Effect of NPA on Banks Profitability

Transcription

1 Effect of NPA on Banks Profitability Sri Ayan Chakraborty Faculty: Accounting & Finance Nopany Institute of Management Studies, Kolkata Abstract Banking business involves borrowing from the public in the form of Demand and Term Deposits and lending it to the people and business at a premium. Lending of money in the form of short & long term Advances involve credit or default risk. When the loans and advances made by banks or financial institutions turn out as non-productive, non-rewarding and non-remunerative, they become Non Performing Assets (NPA). According to SARFAESI 2002, NPA is an asset or account of a borrower, which is classified by a bank or financial institution as sub-standard asset, doubtful asset and loss asset. Indian banks with enormous amounts of bad loans are in pathetic health and witnessed a sharp jump in their gross NPAs. It is also found that at international level Indian banks are among the banks that have higher percentage of NPAs. The objective of this study is to perform an analysis of Non Performing Assets of 5 leading Indian Commercial Banks and their effect on Banks profitability. Keywords: Indian Banking Sector, Commercial Banks, Gross NPA; Net NPA; Advances; ROA; Performance Evaluation, Standard Deviation, ANOVA I. INTRODUCTION Indian Sector has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. Post reform era has changed the whole structure of banking sector of India. The emerging competition has resulted in new challenges for the Indian banks. Hence, parameters for evaluating the performance of banks have also changed. Non performing assets are an unavoidable burden for each banking industry. The success of banks depends upon methods of managing NPAs and keeping them within tolerance level. Hence, to change the curve of NPAs, there is only one technique that an effective monitoring and control policy should be planned and executed which is aided by proper legal reforms. Reasons being non-performing assets (NPAs) An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received. Therefore, this has become what is called as a critical performance is of the banking sector as the level of NPAs affects the profitability of a bank. NPA Banking business is mainly that of borrowing from the public and lending it to the needy persons and business at a premium. Lending of money involves a credit risk. When the loans and advances made by banks or financial institutions turn out as non - productive, non- rewarding and non remunerative, they become Non 201 Sri Ayan Chakraborty

2 Performing Assets (NPA). According to SARFAESI 2002, NPA is an asset or account of a borrower, which is classified by a bank or financial institution as sub-standard asset, doubtful asset and loss asset. The definition of an NPA as given by RBI and its various categories is as under: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non performing asset (NPA) is a loan or an advance where; Exhibit I NPA Parameters Nature of Facility Term Loan Overdraft/Cash Credit Bill Purchased/discounted Crop Loans (short duration crops) Crop Loans (Long duration crops) Securitization transactions Derivative transactions Securitization transaction 202 Sri Ayan Chakraborty Parameters Interest and/or instalment of principal remain overdue beyond 90 days Remains out of order as indicated above Remains overdue beyond 90 days Instalment of principal or interest thereon remains overdue for 2 crop seasons Instalment of principal or interest thereon remains overdue for 1 crop season Amount of liquidity facility remains outstanding beyond 90 days Overdue receivables representing positive mark-to-market value of a derivative contract which remains unpaid beyond 90 days from specified due date for payment Liquidity facility remains outstanding for more than 90 days Classifications of Assets: Non-performing assets are further classified into three categories based on the span for which the asset has remained non-performing and the recovery of the dues: i. Substandard Assets With effect from March 31, 2005, a substandard asset would be the one, which has remained as a nonperforming asset for a period of less than or equal to 12 months. Substandard assets have credit weaknesses that jeopardise the liquidation of the debt and there are also possibility of incurring and sustaining some losses if the deficiencies are not corrected. ii. Doubtful Assets With effect from March 31, 2005, an asset is classified as doubtful if it has remained as a sub-standard asset for a period of 12 months. A loan classified under the doubtful category has all the weakness characteristics as defined for the sub-standard assets; also it has added characteristics that the weakness makes full liquidation or collection, on the basis of the currently known conditions, facts, and values that are highly doubtful and questionable. iii. Loss Assets A loss asset is one where loss has been identified by the bank s internal auditors and RBI s external auditors, but the amount has not been written off fully. These kinds of assets are also considered as uncollectible, and of little value that its continuance or maintenance as a bankable asset is not warranted or acceptable though there may be some salvage or recovery value Leading Commercial Banks Axis Bank Ltd Axis Bank Ltd is the third largest of the private-sector banks in India offering a comprehensive suite of financial products. The bank has its head office in Mumbai and Registered office in Ahmedabad. It has 3300

