CASIRJ Volume 15 Issue 3 [Year - 2024] ISSN 2319 – 9202

A Critical Review and Analysis of Non-Performing Assets at the Banking

Scenario of Kashmir
Research authors
Dr Ajaz Ahmad Bhat
[email protected]
MISBAH MEHRAJ
[email protected]
MEHVISH MUSHTAQ
[email protected]
Abstract
The working of non-performing assets (NPAs) best indicates the soundness of the banking
sector of any nation in the world; non-performing are the loans created by banks on which
repayments or interest are not done on time if the borrower fails to fulfil his promise for
repayment his loan for 90 days then and only termed into NPA’s, the study was conducted to
investigate the relative magnitude of the causes that lead to bad loans in the banks. The
respondents of the study were the credit/advance managers working in various branches
across seven different banking institutions operating in the Srinagar province of J&K state
The cause of this study is to seek and look into the contribution of the Jammuand Kashmir
banks individually to the NPA in the industry by looking into its growth pattern during the
period 2017-2022. Further, the study is made to look into the effect of different groups of
banks, namely, State Bank of India (SBI) and its associates, nationalised banks and private
sector banks on the banking industry in this regard.
Keywords: banks, Assets, loans,credits, repayment, borrower, officials, manager, financial
management,
INTRODUCTION
Banks are identified as financial centres specialized in the art of lending out funds mobilized
from customers. The evil effect of lending is clearly stated in a saying “neither be a borrower,
nor a lender”. If you will lend money to your friend, you will not only lose your money but also
your friend. The statement indicates how difficult it is to get back the money once again. Banks
have certain social obligations to fulfil as per government directives & in such a situation the
position of banks is “lend that much money which it can afford to lose”. Irrespective of little
setbacks, the role of “credit” cannot be undermined when compared to its usefulness to the
economy. That is why it is said that “credit has done more to enrich the nations than all the gold
mines in the world put together. “Credit is like getting paste out of the toothpaste; easy to get it
& recovery is like putting it back to the tube a very difficult task indeed. That is the reason why
good money lent sometimes becomes bad partly & in the banking parlance it is called Non-
Performing Asset (NPA).
Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,

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assets classification, income recognition & provisioning. But it could not match the pace with
which it was expected to. The accomplishment of these norms at the execution stages without
restructuring the banking sector as such is creating havoc, this project study deals with the
problem of having Non-Performing Asset (NPA) & the factors responsible for it. During pre-
nationalization period & after independence, the banking sector remained in private hands, large
industries who had their control in the management of the banks were utilizing major portion of
financial resources of the banking system & as a result low priority was accorded to priority
sectors. Government of India nationalized the banks to make them an instrument of economic &
social change & the mandate given to the banks was to expand their networks in rural areas & to
give loans to priority sectors such as small-scale industries, self-employed groups, agriculture &
schemes involving women. Lead Bank Scheme enabled the banking system to expand its
network in a planned way & make available banking series to the large number of population &
touch every strata of society by extending credit to their productive Endeavour’s. This is evident
from the fact that population per office of the commercial bank has come down from 66,000 in
the year 1969 to 11,000 in 2013. Similarly, share of advances of public sector banks to priority
sector increased from 14.6% in 2009 to 44% of the net bank credit. The number of deposit
accounts of the banking system increased from over 3 crores in 1969 to over 30 crores.
Borrowed accounts increased from 2.50 lakhs to over 2.68 crores
The Bank's Gross NPA Ratio continues to decrease and is further reduced by 51 basis-points Q
to Q to 5.26% from 5.77%, while being down by 241 basis-points YoY 7.67% recorded in
September, 2022. The Net NPA ratio has also moderated by over 35 basis-points in sequential
terms to 1.04% from 1.39% recorded for last quarter.
The accumulation of huge non-performing assets in banks has assumed great importance. The
depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs
in banks & financial institutions is over Rs. 1, 50,000 crores. While gross NPA reflects the
quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is
increasingly evident that the major defaulters are the big borrowers from the non-priority sector.
The banks & financial institutions have to take the initiative to reduce NPAs in time bound
strategic approach.
Review of literature
Gupta and Kesari (2016) found that global economic slowdown and its impact on Indian
economy was the primary reason for rising of the NPAs. Khosla and Kumar (2017) found that
the Indian banks were confronting more than Rs. 90,000 crores NPAs issue and were running
under loss of benefit Karunakar et al. (2008) discuss the various factors that boost NPAs, their
size, their effect on Indian banking operations and suggest measures to control the curse on the
banking industry. Use of suitable credit assessment and risk management methods is the key to
solve the problem of NPA accumulation. Rajeev and Mahesh (2010), in their article deal with the
issue of NPAs after the global financial crisis. They suggest that mere recognition of the problem
and self-monitoring can help to manage the NPA problem to a great extent. Self-help groups can
also play an important role in the recovery of the loans. Barge (2012) examines that early

