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International Journal of Advanced Scientific


e-ISSN: 2395-6089
Research & Development
Vol. 03, Spl. Iss. 03, Ver. I, Sep 2016, pp. 125 134

p-ISSN: 2394-8906

A Study on Non-Performing Assets & Performance of New


Generation Private Banks in India
DEVIKA RANI
Research Scholar, Bharathiar University, Coimbatore.

USHA K N
Research Scholar, Dept. of Management Studies, SCSVMV University, Kanchipuram.

ARTICLE INFO

ABSTRACT

Article History:

The banking system in India functions as a nerve center of


the entire economic system of the country. It has undergone
significant transformation following financial sector
reforms. The weakening domestic macroeconomic
conditions combined with the continuing subdued global
growth posed challenges to the banking sector during 201213. However, the comfortable capital base continues to lend
resilience to the Indian banking sector. It is adopting
international best practices with a vision to strengthen the
banking sector. Several prudential and provisioning norms
have been introduced, and these are pressurizing banks to
improve efficiency and trim down NPAs to improve the
financial health in the banking system. In the background
of these developments, this study strives to examine the
state of affair of the Non-performing Assets (NPAs) of New
Generation Banks in India. The study is based on the
secondary data retrieved from Report on Trend and
Progress of Banking in India. The study examines trend of
NPAs and aims at understanding the performance the
new generation private sector banks in India for the period
five (5) years i.e. from 2009-2013.

Received: 23 Sep 2016;


Accepted: 24 Sep 2016;
Published online: 28 Sep 2016.

Key words:
Non-Performing Assets (NPA),
New Generation Banks,
Net Interest Income,
Gross Advances.

JEC Classification:

Copyright 2016 IJASRD. This is an open access article distributed under the Creative Common Attibution
License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original
work is properly cited.

INTRODUCTION
Commercial banks in India, form the most important part of the Indian financial
landscape in terms of their role in channeling credit to the commercial sector and
facilitating the process of financial inclusion. The adoption economic reforms by the
How to cite this article: Rani, D., & Usha, K. N. (2016). A Study on Non-Performing Assets & Performance of New
Generation Private Banks in India. International Journal of Advanced Scientific Research & Development (IJASRD), 03
(03/I), [Special Issue Sep 2016], pp. 125 134.

Emerging Innovative Strategies in Business Creating a Competitive Edge | Organized by PG


Department of Banking & Insurance Management and Department of Bank Management,
Ethiraj College for Women (Autonomous), Chennai 600 008.

government has enhanced the significance of the commercial banking sector.


Commercial banks have undergone a number of changes in terms of size, efficiency of
operation and financial soundness and are predominantly responsible accelerating trade
and developmental activities in India.A strong banking sector is important for
flourishing economy. The failure of the banking sector may have an adverse impact on
other sectors. Non-performing asset (NPA) is one of the major concerns for banks in
India. NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affect the profitability and networth of banks and also erodes the value of the asset. The NPA growth involves the
necessity of provisions, which reduces the overall profits and shareholders value.
1.1 NPA regulation in India
Non-performing asset means an asset or account of borrower, which has been
classified by a bank or financial institution as substandard, doubtful or loss asset, in
accordance with the direction or guidelines relating to asset classification issued by RBI

Until mid-eighties, the management of NPAs in India was left to the banks and
its auditors. The need for fine tuning regulatory structures to deal with the
changing risk-profile of banking was felt, in 1985, the first-ever system of
classification of assets for the Indian banking system was introduced. This
system was called the Health Code system, involved classification of advances
into eight categories ranging from 1 (Satisfactory) to 8 (Bad and Doubtful Debts).

A significant change in regulatory risk, came in April 1992 with the introduction
of prudential norms on income recognition, asset classification and mathematical
methods for the computation of provisioning requirements. A graded norm for
NPA recognition was brought-in, beginning with a four quarter norm for
classification of advances as non-performing.

With the introduction of 90-day norm for classification of NPAs in 2001, the NPA
classification norms were being gradually tightened to bring them at par with
international standards.

The classification of advances as per the newly introduced prudential norms in


2004 enabled a proper assessment of the extent level of non-performing assets in
the Indian banking system for the first time.

1.2 Asset Classification


The RBI has issued guidelines to banks for classification of assets into four categories.

Standard Assets: These are loans which do not have any problem are less risk.

Substandard Assets: These are assets which come under the category of NPA
for a period of less than 12 months.