3 branches, 13,003 ATMs, and nine international offices. The bank employs over 50,000 people and had a market capitalization of trillion (US$16 billion) (as on March 31, 2016). It offers the entire spectrum of financial services large and mid-size corporate, SME, and retail businesses. HDFC Bank Limited HDFC Bank Limited is an Indian banking and financial services company headquartered in Mumbai, Maharashtra. It has 90,421 employees and has a presence in Bahrain, Hong Kong and Dubai. HDFC Bank is India s second-largest private sector lender by assets. As of December 31, 2016, the Bank s distribution network was at 4,555 branches and 12,087 ATMs across 2,597 cities. ICICI Bank ICICI Bank (Industrial Credit and Investment Corporation of India) is an Indian multinational banking and financial services company headquartered in Mumbai, Maharashtra, India, with its registered office in Vadodara. It is the largest bank in India in terms of assets and third in term of market capitalisation. It offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialised subsidiaries in the areas of investment banking, life, non-life insurance, venture capital and asset management. The bank has a network of 4,450 branches and 14,404 ATMs in India, and has a presence in 19 countries including India. State Bank of India State Bank of India (SBI) is an Indian multinational, public sector banking and financial services company. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank in the Indian subcontinent. Bank of Madras merged into the other two "presidency banks" in British India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank of India, which in turn became the State Bank of India in As of , it had assets of trillion (US$460 billion) and more than 14,000 branches, including 191 foreign offices spread across 36 countries, making it the largest banking and financial services company in India by assets. II. OBJECTIVE OF THE STUDY 1. To analysis the NPA of some leading Commercial banks like Axis Bank, HDFC Bank, ICICI Bank and State Bank of India and its effect on Banks profitability 2. The objective of the study is to find out whether difference lies in the NPA occurrence between the various banks during the period of study REVIEW OF LITERATURE NPA is a burning topic for the banking sector and many authors tried to study the reasons of NPA, the problems created by NPA and the impact of NPA on the banking sector, and moreover came to a solution or remedies of the growing problem of NPA. A number of papers have been written and gone through, and this part of this paper is attempting to present a review of all those are available in the same area of nonperforming assets of the public sector banks, private sector banks and other banks. This survey has conducted a study on the existing papers, articles, journals, and reports provided by different authors, groups and committees from time to time. Dutta. A (2014): This paper studied the growth of NPA in the public and private sector banks in India, and analysed sector wise non-performing assets of the commercial banks. For the purpose of the study data has been collected from secondary sources such as report on Trend and Progress of Banking in India, RBI, Report on Currency and Finance, RBI Economic Surveys of India. Ahmad, Z., Jegadeeshwaran, M. (2013): The current paper is written on the NPA, and causes for NPA. Secondary data was collected for a period of five years and analysed by mean, CAGR, ANOVA and 203 Sri Ayan Chakraborty

