A COMPARATIVE STUDY OF NON-PERFORMING ASSETS OF

CANARA BANK & ICICI BANK

INTRODUCTION

Banking is considered as the life blood of every country’s economy

(https://seekingalpha.com/article/3354865-financials-sector-the-lifeblood-of-the-
economy). Along with receiving deposits from the public it is also bounded with
performing the function of lending. It is considered to be an effective function as the
lended fund is used for productive purposes there by increasing the economic growth of
the country. As we all know everything has its own positive and negative side, and hence
the same is with the lending business that it carries credit risk, which arises from the
borrower when he fails to pay back the lended money back. This will lead to the failure of
banking sector which also has an adverse effect on the other sectors too. Non-performing
assets (NPA) are one of the major threats to the banks in India as it reflects the
performance of banks. The higher rate of NPAs suggests high probability of credit
defaults that affects the profitability and net worth of banks. The NPA growth leads to the
reduction in the profits and shareholders’ value. The consequences of NPA not only affect
the bank but also the whole economy. This project work deals with understanding the
concepts of NPA, its magnitude and major causes for an account becoming non-
performing, projection of NPAs over next years in banks and concluding remarks.
The magnitude of NPA has a direct impact on the profitability of banks. In order
to cope up with this situation various steps have been formulated one of which is the
introduction of Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 by Parliament, which was an important role in eliminating the
NPAs. An asset is said to be non-performing asset if dues in the form of principal and
interest are not paid by the borrower for a period of 180 days, but due to the amendment
made on March 2004 default status would be given to a borrower if dues are not paid for
90 days. If any advance or credit facility granted by bank to a borrower becomes non-
performing, then the bank have to consider all the credit facilities granted to that borrower
as non-performing without having any regard to the fact that there may still exist certain
credit facilities having performing status. The NPA level of Indian banks is way high than
international standards. One cannot ignore the fact that a part of the reduction in NPA’s is

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due to the writing off bad loans by banks. Indian banks should take care to ensure that
they give loans to credit worthy customers.
A Non–performing asset (NPAs) is an obligation in which the debtor has not paid
earlier settled interest and principal amount for a specific period of time. This assets stop
to create incomes for banks, limits the recycling of funds, sets asset liability mismatches,

2
deteriorating non-recovery of interest and instalment on loan portfolio, reflected in
decline in productivity, liquidity, solvency, efficiency and erosion of profitability of the
bank. The efficiency of a bank is reflected by both the extent of its balance sheet and the
amount of return on its assets. Generally the NPAs don’t create financial gain for banks
however at the same time banks are needed to create available provisions for NPAs from
their existing profits. At present the NPAs are thought -about an enormous problem in
Indian banking industry. NPAs have been decreasing regularly year by year except in
some years in public sector banks, on the contrary, the non-performing assets of private
sector banks have been decreasing regularly year by year. Generally decrease in NPAs
displays that banks have reinforced their credit appraisal processes over the years and
enlarged NPAs shows the requirement of provisions that brings down the profitableness
of banks
Non-performing assets (NPA) are those assets which does not generate income
periodically. The non repayment of loans and advances by the customers to the bank are
considered as bad loans. According to the RBI, if the payment of installment or interest
on the principal amount remained overdue for a period of more than 90 days from the end
of particular quarter is called a Non performing asset. Non-performing assets create
problems to the financial institutions as they depend up on the interest payment for
income.
For identification of NPA, to ensure greater transparency in accounting standards
it has been decided to adopt the ‘90 days overdue norm’ from the year ending 31, march
2004. With this effect a non performing asset (NPA) is a loan or an advance where;
 The payment of interest or installment on the principal amount remained overdue for
a period of more than 91 days.
 In case of an advance granted for agricultural purpose, The payment of interest or
installment on the principal amount remained overdue for two harvest season but for a
period not exceeding two half years.
 In case of bills purchased or discounted, the payment of bills remained overdue for a
period more than 90 days.
 In respect of an Overdraft/Cash Credit (OD/CC), the accounts remain ‘out of order’
for a period of more than 90 days.
 In case of cash credit facility, stock statement submission has not been made for 3
continuous quarters.

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LITERATURE REVIEW

Shawn Thomas (1999) in their study titled ‘Bank loan loss provisions’ describes that the
1990 change in capital adequacy regulations to construct more powerful tests of capital
and earnings management effects on bank loan loss provisions. We find strong support
for the hypothesis that loan loss provisions are used for capital management. We also
document the reasons for the conflicting results on these effects observed in prior studies
(Thomas, 1999).

