AN ANALYSIS OF ASSETS QUALITY OF NATIONALISED BANKS

AN ANALYSIS OF ASSETS QUALITY OF NATIONALISED BANKS Deepak Kumar Sharma Asstt. Professor, Deptt of Commerce, M.M.P.G. College, Fatehabad Abstract Non Performing Assets affect the profitability, liquidity and competitive functioning of banks and developmental financial institutions and finally the psychology of the bankers in respect of their nature towards credit delivery and credit expansion. The present paper is to analyse the assets quality of the selected nationalized banks. The present study is used exploratory research design. Sample of the ten nationalised banks have been used and the period of the study is ten year i.e, 2004-05 to 2013-14. The study is based on secondary data. Secondary data has been collected through Reserve Bank of India, viz. Report on Trends and Progress on Banking in India, IBA s Bulletins, Journals, websites, etc. The present study is used average, ranking, coefficient of variance (CV) and correlation of coefficient (r) techniques. It is found that there is a significance relationship in assets quality of among nationalised banks which reflect their varied efficiency in the management of nonperforming assets. Keywords: profitability, competitive, assets quality and relationship. I. INTRODUCTION Non-performing asset (NPA) is one of the major concern and problem for banks in India. NPAs reflect the degree of risk and quality of assets of bank and profitability of a bank. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also wear down the value of the asset. NPA growth involves reduced income from assets and the necessity of provisions, which reduces the overall profits and shareholder value. The level of non-performing assets is at the alarming rate in Indian banking comparatively to other countries. This level is much higher in case of public sector banks due to their directional credit to priority sector projects and social development projects. The public sector banks play an immense role in the development and growth from the very inception. The public sector banks which were operating on social model by mobilising the huge resources and directing them to social and priority sectors for social and economic development of the country. Due to their socio economic role, there was high level of NPA s in their asset portfolio. After the liberalization in 1991, they faced high level competition from private and foreign banks. Due to this furious competition and challenge on their survival, they were forced to improve the performance. They faced biggest weakness and problem was huge NPA s in their portfolio. The efficiency of a bank is not reflected only by the size of its balance sheet but also by the level of return on its assets. The NPAs do not generate interest income for banks. At the same time, banks are required to provide provisions for NPAs from their current profits. The NPAs have toxic impact on the return on assets in the following ways: The interest income of banks will fall and it is to be accounted only on receipt basis. Banks profitability is affected adversely because of the providing of doubtful debts and consequent to writing it off as bad debts. Return on investments (ROI) is reduced. The capital adequacy ratio is disturbed as NPAs enter into its calculation. 75

The cost of capital will go up. Asset and liability mismatch will widen. It limits recycling of the funds II. REVIEW OF LITERATURE Chaudhry and Singh (2012) analysed the impact of reforms on the group-wise/year-wise asset quality of public, private and foreign banks in India. The study found that there is a significant difference in the group-wise asset quality of Indian banks. But, reforms have indeed transformed Indian banks into strong, stable and prosperous entities. Abdul, et al. (2013) examined the persistence of bank asset quality on bank lending behaviour in Ghana. Using a dataset from the Bank of Ghana for 25 Ghanaian banks from 2005 to 2010, the study employed a random effects (RE) model with AR (1) and heteroskedastic