SUMMER INTERNSHIP PROJECT

PROJECT REPORT ON

“TREND ANALYSIS OF NON-PERFORMING ASSETS OF

INDIAN BANKS”

SUBMITTED TO
BENGAL INSTITUTE OF BUSINESS STUDIES, KOLKATA
IN THE PARTIAL FULFILMENT OF THE DEGREE OF MASTER
OF BUSINESS ADMINISTRATION

SUBMITTED BY
AVIJIT DUTTA (FM 1607)

UNDER THE GUIDANCE OF

PROFESSOR ANKIT SINGH

BENGAL INSTITUTE OF BUSINESS STUDIES, KOLKATA
MONTH & YEAR OF SUBMISSION
DATE: SEPTEMBER 2024
 DECLARATION

The research paper titled “Trend Analysis of Non-Performing Assets of Indian Banks” is my
original work, which I confirm has not been submitted for any additional purpose to any other
institution. This work uses only authenticated sources for its information, data, and statistics,
all of which have been properly acknowledged and referenced. With a focus on the different
elements that influence the growth and decline of non-performing assets (NPAs) and an
evaluation of the effects of changes in banking and government policies, the objective of this
analysis is to understand the trends of NPAs in the Indian banking industry over the past few
years. To guarantee that the data and conclusions in this study are accurate, I have taken
every necessary step.

This paper’s results and deductions depend entirely on my knowledge and analysis of the
material; no other researchers were responsible for any influence.

DATE: 30/09/2024

SIGNATURE: AVIJIT DUTTA

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 CERTIFICATE

This certifies that the project report entitled “Trend Analysis of Non-Performing Assets
(NPA) of Indian Banks,” which was submitted in by AVIJIT DUTTA to meet a portion of the
requirements for MBA-PGPFM , was created entirely on your own initiative and under my
supervision.

All references, data, and figures in the paper were gathered from reliable sources and
appropriately represented. The research was carried out with devotion. Examining the causes,
consequences, and impacts of government actions and banking industry changes, this study
provides useful details about the patterns of non-performing assets (NPAs) in Indian banks.

The results of this study, which were entirely the product of the student, show an extensive
awareness of the subject.

I wish AVIJIT DUTTA well in all of their next projects.

DATE: 30/09/2024

SIGNATURE: [Link]
SINGH

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 ACKNOWLEDGEMENT

I want to deeply appreciate everyone that has supported me in finishing this study, "Trend
Analysis of Non-Performing Assets (NPA) of Indian Banks. “I want to start by expressing
my gratitude to, who has been my project guide throughout its entirety. They have supported
me with constant guidance, insightful advice, and encouragement. Their advice and ideas
have been very helpful to the outcome of this study.

I also want to express my gratitude to for providing me the assets and the environment I
needed to carry out my research. The project wouldn't have been possible without the support
and help of each of the aforementioned people.

I’m thankful to all.

NAME:AVIJIT DUTTA

DATE: 30/09/2024

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ABSTRACT-
Non-Performing Assets are a serious challenge faced by the banking sector and they pose a
serious threat to the development of the economy of a country. Non-Performing Assets are
the loans/advances that have been defaulted or are overdue. NPA is considered to be a crucial
factor while assessing the financial performance of a bank. A low NPA rate depicts high
competence of performance of a bank. The objective of the study is to analyze the trend of
NPA in Indian Banks, factors responsible for the creation of NPA, and its impacts. In the
present study, three Public Sector Banks (SBI, PNB & BOB) and three Private Sector Banks
(HDFC Bank, ICICI Bank & Axis Bank) have been selected to analyze the trend of NPAs in
Indian Banks. There are several internal as well as external factors that result in the creation
of NPA in Banks, and those factors have been identified in this study. The impact of NPA on
the profitability of banks has been analyzed with the help of tables and graphs. In the event
when borrowers fail/deny to pay back loans and advances, banks can recover such loans or
advances through recovery mechanisms. Some of the recovery mechanisms available for
Indian banks to recover defaulted loans or advances have been discussed in the present study.
This study shows that in India, Net NPA % of Public Sector Banks is higher than net NPA %
of Private Sector Banks.

Non-Performing Assets (NPAs) are a critical concern for the banking sector, indicating loans
that are at risk of default or have already defaulted. The composition of NPAs within public
sector banks provide valuable insights into the health of the banking system, the efficacy of
lending practices, and the broader economic landscape. This paper will delve into the key
aspects of understanding the composition of NPAs in public sector banks.

The banking sector plays a very crucial role in the development of the Indian economy, and
with their support, our system runs well. Therefore, the stability of the banking system is very
important. The growing non-performing assets of the banking sector over the past few years
have become a problem for the system and the economy. The concept of bad banks was
introduced as a solution, which would help stimulate the economy and clean up toxic assets
from banks' balance sheets. This analytical study is mainly about the comparison of the data
of 4 banks Schedule Commercial Banks, Private Banks, Public Banks, and Foreign Banks for
the years from 2011 to 2023. The data is secondary in nature and the data has been analyzed
using the Trend analysis technique. As per the findings Scheduled Commercial Banks have

4
had more NPAs over the past few years as compared to other banks. With the help of Bad
Bank, commercial banks can improve their profitability and focus more on customer service.
So bad bank will be considered as a good initiative

Purpose – This paper aims to analyse trends and determinants of NPAs in India’s banks. It
has empirically examined the bank-specific determinants of NPAs.

Findings – The determinant of NPAs during the post-crisis period suggests that faulty
earning management and deterioration in loan quality have resulted in high NPAs in India’s
banks. The result is similar for PSBs as well.

Research limitations/implications – The findings of the study suggest that the banks,
especially the Public Sector Banks (PSBs) need to revisit their earning management strategies
to maximise income and improve their loan quality in order to reduce the incidence of loan
failure.

Originality/value – The paper contributes by empirically analysing the determinants of

NPAs during the recent decade, between 2010 and 2023. Separate estimations have been
carried out to understand whether the drivers of NPAs differ in the case of PSBs.

Keywords: Public sector banks, Private sector banks, non-performing assets.

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SERIAL TABLE OF CONTENT PAGE NO
NUMBER

1 TITLE PAGE 0

2 DECLARATION 1

3 CERTIFICATR 2

4 ACKNOWLEDGEMENT 3

5 ABSTRACT 4-5

6 INTRODUCTION 7-9

7 HISTORICAL TREND IN NPA 10-19

8 LITERATURE REVIEW 20-21

9 RESEARCH OBJECTIVE & METHODOLOGY 21-22

10 RECOMMNENDATIONS & LIMITATIONS 22-27

11 IMPACT OF NPA IN PROFITABILIY 27-45

12 RESEARCH FINDING & ANALYSIS 46

13 RECOMMENDATION AND SUGGESTION 46-47

14 RECOVERY MEASURES 47-49

15 GOVERNMENT AND REGULATORY OF NPA 50-52

16 GLOBAL COMPARISON OF NPA 53-56

17 LIMITATIONS OF THE STUDY AND FUTURE 57-59

RESEARCH
18 CONCIUSION 60

19 REFERENCE 61-62

20 BIBLIOGRAPHY 63

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INTRODUCTION-
Banking sector is a vital and dominant part of the financial system, as it plays a crucial role in
economic development of a country. Banks are the 'Backbone of a country's economy. Banks
acts as a link between people with surplus money and people who are in need of money.
People deposit their surplus money in the bank, and bank provides loans with that surplus
money to people who approach the banks in need of money. In certain cases, customers fail
or intentionally default paying back loans to the bank, which results in formation of non-
performing assets.

Non-Performing Assets are the loans that are not paid back by the customers to the bank
within the scheduled time period. If the principal amount/interest is not paid by the customers
within the time period, then they become bad loans. Loans and assets which yield expected
income from it and does not reflect unusual risks beyond standard commercial-risk, then such
assets are called performing assets and the defaulted loans/ advances which fail to yield the
expected income become non-performing assets . Reserve Bank of India defines non-
performing assets as "a loan or an advance where interest and/ or instalment of principal
remain overdue for a period of more than 90 days in respect of a term loan".

Definitions-

An asset, including a leased asset, becomes Non-Performing when it ceases to generate

income for the bank.

A' non-performing asset' (NPA) was defined as a credit facility in respect of which the
interest and/or installment of principal has remained 'past due for a specified period of time.

The specified period was reduced in a phased manner as under:

w.e.f. 31.03.1993: four quarters

w.c.f. 31.03.1994: three quarters

w.c.f. 31.03.1995: two quarters

w.e.f. 31.03.2001: 180 days

w.e.f. 31.03.2004: 90 days

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 90 days' delinquency norms are not applicable to Agriculture segment

With the effect from March 31, 2004, NPA shall be a loan or an advance where:

1. Term loan: Interest and/or installment of principal remain over due for a period of more
than 90 days.

2. Cash credit/overdraft: The account remains 'out of order for a period of more than 90 days.

3. Bills: The bill remains overdue for a period of more than 90days from due date of
payment.

4. Other Loans: Any amount to be received remains overdue for a period of more than 90
days.

5. Agricultural Accounts: In the case of agriculture advances, where repayment is based on

income from crop. An account will be classified as NPA as under:

a) If loan has been granted for short duration crop: interest and/or installment of Principal
remains overdue for two crop seasons beyond the due date.

b) If loan has been granted for long duration crop: Interest and/or installment of principal
remains overdue for one crop seasons beyond due date.

Assets Classification-

Assets can be categorized into Four categories namely (1) Standard (2) Sub - Standard
(3) Doubtful (4) Loss the last three categories are classified as NPAs based on the period for
which the asset has remained non-performing and the realisability of the dues.

(1) Standard assets: The loan accounts which are regular and do not carry more than normal
risk. Within standard assets, there could be accounts which though have not become NPA but
are irregular. Such accounts are called as special Mention accounts.

(2) Sub-Standard Assets: With effect from 31.3.2005, a sub- standard asset is one, which is
classified as NPA for a period not exceeding 12 Months (earlier it was 18 months). In such
cases. the current net worth of the borrower/ guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the bank in full. In other
words, such an asset will have well defined credit weakness that jeopardize the liquidation of
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the debt and are characterized by the distinct possibility that the banks will sustain some loss,
if deficiencies are not corrected.

(3) Doubtful Assets: With effect from 31 march 2005, an asset is to be classified as doubtful,
if it has remained NPA or sub-standard for a period exceeding 12 months (earlier it was 18
months). A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub- standard, with the added characteristic that the weakness make collection or
liquidation in full,- on the basis of currently known facts, conditions and values- highly
questionable and improbable.

(4) Loss assets: A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly. In
other words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or
recoverable value.

When a Sub Standard account is classified as Doubtful or Loss without waiting for 12
months: If the realizable value of tangible security in a sub Standard account which was
secured falls below 10% of the outstanding, it should be classified loss asset without waiting
for 12 months and if the realizable value of security is 10% or above but below 50% of the
outstanding, it should be classified as doubtful irrespective of the period for which it has
remained NPA.

TYPES OF NPA-

There are two types of NPA: i) Gross NPA ii) Net NPA

 Gross NPA: Gross NPA is sum of all unpaid loans that are not recoverable, for which
provisions has been made by the bank & which are still in the bank's balance sheet.
This type of NPA includes loss, doubtful & sub-standard assets. However, this type of
NPA does not indicate actual loss of the bank. Gross NPA indicates that the asset
quality of the bank is poor. GNPA negatively impacts the reputation and credit value
of the bank.
 Net NPA: Net NPA is obtained after bank deducts the provisions for NPA. Net NPA
depicts the actual burden and loss of the bank. It is also a strong indicator of the

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 Financial health of a bank. NNPA has a significant negative impact on the liquidity &
profitability of the bank.

Historical Trend in NPA(Last 2 Decades) –

Non-Performing Assets (NPAs) refer to loans or advances that are in default or arrears.
Here's a summary of historical trends in NPAs over the last two decades:

1. Early 2000s (2000-2010)-High NPAs in early 2000s: Indian banks, especially

public sector banks (PSBs), struggled with high NPAs during the early 2000s. Poor
credit monitoring, inefficient lending practices, and exposure to weak industrial
sectors contributed to this.

Reforms and decline in NPAs: The Reserve Bank of India (RBI) initiated several
reforms, including the introduction of stricter asset classification norms, capital
adequacy requirements, and restructuring schemes like the Corporate Debt
Restructuring (CDR) mechanism. These steps helped to reduce NPAs, leading to an
improvement in banking sector health by the mid-2000s.

2. Mid-2010s (2010-2015)-

Resurgence in NPAs: Despite the earlier reforms, NPAs began to rise again in the
early 2010s. Contributing factors included an economic slowdown, global financial
crisis after-effects, and aggressive lending during the pre-crisis boom years.

Hidden stress: The full extent of NPAs was not apparent due to restructuring
schemes like CDR. In 2015, RBI’s Asset Quality Review (AQR) revealed significant
stressed assets in the system, leading to a substantial increase in NPAs being
recognized.

3. Late 2010s (2015-2020)-

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 Peak in NPAs (2016-2018): NPAs peaked during this period, particularly for PSBs.
Key sectors affected were infrastructure, power, steel, and telecom. Stressed assets
across the banking sector surpassed ₹10 trillion (~$140 billion).

Insolvency and Bankruptcy Code (IBC): Introduced in 2016, IBC became a

landmark reform aimed at resolving NPAs through structured insolvency proceedings.
It helped banks recover a portion of their bad loans by facilitating faster resolution of
stressed companies.

Recapitalization of banks: The government infused capital into PSBs to strengthen

their balance sheets and enable them to deal with NPAs.

4. 2020s (2020-2023)-

COVID-19 impact: The pandemic caused an economic slowdown, further stressing

businesses and individuals. Initially, there were concerns that NPAs would spike
sharply due to the pandemic. However, government interventions such as loan
moratoriums, restructuring schemes, and targeted relief measures helped contain the
rise in NPAs.

Gradual recovery: By 2022, the banking sector witnessed a gradual improvement in

asset quality. Provisions made during the pandemic, along with government relief
measures and economic recovery, led to a reduction in NPAs. By 2023, gross NPAs
had declined to a six-year low of around 4-5% for PSBs.

Key Factors Affecting NPA Trends

Regulatory Changes: Introduction of the IBC, AQR, and restructuring mechanisms

have been critical in managing NPAs.

Economic Cycles: Economic downturns, especially the 2008 financial crisis and
COVID-19, led to increased stress in the banking sector.

Sectoral Exposure: Infrastructure, power, telecom, and steel have been sectors that
experienced high defaults and have contributed significantly to the rise in NPAs.

Government Interventions: Loan waivers, recapitalization of banks, and

moratoriums have helped control the damage at various points in time.
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Current Trends (as of 2023)

Improved NPA ratios: NPAs have been declining thanks to better credit discipline,
improved economic conditions, and continuous efforts by the government and
regulators.

Tech-based credit monitoring: Use of advanced analytics and data for early warning
systems and risk assessment has been instrumental in curbing new NPAs.

Overall, while the NPA problem has been cyclical, structural reforms have played a
major role in addressing these challenges over the past two decades.

Sectoral Analysis of Non-Performing Assets (NPA):

Non-Performing Assets (NPAs) are loans or advances for which the principal or interest
payment remains overdue for a period of 90 days. A sectoral analysis of NPAs helps in
understanding which sectors of the economy are more prone to defaults and require attention
from policymakers, banks, and financial institutions. The analysis typically covers several
sectors such as agriculture, industry, infrastructure, and services.

1. Agriculture Sector

Nature of NPAs: Agriculture loans are often provided for crop production, farm
machinery, and irrigation. The sector is vulnerable to natural calamities like droughts,
floods, and pest attacks, leading to NPAs.

Causes: Weather dependence, inadequate infrastructure, and volatile prices for

agricultural produce make it challenging for farmers to repay loans. Additionally, the
issue of small landholdings and lack of proper risk mitigation tools like crop
insurance also contribute to NPAs.

NPA Trends: The agriculture sector typically has lower NPAs compared to industry,
but NPAs have increased during times of distress, especially during drought years or
periods of low farm income.

2. Industrial Sector

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 Nature of NPAs: The industrial sector covers manufacturing, textiles, steel, cement,
etc. Loans for capital investment, working capital, and infrastructure projects are
common here.

Causes: Over-leveraging, delays in project completion, lack of demand, and stiff

competition from global players can lead to NPAs. Large conglomerates, especially in
sectors like steel, textiles, and power, have contributed heavily to the industrial NPAs.

NPA Trends: Historically, the industrial sector has contributed the largest share to
NPAs, especially in countries like India where large infrastructure projects are
undertaken, leading to high risk if demand does not materialize.

3. Infrastructure Sector

Nature of NPAs: This includes loans related to the development of roads, ports,
power plants, and other long-term infrastructure projects.

Causes: Delays in land acquisition, regulatory hurdles, and poor financial planning
lead to significant NPAs in infrastructure. The long gestation period of such projects
increases their exposure to economic and political risks.

NPA Trends: Infrastructure NPAs have been a growing concern due to stalled
projects and stressed assets. Power and telecom sectors have particularly witnessed
significant defaults.

4. Services Sector

Nature of NPAs: This includes loans to sectors such as real estate, retail, hospitality,
and education. The services sector is highly diverse, ranging from small enterprises to
large corporates.

Causes: Economic slowdown, reduction in consumer spending, and poor business

planning contribute to NPAs in this sector. For example, real estate NPAs are often
driven by slow property sales and delays in construction projects.

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 NPA Trends: While NPAs in the services sector are lower compared to the industrial
sector, they have shown growth in recent years, particularly in retail, real estate, and
hospitality sectors.

5. Retail and SME Sector

Nature of NPAs: The retail segment consists of personal loans, home loans, vehicle
loans, and credit card loans, while the Small and Medium Enterprises (SMEs) borrow
for working capital and expansion.

Causes: Job losses, salary cuts, and a slowing economy can affect individuals’ ability
to repay loans. SMEs face challenges such as lack of access to finance, competition
from large companies, and economic downturns.

NPA Trends: Retail NPAs have been comparatively low but can rise in times of
economic stress, such as during the COVID-19 pandemic when many people lost jobs
or faced salary cuts. SMEs tend to have higher NPAs due to their vulnerability to
economic changes and competition.

6. Sub sectoral Analysis Within Major Sectors

a) Power Sector (Part of Infrastructure)

 Nature of NPAs: Power projects, including thermal, hydroelectric, and

renewable energy plants, require substantial capital investment, with long
gestation periods and regulatory hurdles.
 Causes: Delays in environmental clearances, fuel shortages (especially coal),
inefficient power distribution, and fluctuating demand due to economic
slowdowns lead to NPAs.
 NPA Trends: NPAs in the power sector have increased in recent years,
especially in countries like India, due to stalled projects, discom (distribution
company) inefficiencies, and state government delays in subsidy
disbursements.

b) Telecom Sector

 Nature of NPAs: Loans to telecom companies for infrastructure development,

spectrum purchase, and working capital.
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  Causes: Intense competition, expensive spectrum auctions, regulatory
changes, and high capital expenditure requirements.
 NPA Trends: The telecom sector has seen a rise in NPAs, especially with the
entry of new players disrupting established business models. Several telecom
operators worldwide have faced financial stress, leading to defaults.

c) Real Estate Sector

 Nature of NPAs: Real estate developers and companies borrow to fund

commercial and residential property projects.
 Causes: Delays in project completion, low sales due to weak demand,
regulatory issues, and market oversupply contribute to NPAs.
 NPA Trends: NPAs in real estate tend to rise during economic downturns
when property prices fall, and sales slowdown. The sector is also vulnerable to
liquidity crises, making loan repayments difficult.

d) Steel and Iron Industry

 Nature of NPAs: Loans for capital investment, working capital, and project
financing for steel plants and related infrastructure.
 Causes: Overcapacity, reduced global demand (especially from large
consumers like China), and high debt levels have led to significant NPAs.
 NPA Trends: The steel sector has seen cyclical increases in NPAs, especially
during periods of commodity price crashes, making it one of the largest
contributors to NPAs in industrial sectors.

e) Textile Industry

 Nature of NPAs: Loans are typically for working capital, expansion, and
export-related financing.
 Causes: Competition from cheaper international markets, fluctuating raw
material prices (especially cotton), and changes in trade policies (such as
reduced subsidies or tariffs) lead to NPAs.
 NPA Trends: Textiles, especially in developing economies, have been facing
rising NPAs due to global competition and shifts in consumer demand.

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Analysis of the existing NPAs (Non-Performing Assets) on a sectoral level provides insight
into high-risk sectors and identifies reasons for defaults, both structural and cyclical, therein.
It underlines the need for specific types of measures, regulatory or financial, to be taken in
order to contain and mitigate the impact of respect of NPAs. Due to this reason, the analysis
of the NPAs segmentation by agriculture, industry, services, infrastructure etc. helps to
construct the appropriate line of action for the officials and financial institutions in order to
avoid the economic turmoil and promote healthy advancements within the economy, hence
healthy lending is promoted.

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Impact of Non-Performing Assets (NPA) on the Economy:

Non-Performing Assets (NPAs) are loans or advances for which the principal or interest
payment remains overdue for a period of 90 days or more. The rise in NPAs has serious
implications for the banking sector and the economy as a whole. Below is a detailed
examination of the impact of NPAs on the economy, organized point by point.

1. Reduced Profitability for Banks Explanation: When loans turn into NPAs,
banks stop receiving interest and principal repayments, which directly hits their
revenue streams.

Impact:

Reduced cash inflows affect the banks' ability to cover operational costs, leading to
lower profitability. A consistent rise in NPAs forces banks to allocate more funds
for provisions to cover the potential losses, further eroding their profits.

Economic Implications: Low profitability limits banks' ability to expand credit

facilities, impacting economic activities like investment and consumption. In the
long term, this undermines investor confidence in the banking sector, potentially
leading to a fall in stock prices of banking institutions.

2. Reduced Lending Capacity Explanation: Banks need to maintain a certain

capital adequacy ratio to safeguard against risk. When NPAs increase, they
have to set aside a larger portion of their capital as provisions for bad loans.

Impact:

Banks’ balance sheets become burdened, limiting their ability to lend money for
new projects. The credit crunch restricts liquidity in the economy, especially for
small and medium-sized enterprises (SMEs) that rely heavily on bank loans.

Economic Implications: With reduced lending, businesses face capital shortages,

leading to slower growth and reduced business expansions. The slowdown in

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 credit flow stifles job creation and hampers sectors like infrastructure,
manufacturing, and services, leading to overall economic stagnation.

3. Increase in Borrowing Costs Explanation: As NPAs rise, banks try to maintain

profitability by increasing lending rates to new borrowers to compensate for the losses
from non-performing loans.

Impact:

Higher interest rates make borrowing more expensive for individuals and businesses.
Borrowers may defer or avoid taking loans due to increased costs, impacting sectors like
real estate, automobiles, and consumer durables.

Economic Implications: High borrowing costs can reduce investment and consumption,
leading to a decrease in demand for goods and services. In the long run, the increased cost
of credit can hamper economic growth as businesses delay expansion plans or scale down
operations.

4. Investors' Confidence Explanation: A significant rise in NPAs can damage the

reputation of banks, making them less attractive to investors.

Impact:

Investors, both domestic and foreign, may lose confidence in banks with high NPA levels,
leading to a reduction in capital inflows into the banking sector .The stock prices of banks
with high NPAs can drop, affecting not only the shareholders but also the market
sentiment as a whole.

Economic Implications: A drop in investor confidence leads to reduced investments in

the financial sector, which is critical for furling economic growth. A reduced ability to
raise capital limits banks’ ability to absorb losses and expand their services, potentially
causing a ripple effect in the broader economy.

5. Increase in Banking Frauds and Risk Exposure Explanation: A high NPA level
may lead to fraudulent activities, as banks may resort to malpractices in their lending
processes to recover losses.

Impact:
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 Higher risk exposure can destabilize the banking sector, making it vulnerable to financial
shocks. Fraudulent practices or poor lending standards further weaken the trust between
banks and their customers.

Economic Implications: When banks engage in risky behavior to manage their NPA
crisis, the broader economy becomes more vulnerable to financial instability. Bank
collapses or crises caused by NPAs can lead to significant government bailouts, draining
public resources that could have been used for developmental purposes.

6. Increase in Public Sector Debt Explanation: In economies where the government

owns a significant portion of the banking sector, it may have to intervene to support
public sector banks (PSBs) struggling with high NPAs.

Impact:

Governments may need to infuse capital into these banks to keep them solvent, which
leads to increased public spending and fiscal deficits. Public funds allocated to support
the banking sector reduce the availability of resources for other critical sectors like
infrastructure, health, and education.

Economic Implications: Increased public sector borrowing to cover bank losses can
result in higher government debt, leading to inflationary pressures and potential
downgrades by credit rating agencies. The fiscal burden may lead to higher taxes or
reduced public spending, which can further slowdown economic growth.

7. Undermining Economic Growth Explanation: High NPAs limit the availability of

credit, reduce investments, and erode business and investor confidence, creating a
negative feedback loop that undermines economic growth.

Impact:

When businesses struggle to get financing, it slows down capital formation and industrial
production, leading to reduced output in key sectors. Low lending activity stunts
innovation and technological advancement, essential drivers of long-term economic
growth.

Economic Implications: A sluggish economy can lead to higher unemployment rates as

businesses cut back on hiring or delay expansion. Slow economic growth also reduces tax
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 revenues for the government, limiting its ability to fund public services and welfare
programs.

8. Rise in Unemployment Explanation: As credit becomes scarce and economic growth

slows, businesses are forced to downsize or shut down operations.

Impact:

Sectors like manufacturing, construction, and real estate, which are heavily dependent
on loans for capital, see job cuts. Reduced employment leads to lower disposable
incomes, further diminishing consumption demand in the economy.

Economic Implications: A rising unemployment rate can lead to social unrest and
increased poverty levels. The decline in consumer demand can exacerbate economic
stagnation, creating a vicious cycle of low growth and high unemployment.

9. Decline in Financial Sector Stability Explanation: A banking sector burdened with

NPAs becomes fragile and unable to withstand external shocks like global financial
crises, economic slowdowns, or inflationary pressures.

Impact:

Persistent NPAs can erode the capital base of banks, leading to financial instability. The
banking sector's vulnerability can spill over into other financial institutions like insurance
companies, pension funds, and stock markets, creating systemic risks.

Economic Implications: A fragile banking sector undermines the confidence of foreign

investors and can lead to capital outflows. Systemic instability in the financial sector can
create a severe economic crisis, as was seen during the 2008 global financial meltdown.

The rise in NPAs has wide-ranging effects on the economy. It reduces the profitability of
banks, constrains their lending capacity, raises borrowing costs, and undermines economic
growth. A high level of NPAs also erodes investor confidence, increases unemployment, and
threatens the overall stability of the financial sector. These issues are interconnected, creating
a negative feedback loop that stifles growth and development. Addressing NPAs through

20
effective policy measures is essential for maintaining the health of the banking system and
ensuring sustainable economic growth.

21
LITERATURE REVIEW-

The importance of NPAs levels in India could be checked by looking at various measures
undertaken by the RBI and the government. Budget 2019 had Rs. 70000 crore for
capitalisation of banks in India. There have been ample of studies on the presence of NPAs in
banking sector. The studies range from determining the factors affecting NPA levels in India
to their management. They have been undertaken in relation to various aspects of NPAs.
Below are listed few areas where studies have been conducted.

 Ambuj Tiwari & Vipul Garg, in their article “A Study of Non-Performing Assets of
Indian Banking System and Its Impact on Economy” (2018) studied the present trends
of NPA in the Indian Banking System. The rising rate of NPA in the developing
countries is a real threat to the profitability of the banks and the country’s economy.
Management of bad loans & keeping them under control is extremely crucial for the
Indian Banking System.
 Nitin Bhasker & Palaksha Gombi have discussed the role played by banking sector
and the rising NPA in a country’s economy in their article “An Empirical Study on
Non-Performing Assets with Special Reference to HDFC Bank Ltd.” (2021). The
authors have found that even with specific policies and procedures to control NPA,
high NPA rate has been noticed in HDFC Bank. After the application of reform
policies, there is no instant solution that helps in controlling the rising NPA;
Securitization Act plays a crucial role in bringing the NPA in control. An effective
way to prevent NPA is for the banks to share/exchange information of defaulters.
 Asha Singhin the year 2013, has done a comparative study of NPA in Public sector
banks and Private sector banks in her article “Performance of Non-Performing Assets
(NPAS) in Indian Commercial Banks”. The author is of the opinion that it is almost
impossible to completely get rid of NPAs, but measures need to be taken by banks as
well as government to bring NPA under control.
 Anjali Prava Mishra, Muna Sahoo and Rabindra Kumar Swain have examined the
efficacy of NPA recovery-mechanisms in their article “Non-Performing Assets of
Scheduled Commercial Banks in India: Its Regulatory Frame Work” (2017). Out of all
the measures taken by the government to control & recover NPA, SARFAESI Act-
2002 has been proven to be the most effective one. However, the money recovered is

22
 insignificant when compared to the money that was defaulted. The recovery schemes
need to be upgraded so as to get the most out of them.
 Inchara Gowda in the year 2019 conducted a study to examine the trend of NPAs, its
impact on Public, Private & Foreign Banks in her article “Implications of NPAs on the
Profitability of SCBs – A Comparative Study of Public, Private and Foreign Banks”. It
is noted that NPA has a severe negative impact on public & private sector banks &
their profitability, however in the case of foreign banks, the reasons were not
explained. To get a high profit level, banks need to assess the collaterals kept for
loans.
 Nidhi Agarwala & Varuna Agarwala have studied the growth pattern of NPA of
different banks in their article “A Critical Review of Non-Performing Assets in the
Indian Banking Industry” (2019). They have observed that not only big-sized banks
contribute to the rise of NPA in the banking sector, the small-sized banks also have a
part in the rising NPA. Rise of NPA not only impacts the profitability of the bank, it
also affects the wealth of shareholders. It is the need of the hour for RBI to provide
stringent norms to bring NPA under control.
 Vrinda Batra & Neetika Batra has examined the trend of NPA from 2005 to 2014 in
the article “Trends and Differences in NPAs across Bank Groups in India” (2020).
After interpreting the data, the authors have noted that the NPA has started rising since
2011, and the rise in NPA is higher in public sector banks and considerably low in
private banks. The private banks have been comparatively better in handling NPA, and
the reason behind it maybe because of the business strategy/model opted by the banks.

Research Objective/Gap-

 To study the trend of NPA in Public & Private Sector of India.

 To understand the factors behind NPA in Indian banks.
 To interpret the impact of NPA.
 To study the ways to recover NPAs.

RESEARCH METHODOLOGY-
The research methodology employed in this research is descriptive and analytical. Analytical
approach is used to analyze the trends of NPA in public & private sector banks of India.
Descriptive research is used in describing the causes and impacts behind the trends of NPA.
23
Scope of the Study-

The scope of the present study extends to analyzing the trends of NPA in 3 Public sector
banks (SBI, PNB & BOB) and 3 Private sector banks (HDFC Bank, ICICI Bank & Axis
Bank) of India from annual year 2016-17 to 2020-23.

Data Collection Sources-

For the present study, the data has been gathered from several secondary sources such as
Bank circulars, journals, articles, annual reports & online sources.

Collection of data though bank annual reports , bank manual and other relevant documents.
Collection of date provided by bank.

Method of Analysis-
The method of analysis opted in the present study is secondary data analysis. In this method
of analysis, the secondary data gathered from several sources is examined & analyzed.

RECOMMENDATIONS:

Banks concerned should continuously potential monitors loans to become non-performing.

Bank should offer rescheduling of loans of those borrowers who were struggling with high
interest rates in a falling interest rate environment. Bank should risk management and
recover identify accounts that have offer rescheduling of loans of interest rates in a falling
interest rate more on credit appraisal, monitoring, credit risk management and recoveries.

Limitations –

 The data collected for the present study is only from secondary data, no primary data
has been collected.
 The present study is limited to the issue of NPA.
 This study focuses only on the Indian Banks, it does not cover any foreign banks.
 The study period for this research is only eight years
 To analyze sector wise non -performing assets.

24
Data Analysis and Interpretation-
Public sector bank selected for the study are:

I. State Bank of India (SBI)

II. Punjab National Bank (PNB)
III. Bank of Baroda (BOB)

Private sector banks selected for the study are:

I. HDFC Bank
II. ICICI Bank
III. Axis Bank

Net NPA % of the Selected 6 Banks -

Public Sector Banks Private Sector Bank

YEAR SBI PNB BOB HDFC ICICI AXIS

2016-17 3.71% 7.81% 4.72% 0.33% 5.43% 2.27%

2017-18 5.73% 11.24% 5.49% 0.40% 5.43% 3.69%

2018-19 3.01% 6.56% 3.33% 0.39% 2.29% 2.06%

2019-20 2.23% 5.78% 3.13% 0.36% 1.54% 1.56%

2020-21 1.50% 5.73% 3.09% 0.40% 2.10% 1.05%

2021-22 1.02% 4.80% 0.02% 0.32% 0.81% 0.73%

2022-23 0.67% 2.72% 0.89% 0.27% 0.51% 0.39%

2023-24 0.57% 0.73% 0.68% 0.33% 0.45% 0.31%

Source: Annual reports from official websites of the bank

From the above table, it can be observed that the overall trend of net NPA % of the banks has
declined in the study period i.e., 2016-17 to 2020-23. Among the 3 public sector banks, State
Bank of India has recorded the lowest net NPA % of 0.67% and Punjab National Bank has
recorded the highest net NPA % of 5.78%. Among the 3 private sector banks, HDFC Bank
has recorded the lowest net NPA % of 0.31% and ICICI Bank has recorded the highest net
NPA % of 4.89%. Out of the 6 banks, State Bank of India & ICICI Bank has a steady decline
of net NPA %, whereas the other banks have had a bumpy decline with some spikes in the net

25
NPA %. Rise in the trend of NPA in five banks can be noted in the year 2017-18, except
ICICI bank. But the banks have managed to bring the NPA in control in the year 2019-
20 .When the trends of net NPA % of public sector banks & private sector banks are
compared, public sector banks have a higher net NPA %.

Factors Responsible for Formation of Non-Performing Assets:

Non-Performing Assets are not formed because of any single particular reason. There are
several factors that result into creation of non-performing assets. These factors can be divided
into internal and external factors . Some of the internal responsible for non-performing assets
are:

 Using loan for a different purpose- In several instances, borrowers state a different
reason to procure loan and mislead the bank into believing that the purpose for which
the loan is being taken will yield the expected income. However, the actual purpose
for which the loan is being taken might not be very fruitful and fail to yield the
expected income, because of which the borrower will fail to pay back the loan.
 Faulty lending-process- The most important principle that needs to be followed during
the lending process is the Principle of Safety. This principle is important because it
focuses on ensuring that the borrower is capable to repay the loan with interest in
regular time-intervals; this mainly depends on if the borrower is competent enough,
his financial position, his character and nature of security.
 Granting loans to defaulters: Banks sometimes knowingly or unknowingly grant loans
to borrowers who had previously defaulted their loans, which increases the risk of
them defaulting their loans again.
 Incorrect/Incomplete Documentation In several cases, borrowers submit incorrect or
forged documents, or keep on delaying submitting certain documents so as to avoid
disclosing their financial capability. If the bank fails to properly verify the documents
and the financial capability of the borrower, they end up granting loan to someone
who will not be able to repay it.
 Management Deficiency -Banks should be very cautious while granting loans &
should secure the loans by keeping tangible assets of borrower as security. Banks
should not provide loans/advances to only big firms or just one industry, it should

26
 diversify the risk by granting loans to different industries; so that if one industry is in
loss or is affected badly, the bank will not suffer.
 Defective credit appraisal procedure Credit appraisal means examining the loan
application thoroughly and to assess the capability of the borrower to repay the loan.
If the bank fails to perform the credit appraisal properly, it will result into granting
loans to borrowers who are not capable of repaying the loan.

Some of the external factors responsible for non-performing assets

are:

 Willful-defaults - In Willful defaults, borrowers wilfully/ deliberately do not pay back

loans. Willful defaulters are those borrowers who are capable to pay back loans but
choose not to. These kinds of defaults result in heavy loss to the banks and result in
rising its NPA. Some of the infamous Willful defaulters are Nirav Modi, Mehul
Choksi, Vijay Mallya, etc.
 Natural Calamity India is often hit by several natural calamities which cause wide
range of loss of life, property, financial resources, etc. As a result, several borrowers
are rendered incapable to pay back loans. Farmers heavily depend on rainfall to
produce their crops, due to irregular rainfall, farmers suffer huge loss and unable to
pay back loan.
 Inefficient recovery tribunals For the purpose of recovering debts and advances,
government has set several recovery tribunals. But in several cases, due to the
negligence and carelessness of these tribunals to deal and adjudicate cases on time,
banks fail to recover loans from their customers, which results in the rise of NPA.
 Incapability to predict demand: Entrepreneurs often fail to estimate the demand for
their product and take huge loan to manufacture their products in a large number; due
to lack of demand, huge number of products remain unsold, and it fails to produce the
expected income because of which they fail to pay back loan to the bank (Debbarma,
Das, Laskar, 2021).

Factors Contributing to Non- performing Assets:

Non-Performing Assets (NPAs) in India have been a persistent issue, affecting the banking
sector's overall health. Several factors contribute to the rise in NPAs:

27
 1. Economic Slowdown

A sluggish economy impacts businesses' profitability and repayment capabilities,

leading to a higher number of loan defaults.

2. Policy Paralysis and Delays-

Regulatory and administrative delays in project approvals or policy changes can cause
projects to stall, leading to cost overruns and failure to meet loan repayment
schedules.

3. Poor Credit Appraisal-

Inadequate assessment of borrowers’ creditworthiness, particularly in public sector

banks, results in loans being granted to high-risk individuals or companies who
eventually default.

4. Inefficiency in Project Management-

Several projects, especially infrastructure-related ones, suffer from mismanagement,

resulting in delays, budget overruns, and failure to generate sufficient returns to repay
the loans.

5. Wilful Defaulters-

Some borrowers intentionally default on loans, diverting funds for personal gains
rather than using them for the stated purpose of the loan.

6. Global and Domestic Market Conditions-

Factors such as fluctuating commodity prices, changes in demand, or trade wars can
negatively impact export-oriented industries or other sectors reliant on market
stability, leading to defaults.

7. Frauds and Corruption

Financial frauds, often involving insider participation or collusion between borrowers

and bank officials, have led to a significant rise in NPAs, particularly in high-profile
cases.

28
 8. Sectoral Issues-

Certain sectors, such as infrastructure, power, steel, and textiles, are more prone to
NPAs due to issues like high capital investment, lengthy gestation periods, and
dependency on external factors.

9. Agricultural Loans and Loan Waivers-

In India, agricultural loans often become NPAs, especially in periods of drought or

other adverse weather conditions. Loan waivers announced by governments also lead
to higher defaults as they distort repayment discipline.

10. Over-leveraging by Corporates-

Many companies take excessive debt without having enough capacity to service it,
especially during economic booms. This leads to defaults when the market slows
down.

11. High Interest Rates

During periods of high interest rates, businesses and individuals may struggle to repay
their loans due to increased financial burden, further contributing to NPAs.

12. Judicial Delays

Slow legal processes in resolving insolvency and loan recovery cases prolong the
duration for which loans remain non-performing, exacerbating the issue.

13. Political Interference-

Political pressure, especially in public sector banks, can lead to loans being sanctioned
to entities without proper due diligence, increasing the risk of defaults.

Addressing NPAs requires stronger credit appraisal systems, efficient debt recovery
mechanisms, faster resolution under the Insolvency and Bankruptcy Code (IBC), and
improved governance in financial institutions.

29
Impact of Non-performing Assets in Profitability:

The main impact of increased NPA can be seen in the profitability of the banks.

To analyze the impact of net NPA on the profitability of banks, relation between net NPA
and net profit of Public Sector Bank and Private Sector Bank is shown with the help of
graphical representation.

 Public sector banks :

I. State Bank of India -

Year Net NPA(in crores ) Net Profit (in crores)

2016-17 58,277.38 10,484.10

2017-18 110,854.70 -6,547.45

2018-19 65,894.74 862.46

2019-20 51,871.30 14,488.11

2020-21 36,809.72 20,410.47

2021-22 27,965.71 31,675.98

2022-23 21,466.64 50,232.42

2023-24 21,051.08 61,076.62

30
 Net NPA(in crores ) Net Profit (in crores)
120,000.00

100,000.00

80,000.00

60,000.00

40,000.00

20,000.00

0.00
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

-20,000.00

Source: Annual report 2023-24 of State bank of India

In the above graph, it can be observed that in 2017 was rise in the net NPA and in the same
year, decline of net Profit can be noted. In the year 2019-20, a significant decline in the net
NPA and increase in the net profit of the bank can be seen

Key Factors Driving NPA Reduction and Profit Growth:

 Insolvency and Bankruptcy Code (IBC): This was a pivotal reform that provided a
structured mechanism for resolving bad debts and helped banks like SBI recover a
significant portion of their stressed assets.
 Capital Infusion and Support from the Government: The Indian government
infused capital into public sector banks, including SBI, which strengthened their
ability to absorb losses and maintain adequate capital adequacy ratios.
SBI also raised capital from the market, ensuring it had enough cushion to handle
asset stress.
 Improved Credit Risk Management: SBI improved its loan appraisal and risk
management systems, resulting in better underwriting of loans and reduced slippages
into the NPA category.
31
  Focus on Retail and Digital Banking: SBI’s increasing focus on retail loans (home
loans, auto loans, personal loans) contributed to more stable revenues.
Its digital transformation initiatives, particularly the YONO app, attracted younger
customers and provided more efficient services, further boosting profitability.
 Cost Efficiency Measures: The bank implemented various cost-cutting measures,
improved operational efficiency, and optimized its workforce, which contributed to
profit growth.
 Low-Interest Rate Environment: The post-pandemic period saw a low-interest-rate
environment, which spurred demand for loans, particularly in housing and personal
loan segments. This supported SBI’s loan growth and interest income.
 Regulatory Support: The Reserve Bank of India (RBI) took measures to ease
liquidity during the pandemic, allowing banks to restructure loans. This helped in
controlling NPA spikes during 2020-21 and enabled banks to handle stressed sectors
better.

Future Outlook :

 NPA Management: As of 2023-24, with NPAs stabilizing at around ₹21,051.08

crores, SBI is well-positioned to focus on further improving loan recovery and
preventing slippages.
 Profitability: With robust profit growth, SBI’s future prospects look strong,
especially with India's economic growth picking up, and the bank’s increasing
reliance on digital platforms and a shift toward sustainable lending.
 Sustainable Banking: SBI is likely to focus more on ESG (Environmental, Social,
and Governance) frameworks, which are gaining prominence in the banking industry.
 Asset Quality Management: SBI is expected to focus on maintaining healthy asset
quality through better credit monitoring and continuing with recovery efforts for
existing NPAs.

32
  Digital and Retail Expansion: The bank is likely to expand its digital footprint and
retail banking portfolio further, tapping into the increasing adoption of digital banking
in India.
 Sustainable Lending Practices: With growing emphasis on ESG (Environmental,
Social, and Governance) factors, SBI is expected to align its lending practices with
sustainability goals, offering new growth opportunities in sectors like green energy.

In summary, the data from 2016-17 to 2023-24 demonstrates SBI's remarkable journey from
a period of high NPAs and losses to becoming a highly profitable and financially stable bank.
Effective management of NPAs, focus on recovery, digital innovation, and strong
profitability growth have contributed to SBI’s successful turnaround.

33
II. Punjab National Bank -

Year Net NPA(in crores ) Net Profit (in crores)

2016-17 18,080.18 1,383.13

2017-18 23,482.65 -2,431.81

2018-19 15,607.50 433.52

2019-20 21.576.59 546.18

2020-21 21,799.88 828.95

2021-22 13,364.65 7,272.28

2022-23 8,384.32 14.109.62

2023-24 7,213.34 17,788.78

Net NPA(in crores ) Net Profit (in crores)

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

-5,000.00

Source: Annual report 2023-24 of Punjab National Bank

34
In the above graph, it can be observed that in 2017 was rise in the net NPA and in the same
year, decline of net Profit can be noted. In the year 2019-20, a significant decline in the net
NPA and increase in the net profit of the bank can be seen.

Key Factors Affecting Net NPA and Profitability:

1. Rising NPAs in Early Years: From 2016-17 to 2017-18, PNB experienced rising NPAs,
largely driven by corporate loan defaults and scams. This period was challenging for the
bank and led to significant financial stress.

2. Recovery and Profitability (2018-2020): PNB took several measures to recover bad
loans, reduce fresh slippages, and clean its books. This period saw a gradual improvement,
with the bank slowly returning to profitability despite some lingering challenges with
NPAs.

3. Significant Turnaround (2021 Onwards): From 2021 onwards, PNB made a remarkable
recovery, reducing NPAs drastically and significantly boosting profitability . Factors
contributing to this turnaround include:

Stringent risk management practices.

Enhanced recovery efforts through insolvency processes and resolution of large corporate
accounts.

Improved credit growth in retail, MSME, and agriculture sectors.

Strategic focus on reducing high-risk assets.

4. Factors contributing to this turnaround include: Stringent risk management practices.

Enhanced recovery efforts through insolvency processes and resolution of large corporate
accounts. Improved credit growth in retail, MSME, and agriculture sectors. Strategic focus
on reducing high-risk assets.

5. Macro Environment: The Indian banking sector faced considerable challenges during this
period, including corporate debt defaults, regulatory scrutiny, and economic disruptions
due to the pandemic. PNB’s ability to navigate these crises, particularly during and after
the pandemic, reflects improved governance and operational efficiency.

35
6. Looking Forward: The sharp decline in NPAs and growth in profits is expected to help
PNB strengthen its capital base and fund further growth. However, continued vigilance on
asset quality, corporate governance reforms, and maintaining robust provisioning will be
key to sustaining long-term growth.

Future Outlook:

1. Improving Asset Quality Continued NPA Reduction: With effective risk

management and recovery strategies already in place, PNB is expected to continue
reducing its Net NPAs, benefiting from past efforts in loan recovery and the
resolution of stressed assets.
2. Strong Financial Performance Profitability Growth: Following a period of
improved profitability, PNB is expected to maintain this upward trend as cost
management, reduced provisions, and increased lending contribute to stronger
financial results.
3. Regulatory Support Framework: Continued regulatory support from the Reserve
Bank of India (RBI) for the banking sector, especially concerning liquidity and capital
adequacy, will provide a stable environment for PNB's operations.
4. Focus on Risk Management Enhanced Credit Risk Assessment: Strengthening
credit appraisal processes and adopting advanced analytics for risk assessment can
help PNB manage its loan portfolio more effectively.
5. Market Position and Brand Strength Established Market Presence: As one of the
largest public sector banks in India, PNB's established brand and extensive network
provide a competitive advantage in attracting customers.

In summary, PNB is poised for a promising future, driven by improving asset quality,
economic recovery, digital transformation, and strong financial performance. By focusing on
risk management, embracing technological advancements, and capitalizing on growth
opportunities, PNB can continue its trajectory toward becoming a more robust and profitable
institution in the Indian banking landscape. However, it must remain vigilant to external
challenges and competition in order to sustain its growth momentum.

36
 III. Bank of Baroda -

Year Net NPA(in crores ) Net Profit (in crores)

2016-17 18,080,18 1383.13

2017-18 23,482.62 -2,431.81

2018-19 15,609.50 433.52

2019-20 21,576.59 546.18

2020-21 21,799.88 828.95

2021-22 13,364.65 7,272.28

2022-23 8,384.32 14,109.62

2023-24 7,213.34 17,788.78

Net NPA(in crores ) Net Profit (in crores)

25000

20000

15000

10000

5000

0
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

-5000

37
Source: Annual report 2023-24 of Bank of Baroda

In the above graph, it can be observed that in 2017 was rise in the net NPA and in the same
year, decline of net Profit can be noted. In the year 2020-21, a significant decline in the net
NPA and increase in the net profit of the bank can be seen.

Journey Through Challenging Phases :

 Rise in NPAs and Losses (2016-17 to 2017-18): In 2016-17, Bank of Baroda

reported Net NPAs of ₹18,080.18 crore. This reflects a considerable portion of its
loans being classified as non-performing, indicating stress in its asset quality.
The situation worsened in 2017-18, when Net NPAs peaked at ₹23,482.62 crore. This
could be attributed to the impact of the broader banking sector crisis, where several
public sector banks faced rising bad loans due to defaults by large corporate
borrowers.
As a result, the bank posted a significant net loss of ₹2,431.81 crore in 2017-18,
compared to a profit in the previous year. The increase in NPAs typically results in
higher provisioning requirements, which can eat into a bank's profitability.

 Initial Recovery (2018-19 to 2019-20): From 2018-19, the bank began to show signs
of recovery, with Net NPAs reducing to ₹15,609.50 crore. This drop suggests that
Bank of Baroda intensified its efforts to clean up its balance sheet by recovering bad
loans or writing them off.
Profitability also saw improvement, with the bank reporting a net profit of ₹433.52
crore in 2018-19. However, this was still a modest figure, showing that recovery was
gradual.
The year 2019-20 saw Net NPAs rise again slightly to ₹21,576.59 crore, but the bank
managed to stay in the black with a net profit of ₹546.18 crore. This was a crucial
period where the bank began balancing NPA management with steady profits.

 Strengthened Position Amid Pandemic (2020-21 to 2021-22): Despite the

economic impact of the COVID-19 pandemic, Bank of Baroda saw its Net NPAs
stabilize at ₹21,799.88 crore in 2020-21, showing resilience.
38
 Net profit grew to ₹828.95 crore, as the bank possibly benefited from government
initiatives like loan moratoriums and restructuring schemes that helped prevent further
deterioration of asset quality.
In 2021-22, the bank made an impressive recovery, reducing its Net NPAs to
₹13,364.65 crore, which reflected its strong efforts in loan recoveries and
restructuring.
Net profit skyrocketed to ₹7,272.28 crore, signalling a major turnaround. This surge
in profits could have been driven by higher interest income, lower provisioning
requirements, and improvements in cost efficiencies.
 Continued Growth and Stability (2022-23 to 2023-24): Bank of Baroda further
strengthened its position in the following two years, bringing Net NPAs down to
₹8,384.32 crore in 2022-23 and to ₹7,213.34 crore in 2023-24. This sharp decline
reflects the bank’s sustained focus on cleaning up bad loans and tightening its credit
risk management practices.
The bank’s profits experienced phenomenal growth, with net profits more than
doubling to ₹14,109.62 crore in 2022-23 and further rising to ₹17,788.78 crore in
2023-24. This significant profitability boost could be attributed to a combination of
factors including:
Strong loan growth.
Improved interest margins.
Lower provisioning for bad loans due to better asset quality.

Key Factors Contributing to the Turnaround:

 Improved Asset Quality: The steady decline in NPAs is a clear indicator that Bank
of Baroda took strong steps toward resolving bad loans through a mix of recoveries,
write-offs, and better risk management.
 Government Support: Public sector banks like Bank of Baroda have benefited from
government recapitalization and regulatory initiatives such as the Insolvency and
Bankruptcy Code (IBC) for quicker resolution of bad loans.
 Cost Efficiency: Along with cleaning up bad loans, the bank appears to have
improved its cost-to-income ratio, which further supported profitability.

39
  Economic Recovery: A stronger post-pandemic economic environment and growing
demand for credit likely helped the bank grow its loan book and improve interest
income.

Bank of Baroda’s financial data between 2016-17 and 2023-24 highlights a remarkable
turnaround from a period of high NPAs and losses to becoming one of the most profitable
public sector banks in India.

 Private Sector Banks :

I. HDFC Bank -

Year Net NPA(in crores ) Net Profit (in crores)

2016-17 1,843,99 14,549.66

2017-18 2,601,02 17,486.75

2018-19 3,214.52 21,078.14

2019-20 3,542.36 26,257.32

2020-21 4,554.82 31,116.53

2021-22 4,407.68 36,961.33

2022-23 4,368.43 44,108.71

2023-24 8,091.74 60,812.27

40
 Net NPA(in crores ) Net Profit (in crores)
70000

60000

50000

40000

30000

20000

10000

0
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Source: Annual report 2023-24 of HDFC Bank.

In the above graph, it can be observed that in 2017 was rise in the net NPA and in the same
year, increase of net Profit can be noted. In the year 2023-24, a significant increase in the net
NPA and increase in the net profit of the bank can be seen.

Key Factors Affecting Net NPA and Profitability:

 Provisioning and Risk Management: HDFC Bank has historically followed a

conservative provisioning policy, setting aside funds to cover potential bad loans,
which has protected its profits from NPA shocks.
 Regulatory Support: During challenging times like the pandemic, regulatory
measures such as loan restructuring and moratoriums offered by the RBI helped banks
control NPAs temporarily.
Post-pandemic, the end of such measures led to a spike in NPAs as borrowers faced
repayment challenges.
 Operational Efficiency: Investments in digital banking and cost-efficient operations
have allowed HDFC Bank to maintain profitability despite challenges.
The bank has effectively used its technology infrastructure to increase customer
engagement and reduce transaction costs.

41
  Diversified Revenue Streams: Apart from lending, HDFC Bank generates
significant income from fees, including credit card services, insurance products,
investment services, and transaction banking, which helped sustain its profit growth.

Future Outlook:

 Asset Quality Focus: With the rise in NPAs in 2023-24, the bank is likely to focus on
improving asset quality, enhancing recovery efforts, and managing stressed loans
more efficiently.
 Continued Profit Growth: HDFC Bank's strong fundamentals, including a
diversified loan book, growing customer base, and efficient operational model, will
continue driving profit growth.
However, external risks like global inflation, geopolitical tensions, and rising interest
rates could pose challenges.
 HDFC Ltd. Merger: The ongoing merger with HDFC Ltd. will bring new growth
opportunities, especially in the mortgage business, but could also affect NPA and
profit numbers in the short term due to integration challenges and consolidation of
housing finance operations.
 Focus on Asset Quality: With the spike in NPAs in 2023-24, HDFC Bank will likely
sharpen its focus on improving asset quality by reducing bad loans and enhancing
recovery efforts.
 Profit Growth: Given the bank's strong market position and diversified portfolio, it is
expected to continue its trajectory of profit growth, although the pace may be
moderated by rising interest rates and economic uncertainties.
 Impact of HDFC Ltd. Merger: The ongoing merger with HDFC Ltd. (housing
finance business) may also impact the bank’s financials, potentially adding to NPAs
initially but opening up new avenues for growth, especially in the mortgage business.
 Sustainability and ESG Focus: Environmental, Social, and Governance (ESG)
Initiatives: As global and domestic investors place increasing importance on
sustainable and responsible banking, HDFC Bank may accelerate its focus on ESG
initiatives. This could involve funding more green projects, improving corporate
governance practices, and enhancing its role in social responsibility programs.

42
In conclusion, while HDFC Bank has faced challenges in controlling NPAs, particularly in
2023-24, its profitability remains strong, driven by a solid operational model, prudent risk
management, and a diversified revenue base. However, challenges related to rising NPAs,
global economic uncertainties, and competition from fintech players must be carefully
managed. With its strong fundamentals and history of prudent risk management, the bank is
well-positioned to capitalize on India’s economic growth while navigating the evolving
regulatory and market landscape.

II. ICICI Bank-

Year Net NPA(in crores ) Net Profit (in crores)

2016-17 25,451.03 9,801.08

2017-18 27,886.27 6,777.42

2018-19 13,577.43 3,363.30

2019-20 10,133.86 7,930.81

2020-21 9,180.20 16,192.68

2021-22 6,960.89 23,339.49

2022-23 5,155.07 31,896.50

2023-24 5,377.79 40,888.27

43
 Net NPA(in crores ) Net Profit (in crores)
45,000.00

40,000.00

35,000.00

30,000.00

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Source: Annual report 2023-24 of ICICI Bank.

In the above graph, it can be observed that in 2017 was rise in the net NPA and in the same
year, decline of net Profit can be noted. In the year 2019-20, a significant decline in the net
NPA and increase in the net profit of the bank can be seen.

Key Factors Affecting Net NPA :

1. Economic Conditions:
 GDP Growth: A growing economy typically leads to lower default rates as
businesses and consumers have higher income and cash flow to service their
debts.
 Recession or Slowdown: Economic downturns can increase NPAs as borrowers
struggle to repay loans due to reduced income and job losses.
2. Sectoral Performance:
 Industry Health: The performance of specific sectors (e.g., agriculture,
manufacturing, services) significantly impacts NPAs. Industries facing challenges
may default more, affecting banks' asset quality.

44
  Cyclical Industries: Banks with a significant exposure to cyclical industries may
experience higher NPAs during economic downturns.

Key Factors Affecting Net Profitability:

1. Interest Rate Environment:

 Monetary Policy: Changes in interest rates directly impact the bank’s interest
income. A rising rate environment can boost profitability by widening the net
interest margin (NIM).
 Cost of Funds: The cost at which banks raise funds influences their lending rates
and, consequently, profitability.
2. Asset Quality:
 Provisioning for Bad Loans: Higher provisioning for NPAs reduces net profit.
Conversely, improved asset quality can lower provisioning needs and enhance
profitability.
 Recovery Rates: Successful recovery of written-off loans or distressed assets can
positively impact profitability.

Future Outlook:

1. Strong Economic Growth in India: GDP Growth: India's economy is projected to

grow steadily in the coming years, driven by structural reforms, rising consumer
demand, and increasing infrastructure spending. This will likely boost loan demand,
especially in sectors like housing, automobiles, and small and medium enterprises
(SMEs), where ICICI Bank has a significant presence.
2. Focus on Digital Transformation: ICICI Bank has been at the forefront of digital
banking innovations. As more customers move towards online and mobile banking,
the bank’s investment in technology will help it enhance customer experiences,
reduce operational costs, and drive profitability.
3. Continued Focus on Retail Banking: ICICI Bank is expected to continue expanding
its retail banking operations, which has been a key driver of profitability in recent
years. With India's growing middle class and increased demand for retail financial
45
 products, the bank is likely to maintain its focus on home loans, auto loans, and
personal loans.
4. Growth in Corporate Banking: As the Indian economy growth , the demand for
corporate credit, especially from sectors like manufacturing, infrastructure, and
renewable energy, will increase. ICICI Bank has been cautious in its corporate
lending due to past issues with non-performing assets (NPAs), but with improved risk
management and a stronger balance sheet, it is likely to increase its corporate loan
book gradually.

ICICI Bank’s financial journey from 2016-17 to 2023-24 reflects a strong turnaround story,
marked by a significant reduction in its Net NPA levels and a remarkable increase in
profitability. The bank's success can be attributed to its improved asset quality, focus on retail
lending, operational efficiency, digital transformation, and a favourable economic and
regulatory environment. This trajectory places ICICI Bank in a strong position within India’s
banking sector, with solid fundamentals and the capacity for future growth.

III. AXIS Bank -

Year Net NPA(in crores ) Net Profit (in crores)

2016-17 8,626.55 3,679.28

2017-18 16,591.71 275.68

2018-19 11,275.60 4,676.61

2019-20 9,360,41 1,627.22

2020-21 6,993.53 6,588.50

2021-22 5,512,16 13,025.48

2022-23 3,558.92 9,579.68

46
 2023-24 3,247.47 24,861.43

Net NPA(in crores ) Net Profit (in crores)

30,000.00

25,000.00

20,000.00

15,000.00

10,000.00

5,000.00

0.00
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Source: Annual report 2023-24 of AXIS Bank.

In the above graph, it can be observed that in 2017 was rise in the net NPA and in the same
year, decline of net Profit can be noted. In the year 2019-20, a significant decline in the net
NPA and increase in the net profit of the bank can be seen.

Key Strategic Moves Contributing to Financial Performance:

 Diversification of Loan Book: Axis Bank has diversified its loan portfolio, shifting
from a heavy corporate loan focus to retail loans (home loans, personal loans), which
tend to have lower default rates.
 Digital Transformation: Investment in digital banking services has allowed Axis
Bank to reduce operational costs, improve customer service, and generate more non-
interest income through fees on services.

47
  Risk Management: The bank implemented stronger risk management frameworks
post-2018, ensuring better loan underwriting and reducing exposure to high-risk
sectors.
 Strengthening of Capital Base: Axis Bank has raised capital at various points to
strengthen its balance sheet, which has allowed it to absorb shocks from bad loans and
focus on growth.

Future Outlook:

1. Credit Growth and Loan Portfolio Expansion:

 Retail Lending: Axis Bank’s focus on expanding its retail loan book
(housing loans, personal loans, vehicle loans) is likely to remain a key growth
driver. With rising middle-class income levels and increased demand for
credit in India, the retail lending segment will continue to be a lucrative
space.
 Small and Medium Enterprises (SMEs): With the government’s continued
push for supporting MSMEs, Axis Bank could tap into this underserved
segment to generate growth while maintaining tight risk controls.
2. Digital Banking and Fintech Integration:
 Digital Transformation: Axis Bank has been investing heavily in digital
banking services, which will continue to enhance its customer experience,
reduce operational costs, and allow the bank to tap into new revenue streams.
A key focus area could be digital payments, digital lending, and expanding
its ecosystem of digital products.
 Cost Efficiency: Increased digitalization will lead to lower operating costs,
which will help improve the bank’s cost-to-income ratio and overall
profitability in the coming years.
3. Asset Quality and NPA Management:
 Lower NPAs: The downward trend in NPAs suggests that the bank is
maintaining tighter credit policies and improving its loan recovery processes.
As long as the Indian economy continues to recover and grow, Axis Bank is
likely to maintain a stable and low NPA ratio, which will reduce the need for
high provisioning and bolster profits.

48
  Focus on Risk Management: Axis Bank has strengthened its risk
management framework, which will help in minimizing credit risks associated
with lending. Careful monitoring of sectors prone to stress (like real estate,
infrastructure, and small businesses) will be critical to avoiding another spike
in NPAs.
4. Profitability and Earnings Growth:
 Interest Income: As the bank continues to expand its loan portfolio and lower
its NPAs, its net interest income (NII) is likely to rise, providing a strong
foundation for profit growth. A rising credit demand, driven by India's
economic growth and infrastructure expansion, will positively impact this
area.
 Fee-Based Income: Axis Bank's ability to grow its fee-based income (fees
from advisory services, transaction processing, and insurance cross-selling)
will enhance profitability. With increased digital services, this revenue stream
is poised for growth.

Axis Bank's journey over the past seven years reflects a concerted effort to improve both
asset quality and profitability. While 2017-18 was a challenging year with a peak in NPAs
and a sharp drop in profits, the bank's proactive steps toward risk management, digital
transformation, and loan recovery have yielded substantial improvements. The declining
NPAs and skyrocketing profits in 2023-24 mark a successful turnaround for Axis Bank,
positioning it as a more resilient and growth-oriented institution.

Liquidity:

Non-Performing Assets negatively impact the liquidity of banks. Rise in NPAs results in non-
availability of funds; decline in profitability leads to scarcity of cash, and banks are left with
no option than to borrow money which will become additional expenses for the bank.
Because of shortage of money, it will be cumbersome to carry out the activities of bank.

49
Burden on the Government:

Government holds the majority shares in the Public sector banks; so when the PSBs are
struggling, government will have to provide equity-capital to the banks. Due to the rise in
NPAs, PSBs are facing difficulties, hence, government will need to step in and support the
banks by providing capital.

Brand-image of Banks:

Bank with a high NPA will face decline in its credit value in the market. This affects the
image and good-will of the bank, which will result in customers and investors losing their
trust in the bank and will think twice before investing or keeping their money in the bank. To
retain customers, banks will grant loans to borrowers from whom recovery of loan is doubtful
(Singh, 2013).

Research Finding and Analysis:

 The trend of NPA in Public & Private Sector Banks has declined in the study period.
 Net NPA %of Public Sector Banks is higher than net NPA %of Private Sector Banks.
 There is frequent rise and fall of NPA in both public & private sector banks in the
study period.
 In the year 2017-18, rise in net NPA %in five of the banks was noted.
 There is an inverse relation between NPA & Profitability of banks.

Recommendation and suggestion:

 Banks should take extreme precaution during credit assessment of borrowers.

 Banks should thoroughly verify and cross check the documents submitted by the
borrowers.
 Quality of assets kept as collateral should be examined thoroughly to assess their
worth.
 One of the main responsibilities of banks is to carefully choose the borrowers so as to
prevent loans from becoming NPAs.
 Banks should prioritize loan recovery from borrowers who are capable of paying back
the loan but are not willing to.

50
  Banks should regularly ensure that the borrower is utilizing the loan for the purpose
for which it was granted.
 Banks should send the names of the Willful defaulters across other banks to warn
them against falling in trap of Willful defaulters.

Recovery Measures :

Non-Performing Assets (NPAs) refer to loans or advances which have come to a standstill in
terms of income generation for banks. To address and resolve NPAs, banks and other
financial institutions apply several recovery techniques. Here are the major recovery
techniques:

1. Restructuring of Loans
 Corporate Debt Restructuring (CDR): A mechanism under which banks are
permitted to alter the present obligation towards companies which are in
financial distress, but which are perceived to be economically viable, by
overcoming the existing terms of the advances.
 Strategic Debt Restructuring (SDR): A scenario that enables banks to turn
loans to equity, thus averting losses from defaulters by taking over the
collapsing firms and restructuring the operations in order to recover the debts.
 Sustainable Structuring of Stressed Assets (S4A): This is aimed at very
high amount projects with banks allowing for the separation of the able to pay
and unable to pay debt portions, where only the unable to pay debt portion
gets restrained.
2. Debt Recovery Tribunal (DRT)

Debt Recovery Tribunals (DRTs) were established under the Recovery of Debts Due
to Banks and Financial Institutions (RDDBFI) Act, 1993, enabling the Banks to
approach the DRTs for recovery of the Non-Performing Assets (NPAs). It ensures a
speedy and efficacious process for recovery of dues without the need of any courts.

3. Insolvency and Bankruptcy Code (IBC), 2016

51
 The IBC lays out a defined approach for the insolvency resolution for companies as
well as individuals. When there is a default on an account, to the point where it
becomes non-performing, banks are allowed to approach NCLT for the purposes of
commencing insolvency proceedings. The properties of the defaulting individual can
be auctioned in order to pay the debts that they owe.

4. One-Time Settlement (OTS)

Banks may also extend a One-Time Settlement (OTS) offer to the loan defaulting
customers, where borrowers tend to agree with banks to settle the remaining dues
(usually at a lower rate) rather than paying the full balance outstanding. This is
encouraged to reduce the length of the legal process.

5. Lok Adalat’s

Domestic new moratorium any new advances, in any, age to ascertain the presence of
already settled cases 'Lok Adalat’s'. This is usually the process for low loan amounts
and it takes lesser time than court.

6. Compromise Settlement

In some situations, banks take the approach that rather than taking recourse to legal
action, understand the situation of the borrower and seek to compromise the amounts
due to an agreed lower level with the provision that the remaining amount will not be
pursued further, thus managing to get back part of the loan but not the whole without
going through the long appalling legal processes.

7. Write-offs

In such cases where it is apparent that no recovery effort would be possible, a bank
opts to write off the loan essentially meaning that the loan will not be treated as an
asset in the balance sheet. While this step helps in easing the NPA load on the bank’s
balance sheets, efforts on recovery of the loan may still be in place.

8. Use of Technology and Data Analytics

52
 Very many banks nowadays are using technological tools such as predictive analytics
to locate the early signs of impending default on loans. This makes it possible to
intervene with the borrowers before the account ‘goes bad’ thus minimising
recoveries.

9. Engagement of Recovery Agents

As a last resort banks can also apply other means, for instance hire professional
recovery agents to collect debts. Such agents carry out debt collection and assist in
recovering payments owed by borrowers.

10. Bad Bank Approach

A few countries in the world have established bad banks, which take in the non-
performing assets of various banks and this assets are managed by one distinct
organization. This helps banks to concentrate on their normal activities and leave the
resolution of non-performing assets to a specialized bad bank.

Due to the importance of non-performing asset (NPA) recovery for the banking sector and the
economy at large, its effective and efficient pursuance is very vital. Adoption of timely and
effective recovery strategies can help the banks in liquidity management and lowering of
losses which in turn will enhance their profitability and stability.

Although the reasons may vary in each case, non-repayment of loans results in the
classification of those loans as non-performing. Recovery of non-performing assets (NPAs) is
an affixed asset for managing the developments in the banking practice, its processes and
institutions. Nonetheless, the practices followed to recoup NPAs are nearly negligible.

Sovereign risk can result to either positive or negative effects on the economic performance
of a country. There are various factors that may cause countries and firms to default, however
most of default causes are determined by various factors. Because commercial banks usually
generate interest from the loans they give, when loans are unpaid in due time, this exposes the
bank to losses.

53
Government and Regulatory of NPAs :

Regulatory measures and government policies aimed at controlling Non-Performing Assets

(NPAs) are important for ensuring the stability and the development of the banking sector,
particularly in India where NPAs have always been a thorny issue. Following are some of the
steps taken by the government and regulators to mitigate the NPAs:

1. Establishment of Bad Banks:

A bad bank is defined as an asset managing company which is set up for the specific
purpose of buying NPAs from commercial banks. Recently, India has established the
National Asset Reconstruction Company Limited (NARCL) for the specific purpose
of purchasing and servicing NPAs.

Such bad banks facilitate balance sheet clean-ups and enable the commercial banks to
get on with their regular business.

2. Asset Reconstruction Companies (ARCs):

ARCs buy out NPAs from banks and try to salvage them through asset divestitures,
restructuring and legal actions.

Under the Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act (SARFAESI Act) of 2002, Indian banks can recover their NPAs
by disposing off some of their assets through auction risks.

3. Insolvency and Bankruptcy Code (IBC) 2016:

The IBC is a paradigm shift that simplifies the mechanism used with respect to
corporate bankruptcies. With this, there is power lying with the creditors to possess
the assets of a debtor and even act within a certain period to resolve the situation.

It has enhanced the recovery process and has also set timelines within which cases
will have to be resolved for both the financial and the operational creditors.

4. Prudential Norms for Banks:

The Reserve Bank of India (RBI) prescribes certain prudential norms, which include
timely recognition of NPAs and corrective action against them.

54
 Banks that are classified under the Prompt Corrective Action (PCA) framework are
those that have high levels of NPAs and low levels of capital adequacy; such banks
are restricted from lending but guided towards rehabilitation.

5. RBI’S Restructuring Framework

RBI has rolled out the following restructuring frameworks for the resolution of
stressed assets. Provisions for Corporate Debt Restructuring (CDR) for stress
resolution in large corporates.

Strategic Debt Restructuring (SDR), a provision where banks convert debts in the
defaulting corporate sector to equity and take control of the firms in order to
rehabilitate them. Sustainable Structuring of Stressed Assets (S4A) – a facility which
allows for radical and deep restructuring of non-performing loans.

6. Recapitalization of Banks

Capitalizing is aimed at improving the capital level of governments; hence they

recapitalize the public sector banks. To illustrate, In India, there was the Indra
Dhanush Plan and Recapitalization Bonds which were intended to increase liquidity
and capitalize banks with huge NPAs.

7. Public Credit Registry (PCR)

Public Credit Registry (PCR) is an effective mechanism to prevent borrower from

over leveraging and allows close tracking of the loans thus enables detecting of stress
in the banking system at an early stage.

8. Strengthening Governance and Accountability

Factors that seek to promote better accountability of the bank managements, more
particularly of the banks in public sector include more autonomy and performance
based rewards and penalties.

9. Special Mention Accounts (SMA) and Early Warning Systems

This system was implemented with the provision of SMA categories being introduced
in order to identify accounts exhibiting symptoms of financial distress at the earliest

55
 possible period. Infact, banks are required to take corrective measures in good time
particularly when the loan is still performing before it turns into non-performing asset.
10. Mission Indra Dhanush and Reforms in Public Sector Banks

The initiative has strategies aimed at enhancing the operational efficiency and
governance of public sector banks. It addresses matters of accountability, digitization,
and bank board’s empowerment.

11. Special Mention Account (SMA) Framework

The Reserve Bank of India has further improved the SMA classification to assist in
the forecasting of stressed assets circumstances. The framework consists of;
SMA-0: Principal or interest payment not overdue for more than 30 days but showing
early signs of stress.
SMA-1: Overdue between 31 to 60 days.
SMA-2: Overdue between 61 to 90 days.
This mechanism provides the cause for timely proactive steps being taken by the
banks and not waiting for the accounts to become NPAs.

12. Enhancing Credit Risk Management

Supervisors have been calling on banks, among others, to put in place more
sophisticated methods of credit appraisal and risk mitigation strategies, based on the
predictive modelling and early warning systems.

RBI has also called for reinforcing internal audit functions and the credit monitoring
units of banks to ensure tighter control of their lending activities.

All these regulatory and governmental initiatives strive to lessen the NPA burden, enhance
recovery mechanisms as well as fortify the bank's health.

56
Global Comparison of NPAs: India vs Other Countries-

Non-Performing Assets (NPAs) refer to loans or advances where the principal as well as
interest payments are overdue and remain unpaid. NPAs are an important problem for the
well-being of financial bodies, and the economy in general. India and elsewhere there are too
many NPAs - a comparative study.

[Link]

Like any country, India’s banking and financial sector has not been spared the
problem of NPA’s especially after 2014 when bad loans shot up in some public sector
banks. The following points explain the scenario picture shown above:

NPA Ratio: As per the latest August, 2022 data (FY2023), India region wide average
gross NPA ratio among public sector banks is approximately around 5-6%. However
there is lower ratio in private banks and their subsidiaries.

Causes: Major causes of NPAs in India include:

– Economic recession.

– Inadequate management controls and care in lending decisions.

– Exaggerate expansion in debts of corporate borrowers across many sectors,

chiefly steel, engineering infrastructure, power generation.

– The twin balance sheet issue of banks and corporations plagued with weak
buffers.

– Legal aids less effective and slow.

Measures Taken: Risk Factors in the Banking Sector-

Insolvency and Bankruptcy Code (IBC) - The IBC was passed last year and is a big
advantage in the recovery rate and recovery time.

57
 Banking Reforms: Infusion of capital into struggling banks, mergers of banking
institutions, and the enhancement of governance systems.

SARFAESI Act and DRTs: These were enforced for the recovery of the loans still
their achievement has been debatable.

2. United States

One of the broader systemic issues across the U.S. banking system includes NPA,
more so in recent times, during the 2008 financial crisis.

NPA Ratio: A decade or so after the Great Recession, NPA ratios of banks in the
U.S. fell significantly with the gross NPA ratio reading at less than one percentage
point.

Causes: In the event of a financial crisis, a sharp increase in NPAs was experienced
due to the collapse of the subprime mortgage market.

Post turmoil changes in the financial environment, more rigid lending policies and
improved management of risks has limited the growth of NPAs.

Measures Taken:

Dodd-Frank Act: Enhanced the scope and depth of economic and financial industry
regulation and supervision.

Stress Testing: The introduction of stress testing of banks at regular intervals to

assess their capability to withstand economic shocks.

3. European Union

There have been stark deviations in years of unutilized assets within the EU member
states post the eurozone fiscal crisis pay inequities.

NPA Ratio: While the likes of hungry Italy and Portugal recorded high NPA (ratio in
digit’s), those like Germany, and France managed to stay below 2% NPA ratio.

58
 Causes: The sovereign debt crises, especially the in Southern European nations.
Economic recession together with gradual recuperation from the economic meltdown
of 2008.

Measures Taken:

European Central Bank’s (ECB): More effect management targets for various
classes of banks and their increased provision of funds to meet the minimum capital
requirement.

Asset Management Companies: Employed in countries like Spain for the purpose of
freeing banks from non-performing loans.

4. China

Whereas the Chinese banking system has a serious problem with Non-Performing
Assets (NPAs), it is more opaque in the sense of social control over both banks and
enterprises.

NPA Ratio: China NPA ratios are 1 - 2% announced officially but estimates indicate
they might be actually higher.

Reasons: Credit outrunning the supply, particularly for state-owned enterprises

(SOEs).Sectors such as steel, cement, real estate are characterized by overactivity.

Actions Undertaken:

Debt-for-equity swaps: China has recently been engaging in exchange of non-

performing debts for shares in distressed assets undertakings.

Asset Management Companies: They were established with the purpose of cleaning
the balance sheets of state-owned banks from NPAs.

5. Japan

59
 The 1990s economic recession led to a collapse of the banking system in Japan due to
the large amounts of Non-Performing Assets (NPAs) confined in banks after the
bubble economy of real estate and stock market.

NPA Ratio: NPAs were as high as 8-10% in the late 1990s however they were
brought down gradually through intensive restructuring.

Causes: The rapid rise of real estate and stock markets in the late 1980s was another
foremost factor in the economic crisis.

Measures Taken:

Bank Recapitalization: The government provided capital to the banks.

Resolution and Collection Corporation (RCC): This institution was set up with the
aim of holding and liquidating NPAs.

Low-interest-rate policy: In order to facilitate the recovery of the economy and

avoid a crisis in the banking sector.

6. Comparison: India vs Other Countries-

Aspect India USA EU China Japan

NPA 5-6% <1% Varies 1-2% 8-10%
Ratio (PSBs) (0.5-20%)
Economic 2008 Sovereign Over- Assets
Causes Slowdown, subprime debt crisis, leveraging bubble burst
poor lending crisis economies SOEs
Practices stagnation
IBC, Dodd-frank, ECB Debt-for RCC, low-
Key SARFAESI, stress tests Oversight, equity interest
Reforms recapitalization AMCs Swaps, rates
AMCs
Slow but Fast and Mixed State Gradual
Recovery improving Effective results intervention recovery
under IBC across post-1990s
countries

The NPA problem in India, however big may its share be paints the overall picture very well,
is not a problem unique to the country. The U.S., Japan, and other countries had similar
60
issues and emerged out of them after a phase of institutional reforms and strengthening. India
has made some headway with reforms such as the IBC, but obstacles still exist, especially
concerning the slow pace of the courts and resolution timelines. In contrast, it can be said that
western countries have been swift in tackling the issue of bad debts owing to sound
regulations as well as pre-emptive measures to breathe in reputed banks.

Limitations of the Study and Future Research/Further Studies :

The limitations of a study on the Nigerian Ports Authority (NPA) can vary depending on the
research focus. However, here are some common limitations and possible scope for future
research in such a context:

Limitations of the Study-

1. Data Availability: Access to accurate and up-to-date data may be limited due to
insufficient record-keeping or restrictions on accessing internal documents of the
NPA.

2. Limited Sample Size: If the study involves interviews or surveys of port officials
or stakeholders, the sample size may be too small to generalize findings across all
Nigerian ports.

3. Geographical Constraints: The study may focus on one or a few of the major
Nigerian ports (e.g., Lagos, Port Harcourt) and may not fully represent the operational
dynamics of smaller or less active ports.

4. Regulatory and Political Influence: The influence of changing political

administrations and regulatory frameworks can affect port operations and decisions,
making it difficult to capture consistent data or trends over time.

5. Technological Constraints: Limited access to modern technology or inconsistent

implementation of digital systems at the NPA could hinder a study that seeks to
evaluate the effectiveness of technological solutions.

61
 6. External Factors: Global economic conditions, security challenges (e.g., piracy),
and environmental issues (e.g., erosion, flooding) may affect port operations and can
complicate the study's conclusions.

7. Operational Complexity: The multifaceted nature of port operations, including

shipping logistics, customs procedures, and international trade regulations, may pose
challenges in isolating specific variables for analysis.

8. Regulatory Overlaps: Multiple regulatory bodies oversee different aspects of port

operations, leading to overlaps in authority. This complexity could hinder efforts to
accurately evaluate the NPA’s effectiveness in a regulatory environment.

[Link] of Industry Standardization: Variability in port operations across Nigerian

ports could present a challenge for studies aiming to create a uniform performance
evaluation framework.

10. Economic Fluctuations: Economic instability in Nigeria (e.g., inflation, foreign

exchange volatility) can significantly affect port activities, creating inconsistencies in
the study results, especially when data spans multiple years.

Scope of Future Research

1. Technological Innovation and Port Automation: Future studies could focus on
the adoption of technology in port management and operations, including automation,
blockchain for customs clearance, and smart port solutions.

2. Comparative Studies: Researchers could compare the performance and efficiency

of Nigerian ports with other African or global ports to identify best practices and
potential areas for improvement.

3. Sustainability and Environmental Impact: With increasing emphasis on

environmental sustainability, future studies could examine the NPA's efforts to
minimize the environmental impact of port operations, such as carbon emissions,
pollution, and waste management.

4. Security and Risk Management: Research could focus on the security challenges
faced by Nigerian ports, such as piracy, theft, and smuggling, and explore how the
NPA and relevant agencies can enhance port security measures.
62
 5. Impact of Trade Policies: Studies could evaluate how regional trade agreements
(e.g., the African Continental Free Trade Area) and national trade policies affect port
throughput, efficiency, and competitiveness.

6. Human Resources and Training: Another potential area for future research is the
assessment of workforce development programs, skill gaps, and the need for
professional t raining within the NPA.

7. Public-Private Partnerships (PPP): Research could explore the role of private

sector involvement in port development, how PPP models have fared in Nigeria, and
the impact on overall port performance.

8. Customer Satisfaction and Stakeholder Engagement: Future studies could focus

on the satisfaction levels of key stakeholders (importers, exporters, shipping
companies) and how the NPA can improve stakeholder engagement to enhance
operational efficiency.

9. Digitization and E-Government Solutions: Future studies could investigate how

digital transformation initiatives such as electronic customs clearance systems, online
cargo tracking, and e-payment systems are improving operational efficiency at
Nigerian ports.

10. Port Competitiveness in the Gulf of Guinea: Research can explore the
competitiveness of Nigerian ports in the Gulf of Guinea region and examine how
geopolitical factors, like piracy, influence maritime operations and trade routes.

11. Supply Chain Optimization: A detailed analysis could be conducted on how port
logistics and supply chain management can be optimized to reduce dwell time and
improve cargo movement through Nigerian ports.

12. Performance Benchmarking: Scholars could develop a benchmarking system to

compare NPA's performance against international port standards, focusing on
indicators such as container throughput, vessel turnaround time, and logistics cost
efficiency.

13. Impact of Customs Procedures on Port Efficiency: Future research can focus
on how customs procedures affect port efficiency, including clearance times,
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 compliance with international trade standards, and the influence of bribery or
corruption.

14. Private Sector Integration and Investment: Research could explore the role of
private sector investments in expanding port infrastructure, and how foreign direct
investment (FDI) can be better leveraged to improve port capacity and services.

By expanding on these areas, future research can offer deeper insights into enhancing
Nigerian port operations, contributing to the broader national development agenda.

Conclusion –
NPA poses a threat not only to a particular bank suffering with high NPA or the banking
sector, it affects the economy of a country as a whole. The Public sector banks need to pay
more attention to the issue of NPA and implement proper mechanism and governance to
bring this issue under control. Eliminating NPAs completely may never be possible, but steps
need to be taken to prevent it. Indian banking sector should focus on ways to prevent loans
from becoming NPAs, because “prevention is better than cure”. Analyzing credit-worthiness
of borrowers plays a key role in prevention of loans from becoming NPAs.

Based on the interpretation of the provided data on the allocation of funds by public sector
banks, it appears that there are fluctuations in the amount allocated over the years, with
periods of both increase and decrease. However, there is no discernible clear trend evident
from the data. Additionally, the percentage allocation varies across different years, suggesting
changes in the proportion of funds allocated relative to the total funds disbursed by public
sector banks. In conclusion, the data reflects dynamic shifts in the allocation of funds by
public sector banks, indicating potential responsiveness to various factors or priorities over
time rather than a consistent trend.

It may be concluded that the problem of increasing NPA is one of the burning topics in the
banking industry, now a day which indicates the financial stress of banks in India. It is
difficult to completely reduce the NPA from banks but these may be minimized to lowest
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level possible. The present study indicates that the problem of NPAs is more severe in public
sector banks than in private sector banks. The present study clearly states that the financial
position of HDFC bank is good as it shows low Gross NPA%, low Net NPA% and higher
Net Profits over the last 8 years taken for present study. Thus, it is one of the major issues of
public sector banks as well as government as NPA problem in India is more due to lending to
non-priority sector and sensitive sectors such as personal loan and real estate loans. There is
need to focus on recovery and minimizing of NPAs of every public sector bank in India. A
proper and effective Management Information System (MIS) needs to be implemented for
monitoring of credit warning signals. The credit appraisal and monitoring accountability
should be conducted by banks as well as focusing on the default risk minimization
mechanism. Bank should follow the credit policy of the government and take strict and
timely action against NPA. The prevailing laws in this regard of recovery of NPAs may be
amended to empower the RBI to monitor large accounts and create oversight committees.

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Meena, A. (2020, November 14). How to Recover Non-Performing Assets? Law and
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