Vincent Bouvatier (2000) in their study titled ‘Provisioning Rules and Bank Lending: A
Theoretical Model’ describes that this paper develops a partial equilibrium model of a
banking firm to analyze how provisioning rules influence loan market fluctuations. We
show that a backward-looking provisioning system amplifies the pro-cyclicality of loan
market fluctuations. We demonstrate that, in a forward-looking provisioning system
where statistical provisions are used to smooth the evolution of total loan loss provisions,
the issue of pro-cyclicality of loan market fluctuations does not exist (Bouvatier, 2000).

Balasubramaniam (2001) in their study titled “Non-performing assets and profitability

of commercial banks in India: assessment and emerging issues” said that 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.
However, maintaining profitability is a challenge to commercial banks especially in a
highly competitive era and opening up of banking business to NBFC and foreign banks in
general.

S. N. Bidani (2002) in his book “Managing Non-Performing Assets in Banks” states that
Non-performing Assets (NPAs) are the smoking gun threatening the very stability of
Indian banks. NPAs wreck a bank’s profitability both through a loss of interest income
and write off of the principal loan amount itself. In his book, the author highlighted
various aspects related to non-performing assets, Asset classification and assessment of
provisions, Pre-sanction appraisal and post sanction supervision and follow up,
Monitoring system for existing and potential NPAs, Rehabilitation of sick non-
performing units, way to reduce risk weighted assets, NPA recovery through compromise
and negotiated settlement, Strategies and actionable operational guidelines for reducing
NPAs, and Suggestions for improving bank profitability.
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Prashanth K. Reddy (2002) in his study titled ‘A comparative study of Non Performing
Assets in India in the Global context - similarities and dissimilarities, remedial measures’
analyzed that Financial sector reform in India has progressed rapidly on aspects like
interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential
norms and risk based supervision. The sheltering of weak institutions while liberalizing
operational rules of the game is making implementation of operational changes difficult
and ineffective. Changes required to tackle the NPA problem would have to span the
entire gamut of judiciary, polity and the bureaucracy to be truly effective.

Nanda and Paramjith (2007) in their paper deals with “The comparative analysis of the
priority sectors” that is the private and public sectors. For this various data’s from the past
years were collected and found out the fact that the private sectors were more capable of
managing NPAs as compared to the public sectors. They also suggested certain measures
through which the shortcoming of mismanagement of NPAs in Public banks can be
corrected.

Srinivas K T (2011) presented a research paper on “A study on Non- Performing Assets

of Commercial Banks in India: A Threat to Indian Scheduled Commercial banks”. In this
paper he analyzed to gain insights into the position of Non-performing assets in priority
sector advances by scheduled commercial Banks.

Chandan Chatterjee, Jeet Mukherjee and Dr.Ratan Das (2012) ‘Management of non-
performing assets – a current scenario’ in their study they evident that the NPAs have a
negative influence on the achievement of capital adequacy level, funds mobilization and
deployment policy, banking system credibility, productivity and overall economy. And
they also compare the performance of public, private and foreign banks and they present
that the public sector banks are facing more problems with NPAs rather than others
(Chatterjee, et al, 2012).

Asha Singh (2013) in his research paper title “Performance of Non-Performing Assets in
Indian Commercial Banks” analyzes Non-performing assets in weaker sections of public
Sector banks and private sector banks specifically in India. The study observed that there
is increase in advances over the period of the study. It concluded that public sector banks
should try to upgrade technology and should formulate customer friendly policies to face
competition at national and international level.

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Samir and Deepa Kamra (2013) in their study “A Comparative Analysis of Non-
Performing Assets (NPAs) of Selected Commercial Banks in India.” found that the
problem of NPA is greater in the public sector banks as compared to private and foreign
banks in India. Similarly, the problem of NPAs is more in the non priority sector than
priority and the public sector. Further, SSI sector has the largest share in the total NPA of
priority sector. As a result of this, the financial health of banks has been affected
adversely. The study suggested that banks in India must apply the basic principles of
financial management to solve the problems of mounting NPA and improving recovery
management, corporate governance, upgrading technology, etc.

Stephen, Bernette, and Roshni (2014) in their article “The comparative analysis of
private and public sector banks” they give dual emphasis on the loopholes that are present
in certain areas which adversely affect the whole portfolio management area. The
findings made in the paper are that private banks are more efficient in managing their
NPAs as compared to public sector banks. It’s also been suggested that banks should have
proper capital allocation and provisioning norms so that their NPA burden gets reduced.

