RESEARCH PROPOSAL

TOPIC: “IMPACT OF NPA ON THE PROFITABILITY OF ALL NIFTY INDEXED

BANKS IN INDIA”

CHAPTER 1

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 1.1 INTRODUCTION

Indian Sector has undergone a big 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.

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-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. This Non-Performing Assets have notable impact of change in banker’s sentiments
which may hinder credit expansion to productive purpose. Banks may be inclined towards
more risk-free investments to avoid and reduce riskiness, which is not conducive for the
growth of economy. Reduce the earning capacity of assets and badly affect the ROI. The
cost of capital will go up. The assets and liability mismatch will widen. Higher
provisioning requirement on mounting NPAs adversely affect capital adequacy ratio and

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banks profitability. The economic value additions (EVA) by banks get upset because EVA
is equal to the net operating profit minus cost of capital. NPAs causes to decrease the value
of share sometimes even below their book value in the capital market. NPAs affect the risk
facing ability of banks. Thus, it becomes important to measure whether there is significant
impact of non-performing assets on profitability of the banks.

The Non-Performing Assets are those assets that are not able to generate income for the
bank and are a great threat for the bank. Rather generating profit for the bank, NPA drains
off the income earned by other performing assets by way of paying interest to the real
owners of the resources. NPAs affect the overall profitability of the bank adversely by
affecting return on equity and return on assets. It is extremely important to know why and
how an account is becoming NPA and reasons for NPA.

The main aim behind this study is to know how the NPA become affect the profitability of
the banks, the relationship between NPA and profitability of banks. The result of this study
is verifying with the help of Net profit and Net NPA of banks in bank nifty for last 5 years.

1.2 REVIEW OF LITERATURE

• (Arora, 2000) suggests that the Indian banks must achieve the level of international
standards in NPA management. In the long run, only better credit management terms of
appraising and monitoring of loan assets can only solve the problem of NPAs in Indian
banks. By doing these Indian banks can maintain the pre-eminent position in the global
set up.
• (Banerjee, 2006) observed that NPAs are one of the problem areas which requires
attention for improvement in the management of PSBs and their profitability. The
present scenario shows that the NPAs of PSBs are increasing very speedly. These NPAs
cost the economy in several ways. The author has suggested several strategic measures
to control NPAs of PSBs.
• (Ammannaya, 2010) concludes that future of PSBs will depend on their alertness
operational efficiency, customer orientation and standard of customer service, creation
of large volumes of performing assets, attainment of optimum levels of productivity,
profitability and overall performance. Those banks which are proactive and which
quickly respond to changing customers’ needs and which give adequate attention to the

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 factors indicated above alone can survive successfully face the emerging challenges
perform well and prosper.
• (Arora.U and Vashisht.B, 2009) analysed and compared the performance of credit
schemes of selected banks for the last five years. The study found a positive relationship
between total loan disbursement and total nonperforming assets outstanding of selected
banks.
• (Bhatia, 2007) explored an empirical approach to the analysis of NPAs of public,
private and foreign banks in India. NPAs are considered as an important measuring rod
to judge the performance and financial health of banks. The level of NPAs is one of the
drivers of financial stability and growth of the banking sector. It was observed that the
NPA affects the banks on micro and macro level.
• (Georgekutty, 2000) described that the lending capacity of the banks is adversely
affected due to their inability to recycle the resources or to raise more resources from
higher financing agencies. Any liquidity crisis in co-operative banks will subsequently
hinder capital formation in agriculture, which will decelerate the economic
development.
• ( Husan, Huzaifa, 2011) stated that the banking sector is the sector to avoid for FI‟s,
because there are more loans which will turn NPAs in the near future. Through his
article he has given negative remarks to banking sector for FI‟s as the risk of NPAs is
going to increase day-by-day.
• (Jayasree M and Radhika R, 2011) studied the trends in non-performing assets of
Indian banks and made a comparison of public sector banks, old private sector banks,
new private sector banks and foreign banks. The article attempted to establish
relationship between net profit and NPAs and total advances. It was concluded that the
increasing level of NPAs is a serious matter of concern for Indian banking sector.
• (Vijayaraghavan, 2009) prepared a special chapter in his book to explain the basics of
NPAs in banks in India. He has explained various aspects of NPAs in details to develop
the understanding of readers, e.g. meaning of NPA, trend, classification, RBI‟s
guidelines on asset classification and provisioning, how, why and when NPA occurs,
impact and consequences of NPA as well as RBI‟s definition on willful defaulters.

