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An Analysis of The Non-Performing Assets of Some Selected Public Sector Banks in India

This document is a synopsis submitted by Gour Bandyopadhyay for a Doctorate of Philosophy degree from Maulana Abul Kalam Azad University of Technology, West Bengal in 2016. The synopsis analyzes the non-performing assets of some selected public sector banks in India. It discusses the status of non-performing assets (NPAs) in Indian banking and their impact on the economy. High NPAs reduce bank profitability and capital, restrict credit to productive sectors, and burden the public. The synopsis identifies gaps in previous research and outlines the objectives, methodology, organization, expected results and findings, suggested action plan, social benefits, future applications, and scope of future research on this

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0% found this document useful (0 votes)
104 views21 pages

An Analysis of The Non-Performing Assets of Some Selected Public Sector Banks in India

This document is a synopsis submitted by Gour Bandyopadhyay for a Doctorate of Philosophy degree from Maulana Abul Kalam Azad University of Technology, West Bengal in 2016. The synopsis analyzes the non-performing assets of some selected public sector banks in India. It discusses the status of non-performing assets (NPAs) in Indian banking and their impact on the economy. High NPAs reduce bank profitability and capital, restrict credit to productive sectors, and burden the public. The synopsis identifies gaps in previous research and outlines the objectives, methodology, organization, expected results and findings, suggested action plan, social benefits, future applications, and scope of future research on this

Uploaded by

Gangu Deepika
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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An Analysis of the Non-Performing

Assets of Some Selected Public Sector


Banks in India

Synopsis submitted to
Maulana Abul Kalam Azad University of Technology,
West Bengal
(Formerly known as West Bengal University of Technology)
In partial fulfillment of the Degree of
DOCTORATE OF PHILOSOPHY
2016

By
Gour Bandyopadhyay
M.Phil in Management,
The Heritage Academy

Maulana Abul Kalam Azad University of Technology,


West Bengal
Salt Lake, Kolkata-700064
West Bengal, India
CONTENTS

1. Introduction 2

2. Status of NPA in Indian Banking and the Impact of NPA on Indian Economy 2-5

3. Identification of Research Gap 5-6

4. Objective of the Study 6-7

5. Methodology of the Study 7-8

6. Organization of the Thesis 8-10

7. Results and findings of the Study 10-14

8. Suggested Action Plan based on the findings emanated from the study 14-15

9. Social Benefits of the Research 15-16

10. Future Application of the Thesis 16-17

11. Scope of Future Research on the Subject 17

12. Conclusion 17-18

References 18-19

List of Publication by the Researcher on Related Subject 20


1. Introduction
Both in developed and developing countries, banking system has shown tremendous dynamism
and flexibility for adaptation towards adjusting itself to the sweeping changes in the economy
(Sharma, 1985). The evolution of Indian financial system, since the mid-eighties in general, and
the launching of the economic policy in 1991, in particular, has been characterized by profound
transformation as a result of prolonged and effective reform initiatives by Reserve Bank of India
(RBI). The fundamental philosophy of the development process in India has shifted from closed
and highly regulated regime to free market economy and the consequent liberalisation,
deregulation and globalisation of the economy. Changes in the major economic policy such as
macro economicstabilisation, de-licensing of industries, trade liberalisation, currency reforms,
reforms in financial sector, capital market and banking sector, dis-investment in the public sector
units have far-reaching impact on the corporate sector in India.
One of the major challenges that the banking industry is facing today is the credit risks. Various
dimensions of credit risks expose this fast growing industry to mounting Non Performing Assets
(NPAs). Though macro environmental factors including global recession, economic slowdown,
rising inflation and inadequate legal frame work contributed heavily towards growth of distress
asset in the banking sector, micro banking factors, including poor appraisal and follow-up, defect
in the mindset of the borrower and lender are no less important. Pressure from regulators towards
strict adherence to international norms on asset quality has also contributed to rising bad loans
figures in absolute terms in the Public Sector Banks (PSBs) in India in the last two decades.