Rajeshwari Parmar (2014) in his work ‘Non-Performing Assets (NPAs): A

Comparative Analysis of SBI and ICICI in this study the author takes a comparative study
between SBI & ICICI banks and construct a relation between Net profit and Net NPAs.
The author found that there is a positive relation. In case of SBI means that as profits
increase NPA also increase because of mismanagement on the side of the bank and the
other side of the coin ICICI bank got a negative relation which indicates that amount of
NPA decreases and Profits will increase more by the amount not becoming NPA. So, they
conclude that when compare to SBI (PSB), ICICI (Private bank) manages NPAs
efficiently.

Sonia Narula and Monica single, (2014) ‘Empirical Study on Non-Performing Assets of
Bank’ in this article the authors conduct a study on private bank i.e., Punjab National
Bank (PNB). It is concluded that when PNB Gross and Net NPA compared with total
advances we get the result that there is mismanagement on the side of PNB. While
analyzing the impact of NPA level on PNB we derived the conclusion that there is a
positive relation between Net Profits and NPAs of PNB. It simply means that as profits
increases NPA also increases. It is because of the mismanagement on the side of the bank.

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Amit Kumar Nag (2015) in his study ‘Appraisal of non-performing assets in the banking
sector: An Indian perspective’ the author of this article done a comparative study by
taking ten private, public and foreign banks. This article reveals the performance of
various banks and he suggested some measures to overcome NPAs difficulty.

Shiralashetti A.S. and Lata.N.Poojari (2016) in their study “Non-Performing Assets: A

Case Study of Syndicate Bank” analyzed the causes of NPA and impact of NPA on the
profitability of the bank. The study found that there was a moderate relationship exist
with Gross NPA and Net profit of the syndicate bank and also found that there was no
significant difference between sector wise NPA. The study provided some suggestions to
the regulators.

Ombir and Sanjeev Bansal (2016) in their study “An Analysis of Non-Performing
Assets of Indian Banks” analyzed the recent trends in nonperforming assets (NPAs) of
different categories of Indian banks. It is found that the impact of ownership pattern in
deciding the level of NPAs is investigated against the perception that public sector banks
have a relatively larger level of NPAs. But there was no strong empirical evidence is
found in support of this perception. Their findings suggested that public sector banks are
as good or as bad as their private counterparts, however, foreign banks have relatively
higher profitability as domestic public and private banks. It is also found that a higher
level of NPAs negatively affects the profitability of a bank.

Payel Roy and Pradip Kumar Samanta (2017) in their study “Analysis of Non
Performing Assets in Public Sector Banks of India” indicated the overall NPA position of
all the banks is deteriorating over the years. It found that there is a negative high
correlation between GPA and NP, the profit gradually decreases as the GNPA grows.
And also point out that most of the banks' profit has reduced considerably. Some of the
banks have incurred losses too. The losses due to the increase of NPA can't be avoided
only by making provisions against NPA. It suggested that the Provisioning can act as a
cushion for NPA losses but it can't be regarded as a solution for growing NPAs in all the
selected PSBs. The banks advancing loans should be cautious enough to consider the
backgrounds of the loan receiver and make the recovery procedure more stringent.

Raj Kumar Mittal and Deeksha Suneja (2017) in their study ”The Problem of Rising
Non- performing Assets in Banking Sector in India Comparative Analysis of Public and
Private Sector Banks” revealed that the extent of NPAs is comparatively more in public

7
sector banks as compared to private sector banks. It suggested that the government is
taking many steps to reduce the problem of NPAs but banks should also have to be more
proactive to adopt a structured NPAs policy to prevent the non-performing assets and
should follow stringent measures for its recovery. Bankers should also consider the ROI
on a proposed project and provide loans to customers who have better creditworthiness.

Sukanya and Visvanatha (2017) have done a group wise analysis on “Non Performing
Assets of the commercial banks in India”, it states out the fact that huge volume of NPAs
implies a waste of resources at the disposal of the banking system, apart from its direct
adverse impact on the level of profit of the concerned bank. Their study gives stress on
the fact that the increasing volume of NPAs is a generic problem that all the groups of
commercial banks in the country face.

Suvitha K Vikram, Gayathri G (2018), in their study “Analysis of Non-Performing

Assets” focused the sector, which has higher NPAs (Public/Private sector banks), causes
and control measures for rising NPAs. It found out that the level of NPAs is higher in
Public Sector Banks compared with Private Sector Banks. Also, focused causes, level of
NPA and controlling measures were analyzed. It suggested that the root of the issue of
rising NPAs lies in the nature of overseeing credit chance by the banks and wilful
defaulters.