disturbances to test the relationship between bank lending behaviour proxied as the ratio loans and advances to total asset and bank asset quality (ratio of nonperforming loans to gross loans and advances) while controlling for deposit mobilization, equity, management efficiency, intermediation spread and income diversification. The study found that the effect of the deterioration of bank asset quality (high levels of non-performing loans) on bank lending behaviour is persistence and not contemporaneous. Additionally, bank deposit mobilization, intermediation spread and equity were also found to influence bank lending behaviour. Ahmad and Jegadeeshwaran (2013) studied the non performing assets of nationalised banks. The reason being rising nonperforming assets (NPAs). The data was collected for a period of five years and analysed through mean, CAGR, ANOVA and ranking banks. It found that there is significant difference in the level of NPA s of nationalised banks. Srinivas (2013) examined the reasons for advances becoming NPA in the Indian commercial banks sector and give suitable suggestion to overcome the mentioned problem. It concluded that the banks can avoid sanctioning loans to the non creditworthy borrowers by adopting certain measures. Kapoor (2014) studied the impacts of NPAs on the operations of the Banks and evaluate the comparative ratios of the State Bank of Patiala and Oriental Bank of Commerce. The present study is empirical in nature, in which conclusions have been reached on the basis of secondary data. The secondary data collected from various officially published and unofficially unpublished magazines and periodicals. It found that SBOP showed low risk profile as compare to OBC in terms of NPAs. It also indicated that major NPA increases because of govt. recommended priority sectors. SBOP has better provisioning as compare to OBC. Matthew (2014) examined the bank s asset quality and performance in Nigeria using secondary data obtained from the annual reports and accounts of the six largest banks listed on the Nigeria Stock Exchange based on market capitalization with a sample interval of fifteen-year period from 1999 to 2013. It found that asset quality had a statistically relationship and influence on bank performance. It recommended the policies would encourage revenue diversification, minimize credit risk, and encourage banks to minimize their liquidity holdings. Satpal (2014) evaluated the NPA trend in last 5 years of private and public sector banks and make a comparative study of NPA s of public sector and private sector banks. The present study was an analytical study. The sample consists of three Public sector banks - State Bank of India, Corporation Bank, Bank of Baroda and three Private sector Banks - ICICI Bank Ltd, Axis Bank Ltd, HDFC Bank. The study period was 5 years from the financial year 2009-2013 and secondary data collected mainly from the sources available at internet like the RBI website, websites of the banks etc. It found that extent of NPA is comparatively very high in public sectors banks as compared to private banks. Chandarana (2015) sated that Indian public sector banks, that control three fourth of the assets of the Rs.83 trillion local banking industry are finding it very tough to recover their loan account from defaulting borrowers. It concluded that rising bad loans increases pressure on their profit and capital base and also reduce their ability to grow in a highly competitive environment. Barot (2015) evaluated the relationship between Net NPA with Net Advances of selected public sector banks (PSBs) of India. In this study, data of 8 financial years i.e. 2006-07 to 2013-14 has been 76