2.Status of NPA in Indian Banking and the Impact of NPA on Indian Economy
Banking is a financial intermediary which mobilizes savings of the surplus units in the form of
deposits and channelizes them in deficit units including agriculture, industry and services, as
loans and advances. As a lending institution, bad debt in banking business is an eventuality and
cannot be avoided. Bad lans or Non Performing Assets (NPAs) are loan assets, which cease to
generate income to the bank. These assets have well defined credit weakness that jeopardize the
liquidation of debts and may be characterized by distinct possibilities that bank will sustain some
losses. NPAs have dampening effect on banking system since long, though they were not in the
public domain till early 90s (Khasnobis,2006).
Norms on NPA was implemented for the first time by RBI in 1992-93, when Gross Non
Performing Asset (GNPA) of all PSBs were Rs 39253 crores, representing 23.18% of Gross

2
Advances (GAs), which rose to Rs 112489 crores, representing 3.17% of the GAs as on March
2012. For all Schedule Commercial Banks (SCBs), GNPA were Rs 47,300 crores representing
15.7% of GAs as on March, 1997, which rose to Rs 1,37,055 crores for SCBs representing
2.94% of GA as on March,2012. This indicates low quality of credit portfolio in absolute terms.
Such a high figure of loan defaults is directly eating away vitality of the PSBs and forces us to
relook on the credit appraisal and follow up techniques applied by the banks. (Sharma, 2005).
GAs, GNPAs and GNPA/GA Ratio of all SCBs from March 1997 to March 2012 and of all PSBs
from March 1993 to March 2012 are graphically presented in following charts.

Chart 1. GNPA of SCB and PSB

Chart 2. GA of SCB and PSB

Chart 3. GNPA Ratio of SCB and PSB

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A look at the GNPA curves for PSBs and SCBs exhibit upward trends in the last six years
(though prior to that period over a period of five years there was a declining trend in GNPA due
to number of factors including global recession, for which the GNPA figures increased very
sharply. The GA figures with respect SCBs as well as PSBs reveal existence of continuous
upward trends, which indicate increasing credit appetite in the various segments of the society
(thereby justifying the commonly held impression regarding ‘growth story’ in the Indian
economy). The GNPA ratio [(GNPA/GA) X 100] figures have registered decline over a period of
more than a decade till 2008-09 for PSB and 2009-10 for SCB indicating apparent improvement
over years, primarily because of the many-fold increase in the gross advances and not due to the
activities, like, better management of distress asset through proper appraisal, follow up and
recovery actions. The micro and macro impact of such deadly virus are as under:

Micro or bank specific impact of NPA :


 NPA is like a “double – edged knife” as it not only reduces net interest margin (as
interest cannot be charged on such accounts), but also erodes current profit generated by other
performing assets due to stringent provisioning norms on impaired loans
(Selvarajan&Vadivalagan, 2012). Moreover it puts deterrent effect on the solvency and liquidity
of the bank.
 Asset quality of a bank is measured inter-alia, in terms of the percentage of NPA to total
advances and therefore a higher level of NPA leads to adverse comments and criticism by all
stake-holders which in-turn, adversely affects bank’s image.It also de-motivates the staff and
creates investor apathy and shakes the customer’s loyalty.
 Additional time and efforts required in management of bad loans involve indirect cost
which a bank has to bear for no incremental gain. NPA creates a serious problem of asset
liability mismatch as the money lent for a particular period if not recovered in time, meeting the
matching liability will be extremely difficult and often becomes costly.
 The cost of financial intermediation by banks is high partly because of the cross
subsidization of their NPAs. The immediate consequence of large amount of NPAs in the
balance sheet of a bank is bank failure, (Hou, 2007).There are evidences that even among the
banks that do not fail, there is a negative relationship between NPA and performance efficiency.

4
 It tends to de-motivate the staff and create investor apathy and shake the customer’s
loyalty. Public confidence depends on the intrinsic strength of banks, their sound balance sheet
and strong fundamentals, which is diluted with the existence of NPA level of beyond tolerance.

Macroeconomic/ industry impact of NPA :


 NPA implies bad loans and is a drag on bank’s resources. Scarce resources of the bank
get blocked, restricting the recycling to the productive sectors of the economy. Once the credit to
various sectors of the economy slows down, the economy is badly hit. There is a slowdown in
growth in GDP and consequent depression in the economy.
 Indirectly the burden of NPA is to be borne by the society as a whole. When
government comes to rescue by way of infusion of capital to a sick bank due to erosion of capital
on account of NPAs, the same comes out of government’s budgetary resources which is
contributed by the public in general, either in the form of tax revenues or from the hard earned
savings of the investing public. In any case, the society is bearing the cost of these
NPAs,(Sharma, 2005).
 It is a fact that at present, Indian banks are well-capitalised, with satisfactory capital
adequacy ratio. However, growing distress asset in stressed power and airline sectors is a matter
of great concern for all concerned. (RBI, 2012). Management of NPAs is as such sacrosanct to
ensure effective re-cycling of funds, and improvement of bottom lines. Therefore, reduction in
NPA should be treated as a national priority (GOI, 1999) and it is necessary that NPAs in banks
should be kept at the minimum possible level.