Doubtful Assets: These are NPA exceeding 12 months

Loss Assets: These NPA which are identified as unreliable by internal inspector
of bank or auditors or by RBI.

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A Study on Non-Performing Assets & Performance of New Generation Private Banks in India

1.3 Over Due


Any amount due to the bank under any credit facility is overdue if it is not paid
on the due date fixed by the bank.
1.4 Past Due
An amount due under any credit facility is treated as past due when it has not
been paid within 30 days from the due date. Due to the improvement in the payment
and settlement systems, it was decided to dispense with past due concept, with effect
from March 31, 2001.
Table 1. Reserve Bank of Indias Guideline for Non-Performing Assets
Recognition
Guidelines
Applicable from
31.3.2001

Loans and Advances

Guidelines Applicable
from 31.3.2004

Term
loan
interest
and/or
installment remain overdue for
more than

180 days

90 days

Overdraft/credit A/c

Remains out of order

Remains out of order

Bill Purchased and discounted


remains overdue for more than

180 days

90 days

Agricultural loan interest and or


installments remain overdue for

Two harvest seasons


but not exceeding two
and half years

Two harvest seasons but


not exceeding two and
half years

Other accounts any amount to


be received remains overdue for
more than

180 days

90 days

1.5 Out of Order


An account should be treated as out of order, if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power. If the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power and but not made credits continuously for six months or credits are
not enough to cover the interest debited during the same period, these account should be
treated as out of order.
1.6 Factors Contributing to NPAs
Investing in high risk assets to earn high income.

127

Willful default by the borrowers, siphoning off funds, fraud and misappropriation
by promoters and directors dispute.

Fraudulent practices like advancing loans to ineligible persons, advances without


security or references etc.

Most of the funds are diverted unnecessary expansion and diversion of business.

Many internal reasons like inefficient management, inappropriate technology,


labour problems, marketing failure, etc. resulting in poor performance of the
companies
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Department of Banking & Insurance Management and Department of Bank Management,
Ethiraj College for Women (Autonomous), Chennai 600 008.

External reasons like a recession in the economy, infrastructural problems, price


rise, delay in release of sanctioned limits by banks, delay in settlement of
payments by government, natural calamities, etc.

The absence of portfolio concentration limits, poor industry analysis, cursory


financial analysis of borrowers.

Excessive reliance on collateral, absence of follow up action by banks, poor


control on loan documentation. Inadequate customers contract

1.7 Review of Literature


Arundeep (2005) discussed the desirable norms and techniques to study the
performance of the banks. Prior to nationalization, profit was the sole criterion for
evaluating the performance of commercial banks. After nationalization, profitability and
social banking became the major objectives of commercial banks and thus any
evaluation of banks performance has to be in relation to these goals.
M. Karunakar, Mrs. K.Vasuki and Mr. S. Saravanan (2008) The onus for
containing the factors leading to NPAs rests with banks themselves. This will
necessitates organizational restructuring, improvement in the managerial efficiency and
skill upgradation for proper assessment of credit worthiness It is better to avoid NPAs
at the nascent stage of credit consideration by putting in place of rigorous and
appropriate credit appraisal mechanisms.
Dr. Ravindra N. Sontakke Mr. ChandanTiwari (2013) NPA cause serious strain
on the profitability as, on the one hand banks cannot book income on such accounts and
on the other hand they are required to charge the funding cost and provision
requirements to their profits. A mounting level of NPA in the banking sector can
severely affect the economy in many ways. If NPAs are not properly managed, it can
cause financial and economic degradation which in turns hampers the investment
climate which is crucial source looking to the present state of our economy. Bankers do
opine that NPA is unavoidable in banking because of the basic nature of the business of
banking. However, appropriate remedial measures as discussed above if followed shall
restrain the accounts turning NPA signaling the soundness of banking.
RESEARCH METHODOLOGY
2.1 Significance of the Study
Lending is generally encouraged because it has the effect of funds being
transferred from the system to productive purposes, whichresults into economic growth.
However lending involves credit risk, which arises from default by the borrowers. The
process of credit cycle is affected by non-recovery of loans along with interest. Thus, loan
losses and requirement of provisioning for loss affect the banks profitability on a large
scale. Though complete elimination of such losses is not possible, but banks can always
aim to keep the losses at low level.

