INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN Shri Param Hans Education & Research Foundation Trust

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1 INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN A REFEREED JOURNAL OF Shri Param Hans Education & Research Foundation Trust Published by isara

2 IMPACT OF NON-PERFORMING ASSETS ON PROFITIABILITY OF BANKS- A STUDY OF BANK OF BARODA Abstract Himanshu Mathur Research Scholar Department of Accounting Jai Narain Vyas University, Jodhpur For the development of the economy of nation, banks play a significant role. A bank can be defined as a financial Institution which is engaged in accepting of deposits as savings of the customer and providingadvance from the deposits to borrowers Non-Performing Assets is the major factor on which banking should pay high level of attention. NPAs indicate the banking performance. If the level of NPAs is more than normal level, it shows high chance of a large number of defaulters that have unfavorable impact on profitability and net-worth of banks and also reduce the value of the asset. Whereas lower level of NPAs means that banks have good credit appraisal processes. This paper is an effort to analyze the impact of NPAs on the profitability of Bank of Baroda (BOB) in India. The study uses the annual reports of Bank of Baroda (BOB) for the period of five years from to The data has been analyzed by using tables and applying coefficient of correlation & t test. While analyzing the impact of NPA level on BOB we conclude that there is a negative relation between Net Profits and NPA of BOB. It simply means that as profits decrease NPA increase. It is because of the mismanagement on the side of bank while doing credit appraisals and on other financial measures. It is suggested that the banks should evaluate the creditability and solvency of the borrower before sanctioning as well as after disbursing the advances. Keywords: Bank, Non-Performing Assets, Profitability, Mismanagement, Introduction After the first phase of economic liberalization in 1991, the banking industry has undergone a deep change and concept of credit management comes into existence. The first and foremost function of banks is to receive the deposits from public and provide credit faculty as loans to various sectors like agriculture, manufacturing industry, housing sector and for personal use. There is no risk in receiving deposits, because it is responsibilityof banker to repay the deposit, when consumer demands for it. On the other hand lending function involves high level of risk because there is no assuranceabout the repayment of loan. Page 26

3 In current times the banks have become very careful in providing loans, the reason being behind this is occurrence of non-performing assets. Non-performing assets had been one major reason of decline of the banking sector of India. Earlier the Narasimha committee-i had broadly concluded that importance given to the priority sector for lending purpose was the key reason whichdecline profitability of the commercial banks. The committee had highlighted that priority sector lending was leading factor to create non-performing assets of the banks and thus it recommended that it to be phased out. Consequently, the Narasimha committee-ii also point out the requirement of the nil nonperforming assets for all Indian banks with international presence. Deposit is the main source of fund and bank use this fund for lending purpose. So, at the time of sanctioning the loan to borrowers the banks should analyze the worth of project in order to reduce the probability of non-repayment of installment or amount of advance. Numbers of the banks today in India are facing the default risk wherein some part of the profit is kept as reserve for covering the non-performing assets. The banking sector has confronted anenormous change in the last two decades about the processes of a particular job, performance, planning & its execution and so forth. The change is result of introduction of information technology, increased rivalry, geographical extension, and continuing changes in rules and regulations. For improving financial position and to face existing and emerging challenges, banks changed their interest rate, exchange rate and security price jointly in the influence of lenders and borrowers for their self-interest. Concept of Non-Performing Assets (NPAs) On the recommendation of Narsimham Committee, The Reserve Bank has issued directions from 31/03/1993 and introduces a new concept of Income Recognition. According to these directions the banks have to categorize their credit facilities into two parts: Performing Assets (Standard Assets) Non Performing Assets Performing Assets (Standard Assets) - Standard Asset can be define as an assets which does not reveal any problems and which does not bring more than normal risk attached to the business and default. Such an asset is Performing Asset (PA) and should not be an NPA. Efficiency of banks is negativelyaffected by NPAs. Major part of bank s assets is involved in lending money/advances to customers that s why banks needs effective and efficient management of these assets, as it is essential for smooth and sound working of a bank. Credit expansion is the key objective of bank s as well as a focal point, after nationalization of banks in July Due to nationalization of banks, it resulted in heavy dues, outstanding and bad-debts, as quality and quantity of loans were not maintained in apropermode. The concept of performing and non-performing assets was given by Narsimham committee. The performing assets means that the asset which creates a regular income for a bank in the form of Page 27