3. Identification of Research Gap

In view of the seriousness of the problem, numerous research studies have been conducted on
different issues concerning credit risks in banks including NPAs. However, empirical works on
NPA problems in PSBs are found inadequate. The exhaustive review of literature on NPA
demonstrates that majority of the research work has been undertaken on aggregate PSBs data
with primarily focus on the areas which include

i) Trends of NPA in PSBs (Chaitanya (2004) and Reddy, Babu, Mallikarjuna&Viswanath


(2006)).

5
ii) Impact of NPA on micro as well as well macro economic variables (Sharma (2005),
Gopalakrishnan (2006), Bodla&Verma (2006), Singla (2008), Thiagarajan, Ayyappan,
Ramachandran and Sakthivadivel (2011), Nandy (2011), Yadav (2011), Jayasree and
Radhika (2011), Rajput, Gupta and Chauhan (2012)).

iii) Future value of NPAs with the help of simple/ multiple regression models (Berger &
Young (1997), Ranjan& Dhal, (2003), Misra& Dhal (2003) and Gopalakrishnan (2006)).
Forecasting NPA employing data of past loans (Graham & Humphrey (1978)).
However empirical work on individual bank-wise trend study and modeling for the purpose of
forecasting future value and conducting impact analysis on NPA in PSB has seldom been
attempted. It is against this backdrop that the present study is undertaken to fill up this gap and
make a modest contribution in the field of management of NPA in banks in India. Accordingly,
examination of movement of NPA over time and forecasting the same for medium term with the
help of univariate time series data by employing parametric Curve Estimation Technique of
Regression Analysis, non parametric LOESS Curve Fit Technique and semi parametric Penalised
Spline Curve Fit Technique for six selected PSBs and PSB in aggregate has been attempted in
the thesis. Similarly, for the purpose of examining the impact of NPA on strategic banking
variables, along with time variable in selected PSBs as well as PSBs in aggregate, with the help
of simple as well as multiple regression analysis have been undertaken.

4. Objective of the Study


In view of the relative importance of NPAs in banking sector in India in general with PSBs in
particular, it is perceived that a comprehensive study in this area should be made. The present
study is a humble endeavour to examine various aspects of NPAs in selected PSBs and PSBs in
aggregate. The specific objectives embodied under the research are as follows:
i) to review the existing norms and concepts related to NPA,

ii) to review the mechanism for effective management of NPAs as initiated by PSBs in India,

iii) to examine the overall trends of NPAs and to explore the dynamicity of NPA as the
variable under study over time in selected PSBs.

iv) to examine the status of inter relationship as is existed among the set of relevant banking
variables including NPA,

6
v) to examine the impact of NPAs on profitability and other strategic banking variables along
with time variables, and

vi) to suggest future action plan based on the findings emanated from the points iii, iv and v as
mentioned above.

5. Methodology of the Study


To examine dynamicity of NPA over time as stated in the third objective, parametric, non
parametric and semi parametric and nonlinear regression models have been invoked to
enhance the precision level of the fitted curves. The techniques of regression diagnostics have
been employed to judge the validity of the models. Towards this end, Box Plot has been used
to identify outliers. DW Test and t test have been employed to diagnose the existence of
independence in the data-sets in respect of the parameters GNPA and GA. To examine the
normality or non-normality of the distributions followed by the different data sets on the above
parameters, normal Q-Q plots have been constructed apart from finding out the critical values
(from table) of the SW Test Statistic. To determine the features of the above data sets, values
of the simple statistical measures, like, mean, range, standard deviation, coefficient of
variation along with measures of the properties, namely, skewness and kurtosis have been
computed. Parametric models, using time series regression analysis (Curve Estimation
Technique) have been employed to analyse the trends as are existed in the above data-sets
relating to the parameters, GNPA and GA respectively. Finally, the best fitted model to
represent the trend has been obtained in case of each data-set, and the forecast values based on
the said best fitted model for the respective data-set have been generated. Non parametric and
semi parametric models have also been developed by employing LOESS Curve Fit and
Penalised Spline technique respectively.

With respect to the objective number four, pair wise correlation co-efficient have been
computed and appropriate tests have been employed to judge the significance status of these
co-efficient. This has enabled us to select the appropriate variables to be considered for further
study.

To understand the impact of NPA as mentioned under objective number five, banking variables
selected by employing pair wise correlation under profitability and productivity in addition to

7
strategic banking variables like net interest margin, credit-deposit ratio, capital adequacy ratio,
credit growth and priority sector advances to total advances have been regressed. Model validity
has been studied to finally determine the most appropriate model.