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A Study on Non-Performing Assets & Performance of New Generation Private Banks in India

2.2 Objectives of the Study


To review the recent banking sector reforms in relation to management of bank
assets
To study the magnitude and trend of non-performing assets amongst New
Generation Banks
To evaluate the performance of the banks in relation to NPA
To study the strength and weakness in recovery and provision created for NPAs
in sample bank.
2.3 Data Collection
The study focuses on NPA of New Generation Private Banks, namely Axis
Bank, Development Credit, HDFC Bank, ICICI Bank, Induslnd Bank, Kotak Mahindra
and Yes Bank. The study is based on the secondary data retrieved from Report on
Trend and Progress of Banking in India, RBI annual reports and Indian Banking
association Bulletin.
2.4 Tools Used
The data have been collected from primary as well as secondary are analyzed and
treated with certain statistical techniques for the interpretation of the facts, Karl
PearsonsCoefficient of Correlation, Financial ratios, Percentage and Trend analysis.
2.5 Hypotheses

(H0): There is no significant association between gross NPAs and


advances of New Generation Banks.

(H1): There is significant association between gross NPAs and gross advances
of New Generation Banks

(H0): There is no significant association between NPA and Bank Performance.

(H1): There is significant association between NPA and Bank Performance

gross

ANALYSIS AND INTERPRETATION


It is the strategic policies and quality of loan assets which determines the
functional strength of the bank. Hence there is a need to analyze the volume and
implications of NPAs.
3.1 Asset Wise Classification of NPA
The loan assets of banks are classified in to four categories i.e. standard assets,
sub-standard assets, doubtful assets and loss assets. Standard assets being good quality
of loan assets on the other hand sub-standard assets, doubtful assets and loss assets put
together constitutes non-performing assets. Except standard assets all three categories
of assets are recorded a fluctuating trend over the study period. The proportion of Nonperforming assets has been showing a declining trend from 2.97% in 2010, 2.45% in
2010, 2.08% in 2012 to 1.91% in 2013.
129

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Emerging Innovative Strategies in Business Creating a Competitive Edge | Organized by PG


Department of Banking & Insurance Management and Department of Bank Management,
Ethiraj College for Women (Autonomous), Chennai 600 008.

It shows that loan portfolio of New Generation Private Banks is performing


productively and lending is recovered and revenue is generated.

Year

Standard
Advances

Percent
Share

SubStandard
Advances

Percent
Share

Doubtful
Advances

Percent
Share

Loss
Advances

Percent
Share

Total
NPA

Table 2 :Bank Group-wise classification of Loan Assets of SCBs-2008 to 2013


As on March 31
(Rs.Billion)

2008

4,597.22

97.25

72.81

1.54

44.53

0.94

12.44

0.26

2.74

2009

5,031.87

96.75

105.27

2.02

50.18

0.96

13.45

0.26

3.24

2010

5,677.23

97.03

86.78

1.48

65.43

1.12

21.66

0.37

2.97

2011

7,149.78

97.55

44.00

0.60

107.36

1.46

28.39

0.39

2.45

2012

8,628.96

97.92

51.33

0.58

103.16

1.17

28.72

0.33

2.08

2013

10,266.73

98.09

58.54

0.56

110.69

1.06

30.69

0.29

1.91

Source: Department of Banking Supervision, RBI

3.2 Gross Advances and Gross NPA


Gross NPA is an advance which is considered irrecoverable, requires provisioning
and which is still held in banks booksof account. A distinction between Gross NPA and
Net NPAis, Net NPA is calculated by deducting items like interest duebut not recovered,
part payment received and kept in suspenseaccount from Gross NPA.
Gross advances increased from 4.54 crores in 2009 to 8.86 crs in 2013. Retail
Lending plays an important role for the increase in advances. Gross NPA increased from
13.89 lakh in year 2009 to 15.55 lakh in the year 2013.
Increase was due to unfavorable economic situation in the domestic as well as
foreign market.

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A Study on Non-Performing Assets & Performance of New Generation Private Banks in India

Table 3 : Correlation between Gross Advances & Gross NPA


Gross NPA
Gross Advances

Pearson Correlation

.945*

p value

.015

*Correlation is significant at 0.05 level


Table, shows positive correlation between Gross Advances and Gross NPA. The
calculated p value of .015 is less than 5%. The probability of occurrence of H0 is rejected.
Therefore there is significant correlation between bank advances and NPA.
It can be stated, slowdown in the economy increases the risk of default and
restructuring of loans can increase which could further lead to deterioration of asset
quality. However, implementation of stringent policies could prevent a sharp
deterioration in asset quality.
3.3 Impact of NPA on Bank Performance
NPA percentage is in decreasing trend. It reduced from 3.06 % in 2009 to 1.76 %
in 2013.
Net Interest income is in increasing trend, this is because when NPA percentage
has been reduced which in turn contributed to the increase in Net Interest Income.
Ex. ICICI bank, Gross NPA ratio in the year 2012 is 4.83, decreased to 3.22 in
the year 2013.
This is mainly because of their Retail NPA% (to total NPA) dropped sharply from
80 % in the year 2012 to 60% in the year 2013.