analysed. The results demonstrated that there is significant difference regarding the performance of Net NPA to Net Advance Ratio in the banking sector. III. OBJECTIVE AND HYPOTHESIS OF THE STUDY The primary objective of the study is to analyse the assets quality of the selected nationalised banks. For validate the result of the study, hypothesis has been taken as Null Hypothesis, There is no significance relationship in assets quality among the selected nationalised banks (H 01). IV. METHODOLOGY The present study is used exploratory research design. Sample of the ten nationalised banks i.e., Andra Bank (AB), Bank of Baroda (BOB), Bank of India (BOI), Canara Bank (CB), Corporation Bank (COB), Dena Bank (DB), Indian Overseas Bank (IOB), Indian Bank (IB), Union Bank (UB), United Bank of India (UBI) have been used and the period of the study is ten year i.e, 2004-05 to 2013-14. The study is based on secondary data. Secondary data has been collected through Reserve Bank of India viz. Report on Trends and Progress on Banking in India, IBA s Bulletins, Journals, websites, etc. The present study is used average, ranking, coefficient of variance and correlation of coefficient (r) techniques. V. RESULTS AND DISCUSSIONS TOTAL INVESTMENTS TO TOTAL ASSETS RATIO It shows the extent of deployment of assets in investments as against advances. This is a tool to measure the percentage of total assets locked up in investments, which does not form part of the core income of the bank. A higher ratio means that the bank has maintained conservatively a high cushion of investments against NPA s. Hence, this affects its profitability adversely. It can be expressed as: Total Investments to Total Assets Ratio = Total Investments / Total Assets Total Investments consists investments in government securities, Other approved securities by SEBI, Shares, Debentures, Bonds and other securities both in India and outside India and Total Assets consists cash and balances with RBI, Balance with other banks and Money at call & Short notice, Investments, Advances, Fixed assets and Other assets. Table 1 shows that Total Investments to Total Assets ratio of selected nationalised banks range from 17.61 percent in Bank of Baroda (BOB) in 2013-14 to 39.92 percent in Indian Bank (IB) in 2005-06 during period of study. On an average Total Investments to Total Assets ratio is highest in United Bank of India (UBI) i.e. 31.66 percent and lowest ratio in Bank of Baroda (BOB) i.e. 24.23 percent. On the basis of ranking, Bank of Baroda (BOB) has 1st rank and United Bank of India (UBI) has 10 th rank. From the view point of Variability, Total Investment to Total Assets Ratio of selected banks, it is found that highest ratio of coefficient of variance (CV) of Bank of Baroda (BOB) i.e. 26.58 percent showing less consistency and lowest in Corporation Bank (COB) i.e. 6.94 percent indicating more consistency. On the basis of correlation, it is found that there is a significance relationship in Total Investment to Total Assets of among nationalised banks i.e., Bank of India, Dena Bank, Andra Bank, Canara Bank, Indian Bank, Bank of Baroda and Union bank at 5 percent level of significance. Therefore, Null hypothesis (H 01) is rejected. NET NPA S TO TOTAL ADVANCES RATIO In this ratio, net NPA s are measured as a percentage of Net advances. NPA refers to the non performing assets of the banks which cease to generate income for bank. It can be calculated as follows: Net NPA to Total Advances Ratio = Net NPA s / Net Advances. Net NPA s are gross NPA s, net of provisions on NPA s and interest in suspense account and Total advances includes Bills purchased and Discounted, Cash Credits, Overdrafts and Loans Repayable on Demand, Term Loan etc. both in India and outside India. Table 2 indicates that Net NPA to Net Advances ratio of the selected nationalised banks range from 0.15 percent in Andra Bank (AB) in 2007-08 to 7.18 percent in United Bank of India (UBI) in 2013-14 during the period of study. On an average, Net NPA to Net Advances ratio is highest of United Bank of India (UBI) i.e. 2.35 percent and lowest in Bank of Baroda (BOB) i.e. 0.77 77