To study the impact of NPA on the profitability of banks firstly simple regression have been used
to measure the relationship between two variables. But as there are number of factors affecting
the profitability, it is not appropriate to judge profitability with NPA alone, rather few other
strategic banking variables, along with NPAs have been considered through multiple regression
models which consist of determining a regression equation explaining the relationship between
dependent variables (profitability) with the independent ones. Similarly, simple regression has
been used to examine statistically significant relationship between productivity related variable
like OPE and other selected variables with NPAs. OPE or other selected variables have been
taken as dependent variable and NPA as independent and models have been developed
separately for individual banks and PSBs in aggregate for each variable. For examining the
impact of NPA on OPE and other selected variables as stated above along with time variable,
multiple regression analysis has been undertaken and model developed separately under each
case.
Assumptions of linear regression models, ie, independence of the errors and normality of the
error distribution have been verified with the help of DW statistics and SW statistics
respectively. Significance of the models has been checked at five percent level of F values.
Model coefficients have been checked at five percent level of t values. Also to diagnose the issue
of multi co-linearity in multiple regressions, the value of VIF and Tolerance Factor (TOL) have
also been computed and compared with standard.

6. Organization of the Thesis


The first chapter begins with a brief note on the status of NPA in Indian banking and its impact
on economic variables. It is observed thatGNPA as a percentage of GA have shown marked
improvement with the exception of last few years, though GNPA in absolute figure is still very
high and is of paramount concern for all stake holders and therefore has been identified as the
subject matter of study. A detailed review of literature with respect to subject matter of the thesis
has been made with reasonable precision. Objective, Research Methodology and Scope of the

8
study have been documented. The chapter ends with scheme of the thesis, giving a fair idea of
distribution of the total research work.
Chapter 2, has elaborately described Prudential Norms on NPAs and a few other related concepts.
The concepts of loan assets and their various classifications have been spelt out. The guidelines
of RBI on NPAs, on income recognition, on asset classification and on provisioning have been
narrated in this chapter. A few operational concepts onNPAs have also been discussed in brief.
Chapter 3 delineates on the mechanism for effective management of NPAs as initiated by PSBs
in India.All PSBs individually have framed a Recovery Policy, duly approved by it’s Board
with the primary objective of adopting aggressive recovery measures and implementing case
specific strategies, which may include persuasion, restructuring, settlements, and legal methods,
to ensure maximum and timely recovery of dues in distress asset and includes number of
recovery mechanism.
In chapter 4 an attempt has been made to examine the dynamicity of NPA as the variable under
study over time, in six selected PSBs along with PSBs in aggregate.Parametric models (using
time series regression analysis) have been employed to examine the trends existing in the above
data-sets relating to the parameters, GNPA and GA respectively over time. Finally, the best
fitted model has been used to forecast values for three years.
Chapter 5 and 6 of the thesis attempts to employ Non Parametric(LOESS Curve Fit
(Quadratic))model and Semi Parametric( Penalised Spline ) model to examine the pattern
existing in the above data-sets relating to the parameters, GNPA and GA respectively over time,
followed by forecasting future values for three years. Diagnostic tool like Quantile Comparison
Plots of the Residuals and Residuals vs Predictor Plot have been employed and to check the
presence of outliers in the dataand to examine appropriateness model for the given dataset
respectively.
Chapter 7 examines relationship between NPA and selected banking variables with the help of
pair-wise correlation analysis followed by regression analysis (simple as well as multiple) to
examine impact of NPA along with time variable on such variables and model developed under
each case. For the purpose of examining impact of NPA on the profitability of banks simple
linear regression have been attempted. To examine the impact of NPA along with time variable,
multiple regression model is invoked. Same regression process has been followed for other
statistically significant banking variables as stated above. However, apart from NPA, as there are

9
number of variables affect profitability of a bank, it is not appropriate to judge profitability with
NPA alone, rather few other strategic banking variables along with NPA have been considered
through multiple regression model to examine overall impact of NPA and other strategic variable
on profitability of selected PSB.
Chapter 8 is having three sections. Section I is earmarked for summary of the thesis. Section II
narrates suggested the future action plan based on the findings emanated from chapters 3, 4, 5
and 6, The last Section (Section III) is dedicated for future application of the thesis, uniqueness
of the research work, social benefits of the research, scope of future research on the subject and
comprehensive conclusions.
7. Results and findings of the Study
7.1. Summary Statistics of Goodness of Fit
7.1.1. Parameter GNPA