Gowri and Malepati (2018) in their study “Sectoral Analysis of NPAs of Selected
Private and Public Sector Banks” have detailed about the sectoral analysis of NPAs of
public and private sector banks. In this, sectoral analysis is made so as to know the
tendency of NPAs in private and public sector banks. The paper concludes with the fact
that total NPA is found higher in Public sectors as compared to the private sectors and
hence it advises the public sector banks should be alert enough during the time of
providing loans to priority section.

STATEMENT OF PROBLEM

A sound banking sector is important for the flourishing economy. The banking
industry is growing in leaps and bounds, and so is the difficulty associated with it. In fact,
the level of NPAs in Indian banks is nothing but a reflection of the state of health of the
industry and trade. Any banking institution has to make proper application of the

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financial resources and its disposal loans and advances constitute an important channel of

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application of resources. Non-recovery of loans along with interest forms a major hurdle
in the process of the credit cycle. Though complete elimination of such losses is not
possible, banks can always aim to keep the losses at a low level. The issue of Non
Performing Assets has been discussed at length for the financial system all over the
world. When a bank is not able to recover the loan given or not getting regular interest on
such a loan, the flow of funds in the banking industry is affected. NPA growth involves
the necessity of provisions, which reduces the overall profits and shareholders’ value. The
collapse of the banking sector may have an unfavorable impact on allied and other
sectors. The dilemma of NPAs is not only distressing the banks but also the entire wealth
of the country. It reflects the reputation and performance of the banks. If the level of
NPAs is high it leads to the high probability of credit defaults that affect the profitability
and net-worth of banks and also eat away the value of the asset.
Against this background, the present study under the title “A Comparative study
of non-performing assets of Canara and ICICI bank” is focused on the level of NPA and
how it influences the profitability of banks. This study is an attempt to analyze the study
of non-performing assets with reference to Canara and ICICI bank and suggest
appropriate measures to control the growth of non-performing assets

OBJECTIVES OF THE STUDY

 To analyze and compare Non-Performing assets of Canara Bank and ICICI Bank.
 To evaluate the efficiency in managing Non-Performing assets of Canara Bank and
ICICI Bank via comparative ratios.
 To understand the performance of Canara bank and ICICI bank during the last five
years.
 To know the relationship between Net Profit and Net NPA.
 To study the impact of Non-Performing assets on profitability of Canara Bank and
ICICI Bank.

RESEARCH METHODOLOGY
The study is descriptive in nature. The data is extensively collected from both
primary and secondary sources. Data are collected through published and unpublished
sources such as annual reports of selected banks, RBI annual reports of the organization,

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 other journals, magazines books and other websites.

INDIAN BANKING SECTOR

The origin of banking in India is as early as the Vedic period. It is believed that
the transformation from money lending to banking must have occurred even before Manu,
the great Hindu Jurist, who has committed a section of his work to deposits and advances
and laid down rules relating to rates of interest. During the Mughal period, the indigenous
bankers played a very important role in lending money and financing foreign trade and
commerce. During the days of the East India Company, it was the turn of the agency
houses to carry on the banking ventures. The General Bank of India was the first Joint
Stock Bank to be initiated in the year 1786. The others which came behind were the Bank
of Hindustan and the Bengal Bank. The Bank of Hindustan is announced to have
continued till 1906 while the other two failed in the meantime.
In the first half of the 19th century the East India Company came up with three
banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras
in 1843. These three banks also known as the Presidency Banks were separate units and
functioned well. These three banks were joined in 1920 and a new bank, the Imperial
Bank of India was established on 27thJanuary 1921. With the passing of the State Bank of
India Act in 1955 the covenant of the Imperial Bank of India was taken over by the newly
constituted State Bank of India. The Reserve Bank which is the Central Bank of India was
created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi
Movement, a number of banks with Indian undertaking were established in the country
namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank
Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major
banks of the country were nationalized and in 15th April 1980 six more commercial
private sector banks were also taken over by the government of India.
2.1.1 BANKING ACTIVITIES
 Retail banking, merchandising directly with individuals and small businesses.
 Business banking, providing facilities to mid-market businesses.
 Corporate banking, provided for large business entities.
 Private banking providing wealth management facilities to high net worth individuals.
 Investment banking, activities in the financial markets, such as "underwriting"
(guarantee the sale of) stock and bond issues, trade for their own accounts, make
markets, and advise corporations on capital market activities like mergers and
11
acquisitions.