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monitoring and management of lent funds is the necessity of the hour. The study suggests several
measures like better supervision of end use of funds, information about the credit history of the
borrower and assisting the borrowers to develop entrepreneurial skills to ensure that the asset
does not convert into a non-performing asset. Gupta (2012) makes a comparative study of the
position of NPAs of State Bank of India (SBI) and associates and other public sector banks. The
researcher concludes that for evaluation of the solvency of borrowers each bank should set up a
separate credit rating agency. It also suggests the need for a committee comprising of financial
experts to supervise and monitor the issue of NPAs. Shalini (2013) has analysed the causes and
suggested remedies for reducing NPAs in Indian public sector banks with special reference to the
agricultural sector. The analysis of the different problems faced by the Indian farmers deduces
the conclusion that banks should follow some measures before lending the loan. Prior collection
of reports regarding the goodwill of the farmers, post sanction inspection, educating the farmers
regarding the effects and consequences of defaulting are some of the suggested measures. Singh
(2013) in the investigation on the position of Indian commercial banks with regard to NPAs finds
that these poor quality loans are a major problem for the public sector banks, which show a
consistent rise over the years. The main contribution comes from the loans directed at the micro
sector and for poverty alleviation programmes. Bhaskaran et al. (2016) in their paper have
compared the NPAs of public sector banks and private sector banks over a period of ten years
(2004-2013). From their study, it is evident that private sector banks are performing better than
public sector banks in reducing the level of NPAs. The authors propose that banks should be
proactive in adopting structured NPAs management policy where prevention of NPAs receive
priority. Thomas and Vyas (2016) in a recent study on loan recovery strategy of Indian banks
suggests two measures, preventive and corrective. The paper also discusses several corrective
measures – legal, regulatory and non-legal that are to be taken to recover the non-performing
loans. Singh (2016) in another recent study on NPAs and recovery status find that the problem is
more severe for the public sector banks compared to the private sector banks. The academic
review points to the need to have strict lending policies for speedy recovery of loans. Meher
(2017) in the post-demonetisation period looks into the impact of the government’s notebandi
decision on the NPA of Indian Banks. The researcher finds both positives and negatives of the
event on the banking industry.
RESEARCH METHODOLOGY
Banks accept deposits from public & lend it to the general public for carrying out various
business activities etc. Banks have to pay a fixed rate of interest on these deposits & receive a
higher interest on its lending from borrowers. The difference in the interest rates is margin which
fulfils the operational obligations etc. Rest of the amount is net profit which is distributed among
its shareholders after keeping certain reserves. This is a normal way of functioning & operations
in the Banks. To pay back the depositors, the borrowers of the bank have to pay their loan in
time & when they fail to do so, the circulation of money is stopped which is fatal to a financial
institution. The loan or advance which is not being repaid in the time becomes default which is
termed as Non-Performing Asset.