Parametric (Curve Semi Parametric (Penalized


Non Parametric (LOESS Fit)
estimation) - Best Model Spline)
Bank
Sig. of Sig. of Sig. of
R2 F-Stat R2 F-Stat R2 F-Stat
F F F
SBI 0.910 40.307 .000 0.979 84.269 0.000 0.981 222.851 0.000
SBT 0.793 15.284 .000 0.915 27.035 0.000 0.826 31.980 0.000
SB 0.854 37.887 .000 0.977 36.237 0.000 0.972 79.263 0.000
UCO 0.573 4.922 .021 0.939 31.793 0.000 0.919 65.125 0.000
CBI 0.660 7.756 .004 0.780 7.934 0.003 0.742 18.186 0.000
PNB 0.845 14.969 .000 0.900 16.556 0.000 0.905 44.067 0.000
PSB 0.796 15.571 .000 0.977 91.068 0.000 0.982 282.539 0.000

7.1.2. Parameter GA

Parametric (Curve Semi Parametric (Penalized


Non Parametric (LOESS Fit)
estimation) - Best Model Spline)
Bank
Sig. Sig. Sig.
R2 F-Stat R2 F-Stat R2 F-Stat
of F of F of F
SBI 0.998 1914.541 .000 0.999 608.573 0.000 0.999 1211.258 0.000
SBT 0.998 2331.362 .000 0.999 346.897 0.000 0.998 480.639 0.000
SB 0.994 783.542 .000 0.999 424.746 0.000 0.999 675.707 0.000
UCO 1.000 8962.282 .000 1.000 1366.806 0.000 1.000 2552.735 0.000
CBI 0.994 710.982 .000 0.999 406.278 0.000 0.996 351.744 0.000
PNB 0.999 4090.522 .000 1.000 1115.723 0.000 1.000 2617.785 0.000
PSB 0.999 5356.511 .000 1.000 2282.698 0.000 1.000 3530.950 0.000

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7.2. Aspects of Forecasting using Parametric, Non Parametric and Semi Parametric
Methods
7.2.1. Parameter GNPA (Rs. in Crore)
Semi Parametric (Penalized
Parametric (Curve estimation) Non Parametric (LOESS Fit)
Bank Spline)
2013 2014 2015 2013 2014 2015 2013 2014 2015
SBI 41015 52313 66019 47770 60513 75270 51323 67531 86941
SBT 1333 1711 2183 1689 2164 2730 1702 2186 2761
SB 2712 2947 3197 3705 4437 5284 3896 4848 6006
UCO 2301 2581 2908 4961 6261 7780 5122 6619 8420
CBI 2345 2445 2611 7614 10026 12954 8200 11178 14854
PNB 11883 19282 30206 9864 12887 16520 11234 15599 21036
PSB 103565 129497 161393 134061 170383 212990 146360 194670 253414

7.2.2. Parameter GA (Rs. in Crore)


Semi Parametric (Penalized
Parametric (Curve estimation) Non Parametric (LOESS Fit)
Bank Spline)
2013 2014 2015 2013 2014 2015 2013 2014 2015
SBI 1081499 1273037 1488046 1045556 1202892 1371598 1050842 1217456 1401010
SBT 65412 78393 93949 62739 72069 82271 63477 73641 85068
SB 143708 163533 184691 143015 161322 180477 141953 159559 177970
UCO 138494 161169 186218 136585 157408 179906 137953 160666 186069
CBI 187288 223424 264404 178670 206382 235954 180639 211084 244681
PNB 354665 426495 508430 351174 417222 490197 360837 437843 526481
PSB 4274736 5033027 5884383 4165363 4813296 5512412 4205179 4909130 5693669

7.3. Results and Findings of the Study


7.3.1 Examination of Trends and Forecasting
i) The main objective of the research work undertaken is to obtain a quantitative assessment
of the movement of GNPA values over years with respect to selectedPSBs and to obtain the
pattern of dynamicity different parametric models are fitted in respect of parameters GNPA and
GA. Strikingly, the values of GA follow smooth patterns over years irrespective of banks.
ii) The general diagonal orientations of the points suggest that GNPA and GA datasets are
highly correlated to Time(Year) for all the banks.
iii) Both GNPA and GA dataset of six selected PSBs along with PSBs in aggregate exhibit a
non linear trend with parametric, non parametric as well as semi parametric methods.