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• (Ramu, 2009) indicates that the UCBs are unit banks of the American model rather than
branch banks of the British model. With the tightening prudential norms, the banking
sector has been consistently confirming to and adopting international prudential norms
and accounting practices. Such strengthening of prudential norms has resulted in
increased levels of NPAs for the UCBs. As per CAMELS rating model, the highest
weight is given to asset quality components. He has made an attempt to study the
position of NPAs in UCBs of Tamil Nadu.
• (Ramachandran, 1997) concludes his article on NPAs with the argument that the
quality of advances can be improved through introducing new tools and techniques for
appraisal. Banks have to discard their traditional approach of overdependence on ratios
to appraise projects. They should focus on their ability to foresee problems which might
crop up with the borrowers.
• (Gupta B, 2012) in her study A Comparative Study of Non-Performing Assets of SBI
& Associates & Other Public Sector Banks had concluded that each bank should have
its own independence credit rating agency which should evaluate the financial capacity
of the borrower before credit facility and credit rating agencies should regularly
evaluate the financial condition of the clients.
• (Rai K, 2012) in her study the performance of NPAs of Indian commercial banks find
out that corporate borrowers even after defaulting continuously never had the fear of
bank taking action to recover their dues. This is because there was no legal framework
to safeguard the real interest of banks.
• (Balasubramaniam C.S, 2001) highlighted the level of NPAs is high with all banks
currently and the banks would be expected to bring down their NPA. This can be
achieved by good credit appraisal procedures, effective internal control systems along
with their efforts to improve asset quality in their balance sheets.
• (Karunakar M, 2008) in his study Are non - Performing Assets Gloomy or Greedy
from Indian Perspective, has highlighted problem of losses and lower profitability of
Non- Performing Assets (NPA) and liability mismatch in Banks and financial sector
depend on how various risks are managed in their business. The lasting solution to the
problem of NPAs can be achieved only with proper credit assessment and risk
management mechanism.

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• (Arora N and Ostwal N, 2014) conducted study on “Unearthing the Epidemic of Non-
Performing Assets: A Study of Public and Private Sector Banks” which deals with the
concept of Non-performing assets and analyze the classification of loan assets of public
and private sector banks. It also explores the comparison of loan assets of Public sector
and private sector banks. The study concluded that private sectors improving due to
decline in NPAs ratio compare to Public sector banks due to recovery management done
in NPAs and suggest that there is need to check the NPAs of public sector banks so that
Indian banking system becomes efficient.
• (Roopam kothari & Narendra sharma, 2009) have studied the performance of
banking stocks vis-avis S&P CNX Nifty in the period starting from July 2007 to June
2008.They found out that the banking sector has been severely affected by the upswings
and the downswings in the Indian stock market over a period of one year under study as
Banking and finance industry are largely dependent on confidence amongst the
investors and the depositors but its sustainability comes with the sound economic
fundamentals, per capita income, consumption patterns in the country, GDP growth
rate, etc.
• (K.K Siraj and P. Sudarsanam Pillai, 2013) have focused on identifying relative
efficiency of different bank groups in managing their NPA. The indicators like Gross
NPA (GNPA), Net NPA (NNPA), Additions to NPA, Reductions to NPA and
Provisions towards NPA has been taken for the evaluation of trend in movement of
NPA of different bank groups. These indicators were also compared with selected
micro-performance indicators of banks. The study is important due to its critical
explanation of the success of NPA management in the period from 2001-11. To sum up
the findings, a ranking based on NPA indicators rate NB at the top in management of
NPA, followed by SBIA, Foreign Banks and PSB.
• (Bhagwati and Jaimini, 2011) reviewed that the worries about global financial market
have been increasing because in US the bankers have postulated Tier-I capital
requirement should be raised to 9% of risk weighted assets. This will lead to reduction
in lending. Assessment for China conducted by World Bank and IMF indicates that
there has been increasing in the vulnerabilities in the financial sector. Credit rating
agencies in India have downgraded the SBI and have put it in the negative list because