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Thus the NPAs are always, of prime attention in banks. They should never rise to any
undesirable level. It is known fact that the banks & financial institutions in India face the
problem of swelling NPAs & the issue is becoming more & more unmanageable. In order to
bring the situation under control, some steps have been taken recently. The securitization &
reconstruction of financial assets & enforcement of security interest act-2002 was passed by the
parliament, which is an important step towards elimination or reduction of NPAs.
Scope of the Study
The title of the study undertaken for the research work is“A Critical Review and Analysis of
Non-Performing Assets at the Banking Scenario of Jammu and Kashmir” The study is confined
to seven banks operating their business in the district Srinagar. These seven banks are: The J&K
Bank Ltd, HDFC Bank Ltd, Punjab National Bank, State Bank of India, EllaquaiDehati Bank,
Indian Overseas Bank & ICICI Bank
Objectives of the study
 To study the problem, causes and consequences of an asset becoming non-performing
asset.
 To understand how NPAs affect the performance of a bank.
 To study the procedure & tools used for management of NPA.
Methodology of the study
This study is based on the secondary information and as well, Study is based on the various data
provided by bank officials, RBI circulars, Journals, magazines & data from research literature is
thoroughly studied & interpretation made thereof. Primary data has been collected from
anonymous banking staff from the entire banks understudy.
Plan of Analysis
The data is collected raw & it is complied, classified, tabulated & then analysed using financial
techniques & statistical tools. Graphs & charts are used to highlight the statistics. Based on this
data & analysis, inferences were drawn.
Data Source
The data for this study is primary data which was collected by the questionnaires which were
served to staff of the target banks. The data so collected through questionnaires was compiled &
analysed using the statistical software SPSS version 16.0.The results provided by the software
were interpreted. Moreover, descriptive statistics, correlation, regression analysis & comparative
statistics together with model fit statistics were used to deduce logical conclusions.
Fig-1: Descriptive Statistics
FACTORS MEAN Std. Deviation
Bank specific 3.9821 .2147
Client specific 3.4524 .2331
Manager’s Action 3.6964 .3725
The descriptive analysis reveals a mean of above 3 to each of the causes of NPA meaning that all
the respondents of the study agree that these factors make a considerable influence on the net
Non-Performing Asset figure of the bank as they have attached a high significance to each factor.

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The major factor leading to NPA as identified by the respondents is the bank specific factor
which has the highest mean value of 3.9821. Also from descriptive analysis, it is evident that
standard deviation for all the variables is less than 1.According to Cohen (2003), for the normal
distribution of data standard deviation must have a range of 0 to 1. As it is evident that the
standard deviation of all the variables fall within in the range, the data may be considered
normally distributed & Pearson correlation analysis may also be carried to assess the relationship
between variables understudy.
Fig-2: Correlation Analysis
FACTORS Bank Client Manager NPA
specific specific Action
Bank specific Pearson 1
correlation
Sig (2-tailed)
Client specific Pearson .667** 1
correlation .000
Sig (2-tailed)
Manager Action Pearson .746 .663 1
correlation .000 .000
Sig (2-tailed)
NPA Pearson .824 .729 .709 1
correlation .000 .000 .000
Sig (2-tailed)
Correlation is significant at the 0.01 level (2-tailed)
Pearson correlation coefficient was calculated to assess the relationship between the independent
& the independent variables of the study. The above table exhibits the direction & the strength
among the dependent & the independent variables. It was found that there exists positive high
correlation between all the independent variables, rather causes & the dependent variable. From
the table, it is clear that there exists a positive high correlation between all the factors /causes
NPA, like, bank specific, client specific, manager action, & the effect, i.e. NPA. The level of
relations between the dependent variable NPA & the independent variables.like bank specific is
82.4 %( .824**), client specific 72.9 %(.729**), manager action 70.9%(.709**) respectively.
These relationships are significant at 1% level of significance for two tailed test. Among these
relations the bank specific factor is depicting a very high positive correlation to the extent of
82.4% indicating the fact that the bank specific causes are primarily responsible for the
deterioration in the asset quality in the banks. These causes are those which are considered to be
within the direct scope of the bank management.
For hypothesis testing & studying the variable relationship regression analysis has also been
conducted. The result of regression analysis by SPSS is reproduced in the following table:

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Fig-3: Regression Analysis

Coefficients a
Unstandardized Standardized
Model coefficients coefficients T Sig. R R Square
B Std..error Beta

1. (constant) .811 .832 1.975 .000

Bank specific .148 .156 .776 1.945 .000
0.929 0.863
Client specific .149 .160 .778 1.934 .000

Manager Action .199 .113 .849 2.761 .000

Dependent variable: NPA
Regression analysis was conducted to assess the impact of the causes of the NPAs on the level of
NPAs in the banks understudy. The regression table provides the result of constant, coefficient of
determination .t-value. Coefficient is the slope of regression line & it explains that 1 unit in
independent variable will bring how much change in dependent variable .The coefficient of
determination (R 2.) explains how much variation in the dependent variable is explained by the
independent variable.
According to the regression findings,1% change in the bank specific factor would bring about
77.6% change in the level of NPA, likewise 1% change in client specific would bring about
77.8% change in the level of NPA & the manager action would influence the level of NPA to the
extent of 84.9% by a 1% change . Thus, it is evident from the above findings that the correct
action of the managers would reduce the level of NPA in banks by a significant percentage of
approximately 85%.
The regression result also interpret the value of coefficient .929 that indicates 1% change in
independent variables ( Bank specific, client specific & manager action) in total can result in
92.9% change in dependent variable (NPA).Thus ,the causes are kept intact by 1% ,this will
result in 92.9%decrease in the level of NPAs. This relationship is positive & significant as shown
by the respective t values. The value of coefficient of correlation of determination (R 2) reveals
how robust the model is, which an estimated 86.3% is.
Fig-4: Model summary
Model summary

R SQUARE Adjusted R Std.Error of Change statistics

Model R square the Estimate R F Change Df1 Df2 Sig.F
Square change
change
1 .929a .863 .801 .31158 .863 114.120 4 9 .000

predictors: (constant) , General opinion, client specific, manager action, bank specific The model
analysis includes the independent variables & dependent variables. The linear combination of the
independent variables was significantly related to the dependent variable, R= .929, adjusted R

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square=.801, F=114.120 (p=0.000). An estimated 80% of variance of NPA is explained by the

causes of the dependent variables, thereby confirms the model fit.
The study also reveals that the major activity that leads to NPA is priority lending sector & the
major factor contributing to NPA is the bank specific factor, thus making it imperative for the
bankers to critically evaluate the bank specific factor before advancing loans to the said sector.
Fig-5: Descriptive statistics of Bank Specific Variables
Descriptive statistics
Factors Mean Std. Deviation N
Credit administration 2.8959 .42273 50
Supervisory 3.7261 .34038 50
authorities
Corporate governance 3.4514 .33047 50
The descriptive statistics analysis reveals a mean above 3 to each of the Bank specific causes of
NPA meaning that all the factors make a considerable influence on the net Non-Performing
Asset figure of the bank as all the respondents of the study have attached a high significance to
each factor, supervisory & regulatory authority being the most dominant factor.
Fig-6:Correlation analysis of Bank Specific Variables
Correlations
Factors Credit Supervisor Corporate Manager
awareness y governance opinion
authorities
Credit administration Pearson correlation 1
Sig.(2-tailed)
N 50
Supervisory authorities Pearson correlation .817** 1
Sig.(2-tailed) .000
N 50 50
Corporate governance Pearson correlation .683** .751** 1
Sig.(2-tailed) .000 .000
N 50 50 50
Manager opinion Pearson correlation .822** .777 .727 1
Sig(2-tailed) .000 .000 .000
N 50 50 50 50
**, correlation is significant at the 0.01 level (2-tailed)
*.correlation is significant at the 0.05 level (2-tailed)

Pearson correlation coefficient was calculated to assess the relationship. This table exhibits the
direction & strength among the causal variables of the Bank specific variable. It was found that
there exists a positive high correlation between these variables. All the relationship are
significant at 1% level of significance for two tailed test. The table shows that all the variables of
the Bank specific factors are highly correlated with each other.