Table- 4, shows Net Interest Income and NPA have a low negative correlation.
The probability of occurrence of H0 at 5% level of significance is accepted as p value .720
is greater than .05. Hence there is no significant correlation between NPA and NII.
Thus decrease in NPA improves banks performance.
Table 4: Correlation between NPA & Net Interest Income
Net Interest Income
NPA
Pearson Correlation
-.222*
p value
.720
N
5
*Correlation is significant at 0.05 level
131

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Emerging Innovative Strategies in Business Creating a Competitive Edge | Organized by PG


Department of Banking & Insurance Management and Department of Bank Management,
Ethiraj College for Women (Autonomous), Chennai 600 008.

SARFAESI ACT (Securitisation and reconstruction of financial assets and


enforcement of security interest act) enacted by RBI plays a major role for
recovery of loans. NPA's recovered through this act accounted for about 80% of
the total amount of NPA's.
Very recently, MEGA LokAdalat was organized by Indian Government in various
region to settle the NPA accounts. However, in terms of the total number of cases
referred, lokadalats dominated with a share of 80%. This was because these
courts dealt with a large number of cases involving smaller amounts having an
individual ceiling of Rs 20 lakh.
Tamil Nadu has settled more than 13.7 lakh pending cases and distributed a
record compensation of Rs 1,113 crore at the mega National LokAdalat The
adalat was held on the direction of Chief Justice of India Justice P Sathasivam
and National Legal Services Authority executive chairman Justice G S Singhvi .

3.4 Financial Ratios


The concept of priority sector lending was evolved to ensure adequate credit
facilities o certain neglected sectors of the economy such as agriculture, weaker sections,
SSI, Tiny sectors within SSI, Export finance. The banks priority sector lending at 32.7%
has gradually declined to 27.58% in 2013.
The private banks have by and large stayed away from directly lending to small
farmers and weaker sections in Indias far-flung areas. They achieve their priority
lending obligations by buying out loans from non-banking institutions or by investing in
rural infrastructure development fund (RIDF) of the National Bank for Agriculture and
Rural Development (NABARD).
Table 5: Financial Ratios
Year

Ratio of Priority sector


advances to Total
advances

Ratio of Secured
advances to Total
advances

2009

32.7 %

74.28 %

2010

31.35 %

74.4 %

2011

31.11 %

79.6 %

2012

30.7 %

83.13 %

2013
27.58 %
83.42 %
Secured loans is in increasing trend. It has increased from 74.28 % in 2009 to
83.42 % in the year 2013 Which has resulted in reduction of NPA percentage from 3.06
% from 2009 to 1.76% in the year 2013.Banks were able to recover the amount since it is
backed by security.
CONCLUSION
The health of the economy is closely related to the soundness of its banking
system. Non-Performing Assets may not turn banks into Non-Performing Banks;
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A Study on Non-Performing Assets & Performance of New Generation Private Banks in India

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


Assets.
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. For
preventing fresh NPAs, the bank itself should adopt proper policies. It is better to avoid
NPAs at the budding stage of credit consideration by putting in place of rigorous and
appropriate credit appraisal mechanisms. Private Sector Banks should be well versed in
proper selection of borrower or project and in analyzing the financial statement.
Recently, RBI has released framework for revitalizing distressed assets in the
economy.
The Framework outlines a corrective action plan that will incentivize early
identification of problem cases, timely restructuring of accounts which are considered to
be viable, and taking prompt steps by banks for recovery or sale of unviable accounts.
The main features of the Framework are: Early formation of a lenders committee with
timelines to agree to a plan for resolution. Incentives for lenders to agree collectively
and quickly to a plan: better regulatory treatment of stressed assets if a resolution plan
is underway, accelerated provisioning if no agreement can be reached.
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Emerging Innovative Strategies in Business Creating a Competitive Edge | Organized by PG


Department of Banking & Insurance Management and Department of Bank Management,
Ethiraj College for Women (Autonomous), Chennai 600 008.

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