A Study on Non Performing Assets

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International Journal of Business and Management Tomorrow

Vol. 2 No. 3

A Study on the Performance of Non-Performing Assets (NPAs) of Indian Banking During Post Millennium Period Siraj. K.K*, Research Scholar, School of Management Studies, CUSAT, Cochin Prof. (Dr). P. Sudarsanan Pillai, Research Guide, School of Management Studies, CUSAT, Cochin

NPA is a virus affecting banking sector. It affects liquidity and profitability, in addition posing threat on quality of asset and survival of banks. This study explored movement of various NPA indicators; Gross NPA, Net NPA, Additions to NPA, Reductions to NPA and Provisions towards NPA and compare it with Total Advances and Total Deposits of banks. The study utilized bank-group wise performance statistics for post-millennium period up to the period ended 31st December 2011. The study utilized growth rate calculating using AAG rate, correlation and regression study to analyze the movement and significance of NPA indicators during the period. The effect global financial crisis on the NPA indicators as well is explained. The study concluded that NPA still remains a major threat and the incremental component explained through additions to NPA poses a great question mark on efficiency of credit risk management of banks in India. Keywords: Gross NPA, Net NPA, Additions to NPA, Total Advances, Total Deposits, AAG Rate.

1. Introduction
The economic progress of a nation and development of banking is invariably interrelated. The Banking sector is an indispensable financial service sector supporting development plans through channelizing funds for productive purpose, intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of government. The importance of bank’s stability in a developing economy is noteworthy as any distress affects the development plans (Rajaraman and Vasishtha, 2002) thereby the economic progress (Thiagarajan, et al, 2011). The Indian Banking sector accounts a major portion of financial intermediation and acknowledged as main vehicle for monetary policy signals, credit channel and facilitator for payment systems. ISSN: 2249-9962 March|2012 www.ijbmt.com Page | 1

International Journal of Business and Management Tomorrow

Vol. 2 No. 3

The stability of banking hence is a pre-requisite for economic development and resilience against financial crisis. Like any other business, success of banking is assessed based on profit and quality of asset it possesses. Even though bank serves social objective through its priority sector lending, mass branch networks and employment generation, maintaining asset quality and profitability is critical for banks survival and growth. A major threat to banking sector is prevalence of Non-Performing Assets (NPAs). NPA represent bad loans, the borrowers of which failed to satisfy their repayment obligations. Michael et al (2006) emphasized that NPA in loan portfolio affect operational efficiency which in turn affects profitability, liquidity and solvency position of banks. Batra, S (2003) noted that in addition to the influence on profitability, liquidity and competitive functioning, NPA also affect the psychology of bankers in respect of their disposition of funds towards credit delivery and credit expansion. NPA generate a vicious effect on banking survival and growth, and if not managed properly leads to banking failures. Many researches including Chijoriga, MM (2000) and Dash et al (2010) showed the relationship bank failures and higher NPA worldwide. In this study, we provide empirical evidence that explain how NPA performed in Indian banking, based on statistics during post-millennium period. We undertook the study on Indian banking, classified based on ownership into SBI & Associates, Nationalized Banks, Private Sector Banks and Foreign Banks. We propose a unique approach, investigating the effect of NPA based growth rate based on absolute figures and its...
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