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ANOVA
Factors Sum of Df Mean F Sig.
square square
Bank specific factors 16.950 4 4.238 24.532 .000
Between Groups 6.564 38 .173
23.514 42
Within Groups

Total
Client specific factors 6.380 4 1.595 7.864 .000
Between Groups 7.707 38 .203
14.087 42
Within Groups
Total
Major bank activity causing 23.342 4 5.836 7.840 .000
Between Groups 28.286 38 .744
npas 51.628 42
Within Groups

Total

Fig-7: Comparative statistics

The result shown by the comparative statistics indicate that the understudied banks have
significantly different approach towards their client & administration on the whole. However, the
post hoc test reveals that two homogenous groups exhibiting significant difference at 95%
confidence level. The tables are shown as under:
Fig-8: POST HOC Tests
Homogenous subsets
Bank Specific Factors
Subset for alpha =0.05
Bank N
1 2
PNB 3 2.0000
JKB 21 2.4000

EDB 3 2.4000
SBI 6 3.6000

HDFC 10 3.6600
Means for groups in homogenous subsets are displayed

With respect to the bank specific factor, the Table places Punjab National Bank, J&K Bank
&EllaquaiDehati Bank in subset 1 & places State Bank & HDFC bank in subset 2.

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Client Specific Factors

Subset for alpha =0.05
Bank N
1 2
PNB 3 2.8000
JKB 21 3.1429
EDB 3 3.2000
HDFC 6 3.4800
SBI 10 4.2000
Means for groups in homogenous subsets are displayed

In terms of client specific factor, the categorization is as under:

Punjab National Bank, J&K Bank, EllaquaiDehatiBank,HDFC Bank are placed in the first subset
& the State Bank is placed in second subset.
Major Bank Activity Causing NPAS
Subset for alpha =0.05
Bank N
1 2
SBI 6 1.0000
PNB 3 1.0000

EDB 3 1.0000
HDFC 21 2.2857
JKB 10 3.0000 3.0000
Means for groups in homogenous subsets are displayed

With regards to the element of the major bank activity leading to NPA’S,the table puts State
bank , Punjab National Bank,EllaquaiDehati Bank in subset 1 & HDFC Bank in category 2 ,with
J&K Bank featuring in both categories.
Fig-9: Comparative statistics
ANOVA
Sum of Df Mean F Sig.
square square
CA Between Groups 2.281 6 .380 .661 .681
Within Groups 20.693 36 .575
Total 22.974 42
SRA Between Groups 1.474 6 .246 .372 .892
Within Groups 23.793 36 .661
Total 25.266 42

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CG Between Groups 3.134 6 .522 .594 .733

Within Groups 31.650 36 .879
Total 34.784 42

NPA Between Groups 14.373 6 2.396 5.063 .001

Within Groups 17.032 36 .473
Total 31.406 42

The above table shows the result of comparative statistics conducted across the different banks.
The results indicate insignificant differences in the bank’s credit administration,
supervisory/regulatory authorities & corporate governance. While as significant differences was
found in the level of NPA’s of the said banks.
Findings:
The project study was conducted to investigate the relative magnitude of the causes that lead to
bad loans in the banks. The respondents of the study were the credit/advance managers working
in various branches across seven different banking institutions operating in the Srinagar province
of J&K state. The managers believe that the factors like bank specific, client specific & the
actions of managers have a considerable influence on the level of NPA in these banks. They have
attached highest mean significance to bank specific factor indicating that these banks have to
improve on their existing internal system in order to curb the rising levels of NPA. Within, the
bank specific factors three elementary factors were thoroughly studied which influence the level
of NPA in banks. The respondents of the study attached the highest significance to the
supervisory authority factor indicating loop holes in the said area should be plugged to decrease
the rising levels of NPA.
The respondents also believe that the right actions taken by the managers of the banks can help
in reducing the level of NPA by 84.9% the specific actions to be taken by the managers include
reduction in interest rates, obtaining credit information of the borrower, training the bank
officials, increased use of credit reference bureaus, using ratios in the process of evaluation,
emphasizing on project feasibility, monitor of loan quality ,using standard sanctioning procedure
& others.
The study also revealed that the banks have to be more vigilant while granting of loans to the
priority sector as this particular activity is seen as the major activity lending to mounting levels
of NPA.
Also, the fact in apparent that the NPAs are draining the capital of the banks & weakening their
financial strength. It is also as much a political & a financial issue. The banks & financial
institutions should be more proactive & pragmatic & structured non-performing assets
management policy where prevention of non-performance assets receives priority. Compared to
private sector banks, public sector banks are more in the NPA level.Therefore,public sector
banks must take more care in avoiding any account becoming NPA by taking proper preventive
measures in an efficient manner.

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Fig-10: Major Activities causing NPAs

Education loans 7%
Major activities causing NPAs

Education loans 7 %
Business
loans 43% Priority Business loans43%
sector
lending
priority sector lending 50
50%

Housing loans 0%

The pie chart shown above depicts the percentage that various banking activities cause
substantial NPA to the bank. The pie chart reveals that the major activity causing NPA is the
lending to the priority sector with the influence of 50%, followed by business loans to the extent
of 43%.We can interpret the information in the way that the lending process of the banks of the
priority sectors & the business establishments cause a considerable NPA to the bank. The
percentage of education loans to overall NPA is merely 7% which although is not negligible but
compared to the rest two is very low. The percentage on housing loans is 0% because the loans
sanctioned for the construction or purchase of a house is secured by the collateral security of the
house which is constructed or purchases until the loan amount is settled. The focus of the bank
should be to strengthen the collaterals on the business & priority lending.
Frequency Analysis:
The data collected with the help of questionnaire revealed that 50% of non-performing loans are
caused due to lending to priority sector. Some of the main reasons identified were:
 Directed loan system: Under this system the commercial Banks are required to supply
40% of their credit to priority sector.
 Loans directed to micro sector: Advances made to micro sector are problematic of
recovery especially when some of its units become sick & weak.
 Failure of poverty eradication schemes: Banks provide loans for poverty eradication
programs like IRDP, RREP, SUME, SUPEP, JRY, PMRY failed on various grounds in
meeting their objectives.
Huge amount of loans granted under these schemes are totally irrecoverable by banks due
to:
 Political manipulation
 Misuse of funds
 Non reliability of target audience of these sections.
It is advised to the bankers to adhere due care & diligence while granting loans to this particular
sections because bankers are also found negligent while making advances to priority sector.

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Bankers identified business loans as the second major activity that lead to bad loans. According
to them identified 43% of the total NPA’s is caused by this activity. There is an ever increasing
trend of granting loans to this sector that has set the alarm bell in ringing for the bank
management. Therefore, banks need to properly scrutinize the feasibility & viability of the
projects before making any such advances.
Responses of the managers with respect to their specific actions to reduce NPA:
Fig-11: Reduction in Interest Rates

Reduction In Interest Rates

12
10
8
Reduction in interest rates
6
4
2
0
yes No
From the above figure, it is evident that the majority of the credit/advance managers do not agree
with the view that reduction in the interest rates will actually help in bringing down the menace
of Non-Performing Assets. Majority say that bringing down interest rates will not help to
eradicate the NPA problem facing the banks
. Fig-12: Credit Information of the Borrower

14
Credit Information of the Borrower
12
10
8 Credit information of the
borrower
6
4
2
0
Yes No
This figure reveals that almost all of the credit managers of all banks agree to the fact the making
the borrower fill detailed information regarding his assets & other liabilities will help

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Fig-13: Credit worthiness of the borrower

CREDIT WORTHINESS OF THE BORROWER

14
12
10
credit worthiness of the
8
borrower
6
4
2
0
Yes No
Interpretation From this graph, it is evident that majority of our respondents agree that the
credit worthiness of the borrower is a major determinant whether the loan sanctioned will be a
performing loan or a non-performing loan. A borrower with good credit worthiness is less
susceptible to become a non-performing borrower. On the other hand, if the credit worthiness of
a borrower is not up to the mark, he is likely to become non-performing, adding to the worries of
the bank.
Fig-14: Ratios in Evaluation Process

RATIOS IN EVALUATION PROCESS

14
12
10
8 Ratios in evaluation process
6
4
2
0
Yes No
Interpretation Majority of the bank officials agreed that certain ratios, ifcalculated, can help
reduce the NPA level. These ratios need to be calculated before the sanctioning of the loan to the
borrower. These ratios may include certain liquidity, profitability& solvency ratios.

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Fig-15: Use of project appraisal techniques

USE OF PROJECT EVALUATION TECHNIQUES

14
12
10
use of project evaluation
8
techniques
6
4
2
0
Yes No
Interpretation From the above graph,it is clear that the managers of the credit department of the
banks understudy find it appropriate to use the techniques of project appraisal so as to establish
the reliability & the validity of the project to be financed could be established.
Fig-20: Management of loans with problems

MANAGEMENT OF LOANS WITH PROBLEMS

14
12
10
Management of loans with
8
problems
6
4
2
0
Yes No
From the above graph, it is clear that majority of advance managers of the banks understudy
come to an understanding that proper management of loans with problems helps in regularizing
the non-performing loans into standard loans or brings the loan from sub-standard to standard
loan platform. Managers from mainstream banks before believe in prevention than cure. If the
loan with the problem is treated as the early stage, it cannot be regularized & the threat of
becoming non-performing loan can be evaded with this simple approach.
Fig-16: Monitor loan quality

MONITOR LOAN QUALITY

15

10 Monitor loan quality

0
Yes No

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Monitoring the quality of loan is an important tool to curb the non-performing assets.Fron the
study concluded in Srinagar, majority of the bank officials dealing in sanctioning & maintenance
records agree that constantly monitoring the quality of the loan disbursed & keeping a vigil on
the spending of the loan amount makes it as profitable investment rather than a non-performing
asset.
DISCUSSION & CONCLUSION
A commercial bank is a profit making institution which accepts deposits, makes business loans
& offers related services. Commercial banks also allow for a variety of deposit accounts such as
checking, savings, & time deposit. While commercial banks offer services to the individuals
,they are primarily concerned by the bank.However,the loan is a risk output .There is always an
ex-ante risk for a loan to finally become non-performing when payments of interest & principal
are past due by 90 days or more, orat least 90 days of interest payments have been capitalized,
refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are
other good reasons to doubt that payments will be made in full. The non-performing assets that
are not able to generate income for the bank are the great threat for banking constitution. Rather
than generating profit for the bank, PA drains off the income earned by the other performing
asset by the way of paying interest to the real owner of the resources. It affects the overall
profitability of the bank adversely by affecting the return on equity & return on asset. Therefore,
there is a need to study the reasons that lead to NPAs & controlling them is crucial for both the
performance of an individual bank & the economy’s financial environment.
The purpose of the project study was to find out the relative magnitude of the causes of non-
performing assets with regard to all the causes in the seven commercial banks operating in
district Srinagar of Kashmir province of the State of Jammu &KashmirThese Bank's Gross NPA
Ratio continues to decrease and is further reduced by 51 basis-points QoQ to 5.26% from 5.77%,
while being down by 241 basis-points YoY 7.67% recorded in September, 2022. The Net NPA
ratio has also moderated by over 35 basis-points in sequential terms to 1.04% from 1.39%
recorded for last quarter Jammu and Kashmir bank has net profit of 422.77 Crores in its last
quarter. Listed peers of Jammu & Kashmir Bank include Bandhan Bank (-0.74%), RBL Bank (-
2.62%), Jammu & Kashmir Bank (0.71%) etc. Jammu & Kashmir Bank has a 59.40% promoter
holding & 40.60% public holding.
These banks are:
 Jammu & Kashmir Bank Ltd
 State Bank Of India
 Punjab National Bank
 HDFC Bank
 ICICI Bank
 EllaquaiDehati Bank
 Indian Overseas Bank
The study was carried out over a period of two months & the data was collected from the
respondents who were the credit/advance managers of the banks understudy. The respondents

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were served questionnaires which focused on the potential causes of NPAs. Likewise bank
lending in Kashmir is characterized by problem of non-performing loans. The high magnitude of
non-performing loans in commercial banks & the rate at which it grows annually poses serious
danger to both banking sector & the entire economy. A lot of factors are responsible for these
abnormalities in the banking sector. They include mal administration in credit process, laxity in
supervisory/regulatory oversight by RBI, weak corporate governance & unfriendly economic
situation in the country. These factors contributed immensely to the excessive high level
nonperforming loans in banks. Unless these roots cause the problem are tackled as suggested
above, the problem of non-performing loans will continue to have tremendous & debilitating
impact in the business of banking. However the economic performance of the country should be
a problem if banks can scan their environment, anticipate environmental changes & plan for
them.
RECOMMENDATIONS
In view of numerous findings from different studies &this study in particular, the following
general lines of action are advocated for consideration & implementation.
 Banks should articulate lending policy that must set out the bank’s lending philosophy &
objectives including the modalities for implementation, monitoring, appraisal & review.
 Before loans are advanced to prospective loan customers, banks should carry out through
credit assessment based on the cannons of good lending.
 Banks should obtain & use reliable information on potential customer from independent
sources. In this regard, the need for credit bureau services cannot be over emphasized .
Bank should therefore avail themselves of the services provided by the credit bureau that
are currently springing up in India’s financial sector.
 Banks must develop a corps of credit risk offers who have the experience, knowledge,
competence & the background to exercise prudent judgement is assessing, approving &
managing the process of granting credit.
 Banks must at all times ensure that all loans are adequately collateralized .Unsecured
lending should be avoided as much as possible. Every collateral/security pledged must be
perfected to enable the bank move easily against them in the event of the default.
 Given the level of abuse in the practice of margin loan, the RBI should articulate a
framework under which margin loan would operate in the financial market. Such a frame
work should restrict the loan portfolio of the banks to a certain percentage for the margin
facilities.
 Regulatory authorities should establish ‘whistle blowing’ procedures that encourage all
stakeholders to report any unethical activity/breech of the corporate governance code
using among others, a special e-mail or hotline to both the bank & the RBI.
 The idea of self-regulation by the banks should be actively pursued. The RBI as an
umbrella organization for the bankers has a crucial role to play in this dispensation.

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 The practice of regulatory forbearance must be discouraged. The regulatory authorities

must act decisively by applying the full weight of the law whenever there is a serious
breach of rules & regulations.
 Projects with old technology should not be considered for finance.
 Large exposure on big corporate or single project should be avoided.
 Operating staffs’ skills pertaining to the sanction of credit should be up graded.
 There is need to shift banks approach from collateral security to viability of the project &
intrinsic strength of promoters.
 Bank should prevent diversion of funds by the promoters.
 Operating staff should scrutinize the level of inventories/receivables at the time of
assessment of working capital.
 The Credit section should carefully watch the warning signals viz,non-payment of
quarterly interest, dishonour of bills etc.
 The bank must focus on recovery from those borrows who have the capacity to repay but
are not repaying initiation of coercion action a few such borrows may help.
 The recovery machinery of the bank has to be streamed lined ;targets should be fixed for
field officers/supervisors not only for recovery in general but also in terms of upgrading
number of existing NPAs.
LIMITATIONS
 Due to time constraints, the project study had to be restricted to the time period of two
months only.
 The study was confined to the district Srinagar Of Jammu & Kashmir state. This is
certainly a major limitation of this study as the findings of this study cannot be
generalized as the data pertaining to this project was only collected from Srinagar district.
And as such this finding may not hold good for the banks operating in other districts of
the valley.
 The conclusions of the study were based on the opinions/responses of the credit/advances
managers. The responses of the banking personnel may be biased as they might have
made their response in favour of their bank. Therefore subjectivity remains a concern.
 The information sought by the questionnaire produced to the potential respondents
contained confidential information which was not made public by the credit/advance
managers of the banks understudy.
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