4 pre-determined amount which includes principal and interest. On the other hand, non-performing assets means that the assets which are not creating any regular income, and are having over- due more than 180 days. Non-recovery of Interest and Principal amount is the major issue in credit cycle of a bank. Bank has no feasible solution to get rid of these types of assets but banks should try to keep these assets at minimum level. Reserve Bank of India (RBI) has developed various credit rating tools, which helps in analyzing the repay capacity of borrower and quality of assets. Review of Literature: 1. Narula, Dr. Sonia, Singh Monika, (2014), Empirical study of Non-Performing Assets of Bank, International Journal of Advance Research in Computer Science and Management Studies, ISSN: , Vol.2, No.1, January 2014:- This paper was an attempt to analysis the impact of Non-Performing Assets (NPA) on Profitability of bank and to see relationship among Total advance, Net profit, Gross NPA, Net NPA. He took Punjab National Bank (PNB) as sample and did his study for the year from to and used the coefficient of correlation. He found that there was mismanagement in PNB though there was a positive relation between Net profit and Net NPA. 2. Selvarajan, B. & Vadivalagan, G., (2013), A study on Management of Non-Performing Assets in Priority Sector reference to Indian Bank and Public Sector Banks, International Journal of Finance & Banking Studies, ISSN: : This paper was an attempt to analyze the management of Non-Performing Assets. The author analyzes the Non-Performing Assets under Priority Sector Advance of Indian Bank and compare with Public Sector Bank. He did his study for the period from He found that Priority Sector Advance of both banks showing increasing trend. In case of NPAs in Priority Sector Advance, he found that Indian bank was good in controlling the NPAs and NPAs of Indian Bank registered overall net decrease in NPAs. On the other hand, Public Sector Bank s management was not good in case of controlling NPAs and registered net increase in amount of NPAs during his study period. 3. Mohnani, Priyanka, & Deshmukh Monal, (2013), A Study of Non-Performing Assets on Selected Public and Private Sector Banks, International Journal of Science and Research (IJSR), India Online ISSN: , Volume 2 Issue 4, April 2013:- This paper was an attempt to evaluate the performance of the selected public and private sector in India and analyses how efficiently banks can managing NPA. He did his study from the year from and found that the magnitude of NPA was comparatively higher in public sectors banks compared to private banks under study but now, they have managed the number at lower end. ICICI bank have higher NPA figure compared to PSB under study 4. Jain, Dr. Kamlesh M. &. Raval, Manish, (2013), Impact of Non-Performing Assets on Profitability in Nationalized Banks of India, Research Expo International Multidisciplinary Research Journal, Vol-3, No.4, ISSN , December 2013:- The author has made an effort to find out the impact of NPA on profitability. He did his study for the period of 10 years from to He took the 6 Nationalized banks as sample for Page 28

5 study and used Regression analysis. He found that NPA was not only one variable that affect profitability of firms 5. Ganesan, D. & Santhanakrishna, R., (2013), Non-Performing Assets- A study of State Bank of India, Asia Pacific Journal of Research, Vol-1, No.10, ISSN , October 2013: The author has made an effort to analyze the Non-Performance Assets of State Bank of India from the year to He found that SBI bank was affected by slightly affected by NPAs. He also gave some suggestion for reducing the NPAs in bank Objective of Study 1) To study the relationship between Net Profit and Non-Performing Assets of BOB bank Hypothesis 1. H0 Non-Performing assets is not negatively affecting profitability of bank 2. Ha Non-Performing assets is negatively affecting profitability of bank Research Methodology The term research is combination of two words: Re+ Search. Re means again and again and search means to find out something new.so research can be defining as process where researcher observe problem again and again from different perspective, collect the data and on the basis of data he draw the conclusion. According to Rusk Research is a point of view, an attitude of inquiry or a frame of mind. It asks questions which have hitherto not been asked, and it seeks to answer them by following a fairly definite procedure. It is not a mere theorising, but rather an attempt to elicit facts and to face them once they have been assembled. Research is likewise not an attempt to bolster up pre-conceived opinions, and it implies a readiness to accept the conclusions to which an inquiry leads, no matter how unwelcome they may prove. When successful, research adds to the scientific knowledge of the subject. According to George J. Mouly He defines research as, The systematic and scholarly application of the scientific method interpreted in its broader sense, to the solution of social studies problems; conversely, any systematic study designed to promote the development of social studies as a science can be considered research. Page 29