11
iv) When examining the pattern of the curve under parametric approach, we have found that
in case of GNPA dataset all the banks with the exception of PNB have best fitted with cubic
curve while PNB has been fitted with polynomial of degree 5. For GA dataset all the banks
including PSB in aggregate are best fitted with cubic model. We may therefore, conclude that
polynomial family of curves has represented both GNPA and GA dataset adequately. With non
parametric approach, it has been observed that both GNPA and GA dataset of all the banks
including aggregate PSB have fitted well with LOESS fit (Quadratic) exhibiting the non linear
nature of the given dataset. Semi parametric method also establishes non linearity of the GNPA
and GA dataset of all the banks including aggregate PSBs.
v) Residuals from best models are found to be random and they follow normality, thus
model post-requisites in regard to both randomness and normality have been satisfied, and hence
suggest future use of such models on other banks also.
vi) With parametric, non parametric and semi parametric modeling GNPA data set of all the
banks including aggregate PSB show general upward trend in the later years whereas in case of
GA data set continuous upward trend is observed.
vii) By extrapolating models beyond the period over which they were estimated, we have
forecasted values for the years, 2013, 2014 and 2015 with respect to the parameters GNPA and
GA. Forecasted values exhibit rise in future value in respect of both the parameters.
viii) It has been observed that in respect of parameter GNPA, both non parametric and semi
parametric models are exhibiting higher level of precision and better fit as compared to
parametric models and hence are very muchrelevant and useful in forecasting future values.
However, in respect of parameter GA, parametric,non parametricand semi parametricmodels are
very much relevant and useful as they exhibit very high level of precision of the predicted
values.
Thus it can be concluded from the above that the dataset in respect parameters GNPA and GA of
all the selected PSBs alongwith PSBs in aggregate have exhibited similar features like – curve
linearity in the sample dataset and upward trends in the recent past and foreseeable future.

7.3.2. Analysis of Impact of NPA

The main objective of the research work undertaken is to obtain a quantitative assessment of the
relationship between NPA and selected strategic banking variables including profitability,

12
productivity and few others and to examine the impact of NPA along with time variable on such
dependent variables. Accordingly, Correlationand Regression Analysis has been undertaken .
1. Correlation Analysis exhibits the following relationship
(i) Profitability represented by PBT/TAof all PSBs with the exception of SBI, Productivity
represented by OPE and CDR of all PSBs, CAR of all selected PSBs with the exception of SBI
and SB have been found to have statistically significant (p value less than 0.05) negative
relationship with NPA (GNPA/TA),though at varying degree. Profitability of SBI and CAR of
SB also has negative relationship with NPA though not statistically significant with p value very
high.
(ii) NIM/TA of SBT has been found to have statistically significant (p value less than 0.05)
negative relationship with NPA (GNPA/TA), while for PSBs similar relationship is observed
with p value marginally higher than 0.05. CRDGROWTH of SBT, UCO, PNB and PSB have
been found to have statistically significant (p value less than 0.05) negative relationship with
NPA (GNPA/TA), while for CBI similar relationship is observed with p value marginally higher
than 0.05. The relationship of other banks are not statistically significant and hence left out from
the scope of our study.
3. Impact Analysis using Regression Technique:
(i) The study clearly reveals that NPA has negative impact on profitability for all the selected
banks along with PSBs in aggregate both in respect of simple regression with NPA as predictor
and multiple regressions where along with NPA selected strategic banking variables are
predictors. It is also noted that impact of these selected strategic banking variables are not same
for different PSBs. The multiple regressions have also improved the precision of the modeling as
evident from the tremendous increase in the R2 value of the models in comparison to simple
regression. It has also been observed that with time and NPA, as predictors, only SBI, SBT and
UCO are found to have statistically significant impact on profitability. However, with the
inclusion of other statistically significant strategic variables in predictor only SBI and SB are
found to have statistically significant impact on profitability.
(ii) In case of productivity (OPE) we observe that though it has strong negative correlation with
NPA for all the banks but simple linear model couldnot be established. However, with the
inclusion of time in the predictor, models with very high R2(between 0.917 to0.978) have been
established for all the banks excepting CBI and PSBs in aggregate.

13
(iii) Since NIM/TA has high negative correlation with SBT and moderate correlation with PSBs
in aggregate, statistically significant models have been established in these cases. However, with
the inclusion of time in the predictor, model for SBT can only be developed.
(iv) In case of CDR we observe that though it has strong negative correlation with NPA for all
the banks but simple linear model couldnot be established. However, with the inclusion of time
in the predictor, models with very high R2 (.944) could be established for SB.
(v) Since Credit Growth has negative correlation for all the banks except SBI and SB,
statistically significant models have been established in these cases though R2 value is not good.
With the inclusion of time in the predictor, model for SBT could only be developed with
moderate R2 value.
(vi) CAR has been found to have negative correlation for all the banks except SBI and SB, but
statistically significant models could be established in case of SBT only though R2 value is not
good. With the inclusion of time in the predictor, models for SBT could only be developed with
low R2 value.

