An Empirical Study on Profitability and Survivability of Banking Credit Policy: Management and Culture of Npas: Exploring the influence of credit policy on profitability and survivability of banking institutions

Abstract

This paper explores an empirical approach to the analysis of commercialbanks' nonperforming loans (NPLs) in the Indian context. The empirical analysisevaluates as to how banks’ non-performing loans are influenced by three majorsets of economic and financial factors, i.e., terms of credit, bank sizeinduced risk preferences and macroeconomic shocks. The empirical results from panel regression models suggest that termsof credit variables have significant effect on the banks' non-performing loansin the presence of bank size induced risk preferences and macroeconomic shocks.Moreover, alternative measures of bank size could give rise to differentialimpact on bank's non-performing loans. In regard to terms of credit variables,changes in the cost of credit in terms of expectation of higher interest rateinduce rise in NPAs. On the other hand, factors like horizon of maturity ofcredit, better credit culture, favorable macroeconomic and business conditionslead to lowering of NPAs. Today the Indian banking system has undergone significanttransformation following financial sector reforms, adopting international bestpractices. Several prudential, payment, integrating and provisioning norms havebeen introduced, and these are pressurizing banks to improve efficiency andtrim down NPAs to improve the financial health in the banking system. It isamong the best in the world because Indian banks are favorable on growth, assetquality and profitability; RBI and Government have made some notable changes inpolicies and regulation to strengthen the sector. NPA involves the necessity ofprovisions, any increase in which bring down the overall profitability ofbanks; is the indicator of banking health in a country. In this paper, aneffort has been made to evaluate the operational performance of the PSBs &Private bank in India between 2003-04 and 2007-09, NPAs Trends and issuesthrough secondary data. This paper analyzes how efficiently Public and Private sector bankshave been managing NPA. The Indian banks are facing hard time managing theirNPA. The magnitude of NPA was comparatively higher in public sectors bankscompared to private banks but now, they have managed the number at lower end. There are many mergers and acquisitions have been taken place inIndian banking industry in last couple of decade. Many reason behind it but onequestion is always associated that the survivability of weaker financialorganization. Competition insists organizations to justifyi the earning andprofitability. Reserve Bank of India I RBI) and other regulatory frameworkcontrol the banking industry and individual bank. Banks cannot make big profitwithout giving good quality of services to their customers. Banks survive withhigh turnover offund and low margin. If there is undue losses like NonPerforming Assets (NPA) and other deliquesce cost come in the part of expensesbanks reduce their profit. There may be negative profit in the incomestatement.