percent. On the basis of ranking, Bank of Baroda (BOB) has 1st rank and United Bank of India (UBI) has 10th rank in all. From the view point of Variability, Net NPA to Net Advances ratio of selected banks, it is found highest Coefficient of Variance (CV) in Andra Bank i.e.133.90 percent showing less consistency and lowest in Canara Bank (CB) i.e. 35.08 percent indicating more consistency. On the basis of correlation, it is found that there is a significance relationship in Net NPA to Net Advances of among selected Nationalised banks i.e., Andra Bank, Corporation Bank, Canara Bank, Indian Bank, United Bank of India at 5 percent level of significance. Therefore, Null hypothesis (H 01) is rejected. NET NPA TO TOTAL ASSETS RATIO In this ratio, net NPA s are measured as a percentage of Net advances. NPA refers to the non performing assets of the banks which cease to generate income for bank. It reflects the performance of the banks. A high level of NPA s suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also wear down the value of the asset. It can be calculated as: Net NPA to Total Assets = Net NPA / Total Assets. Net NPA s are gross NPA s, net of provisions on NPA s and interest in suspense account and Total Assets consists cash and balances with RBI, Balance with other banks and Money at call & Short notice, Investments, Advances, Fixed assets and Other assets. Table 3 shows that Net NPA to Total Assets ratio of selected banks range from 0.09 percent in Andra Bank (AB) in 2007-08 to 3.73 percent in United Bank of India (UBI) in 2013-14 during the period of study. On an average, Net NPA to Total Assets ratio is highest in United Bank of India (UBI) i.e. 1.24 percent and lowest in Bank of Baroda (BOB) i.e. 0.44 percent. On the basis of ranking, Bank of Baroda (BOB) has 1 st rank and United Bank of India (UBI) has 10 th rank in all. From the view point of Variability, Net NPA to Total Assets ratio of selected banks, it is found that highest CV of Andra Bank (AB) i.e. 136.35 percent showing less consistency and lowest in Canara Bank (CB) i.e. 33.04 percent indicating more consistency. On the basis of correlation, it is found that there is a significance relationship in Net NPA to Total Assets of among selected nationalised banks i.e., Andra bank, Corporation Bank, Canara Bank, Indian Bank, Bank of Baroda, United Bank of India at 5 percent level of significance. Therefore, Null hypothesis (H 01) is rejected. VI. CONCLUSION Reduction of NPAs in banking sector should be treated as national priority item to make the Indian Banking system more strong, vibrant and geared to meet the challenges of globalization. It is found that there is a significance relationship in assets quality (Total Investment to Total Assets; Net NPA to Net Advances and Net NPA to Total Assets) of among nationalised banks i.e., Andra bank, Corporation Bank, Canara Bank, Indian Bank, Bank of Baroda, United Bank of India, Bank of India and Dena Bank which reflect their varied efficiency in the management of assets quality. It is also resulted that Bank of Baroda and Andra Bank are in top two nationalised banks in term of assets quality. Indian banking system can now claim that their level of NPAs have registered a declining trend over a period of time. But effective cost management, recovery management, technological intensity of banking, governance and risk management, financial inclusion are the areas, which can be used as key bearing and ability of Indian banks to remain competitive and enhance soundness. REFERENCES: Abdul, L. A.; Freeman, O. B. & Michael, E. A. (2013). Does Asset Quality Persist on Bank Lending Behaviour?. Empirical Evidence from Ghana. Global Journal of Management and Business Research Finance. 13(4). Ahmad, Z. & Jegadeeshwaran, M., (2013). Comparative Study on NPA Management of Nationalised Banks. International Journal of Marketing, Financial Services & Management Research. 2(8), August, 66-78. 78

