, 31(2), Feb., 56-85.
  9. Bhasin, M.L. (2016b), Integration of Technology to Combat Bank Frauds: Experience of a Developing Country, Wulfenia Journal KLAGENFURT, 23(2), Feb. 201-233.
  10. Bhasin, M.L. (2016c), Creative Accounting Scam at Satyam Computer Limited: How the Fraud Story Unfolded? Open Journal of Accounting, 5(4), Sept. 57-81.
  11. Bhasin, M.L. (2017), Integrating Corporate Governance and Forensic Accounting: A Study of an Asian Country, International Journal of Management Sciences and Business Research, 6(1), Jan., 31-52.
  12. Bock, R.D. and Demyanets, A. (2012), Bank Asset Quality in Emerging Markets: Determinants and Spillovers, IMF Working Paper WP/12/71 https://www.imf.org,
  13. Borse, N.B. (2016), The Study of the Effect of Non-Performing Assets (NPA) on Return on Assets (ROA) of Major Indian Commercial banks, International Journal in Management and Social Science, 4(1), Jan. 222-227.
  14. Care Ratings (2015), Banking Sector Performance Study–FY15, Aug. 26, Credit Analysis & Research Limited, 1-6.
  15. Care Ratings (2016), The NPA Story –FY16. Feb. 19, Credit Analysis & Research Limited 1-6.
  16. Chakrabarti, M. (2015), The Role of Asset Reconstruction Companies in NPAs Management in Indian Banking Sector: An Empirical Study, Abhinav International Monthly Refereed Journal of Research in Management & Technology, 4(5) May, 56-66.
  17. Chaudhury, S. and Singh, S. (2012), Impact of Reforms on the Asset Quality in Indian Banking, Zenith International Journal of Multidisciplinary Research, 2(1), Jan. 13-31.
  18. EY (2016), Role of core banking solutions in banks, Ernst & Young LLP, India, http://www.ey.com, 1-20.
  19. Crisil-Assocham Study (2016), ARCs might be able to improve recovery rates & churn capital better: ASSOCHAM-Crisil study, Nov. 21, http://assocham.org.
  20. DTA (2014), Rising NPA, a stress on India‘s banking sector, Feb. 1-5.
  21. EY (2015), Unmasking India‘s NPA issues: Can the Banking Sector Overcome this Phase? http://www.ey.com.
  22. EY (2016), ARCs – at the crossroads of making a paradigm shift, July. http://www.ey.com
  23. EY (2016), Insolvency and Bankruptcy Code, 2016: An Overview, July, http://www.ey.com.
  24. FICCI (2016), NPA Management in Banks, Financial Foresights: Views, Reflections and Erudition, Federation of Indian Chambers of Commerce and Industry, 6(2), Q3 FY 2016. www.ficci.com.
  25. Ghosh, A. (2014), Asset Quality of banks: Evidence from India, Indian Institute of Banking & Finance. www.iibf.org.in.
  26. Gupta, B. (2012), A Comparative Study of Non-Performing Assets of SBI & Associates & Other Public Sector Banks, SIT Journal of Management, 2(2), Dec., 175-189.
    Gynedi, R. (2014), India‘s Non-performing Assets—A Lurking Crisis, Center for Strategic & International Studies, April, 1-5, https://www.csis.org.
  27. Jain, M. (2016), Four charts show how the bad loan problem of Indian banks is much bigger than Vijay Mallya, Mar, https://scroll.in.
  28. Jana, M.M. and Thakur, M.K., (2015) ―An Overview of Non-Performing Assets Management and Banking Performance - An Empirical Analysis‖, The Management Accountant, 50(1), 42-48.
  29. Kanan, R. (2013), How to Swat the NPA Bug, Business Line, April 5, http://www.thehindubusinessline.com
  30. Karunakar, M. (2008), Are Non-Performing Assets Gloomy or Greedy from Indian Perspective? Research Journal of Social Sciences, 3: 4-12.
  31. Kaur, K. & Singh, B. (2011), ―Non-performing assets of public and private sector banks A comparative study‖, South Asian Journal of Marketing and Management Research, 1(3), Dec. 54-72.
  32. Klein, N. (2013), Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance, IMF Working Paper WP/13/72 https://www.imf.org.