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 of mounting NPAs. From the analysis it is concluded that private sector banks
performed better than PSBs in terms of recovery of loans and advances.
• (Das S and Bose S.K, 2005) elaborated while there have been several schemes in the
past to facilitate the recovery from NPAs, the success of such efforts in terms of NPAs
reduction has been far from satisfactory. It was hoped that SARFAESI Act would
greatly help banks to reduce and recover money from NPAs. Nonetheless, the recent
developments have also brought out the limitations of the act, thereby creating
apprehensions amongst banks and financial institutions.

1.3 STATEMENT OF THE PROBLEM

Indian banking industry, which was in glory phase once upon a time, has been facing a lot
of challenges on NPA at present scenario. Many banks have kept their NPAs under the
control but some banks are not able to control their NPA levels. They are facing lots of
problems. There can be various reasons behind this NPA. NPA has been hitting the
profitability of the banks or it can be said that due to NPA, the profitability of the banks is
going down day by day. The country’s economic fitness depends on the performance and
the efficiency of banks in an economy. The banking system reforms such as Basel Norms
in India was introduced to reduce NPA levels thereby improving the performance and
increasing the profitability of banks, despite these efforts, NPA remains a major problem in
banking sector. This study tries to analyze the “Impact of NPA on the profitability of all
Nifty indexed banks in India”.

1.4 OBJECTIVES OF THE STUDY

• To analyze the trend and occurrences of NPAs to total assets of Nifty indexed banks.
• To compare the levels of NPAs across selected banks.
• To suggest the measures to reduce NPA in banking sector

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1.5 METHODOLOGY
1.5.1RESEARCH DESIGN
Research design is a layout of the executing research project. Research design is the way of
the systematic collection of data and analysis of data which is relevant to the objective of
the research project. For this research study descriptive research design has been applied
and also data collection is secondary source of information. To examine the relationship,
12 Banks were selected from Bank Nifty.

1.5.2 SOURCES OF DATA

The sources of data for this study is secondary in nature include annual reports of banks in
bank nifty for last 5 years, established websites, authorized text book, project papers.

1.5.3 POPULATION
Banking industry is taken for the study.

1.5.4 SAMPLE DESIGN

Sample for the study is selected using Judgmental sampling. The stocks listed in Bank
Nifty such as Axis Bank Ltd, Bank of Baroda, Federal Bank Ltd, HDFC Bank Ltd, ICICI
Bank Ltd, IDFC First Bank Ltd, IndusInd Bank Ltd, Kotak Mahindra Bank Ltd, Punjab
National Bank, RBL Bank ltd, State Bank of India, Yes Bank Ltd.

1.5.5 METHOD OF DATA COLLECTION

The method of data collected through secondary data through the annual reports published
by the banks and research journals.

1.5.6 DATA ANALYSIS TECHNIQUES

The technique which will be used for this study is Correlation to measure the relationship
between profitability and NPA.

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1.6 SCOPE OF THE STUDY

Through this project the banks can analyze the relationship between profitability and Net
NPA. It also helps to understand how much movement in the their NPA for past 5 years.
NPAs affect the overall profitability of the bank adversely by affecting return on equity
and return on assets. This project is verifying the relationship between Net NPA and Net
profit by using 5 years’ data. So, with the help of this project banks can try to reduce the
Net NPA and improve the profitability.

1.7 LIMITATIONS

The inherent features of time series data are not considered while using the tools for
analysis. Econometric model should have been used in order to get accurate result. Net
profit and Net NPA are influenced by a number of factors, when the inter relationship
between the two variables are studied, the influence of other variables are ignored

1.8 SCHEME OF THE STUDY

CHAPTER 1: INTRODUCTION-STATEMENT OF THE PROBLEM
CHAPTER2: INDUSTRY PROFILE
CHAPTER 3: REVIEW OF LITERATURE
CHAPTER 4: METHODOLOGY OF THE STUDY
CHAPTER 5: DISCUSSION
CHAPTER 6: FINDINGS OF THE STUDY
CHAPTER 7: CONCLUSIONS.
BIBLIOGRAPHY
ANNEXURES

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