8. Suggested Action Plan based on the findings emanated from the study

The study reveals a non linear upward trend in classified debt over the sample period and
forecast steep rise in the next three years, which is an alarming situation for the growing
economy in general with banking industry in particular. Moreover, it has been found that NPA
has statistically significant negative impact on profitability with all the selected PSBs along-with
PSBs in aggregate. In respect of other selected banking variables, NPA has statistically
significant impact only with respect to few of the selected PSBs. In short, it may be concluded
that arresting the steep growth in NPA is the prime challenge with the policy makers in PSBs.
Though arresting the growth of NPA is really a challenging task but it is certainly possible to
containit’s growth. In this direction, a few comprehensive action plans have been suggested to
contain the growth of distress asset as under.

8.1. General Action Plan

Top priority has to be accorded towards management of NPA with a view to improve overall
quality of asset. A two pronged approach comprising (i) preventive measures and (ii) curative
measures is advocated to contain the rising NPAs.It is observed that even a good appraised

14
account tends to become non performing for lack of proper monitoring. Ensuring compliance of
sanction terms, periodical verification of primary & collateral securities, proper valuation of
securities charged in favour of the bank, identification of early warning signal for initiating
timely preventive measures, monitoring and follow-up is treated as nucleus of effective Credit
Management System as it arrests degradation in the quality of assets. Signals can be picked up at
the incipient stage of sickness. The bank should identify these stress symptoms and take
corrective steps to avoid slippage into NPA category. The branches/ offices should put more
impetus on credit appraisal/ sanctioning/ documentation/ monitoring/ review/ renewal etc to
restore quality of the asset. In cases where the accounts show symptoms of irregularity/ sickness
for reasons beyond the control of the borrower, the same should be restructured/ rescheduled/
rehabilitated in early stage itself when it is detected in order to prevent its slippage to NPA.

8.2. Other Action Plans


i) Autonomy in Framing Credit Policy and Credit Decision
ii) Introduction of Risk based Pricing
iii) Greater due diligence for Priority Sector Lending (PSL)
iv) Management of Time Barred Documents
v) Special Care for Compromise/ OTS/ legal cases
vi) Motivational package and training for employees
vii) Introduction of Credit Audit Cell
viii) Special Attention on High Value NPA
ix) Restructuring and Up-gradation of Potential as well as existing NPA Accounts
x) Transparency in communication between bankers and FIs.

9. Social Benefits of the Research


High level of NPA implies scarce resources of the bank get blocked, restricting the recycling of
funds in the productive sectors of the economy. Once the credit to various sectors of the
economy slows down, the economy is badly hit, resulting in increase in unemployment and
poverty. Moreover mounting menace of NPA raises the cost of credit, makes banks more averse
to credit risk and as a result, genuine small and medium entrepreneurs are denied of credit, which
unfortunately, throttle their enterprising spirits as well.

15
Again, when a NPA burdened PSB becomes sick with negative net worth, government comes
forward to rescue by way of infusion of capital to the sick bank. Such financial assistance comes
out of government’s budgetary resource which is contributed by the public in general, either in
the form of tax revenues or from the hard earned savings of the investing public. In any case, the
society is bearing the cost of these NPAs.
The study has not only identified factors behind the growth in NPA, but also recommended
measures to overcome the same. Moreover, by forecasting NPA for medium term and examining
the impact of NPA on banking variables in a PSB, as attempted in the Thesis, a PSB will be in a
position to initiate corrective actions towards improving the forecasted NPA, which will
undoubtedly improve the NPA level in the industry and a great relief for the society.