12
 Merchant banking is the private equity activity of investment banks.
 Financial services, global financial institutions that engage in multiple activities such
as banking and insurance.

CANARA BANK
Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great visionary
and philanthropist, in July 1906, at Mangalore, then a small port in Karnataka. The Bank
has gone through the various phases of its growth trajectory over hundred years of its
existence. This small seed blossomed into a limited company as 'Canara Bank Ltd.' in
1910 and became Canara Bank in 1969 after nationalization. Growth of Canara Bank was
phenomenal, especially after nationalization in the year 1969, attaining the status of a
national level player in terms of geographical reach and clientele segments. Eighties was
characterized by business diversification for the Bank. In June 2006, the Bank completed
a century of operation in the Indian banking industry. The eventful journey of the Bank
has been characterized by several memorable milestones. Today, Canara Bank occupies a
premier position in the comity of Indian banks. Canara Bank has an unbroken record of
profits since its inception. Sound founding principles, enlightened leadership, unique
work culture and remarkable adaptability to changing banking environment have enabled
Canara Bank to be a frontline banking institution of global standards.
Canara is India’s fifth largest bank in terms of asset size; as on March 31, 2010, it
had an asset base of around Rs 2.6 trillion. The bank’s strong market position is
underpinned by its market share of over 4.8% in deposits and advances, and its pan‐India
branch network. The new brand identity for Canara Bank is based on the idea of a bond
and is a representation of the close ties between the Bank and its many stakeholders –
from customers and employees to investors, institutions and society at large. With its rich
heritage of banking expertise, dedicated customer service and corporate social
responsibility, Canara Bank is a powerful enabler who helps its stakeholders to achieve
their goals. The two seamlessly connected links capture the essence of this partnership.
Canara bank, being a major public sector banks in India, is well known for its
banking operations. It provides various products and services to customers in the banking
industry. Other than banking operations it also provides Foreign Business, Asset
Management, Financial Services, Securities Market, Computer Services, Home Loans,
Corporate Cash Management Services, Factoring, Venture Capital Fund, Mercantile
Banking, and Insurance Banking to the various customers in India as well as in abroad.

13
ICICI BANK

ICICI Bank limited is an Indian multinational banking and financial services

company headquartered in Mumbai, Maharashtra with its registered office in Vadodara,
Gujarat. As of 2018, ICICI Bank is the second largest Bank in India in terms of assets and
market capitalization. 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 and non-life insurance, venture
capital and asset management. The bank has a network of 5,275 branches and 15,589
ATMs across India and has a presence in 17 countries including India
ICICI Bank is an Indian multinational banking and financial services company
headquartered in Mumbai, Maharashtra with its registered office in Vadodara. As of
2018, ICICI Bank is the second largest bank in India in terms of assets and market
capitalization. ICICI Bank is one of the Big Four banks of India. The bank has
subsidiaries in the United Kingdom and Canada; branches in United States, Singapore,
Bahrain, Hong Kong, Qatar, Oman, Dubai International Finance Centre, China and South
Africa and representative offices in United Arab Emirates, Bangladesh, Malaysia and
Indonesia. The company's UK subsidiary has also established branches in Belgium and
Germany.
ICICI Bank offers a wide range of banking product and financial services to
corporate and retail customers through a variety of delivery channels and through its
specialized subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. ICICI Bank set up its international
banking group in fiscal 2002 to cater to the cross boarder needs of clients and leverage on
its domestic banking strengths to offer products internationally. ICICI Bank currently has
subsidiaries in the United Kingdom. Russia and Canada, branches in Singapore, Bahrain,
Hong Kong, Sri Lanka and Dubai international Finance centre and representative officers
in the United States, United Arab Emirates, China, South Africa and Bangladesh. UK
subsidiary has established a branch in Belgium. ICICI Bank is the most valuable bank in
India in terms of market capitalization.
ICICI Bank’s equity shares are listed in India on the Bombay stock Exchange and
the National stock Exchange of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York stock Exchange (NYSE). ICICI Bank has formulated
a Code of Business Conduct and Ethics for its directors and employees. At June 5, 2006,