4 ranking banks. The banks were ranked as per their performance in managing the NPAs. The efficiency in managing the NPA by the nationalised banks was tested. Ranjan, R., Dhal, S.C. (2013): This paper explores an empirical approach to the analysis of the Indian commercial banks' nonperforming loans by regression analysis. The empirical analysis evaluates as to how the NPLs are influenced by three major sets of economic and financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks. Patidar, S.,Kataria, A. (2012): The study analyzed the percentage share of NPA as components of priority sector lending, the comparative study was conducted between SBI and Associates, Old Private Banks and New Private Banks and Nationalized Banks of the benchmark category, to find out the significant difference of the NPA and also find out the significant impact of Priority Sector Lending on the Total NPA of Banks using statistical tools like regression analysis and ratio analysis. Arora, N., Ostwal, N. (2014): The present paper analyses the classification and comparison of loan assets of public and private sector banks. The study concluded that NPAs are still a threat for the banks and financial institutions and public sector banks have higher level of NPAs in comparison to Private sector banks. Kumar, M.,Singh, G. (2012): The paper focuses on the most significant factors, which contribute towards the non-performing assets problem from the view point of the top bankers of public sector banks and, some foreign banks in India and the measures required for managing the NPAs Rajput, N.,Arora, A.P., Kaur, B. (2011): This study attempts to trace the movement of the NPAs presence in public sector banks of India, by analyzing the financial performance in managing NPA. Tripathi, L. K., Parashar, A., Mishra, S. (2014): The present study, with the help of multiple regression model attempts to investigate the impact of priority sector advances, unsecured advances and advances made to sensitive sectors by banks like SBI group and other nationalised banks on Gross NPAs of banks. Chaudhary, K., Sharma, M. (2011): This paper has made an attempt to analyses how efficiently Public and Private sector banks have been managing NPA. A statistical tool for projection of trend was used for analysis. III. SCOPE OF STUDY The study shows the role of profitability position and the NPA of leading commercial banks in India. This is the process of comparing income to output and determining how much profit was made during a specific time period. A properly conducted profitability analysis provides invaluable evidence concerning the earnings potential of a company and the effectiveness of management PERIOD OF STUDY The study covers a period of 5 years from 2012 to 2016 is taken for the study. METHODOLOGY Sources of Data The study is based on secondary data. Information required for the study has been collected from the Annual Reports of Axis Bank, HDFC Bank, ICICI Bank, State Bank of India and Punjab National Bank and different books, journal, magazines, and data collected from various banks websites. Tools Applied In this study various tools: Financial Tools Ratio Analysis and Statistical Tools (i.e.) Mean and ANOVA test have been used for data analysis. MEAN = Sum of variable/n Standard Deviation (SD) = X2/N-( X/N) Coefficient of Variation (COV) = SD/MEAN* Sri Ayan Chakraborty

5 Hypothesis An ANOVA is statistical hypothesis in which the sampling distribution of test statistic when null hypotheses is true. Null hypotheses have been set and adopted for the analysis of data. The null hypotheses are represented by H 0. It is a negative statement which avoids personal bias of investigator during data collection as well as the time of drawing conclusion. IV. LIMITATION OF THE STUDY 1. The study is related to a period of 5 years. 2. As the data are only secondary i.e. they are collected from the published annual reports. 3. Profitability ratio and NPA have been taken for the study. V. A BRIEF ACCOUNT OF PROFITABILITY The primary objective of each business enterprise is to earn profit. In facts profit earning is considered essential not only for the survival of business but is also required for its expansion and diversification. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company s bottom line and its return to its invertors. Profitability ratios are typically based on net earnings, but variations will occasionally use cash flow or operating earnings. Profitability is a measure of efficiency and control. Profitability is the main base for liquidity as well as solvency. As per Para 2.1 of the RBIs master circular dated An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. It is also known as non- productive assets (NPA s), non-performing loans and constitutes integral part of Bank s operations. It means NPA an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. A critical look through the existing statistics on the movement of NPAs of the leading Commercial Banks will help to determent the extent to which they are standing with regard to NPAs. Gross NPA: Gross NPA is the amount outstanding in the borrower account, in books of the bank other than the interest which has been recorded and not debited to the borrower account. Exhibit - II GROSS NPA: MEAN, SD & COV In Millions SBI ICICI HDFC AXIS ,760 95,630 20,032 18, ,890 96,470 23,739 23, , ,540 31,008 31, , ,420 36,019 41, , ,210 43,928 60,875 MEAN 614, ,454 30,945 35,085 SD 220,812 73,021 9,557 16,798 CV The above analysis of bank wise mean standard deviation and coefficient of variation of Gross NPA s of five selected banks. SBI has the highest Mean Value while HDFC has lowest Mean Value in comparison to other banks. Standard deviation of Gross NPA of SBI is 220,812 while that of HDFC is 9,557. From above analysis ICICI Bank reported the highest coefficient of variation while HDFC Bank reported the lowest COV (0.3088) 205 Sri Ayan Chakraborty