6 According to C.C. Crawford He writes that Research is simply a systematic and refined technique of thinking, employing specialized tools, instruments, and procedures in order to obtain a more adequate solution of a problem than would be possible under ordinary means. It starts with a problem, collects data or facts, analysis these critically and reaches decisions based on the actual evidence. It evolves original work instead of mere exercise of personal. It evolves from a genuine desire to know rather than a desire to prove something. It is quantitative, seeking to know not only what but how much, and measurement is therefore, a central feature of it. 1. Data Collection: For the research study, secondary data has been collected from annual report of Bank of Baroda Bank, Reserve Bank of Indiapublicationincluding, different data website, statistical tables related to banks in India and report oncurrency and finance. Research paper and articles relating to NPApublished in different business journals, magazines,newspaper, periodicals were studied and other sources have also been used. 2. Period of Study and Tools: Along with this assets quality of banks andrecommendations also studied.in the present study coefficient ofcorrelation and T Paired sample test have been used to analyze impact of NPAs on profitability. In the light of objective mentioned above, thepresent study is restricted to examine the impactof on Bank of Baroda Bank only. The study covers the period from to Limitation of the Study: As the study is mainly based on secondary data, the inherent limitations are expected to affect the study. Secondary data are obtained from published accounts and statements of the concerned banks. Inherent limitations of the published accounts and statements such as window dressing, errors of omission, commission, duplication, compensating errors, etc. may influence the reliability and accuracy of the study. The present study covers only 5 year data only. Impact of NPAs: 1. Profitability- NPAs negatively affect profitability of a bank in two ways, first is, it stops the earning of banks and secondly banks have to createhuge amount of provisions for it. High amount of provisions state that a bank has to create more than 25% of extra provision on additional NPAs, which in result decreases the profitability and efficiency of banks. 2. Liquidity- Because of Non-Performing Assets banks money blocked, which in turn show low liquidity in hands of banks. Thus, it become impossible for banks to manage their day to day working effectively and pays to depositor on their demand. Page 30

7 3. Credit Loss- Market value of bank is also affected by NPAs. Banks will lose its goodwill, credit in market and market image because bank will not be able to pays funds to its depositor on their demand, which in result have negative impact on perception of people about the banks. Data Analysis and Interpretations Year Advance Deposit Net NPAs Net Profit The above table shows the Total Advance, Deposit, Net Profit and Net NPAs of BOB. By this table we can analyze that total advance and deposits is showing increasing trend. But Net NPAs is also increasing which means there are some customers who are not paying their due money, due to which Net NPAs is increasing. On the other hand, net profit showing fluctuation during 5 years which may be due to Increase in NPAs. VAR00001 VAR00002 Correlations VAR00001 VAR00002 Pearson Correlation Sig. (2-tailed).229 N 5 5 Pearson Correlation Sig. (2-tailed).229 N 5 5 Paired Samples Statistics Statistic Bootstrap a Bias Std. Error 95% Confidence Interval Lower Upper Mean VAR00001 N 5 Std. Deviation Pair 1 Std. Error Mean Mean VAR00002 N 5 Std. Deviation Std. Error Mean a. Unless otherwise noted, bootstrap results are based on 1000 stratified bootstrap samples Page 31

8 Paired Samples Correlations N Correlation Sig. Bootstrap for Correlation a Bias Std. Error 95% Confidence Interval Lower Upper VAR00001 & Pair 1 VAR a. Unless otherwise noted, bootstrap results are based on 1000 stratified bootstrap samples Pair 1 VAR VAR Mean Std. Devia tion Paired Samples Test Paired Differences t df Sig. (2- Std. 95% Confidence Interval of the tailed) Error Difference Mean Lower Upper Pair 1 VAR VAR00002 Bootstrap for Paired Samples Test Mean Bias Std. Error Bootstrap a Sig. (2- tailed) 95% Confidence Interval Lower Upper a. Unless otherwise noted, bootstrap results are based on 1000 stratified bootstrap samples The above data for bootstrapped on 1000 samples gives us the significance for t test.001 and for correlation coefficient is.229 hence we can conclude here that null hypothesis is rejected whereas alternate hypothesis is accepted which is Non-Performing Assets are adversely affecting Profitability of banks. Finding and Conclusion 1. The first and foremost function of banks is to receive the deposits from public and provide credit faculty as loans to various sectors like agriculture, industry, personal and Page 32