14
ICICI Bank, with free float market capitalization*of about Rs.480.00 billion (US$ 10.8
billion) ranked third amongst all the companies listed on the India stock exchanges.
ICICI Bank was originally promoted in 1994 by ICICI Limited, an India financial
institution, and was its wholly-owned subsidiary. ICICI’s shareholding in ICICI Bank
was reduced it 46% through a public offering of shares in India in fiscal 1998, an equity
offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank’s acquisition
of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary
market sales by ICICI to institutional investors in fiscal 2001, and 2002.ICICI was
formed in 1955 at the initiative of the world Bank, the Government of India and
representatives of India industry. The principal objective was to create a development
financial institution for providing medium term and long-term project financing to India
businesses. In the 1990s, ICICI transformed its Business from a development financial
institution offering only project finance to a diversified financial services group offering a
wide variety of products and services, both directly and through a number of subsidiaries
and affiliates like ICICI Bank. In 1999, ICICI become the first India Company and the
first bank or institution from non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of
the emerging competitive scenario in the India banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group’s universal banking
strategy. The merger would enhance value for ICICI shareholders through the merged
entity’s to access to low-cost deposits, greater opportunities for earning fee-based income
and the ability to participate in the payment system and provide transaction-bank services.
The merger would enhance value for ICICI Bank shareholders through a large capital
base and scale of operations seamless access to ICICI’s strong corporate relationship built
up over five decades, entry into new business segments, higher market share in various
business segments, particularly fee-based services, and access to the vast talent pool of
ICICI Bank and its subsidiaries. In October 2001, the Boards of Directors of ICICI and
ICICI Bank approved the merger of ICICI and two of wholly-owned retail finance
subsidiaries, ICICI personal financial services Limited and ICICI Capital services limited,
with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in
January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the
High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002.

15
 NON- PERFORMING ASSETS
The three letters “NPA” strike as a nightmare for the banking sector and business
circle today. NPA is a short form used for “Non-Performing Assets”. In banking, NPA
are loans given to doubtful customers who may or may not repay the amount taken as
loan on time. There are two types of assets viz. performing and non-performing assets.
Performing loans are those standard loans on which both the principle and interest are
secured and their return is guaranteed. Non-Performing assets means those debt which is
given by the Bank which is unable to recover. Non- Performing Asset [NPA] is a result of
asset Liability mismatch, an NPA account in the books of accounts is an asset as it
indicates the amount receivable from the defaulters. It means if any bank gives loan to the
customer if the interest for that loan is not paid by the customer till 90 days then that
account is called as NPA account. The loans or leases that are not meeting its stated
principal and interest payments are considered to be bad. Banks usually classify the non-
performing assets as any commercial loans which are more than 90 days overdue and any
consumer loans which are more than 180 days overdue. In simple sense we can say that
an asset which is not producing income becomes non-performing.

Definitions
An asset, including a leased asset, becomes Non-Performing when it ceases to
generate income for the bank. A non-performing asset’ (NPA) was defined as a credit
facility in respect of which the interest and/or instalment of principal has remained ‘past
due’ for a specified period of time. The specified period was reduced in a phased manner
as under:
 w.e.f. 31.03.1993 : four quarters
 w.e.f. 31.03.1994 : three quarters
 w.e.f. 31.03.1995 : two quarters
 w.e.f. 31.03.2001 : 180 days
 w.e.f. 31.03.2004 : 90 days
90 days’ delinquency norms are not applicable to Agriculture segment With the effect
from March 31, 2004, NPA shall be a loan or an advance where:
 Term loan: Interest and /or instalment of principal remain over due for a period of
more than 90 days.
 Cash credit/overdraft: The account remains ‘out of order’ for a period of more than
90days.

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  Bills: The bill remains overdue for a period of more than 90days from due date of
payment.
 Other Loans: Any amount to be received remains overdue for a period of more than
90days.
 Agricultural Accounts: In the case of agriculture advances, where repayment is based
on income from crop.
An account will be classified as NPA in agricultural sector as under;
 If loan has been granted for short duration crop: interest and/or instalment of Principal
remains overdue for two crop seasons beyond the due date.
 If loan has been granted for long duration crop: Interest and/or instalment of principal
remains overdue for one crop seasons beyond due date. Non-Performing Asset is
defined as the loans which are in jeopardy of being default. If a borrower has failed to
pay interest on principal payment for 90 days or more in case of a loan, than that loan
is considered to be non-performing asset (NPA).This kind of thing can be termed as
Non-Performing Loan. NPAs affect the smooth flow of credit and profitability as
higher NPAs mean higher provisioning which reduces s the profit. These are loans
and advances whose time period for payment of interest and principle has exceeded
90 days. In this case the account of person is marked as out of order. If the loan is
granted to a person for agricultural purpose the instalment period for interest might
remain due for two harvest seasons. Non-performing assets tells us about the banks as
the institutions of finance and companies judge their non-performing assets through
NPA and higher the NPA means bad performance of the institute of finance.