6 NET NPA: Net NPA is the amount of Gross NPA less (1) interest debited to borrower and not recovered and not recognized as income and kept in interest suspense (2) amount of provisions held in respect of NPA and (3) amount of claim received and not appropriated. Exhibit - III NET NPA: MEAN, SD & COV In Millions SBI ICICI HDFC AXIS ,190 18, , ,565 22,340 4, , ,961 33,010 8, , ,348 63,250 9,885 13, , ,970 13,204 25,221 MEAN 280,744 54,102 8,065 12,082 SD 100,265 47,418 3,894 8,010 CV The above analysis of bank wise mean standard deviation and coefficient of variation of Net NPA s of five selected banks. SBI has the highest Mean Value while HDFC has lowest Mean Value in comparison to other banks. Standard deviation of Net NPA of SBI is 100,265 while that of HDFC is 3,894. From above analysis ICICI Bank reported the highest Coefficient of Variation while SBI reported the lowest COV (0.3571) Return on Assets: ROA is the ratio between Net Profit and Total Assets. It is a Key Profitability ratio measuring the efficiency of Asset management. The return on assets ratio is also known as return on investment relates to the firm s assets base and what kind of return they are getting on their investment in their assets. A high ROA indicates that management is effectively utilizing the company s assets to generate profit. Return on Assets% = Net Profit / Total Assets Exhibit - IV RETURN ON ASSETS Year SBI ICICI HDFC AXIS % 1.23% 1.54% 1.48% % 1.42% 1.68% 1.54% % 1.48% 1.74% 1.63% % 1.48% 1.76% 1.59% % 1.11% 1.75% 1.57% MEAN 1.14% 0.66% 0.15% 0.28% SD COV The above table depicts the bank wise Mean, Standard Deviation & Coefficient of Variation of Return on Assets of selected banks. As per the above analysis SBI has the highest Mean Value while HDFC Bank has lowest Mean in comparison to other banks. ICICI Bank has the highest Standard Deviation and Coefficient of Variation which are and respectively. 206 Sri Ayan Chakraborty

7 Hypothesis: H0: µ1=µ2=µ3=µ4 (There is no significant relationship between Return on Assets of the above Banks) H1: µ1 µ2 µ3 µ4 (There is significant relationship between Return on Assets of the above Banks) ANOVA: Single Factor Groups Count Sum Average Variance SBI E-06 ICICI E-06 HDFC E-07 AXIS E-07 ANOVA: VARIATION Source of Variation SS df MS F P-value F crit Between Groups E Within Groups 2.9E E-06 Total Above analysis shows that the F value ( ) is more than F Critical value of , therefore null hypothesis is rejected. Therefore it is concluded that there is significant relationship between the ROA of the above banks. Gross NPA/Total Assets: Gross NPA is the sum of all loan assets that are classified as NPA as per RBI guidelines. Gross NPA Ratio is the ratio of Gross NPA to the Total Assets of the Banks Exhibit - V GROSS NPA/TOTAL ASSETS Year SBI ICICI HDFC AXIS % 1.54% 0.59% 0.63% % 1.43% 0.58% 0.70% % 1.41% 0.62% 0.81% % 1.85% 0.59% 0.88% % 2.91% 0.60% 1.14% MEAN 2.51% 1.83% 0.60% 0.83% SD COV The above table depicts the bank wise Mean, Standard Deviation & Coefficient of Variation of Gross NPA to Total Assets of selected banks. As per the above analysis SBI has the highest Mean Value while HDFC Bank has lowest Mean in comparison to other banks. ICICI Bank has the highest Standard Deviation and Coefficient of Variation which are and respectively. 207 Sri Ayan Chakraborty

8 Hypothesis: H0: µ1=µ2=µ3=µ4 (There is no significant relationship between Gross NPA to Total Assets of the above Banks) H1: µ1 µ2 µ3 µ4 (There is significant relationship between Gross NPA to Total Assets of the above Banks) ANOVA: Single Factor Groups Count Sum Average Variance SBI E-05 ICICI E-05 HDFC E-08 AXIS E-06 ANOVA: VARIATION Source of Variation SS df MS F P-value F crit Between Groups E Within Groups E-05 Total Above analysis shows that the F value is which is more than F Critical value of as a result of which null hypothesis is rejected. Therefore it is concluded that there is significant relationship between the Gross NPA to Total Assets of the above banks. Net NPA/Total Assets: Net NPAs are calculated by deducting provisions from gross NPAs. Net NPA Ratio is the ratio of Net NPA to the Total Assets of the Banks Exhibit - VI NET NPA/TOTAL ASSETS Year SBI ICICI HDFC AXIS % 0.31% 0.10% 0.17% % 0.33% 0.12% 0.21% % 0.44% 0.17% 0.27% % 0.77% 0.16% 0.28% % 1.45% 0.18% 0.47% MEAN 1.14% 0.66% 0.15% 0.28% SD COV The above table depicts the bank wise Mean, Standard Deviation & Coefficient of Variation of Gross NPA to Total Assets of selected banks. As per the above analysis SBI has the highest Mean Value while HDFC Bank has lowest Mean in comparison to other banks. ICICI Bank has the highest Standard Deviation and Coefficient of Variation which are and respectively. 208 Sri Ayan Chakraborty