9 housing etc.earlier the Narasimha committee-i had broadly concluded thatimportance given to the priority sector for lending purpose was the key reason which decline profitability of the commercial banks.the committee had highlighted that priority sector lending was leading factor to create non-performing assets of the banks and thus it recommended that it to be phased out. 2. Major portion of bank's assets is involved in lending money/advances to customers that's why banks needs effective and efficient management of these assets, as it is essential for smooth and sound working of bankin current times the banks have become very careful in providing loans, the reason being behind this is occurrence of non-performing assets. 3. It is finding that advance, deposit and NPAs are showing increasing trends and on the other hand Net Profit is showing fluctuation from year to year. 4. There is negative relationship between Net Profit and NPAs. It shows NPAs is increasing whereas Net profit is decreasing. Suggestions- 1. Before approving the loan to consumer, bank should access the financial position, credit status, ease of payment of borrower in order to reduce chance of Non-Payment. 2. Bank should have adequate manpower to deal with Non-Performing Assets. 3. In case of Non-payments Bank should opt for a mutual settlement. 4. If required or feel essential, bank should go for legal action against borrowers to recover the dues. 5. To avoid major non-payments Bank should provide loans to different sectors according to their creditworthiness, which can be termed as Risk Management. 6. The bank should take measures to keep watch on the credit habit of the borrower post disbursement. Bibliography: - A. Books 1. Gopal, Krishna, T.V., (2005), Management of Non-Performing Advance, Indian Institute of Banking and Finance, Northern Book Center, Mumbai 2. Gupta, Ambuj, 2010, Non-Performing Assets in Indian Sector Bank, LAP Lambert Acad. Publication 3. Jain, Vibha, (2007), Management of Non-Performing Assets in Commercial Banks, Regal Publishers, New Delhi 4. Kothari, C.R, 2009, Research Methodology: Methods& Techniques, New Age International Publishers, New Delhi 5. Sethi Jyotsan, Bhatia Nishwant, 2012 Element of Banking and insurance, PHI publisher, 6. Vallabh, G., Mishra, S. and Bhatia, A. (2007), Non-Performing Assets of Indian Public, Private and Foreign Sector Banks: An Empirical Assessment, ICFAI Journal of Bank Management, Vol. 6, No. 3, pp. 7-28, August Page 33

10 B. Journal and Research Papers 1. Singh,Asha, 2013, Performance of Non-Performing Assets in Commercial Banks, International Journal of Marketing, Financial Services and Management Research, Volume 1 No. 2 ISSN Ganesan, D. & Santhanakrishna, R., (2013), Non-Performing Assets- A study of State Bank of India, Asia Pacific Journal of Research, Vol-1, No.10, ISSN , October Jain, Dr. Kamlesh M. &. Raval, Manish, (2013), Impact of Non-Performing Assets on Profitability in Nationalized Banks of India, Research Expo International Multidisciplinary Research Journal, Vol-3, No.4, ISSN , December Mohnani, Priyanka, & Deshmukh Monal, (2013), A Study of Non-Performing Assets on Selected Public and Private Sector Banks, International Journal of Science and Research (IJSR), India Online ISSN: , Volume 2 Issue 4, April M.S. Shalini H.S., 2013, A study on causes and remedies for non-performing assets in Indian public sector banks with special reference to agricultural development branch, state bank of Mysore, 6. Narula, Dr. Sonia, Singh Monika, (2014), Empirical study of Non-Performing Assets of Bank, International Journal of Advance Research in Computer Science and Management Studies, ISSN: , Vol.2, No.1, January Nayan J. & Kumaraswamy, 2014, Retail Credit Risk Management in Indian Public Sector Bank, International Global Journal for Research Analysis, Volume 3 Number 8 ISSN , P.no Rama Prasad K., Ramachandra Reddy, B. 2012, Management of Non-Performing Assets in Andhra Bank, Indian Journal of Applied Research, Volume 2 No.2 ISSN X, P Rani Neha, Gaba Dinesh, 2014, Analysis of Non-Performing Assets in Public Sector Bank, Goble Journal for Research Analysis, ISSN: , Volume-3, Issue No. 9, Sep International Journal of Business and Management Invention, ISSN (Online): , ISSN (Print): X Volume 2 Issue 1 January PP Srinivas K T, 2013, A Study on Non-Performing Assets of Commercial Bank in India, International Monthly Refereed Journal of Research In Management & Technology, ISSN: , Volume- II 11. Selvarajan, B. & Vadivalagan, G., (2013), A study on Management of Non- Performing Assets in Priority Sector reference to Indian Bank and Public Sector Banks, International Journal of Finance & Banking Studies, ISSN: C. Websites 1. Annual report of Bank of Baroda from;available at ; Retrieved as on Page 34

11 2. Causes of Non-Performing Assets in Indian Pubic Sector Bank, Available at on Literature Review Related to Banks, Available on as on ymposium2015_paper2.pdf 5. Retrieve as on Mehta, Ketan, Performance of Commercial Bank in India, Available at PERFORMING_ASSETS_NPAS_IN_INDIAN_COMMERCIAL_BANKS Retrieve as on Page 35

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13 .. Shri Param Hans Education & Research Foundation Trust भ रत य भ ष, श, स हहत य एव ध ISSN INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SCIENCE & TECHNOLOGY ISSN (0) (P) INTERNATIONAL RESEARCH JOURNAL OF COMMERCE, ARTS AND SCIENCE ISSN INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SOCIOLOGY & HUMANITIES ISSN (0) (P) INTERNATIONAL RESEARCH JOURNAL OF SCIENCE ENGINEERING AND TECHNOLOGY ISSN (online) INTERNATIONAL RESEARCH JOURNAL OF MANAGEMENT SCIENCE AND INNOVATION