NPA as Defined by RBI

Any asset and it also includes leased asset can become Non Performing Asset
when income stops to be generated from it for the bank. It is an advance or loan where;
 For 90 days’ time interest or instalment of principle amount may remain overdue.
 The account an overdraft or cash credit with respect of it may remain out of order as it
is indicated below.
 In case the bills are purchased or discounted then they remain overdue for more than
90days period.
 The instalment for two of the crop seasons for short duration of crops remains
overdue whether it is principal or interest. The instalment for long duration crops
therefore remains overdue whether its interest or principal amount.

17
  The instalment therefore remains overdue for one crop season for long duration crops
of principal or interest.
 In respect of a securitization transaction that has been undertaken like in terms of
guidelines on securitization on dated February 1, 2006. For more than 90 days the
amount of which like of liquidity facility will remain outstanding. A debt obligation
where the borrower has not paid any previously agreed upon interest and principal
repayments to the designated lender for an extended period of time. The
nonperforming asset is therefore not yielding any income to the lender in the form of
principal and interest payments.

TYPES OF NPA
1 Gross NPA
2 Net NPA
1. Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as
NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality
of the loans made by banks. It consists of all the non-standard assets like as sub-
standard, doubtful, and loss assets. It can be calculated with the help of following
ratio:
Gross NPAs
Gross NPAs Ratio =
Gross Advance

2. Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India,
bank balance sheets contain a huge amount of NPAs and the process of recovery and
write off of loans is very time consuming, the provisions the banks have to make
against the NPAs according to the central bank guidelines, are quite significant. That
is why the difference between gross and net NPA is quite high. It can be calculated by
following
Gross NPAs – Provisions
Net NPAs =Gross Advances – Provisions

WHY ASSETS BECOME NPA?

Several factors are responsible for increasing size of NPAs in PSBs. The Indian
banking industry has one of the highest percent’s of NPAs compared to international
levels. A few prominent reasons for assets becoming NPAs are as under:

 Lack of proper monitoring and follow-up measures.

18
  Lack of sincere corporate culture.
 Inadequate legal provisions on foreclosure and bankruptcy.
 Change in economic policies/environment.
 Non transparent accounting policy and poor auditing practices.
 Directed landing to certain sectors.
 Failure on part of the promoters to bring in their portion of equity from their own
sources or public issue due to market turning unfavourable.
 Criteria for classification of assets.

REASON FOR NPA

An internal study conducted by RBI shows that in the order of prominence, the
following factor contribute to NPAs.

 Internal Factor
 Diversion of funds for
 Expansion/diversification /modernization
 Taking up new project
 Helping /promoting associate concerns time/cost overrun during the project
implementation stage
 Business Failure
 Inefficiency in management
 Slackness in credit management and monitoring
 Inappropriate Technology/technical problem
 Lack of coordination among lenders
 External Factor
 Recession
 Input/power storage
 Price escalation
 Exchange rate fluctuation
 Accidents and natural calamities, etc.
 Changes in government policies in excise/ import duties, pollution control orders,
etc.

19
  Other Factors
 Liberalization of economy/removal of restriction/reduction of tariffs:-A large number
of NPA borrowers were unable to compete in a competitive market in which lower
prices and greater choices were available to consumers. Further, borrowers operating
in specific industries have suffered due to political, fiscal and social compulsions,
compounding pressures from liberalization.
 Tax monitoring of credit and failure to recognize Early Warnings Signals:-It has been
stated that approval of loan proposal is generally thorough and each proposal passes
through many levels before approval is granted. However, the monitoring of
sometimes complex credit files has not received the attention it needed which meant
that early warning signals were not recognized and standard assets slipped to NPA
category without banks being able to take proactive measures to prevent this. Partly
due to this reason, adverse trends in borrower’s performance were not noted and the
position further deteriorated before action was taken.
 Over optimistic promoters:-Promoters were often optimistic in setting up large
projects and in some cases were not fully above board in their intentions. Screening
procedures did not always highlight these issues. Often projects were set up with the
expectation that part of the funding would be arranged from the capital markets which
were booming at the time of the project appraisal. When the capital markets
subsequently crashed, the requisite funds could never be raised, promoter often lost
interest and lenders were left stranded with incomplete/unviable projects.
 Directed lending:-Loans to some segment were dictated by Governments policies than
commercial imperatives.
 Highly Leveraged borrowers:-Some borrowers were undercapitalized and over
burdened with debt to absorb the changing economic situation in the country.
Operating within a protected marked resulted economic situation in the country.
Operating within a protected market resulted in low appreciation of
commercial/market risk.