Barot, G. C., (2015). Net Non-Performing Assets to Advance Ratios Performance of Public Sector Banks in India. MERC Global s International Journal of Social Science & Management, 2(2), March, 81-87. Chandarana, H. (2015). Indian Banking Sector & Non-Performing Assets. Indian Journal of Applied Research, 5(3), March, 69-70. Chaudhry, S. & Singh, S., (2012). Impact of Reforms on the Asset Quality in Indian Banking. International Journal of Multidisciplinary Research, 2(1), January, 13-31. https://en.wikipedia.org/wiki/asset_quality https://www.fdic.gov/regulations/safety/manual/section3-1.pdf Kapoor, M. (2014). Non Performing Assets of Public Sector Banks in India. International Journal of Innovations in Engineering and Technology (IJIET). 3(3), 33-40. Matthew, A. A., (2014). Asset Quality and Bank Performance: A Study of Commercial Banks in Nigeria. Research Journal of Finance and Accounting, 5(18), 39-44. Satpal (2014). A Comparative study of Non Performing Assets in Public and Private Sector Banks in the New Age of Technology. International Journal of Current Engineering and Technology, 4(4), August, 2468-2475. Srinivas, K. T., (2013). A Study on Non- Performing Assets of Commercial Banks in India. International Monthly Refereed Journal of Research In Management & Technology, 2, December, 61-69. 79

Table 1: Total Investments to Total Assets Ratio (In Percent) BANKS IOB BOI DB AB COB CB IB BOB UB UBI Years 2004-05 37.42 30.19 40.36 32.53 30.25 34.47 34.76 39.16 31.46 29.98 2005-06 31.93 28.31 32.29 28.14 26.30 27.81 39.92 30.97 29.06 32.50 2006-07 29.15 25.06 29.36 30.08 27.35 27.23 37.18 24.41 27.23 34.52 2007-08 27.95 23.38 26.61 26.33 24.79 27.57 31.08 24.43 27.21 34.09 2008-09 25.78 23.33 25.74 24.70 28.70 26.30 27.10 23.06 26.71 28.89 2009-10 28.72 24.40 27.25 23.11 30.92 26.32 27.88 21.98 27.88 33.85 2010-11 27.19 24.45 26.50 22.23 30.28 24.90 28.58 19.88 24.75 29.16 2011-12 25.30 27.28 26.35 23.71 29.03 27.28 26.85 18.60 23.78 28.49 2012-13 25.10 20.90 30.27 25.72 30.07 29.38 25.68 22.19 25.92 29.20 2013-14 25.55 19.92 29.32 27.10 29.81 25.78 25.04 17.61 26.49 35.87 Average 28.41 24.72 29.41 26.37 28.75 27.70 30.41 24.23 27.05 31.66 Ranking 6 2 8 3 7 5 9 1 4 10 CV 13.46 12.86 14.89 12.22 6.94 9.66 16.99 26.58 7.97 8.81 Correlation (p value) 1.004*.001*.008*.442.006*.008*.000*.000*.434 Source: Performance Highlights of Various Banks; * Significance at the 5% level of Significance. Table 2: Net NPA to Total/Net Advances Ratio (In Percent) BANKS IOB BOI DB AB COB CB IB BOB UB UBI Years 2004-05 1.27 2.00 5.23 0.28 1.12 1.88 1.35 1.45 2.64 2.43 2005-06 0.65 2.06 3.04 0.24 0.64 1.12 0.79 0.87 1.56 1.95 2006-07 0.55 1.46 1.99 0.17 0.47 0.94 0.35 0.60 0.96 1.50 2007-08 0.60 0.91 0.94 0.15 0.32 0.84 0.24 0.47 0.17 1.10 2008-09 1.33 1.31 1.09 0.18 0.29 1.09 0.18 0.31 0.34 1.48 2009-10 2.52 0.44 1.21 0.17 0.31 1.06 0.23 0.34 0.81 1.84 2010-11 1.19 0.52 1.22 0.38 0.46 1.11 0.53 0.35 1.19 1.42 2011-12 1.35 0.74 1.01 0.91 0.87 1.46 1.33 0.54 1.70 1.72 2012-13 2.50 1.49 1.39 2.45 1.19 2.18 2.26 1.28 1.61 2.87 2013-14 3.20 2.80 2.35 3.11 2.32 1.98 2.26 1.52 2.33 7.18 Average 1.52 1.37 1.95 0.80 0.80 1.37 0.95 0.77 1.33 2.35 Ranking 8 6.5 9 2.5 2.5 6.5 4 1 5 10 CV 60.46 55.04 68.79 133.90 78.60 35.08 85.14 61.58 59.98 75.52 Correlation (p value) 1.242.409.004*.017*.018*.024*.094.139.006* Source: Performance Highlights of Various Banks; *Significance at the 5% level of Significance. 80

Table 3: Net NPA to Total Assets Ratio (In Percent) BANKS IOB BOI DB AB COB CB IB BOB UB UBI Years 2004-05 0.63 1.63 2.46 0.15 0.61 1.02 0.62 0.65 1.46 0.96 2005-06 0.38 0.86 1.63 0.13 0.38 0.66 0.37 0.46 0.94 0.91 2006-07 0.31 0.45 1.16 0.10 0.27 0.56 0.18 0.35 0.58 0.79 2007-08 0.36 0.33 0.56 0.09 0.19 0.50 0.14 0.27 0.10 0.56 2008-09 0.83 0.28 0.65 0.12 0.16 0.68 0.11 0.20 0.20 0.85 2009-10 1.52 0.81 0.74 0.11 0.18 0.68 0.14 0.22 0.49 1.01 2010-11 0.74 0.56 0.77 0.25 0.28 0.70 0.33 0.22 0.76 0.84 2011-12 0.87 0.98 0.65 0.60 0.53 0.91 0.85 0.35 1.15 1.05 2012-13 1.65 1.32 0.81 1.65 0.73 1.28 1.46 0.77 1.08 1.72 2013-14 2.06 1.30 1.46 2.00 1.43 1.21 1.48 0.92 1.51 3.73 Average 0.94 0.85 1.09 0.52 0.48 0.82 0.57 0.44 0.83 1.24 Ranking 8 7 9 3 2 5 4 1 6 10 CV 64.71 53.78 55.44 136.35 81.51 33.04 93.38 57.72 59.08 74.39 Correlation (p value) 1.073.398.002*.014*.007*.010*.040*.111.002* Source: Performance Highlights of Various Banks; * Significance at the 5% level of Significance. 81