Analyzing the Trend of Npa Level In Private Sector Banks and Public Sector Banks

The Banking system remains, as always the most dominant segment of the financial sector. 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 or any other external and internal factors. Indian Banks continue to build on their strength under the regulators watchful eye and hence has emerged stronger. 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. Today, he has a choice [1].

Several studies have been carried out to measure the banking sector performance (efficiency) using the frontier analysis method (Abbasoglu et. al, 2007; Carbo et. al, 2002). The frontier analysis separates the institutions those perform better relative to a particular standard from the institutions those performances are poor. Such separations can be done by using a parametric or non-parametric frontier analysis. Most of the studies which look at the efficiency of Indian commercial banks concentrate on cost, profit, income or revenue efficiencies [Das Abhiman, Ashok Nag and Subhash Ray, 2005]. Among them few studies use data related to either only pre-reform period or only post-reform period. Furthermore many of them use data for a single time period which makes it difficult to compare the efficiency in a dynamic setup. NPA (non-performing assets) is related to banking and finance term. When bank or finance company is unable to recover its lent money from borrower in 90 days than that amount which have not been recovered will be treated as NPA. It represents bad loans, the borrowers of which failed to satisfy their repayment obligations. The below mentioned table indicated the Indian banking sector at a glance:

Source [2] Public Sector Banks (PSBs) in India have performed rather poorly over the past 3-4 years. For the most part this has been on account of Non-Performing Asset (NPA) related worries which have so far been brushed under the carpet. The current level of NPAs as disclosed by most public sector banks is far from reality and made possible because of the flexibility enjoyed by PSBs in terms of disclosure requirements.

Reserve Bank of India (RBI) defines NPAs as below: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. As per guidelines issued by the RBI, banks classify an account as NPA only if the interest due and charged on that account during any quarter is not serviced fully within 90 days from the end of the quarter.

Banks are required to classify NPAs into the following 3 categories based on how long do they remain non-performing. The three categories are – Substandard Assets, Doubtful Assets and Loss Assets. 1. Substandard Assets – If an account remains as NPA for a period less than or equal to 12 months 2. Doubtful Assets – An asset would be classified as doubtful if it has remained in the substandard category for 12 months. 3. Loss Asset – A loss Asset is one where loss has been identified by the bank’s internal or external auditors or upon an RBI inspection.

Banks with high level of NPAs effectively have lesser funds to advance i.e. lesser funds on which they can potentially earn interest income. Other negative impact of high NPAs:

• High level of provisioning [See Footnote] (banks are required to keep aside a portion of their operating profit as provisions, higher NPAs will increase the amount of provision thereby impacting the profitability);

• Burden on maintaining capital adequacy ratio;

• Increased pressure on Net Interest Margin (NIM);

• Reduce competitive position

Key Ratios for Asset Quality Gross Non-Performing Assets (GNPAs): Gross NPA is the sum of all loan assets that are classified as NPA Non-Performing Assets (NPA) ratio: Net NPAs are calculated by deducting provisions from gross NPAs. The net NPA to advances (loans) ratio is used as a measure of the overall quality of the bank’s loan book. Net non-performing assets = Gross NPAs – Provisions

Source [3] For Private sector Banks, Yes Bank is the best performer, followed by HDFC, IndusInd, and Axis. At the other end, for Public sector Banks, United Bank of India is the worst performer followed by Indian Overseas Bank, UCO Bank, and Allahabad Bank. Some of the other public sector banks which have significant amount of NPAs include IDBI Bank (3.05%), SBI (2.80%), Bank of India (2.50%), Canara Bank (2.42%) and Syndicate Bank (2.38%). Increasing bad loans have been a concern for the RBI for many years. The NPA problem is far graver for PSBs compared to their private sector peers. Increasing bad loans have been a concern for the RBI for many years. The NPA problem is far graver for PSBs compared to their private sector peers. The reforms in the banking industry started in the early 1990s have been continued till now (Bansal, 2004). The Narasimham Committee, 1991 had recommended several reforms in banking sector with the change wind of financial sector reforms (Sekhar, 2007) the winds of change gained momentum in the last few years, such as globalization of Indian economy and opening up of financial services under WTO. It is expected that the banking sector will undergo mergers and acquisitions (M&A), impact of economic liberalization on the performance of Indian banking sector in the last decade and also the impact of banking sector reforms on the Indian banking sector.

NPAs are draining the capital of the banks and weakening their financial strength. It is also as much a political and a financial issue. The banks and financial institutions should be more proactive to adopt a pragmatic and structured non-performing assets management policy where prevention of non-performance assets receives priority. Compared to private sector banks, public sector bank is more in the NPA level [1].

1. Ashly Lynn Joseph, Dr. M. Prakash, A Study on Analyzing the Trend of NPA Level in Private Sector Banks and Public Sector Banks, International Journal of Scientific and Research Publications, Volume 4, Issue 7, July 2014, ISSN 2250-3153 2. https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Statistical%20Tables%20Relating%20to%20Banks%20in%20India 3. http://www.blog.sanasecurities.com/non-performing-asset-npa-in-public-sector-banks/ 4. Bansal, S. (2004), Impact of Liberalization on the Productivity and Profitability of Public Sector Banks in India, A Doctorate Thesis submitted to UBS, Panjab University, and Chandigarh. 5. Sekhar, D. S. (2007), “Trends in Growth and Development: Nationalized Banks in India”, The Indian Banker, Vol.11, No.10, pp.28-32 6. Abbasoglu, Osman Furkan, Aysan, Ahmet Faruk and Gunes, Ali (2007), “Concentration, Competition, Efficiency and Profitability of the Turkish Banking Sector in the Post Crises Period”, MPRA Paper No. 5494. 7. According to Carbo et. al (2002), “Since the FF is a combination of polynomial and trigonometric expansions, the order of approximation can increase with the size of the sample size”. 8. Das Abhiman, Ashok Nag and Subhash Ray (2005): “Liberalisation, Ownership and Efficiency in Indian Banking: A Nonparametric Analysis” Economic and Political Weekly, May 19, Vol XL No 12.