9 Hypothesis: H0: µ1=µ2=µ3=µ4 (There is no significant relationship between Net NPA to Total Assets of the above Banks) H1: µ1 µ2 µ3 µ4 (There is significant relationship between Net NPA to Total Assets of the above Banks) ANOVA: Single Factor Groups Count Sum Average Variance SBI E-06 ICICI E-05 HDFC E-07 AXIS E-06 ANOVA: VARIATION Source of Variation SS df MS F P-value F crit Between Groups E Within Groups E-06 Total Above analysis shows that the F value is which is more than F Critical value of as a result of which null hypothesis is rejected. Therefore it is concluded that there is significant relationship between the Net NPA to Total Assets of the above banks. Net NPA to Advances: It is the ratio between Net NPA and advances (loans). It is used as a measure of the overall quality of the bank s loan book. Exhibit - VII NET NPA/ADVANCES Year SBI ICICI HDFC AXIS % 0.82% 0.18% 0.28% % 0.81% 0.20% 0.36% % 1.05% 0.28% 0.45% % 1.77% 0.26% 0.47% % 3.23% 0.27% 0.74% MEAN 2.48% 1.54% 0.24% 0.46% SD CV The above table depicts the bank wise Mean, Standard Deviation & Coefficient of Variation of Net NPA to Advances of selected banks. As per the analysis SBI has the highest Mean Value while HDFC Bank has lowest Mean in comparison to other banks. ICICI Bank has the highest Standard Deviation and Coefficient of Variation which are and respectively. 209 Sri Ayan Chakraborty

10 Hypothesis: H0: µ1=µ2=µ3=µ4 (There is no significant relationship between Net NPA to Advances of the above Banks) H1: µ1 µ2 µ3 µ4 (There is significant relationship between Net NPA to Advances of the above Banks) ANOVA: Single Factor Groups Count Sum Average Variance SBI E-05 ICICI HDFC E-07 AXIS E-06 ANOVA: VARIATION Source of Variation SS df MS F P-value F crit Between Groups Within Groups E-05 Total Above analysis shows that the F value is which is more than F Critical value of as a result of which null hypothesis is rejected. Therefore it is concluded that there is significant relationship between the Net NPA to Advances of the above banks. CONCLUSION The Indian Banking Sector is mainly dominated by the Public Sector Banks. Globalization has encouraged multinationals and foreign banks to set up their business unit in India. The study indicated that the selected Commercial Bank is different in terms of total assets, Gross and Net NPAs, Advances and efficiency factors. Differences exist in their mean value of Return on Assets, Gross NPA/Total Assets, Net NPA/Total Assets & Net NPA to Advances. Profitability ratios are employed by the management in order to assess how efficiently they carry on their business operations and also it is suggested for the entire bank to take effective steps to improve the operating efficiency. Public Sector Banks (PSBs) in India have performed rather poorly over the past 3-4 years. For the most part this has been on account of Non Performing Asset (NPA) related worries which have so far been brushed under the carpet. There have been Substandard Assets, Doubtful Assets and Loss Assets of the selected Commercial Banks REFERENCES Ranjan R. & Dhal S., (2003), Non-Performing Loans and Terms of Credit of Public Sector Banks in India: An Empirical Assessment, Reserve Bank of India Publication, Mumbai, Occasional Papers, winter, Vol. 24, No. 3. Rao & Tiwari, (2008), A Study of Factors affecting Efficiency of Public Sector Banks, Journal of Services Research, Vol. 8, pp Reddy, (2002), A comparative study on NPA in India in the Global Context, available at, Reserve Bank of India, Reports on Trend and Progress of Banking in India, several issues, Some Aspects and Issues Relating to NPAs, and Annual Reports, RBI Publication, Mumbai, available at, Pradeep, (2007), Banking Sector Reform: NPA Management Assets Reconstruction Company (ARC) in Indian Scenario, Currently Viewing, Vol. 42, No. 10. Prasad et al., (2004), Post-reform Performance of Public Sector Banks with Special Reference to Non-performance Assets, Edited Book Banking in the New Millennium, pp Annual Report of Axis Bank, HDFC Bank, ICICI Bank and State Bank of India 210 Sri Ayan Chakraborty