10. Future Application of the Thesis

The main purpose of constructing a time series model is to forecast. Such forecasts enable the
policy makers to judge whether it is necessary to take any measure to influence the relevant
economic variables. Given its association with bank failure and financial crisis, the evaluation of
non-performing loans (NPLs) is of great importance and should therefore be of interest in a
developing country like India. Specific areas of future application of such modeling are:
1. Future values of GNPA and GA,along with other banking variables, can be predictedby
other banks from the past dataset using the three methods (parametric, non parametric and semi
parametric) which has been illustrated in the forecasting section of the relevant chapters of the
thesis.
2. With the help of these forecasted values, banks can formulate policy initiatives to bridge the
gap between the tolerable level of NPA and forecasted level of NPA and thereby to mitigate risk
associated with credit portfolio.
3. Such forecasts enable the policy makers to judge whether it is necessary to take any measure
to influence the relevant economic variables.
4. Motivational schemes like promotion/ fringe benefits can be employed through performance
benchmarking based on forecasted value of GNPA and GA.
5. Applying the same methodology, other banks can also undertake impact analysisfor
examining the impact of NPA on strategic banking variables.The models can be used as a
performance measurement means for the selected PSBs as well.

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11. Scope of Future Research on the Subject
In future the researchers can use this study as a reference to examine the trend of NPA for other
PSBs and PrSBs and develop appropriate forecasting models and to examine the impact of NPA
on strategic banking variables and further compare these results among different group of banks
for examining the relative strengths and weaknesses of different banks. The researchers may
also explore multivariate modeling in forecasting NPA taking clue from this study which
primarily focuses on univariate modeling.

12. Conclusion
With the tightening of prudential norms over the years since its introduction andimplementation
in Indian banking industry, global recession, volatility in market driven factors and changes in
socio-economic environment in India, restoration of asset quality has gained paramount
importance.

The study undertakes regression analysis to examine impact of NPA on strategic banking
variables in six selected PSBs, along-with PSBs in aggregate in India and finds statistical
evidence in support of general perception, though at varying proportion. Movement of GNPA
and GA over time in respect of selected PSBs and PSBs in aggregate has been adequately
captured by parametric regression (curve estimation technique), non parametric regression
(lowessfit technique) and semi-parametric regression (penalized spline technique). All the
technique exhibited non linear feature and upward trend in our dataset in respect of parameter
GNPA and GA for all the PSBs and PSBs in aggregate. Models of most of the banks captured
are backed by precision level of high magnitude. Based on our findings, we suggest that highly
accurate forecasts may be obtained through the use of univariate time series modeling.
The study has clearly demonstrated that NPA in PSBs are on the rise for last three years and is
expected to rise still further in next three years. Of late, several institutional mechanisms have
been developed and are being followed by PSBs in Indiaand there has also been tightening of
legal provision to contain growth in NPA. It is suggested in the thesis that bankers should evolve
a two prone strategy and religiously implement the same to put a break on the tremendous
growth in NPA. The strategies are : (a) Blocking further slippage of advances to NPA category
and (b) Recovery of existing NPA. Number of strategic action plans has been suggested in
thestudy. However, it is generally perceived that effective management of NPAs require an

17
appropriate internal checks and balance systems in a bank, which depends primarily on the
wisdom and mindset of the top management (Board).

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___________________ ___________________
Signature of the Supervisor Signature of the Candidate
Prof. (Dr) Malayendu Saha Gour Bandyopadhyay

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List of Publications by the Researcher on Related Subject

Sl.
Title of the Paper Name of the Journal Date
No
Examination of Movement of NPA
International Journal of
Data over Time in Selected Public
Scientific and Engineering January,
1. Sector Banks in India with Non
Research (ISSN: 2229-5518, 2014
Parametric Approach, Page No : 741
Vol. 5, Issue 1, January 2014).
- 755
International Journal of
Modeling NPA Time Series Data in
Scientific and Engineering
Selected Public Sector Banks in India December,
Research (ISSN: 2229-5518,
2.
with Semi Parametric Approach, 2013
Page No: 1876 - 1889 Vol. 4, Issue 12, December
2013).
International Journal of
Impact of NonPerforming Assets
Engineering Science
NPAs on Strategic Banking Variables December,
3. Technology (ISSN: 0975-5462,
in Selected Public Sector Banks in 2013
Vol.5 No.12 Dec 2013).
India, Page No: 1933 - 1948
A Comparative Study of Trends and Perspective on Management by
Progress in Non – Performing Assets Heritage Business School, Bi –
4. in Selected Public sector Banks in July, 2013
annual Journal of Management
India, Page No: 79 – 97 Education Center (ISSN: 0974
– 7095, Vol. 5, 1&2 July 2013).
Conference
Achieving Excellence in International Conference on
Management of Non Performing Achieving Excellence in
1.
Assets (NPAs) by Scheduled Business Organizations: Issues
Commercial Banks (SCBs) in India and Challenges, 29 – 31st January,
with particular reference to Public January, 2009 at Centre for 2009
Sector Banks (PSBs), Page No: 18. Management Studies, University
of Burdwan.

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