  33. Kumar, R., Krishna, G.D. and Bhardwaj, S. (2016), Indradhanush: Banking Sector Reforms, www.cprindia.org.
  34. Lee, A. (2016), All you need to know about wilful defaulters, Feb. 24, http://www.business-standard.com.
  35. Mahajan, P. (2014), Non-Performing Assets: A Study of Public, Private & Foreign Sector Banks in India, Pacific Business Review International, 7(1), July, 9-16.
  36. Mathew, G. (2017), Non-performing assets: Bad loan recovery by banks only gets worse in four years, Jan. 3, http://indianexpress.com.
  37. Mazumdar, S. (2017), Evolution of NPA Management in Indian Banking Sector, The Management Accountant, 52(1), Jan.
  38. Patrick, M. (2016), The burgeoning number of NPAs: A cause of worry for the Indian banking system, Centre for Public Policy Research, 20 Feb. http://www.cppr.in
  39. PTI (2015), FM Jaitley says NPAs at Unacceptable Level for PSBs, Business Today, PTI, New Delhi, August 21, http://www.businesstoday.in
  40. Rai, K., (2012), ―Study on performance of NPAs of Indian commercial banks‖, Asian Journal of Research in Banking and Finance, 2(12),
  41. Rao, K.R. (2017), Centre sets up credit registry to help banks tackle stressed assets, March 3, Business Line. http://www.thehindubusinessline.com.
  42. RBI (2016), The Financial Stability Report (2016)
  43. RBI (2014), ―Framework for Revitalizing Distressed Assets in the Economy‖ Jan.
  44. RBI (2014a), Report on Trend and Progress of Banking in India 2014-15.
  45. Roy, P. and Samanta, P.K. (2017), Analysis of Non-Performing Assets in Public Sector Banks of India. International Journal of Management, 8(1), 2017, 21–29.
  46. Samir and Kamra, A. (2013), A Comparative Analysis of Non- Performing Assets (NPAs) of Selected Commercial Banks in India, Opinion-International Journal of Management, 3(1), 68-80.
  47. Sasikala, P. and Mohanapriya, G. (2017), A Study on Functional Issues in Reducing NPA Among Cooperative Banks in Pondicherry, International Journal of Innovation in Engineering Research & Management, 4(1) 1-10.
  48. Shivani, V. (2016), NPA Management: The Need to Balance Credit Quality with Growth, White Paper, iCreate Software Pvt. Ltd www.icreate.in. pp. 1-4.
  49.  
  50. Shreesh (2016), The Indian Banking Sector Report: NPA Shocks Continue as Banks Struggle to Provision Enough, September 28, Capitalmind, https://capitalmind.in) Shreesh (2016), The Indian Banking Sector Report: NPA Shocks Continue as Banks Struggle to Provision Enough, 28 Sept. Capitalmind, https://capitalmind.in.
  51. Shukla, R. (2015), Role of Credit Rating Agencies in Reducing NPAs in Banks, Remarking, 2(6), Nov. 25-28.
  52. Singh, V.R. (2014), A Study of Non-Performing Assets of Commercial Banks and it‘s recovery in India, Annual Research Journal of SCMS, Pune 4(3), March, 110-125.
  53. Subramanian, K. (2017), Budget 2017: Forgotten Reforms becoming a NPA for Banking Sector, Feb. 2, The Economic Times, http://economictimes.com.
  54. Tripathi, R. and Singh, P.T. (2015), Proposed Basel III Implementation: Are Indian Commercial Banks Ready, Apeejay Journal of Management Sciences and Technology, 3 (1), October, 20-38.
  55. Unnikrishnan, D. (2017), Bank NPAs are worsening: Is the Narendra Modi govt ignoring the warning signals? Feb. 20, First Post, http://www.firstpost.com.
  56. Vallabh, G., Bhatia, A. and Mishra, S. (2007), Non-Performing Assets of Indian Public, Private and Foreign Sector Banks: An Empirical Assessment‘, ICFAI Journal of Bank Management, 6(3), 7-28.
  57. Vallabh, G., Singh, D., Prasoon, R. and Singh, A. (2016), Methodology to Predict NPA in Indian Banking System, Theoretical Economics Letters, 6(4) Aug., 827-836.
  58. Venkatesh, M. (2017), Budget 2017 doesn‘t bank on tackling NPA problem, Hindustan Times, Feb. 1, New Delhi.

Cite this Article: