EFFECT OF NON-PERFORMING ASSETS ON THE PRODUCTIVITY OF PUBLIC SECTOR BANKS IN INDIA
Vandana Kumari
Research Scholar, Patna University, Dr. (Prof.) Umesh Mishra
Former Head of the Department of Applied Economics and Commerce, Patna University Abstract - Indian banking has been the backbone for the economic development in the country. They provide financial assistance to the large as well as the SMEs, hence supporting the economy indirectly. The Public Sector Banks play a vital role in the Indian financial sector as 75 percent of the financial markets are covered by Nationalized Banks.
But such an important Sector has been badly affected by the growing quantum of bad loans/NPA. Banks' productivity as well as profitability has been adversely affected. Using the secondary data, the objectives and hypothesis of the study have been justified and accordingly suggestions have been given.
Keywords: NPA, Productivity, PSBs.
1 INTRODUCTION
A Non-performing Asset is a loan account on which either interest or installment has remained unpaid for a period of 90days. Since, the amount due is unpaid for a number of days or months, it ceases to create income for the bank, hence, Non-performing assets.
Hence, NPA affect the banks in many ways. The PSBs have been the worst affected, as they cover 75 percent of the financial market.
1.1 Causes of NPA
Following can be the reasons for increasing NPA in banks. They can be both, external as well as internal factors.
External Factors:
● Ineffective recovery tribunal
● Natural calamity
● Wilful defaults
● Decrease in demand
● Industrial sickness
● Frequent change in government policies.
Internal Factors:
● Inappropriate lending process and credit appraisal system
● Inappropriate technology and management information system
● Improper SWOT analysis
● Loopholes in Management/Managerial deficiencies etc.
Impact of NPA
● Decreased profitability
● Reduced liquidity
● Involvement of management; extra time, efforts and cost,
● Loss of goodwill
2 STATEMENT OF PROBLEM
The increasing NPA has led to reduced productivity in PSBs. The output of banks has come down to negative in recent years. This has shattered the very existence of the banks. Hence, this study has been taken up in order to find out the exact effect of increasing NPA on banks' productivity.
Productivity of PSBs in terms of advances and deposits has deteriorated in recent years. Hence, this study is an attempt towards focusing on the effects of increasing NPA on the productivity of PSBs.
2.1 Objectives of the study
1. To know the cause and effect relationship between increasing NPA and productivity of PSBs.
2. To compare the productivity of PSBs with that of Private Sector banks.
3. To suggest the probable solution for the decreasing productivity due to increasing NPA.
2.2 Hypothesis
H0: Increasing NPA doesn't affect the productivity of banks.
H1: Increasing NPA affects the productivity of banks.
3 RESEARCH METHODOLOGY
This study is an analytical research. The variables, credit/advances and deposits have been taken up as an indicator of productivity of banks. Data has been used since 2011 to 2020.
Secondary data has been used for the purpose of analysis. And statistical tools used are Ms-excel, Graphs etc.
3.1 Analysis and Interpretation
Following is the table showing advances given by Public Sector banks and Private Sector Banks since the financial year 2011.
Table No. 1 Table showing Loans and Advances of PSBs and Private Sector Banks since 2011: (Million)
YEAR Public Sector Banks Private Sector Banks Loans &
Advances ( )
Credit growth (%) Loans &
Advances ( )
Credit growth (%)
2009-2010 27010187 - 6324409 -
2010-2011 33044329 22.34 7975440 26.11
2011-12 38773075 17.34 9664030 21.17
2012-13 44728447 15.36 11432486 18.30
2013-14 51011376 14.05 13429346 17.47
2014-15 54762495 7.35 15843119 17.97
2015-16 55935768 2.14 19393394 22.41
2016-17 55572316 -0.65 22195630 14.45
2017-2018 56973497 2.52 26627531 19.97
2018-19 58926673 3.43 33273281 24.96
2019-20 61581120 4.50 36251545 8.95
Source: www.dbie.rbi.org.in
Form the study of the above Table no. 1, it is evident that the growth in loans and advances of PSBs has been decreasing since the financial year 2012. In the year 2017 there was a negative growth, which means the loans and advances hai decreased by 0.65%. From the year 2018, it is gaining a little pace. On the other hand the loans and advances of Private Sector Banks has been showing a moderate trend. It decreased in the year 2014, then gained pace and again decreased in the year 2017. After that the loans and advances increased to 24.96% in the year 2019. But in the year 2020, it increased only by 8.95%.
Following is the graphical presentation of the above Table no.1
Graph 1, showing trend of Credit Growth in PSBs and Private Sector Banks:
Trend of Credit Growth(%)
Source: Based on figures given in Table no.1
The above graph shows that the credit has been overall decreasing till the year 2017 and after that started increasing from the year 2018. But the credit growth ratio of Private banks are greater than that of PSBs.
Following is the deposits of PSBs and Private Sector Banks and their growth rate since 2011.
Table no. 2 Table showing deposits and growth rate of deposits in PSBs and Private Sector Banks since 2011: (In millions)
As on 31st
March Public Sector Banks Private Sector Banks Deposits (Rs.) Growth (%) Deposits ( ) Growth (%)
2011 43724487 - 10027588 -
2012 50020134 14.40 11745874 17.14
2013 57456972 14.87 13958355 18.84
201 65890205 14.68 15916937 14.03
2015 71941924 9.18 18344697 15.25
2016 74861780 4.06 21476733 17.07
2017 80767820 7.89 25648390 19.42
2018 82623218 2.30 30136881 17.50
2019 84862145 2.71 37700127 25.10
2020 90484198 6.62 41590436 10.32
Source: www.dbie.rbi.org.in
22.34
17.34 15.36
14.05
7.35
2.14 -0.65
2.52 3.43 4.5 26.11
21.17
18.3 17.47 17.97 22.41
14.45 19.97
24.96
8.95
-5 0 5 10 15 20 25 30
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Credit Growth of PSBs(%) Credit Growth of Private Sector Banks(%)
From the study of the above Table no. 2, it is explicit that the growth in deposits of PSBs has been decreasing since 2014 except in the year 2017 in which it grew to 7.89%.
After that it decreased to 2.30% in the year 2018. Again the growth in deposits has started picking up the pace in the year 2019 and 2020. The deposits of Private Sector Banks are increasing since 2014 except in the year 2018 in which it decreased to 17.50%. Again in the year 2020 the deposits decreased to 10.32% from 25.10% in the previous year.
Following is graphical presentation of the above Table no. 2.
Graph 2, showing trend of Deposits growth of PSBs and Private Sector Banks:
Trend of Deposit Growth
Source: Based on figures given in Table no.2
From the above graph it is explicit that the deposit growth rate has been decreasing at a faster rate in case of PSBs during the year 2014 to 2016. However the deposits rate of Private Sector banks are much above that of Public Sector Banks.
Hence from the above analysis it is proved that the Increasing NPA affects the productivity of PSBs and Null hypothesis is rejected and alternate is accepted.
Findings of the study:
1. The loans and advances of PSBs has been decreasing since the financial year 2012 which is the result of risk aversion in banks due to deteriorating asset quality. Again in the year 2019 it increased to 3.43% and in the year 2020 increased to 4.50%. And from the year 2019 the Gross NPA has started decreasing, in the year 2020 it decreased to 10.24% from 11.59% in the previous year and 14.58% in the year 2018.
2. As per Report on Trend and progress in Banking in India by RBI, it is evident that the banks have become choosy or risk averse due to increasing quantum of bad loans and their increasing provisioning. Besides this the Private Sector Banks managed a good rate of growth of loans and advances during the same period.
Hence, this is risk aversion in Public Sector Banks due to increasing NPA and their corresponding provisioning.
3. The deposits of PSBs have been decreasing since the year 2012 except in the year 2013 and 2017 in which it grew marginally to 14.87% and 7.89% respectively.
Which shows the public are losing faith in PSBs because of the latter's poor asset quality and increasing NPA.
4. Due to decreasing profitability as a result of increasing NPA, the banks increase the rate of interest charged on loans and advances and decrease the rate of interest offered on deposits. Hence, decreasing deposits in PSBs.
14.4 14.87 14.68
9.18
4.06 7.89
2.3 2.71 6.62 17.14
18.84
14.03 15.25 17.07
19.42 17.5
25.1
10.32
0 5 10 15 20 25 30
2012 2013 2014 2015 2016 2017 2018 2019 2020
Deposits Growth of PSBs(%) Deposits Growth of Private Sector Banks(%)
5. Deposits of Private Sector Banks are much above that of the PSBs. This is because of the high NPA ratio in PSBs which deteriorates asset quality, while the Private Sector Banks maintain a reasonable NPA ratio.
4 SUGGESTION FOR THE PROBLEM:
1. The decrease in GNPA in the year 2019 and 2020 has triggered an increase in loans and advances and deposits as well. Hence, the NPA or bad loans need to be brought down by way of policies and guidelines. In case of genuine defaults, concession and relaxation may be given but in case of wilful defaults the accused must be punished or the conspirer in the institution must be penalized.
2. 'Bad Bank' which has been successful in countries like Sweden, US etc can be a helpful tool at the hands of banks. As they can focus on the core activities rather than focusing on bad loans.
3. Asset quality review has been successful in reviving the stressed assets. Hence, risk aversion in PSBs can be curbed so that loans and advances can increase.
4. Steps must be taken to get back the attention and interest of the public for investment in the PSBs. The losses on NPA accounts must not be recovered by way of increase in interest rates on deposits. Otherwise the potential customers can be lost.
5. A bad loan or NPA is an inevitable aspect of banking but it can be managed and maintained at a reasonable and moderate percentage. The Private counterparts of the Public Sector Banks have managed to control their NPA ratio, hence their productivity is higher than that of PSBs. Hence, the ailing banks can get some insight from their private counterparts.
5 CONCLUSION
The study has focused on impact of increasing NPA on productivity of banks. Loans &
Advances and Deposits have been selected as a measure of productivity in banks.
From the analysis of the secondary data it is evident that the loans & advances and deposits of PSBs has been decreasing since 2012/2013 with a exception of one or two years. On analysis, it is found that due to increasing NPA and its corresponding provisioning, the Public Sector Banks have become selective for granting of loans as they try to avoid risk of fresh slippages. Besides, Deposits of PSBs have also decreased till 2018 due to increasing NPA. As the customers have lost interest in Public Sector bank due to deteriorated asset quality and increasing losses of the banks. The loans & advances and Deposits of Private Sector banks has shown a good trend when compared to PSBs. Even when they are decreasing but are much above that of PSBs. After the year 2018 the loans&
advances and deposits have started increasing because GNPA of PSBs has started decreasing. The GNPA decreased to 10.24% in 2020 from 14.58% in 2018 and during this years the loans & advances have increased from 2.52% in the year 2018 to 4.5% in the year 2020. The deposits have increased to 6.62% in the year 2020 from 3.2% in the year 2018.
For the findings above some suggestions can be; Firstly, change in policy and guidelines for controlling the NPA. Wilful defaults should be handled strictly and genuine defaults can be given relaxation. Secondly, the concept of 'Bad Bank' can be given shape in the country so that the ailing banks can focus on core activities. Thirdly, the approach adopted by Private counterparts can be incorporated in PSBs.
BIBLIOGRAPHY:
1. Report on Trend and Progress of Banking in India. 2015-16, 2016-17, 2019-20.
2. Www.dbie.rbi.org.in 3. Www.rbi.org.in
4. https://www.paisabazaar.com/banking/
5. https://m.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9009#CT38 6. Financial Express
7. Research Methodology by C. R. Kothari