IMPACT OF NPA

 Profitability: NPA means booking of money in terms of bad asset, which occurred
due to wrong choice of client. Because of the money getting blocked the prodigality
of bank decreases not only by the amount of NPA but NPA lead to opportunity cost
also

20
 as that much of profit invested in some return earning project/asset. So NPA doesn’t
affect current profit but also future stream of profit, which may lead to loss of some
long-term beneficial opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning of bank.
 Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shortest period of time which lead to
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.
 Involvement of management: Time and efforts of management is another indirect cost
which bank has to bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which would have
given good returns. Now day’s banks have special employees to deal and handle
NPAs, which is additional cost to the bank.
 Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank
in terms of market credit. It will lose its goodwill and brand image and credit which
have negative impact to the people who are putting their money in the banks.

NORMS FOR TREATING LOANS / ADVANCES AS NPA

 Treatment of agricultural advances In respect of advances granted for agricultural

purposes where interest payment is on half-yearly basis synchronizing with harvest,
banks should adopt the agricultural season as the basis. In other words, if interest has
not been paid during the last two seasons of harvest (covering two half-years) after the
principal has become overdue then such an advance should be treated as NPA. This
norm is applicable to all direct agricultural advances listed in the Annexure. In respect
of agricultural advances other than those specified in the Annexure, identification of
NPA would be done on the same basis as non-agricultural advances which at present
are the 180 days delinquency norm. Crop loans for each season, viz., Rabi and Kharif
has to be treated as separate account and IRAC norms have to be applied accordingly.
Treatment of advances for allied agricultural activities as well as non-farm sector
Credit facilities granted for other allied agricultural activities as well as for non-farm
sector activities should be treated as NPA if amounts of instalments of principal and /
or interest remain outstanding for a period of two quarters from the due date.

21
  Project / Housing Loans, etc In case of projects (industry, plantation, etc.) where
moratorium is given for payment, [loan becomes due only after moratorium or
gestation period is over] such a loan becomes overdue if instalment is not paid on due
date. Similarly, in the case of housing loans or similar advances granted to staff
members where interest is payable after recovery of principal, such loans should be
classified as NPA when there is a default in repayment of principal on due date of
payment and overdue criteria will be the basis for classification of assets.
 Consortium advances In respect of consortium advances each bank is required to
classify the borrowable accounts according to its own recovery i.e., on the record of
recovery of the individual member banks. The banks participating in the consortium
should therefore, arrange to get their share of recovery transferred from the lead bank
of the consortium.
 ‘Out of order status’ In respect of cash credit / over draft facility an account should be
treated as “out of order”, if the outstanding balance remains continuously in excess of
the sanctioned limit / drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit / drawing power, but there
are no credits continuously for six months as on the date of Balance Sheet or credits
are not enough to cover the interest debited during the same period, these accounts
should be treated as “out of order”.
 ‘Overdue’ any amount due to the bank under any credit facility is “overdue”, if it is
not paid on due date fixed by the bank.

NPA MANAGEMENT PRACTICES IN INDIA

 Formation of the Credit Information Bureau (India) Limited (CIBIL)

 Release of Wilful Defaulter’s List. RBI also releases a list of borrowers with
aggregate outstanding of Rs.1crore and above against whom banks have filed suits for
recovery of their funds
 Reporting of Frauds to RBI
 Norms of Lender’s Liability
 framing of Fair Practices Code with regard to lender’s liability to be followed by
banks, which indirectly prevents accounts turning into NPAs on account of bank’s
own failure
 Risk assessment and Risk management

22
  RBI has advised banks to examine all cases of wilful default of Rs.1crore and above
and file suits in such cases. Board of Directors are required to review NPA accounts
of Rs.1crore and above with special reference to fixing of staff accountability.
 Reporting quick mortality cases
 Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category.

IMPACT OF NPA

 Profitability: NPA means booking of money in terms of bad asset, which occurred
due to wrong choice of client. Because of the money getting blocked the prodigality
of bank decreases not only by the amount of NPA but NPA lead to opportunity cost
also as that much of profit invested in some return earning project/asset. So NPA
doesn’t affect current profit but also future stream of profit, which may lead to loss of
some long-term beneficial opportunity. Another impact of reduction in profitability is
low ROI (return on investment), which adversely affect current earning of bank.
 Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shortest period of time which lead to
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.
 Involvement of management: Time and efforts of management is another indirect cost
which bank has to bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which would have
given good returns. Now day’s banks have special employees to deal and handle
NPAs, IIwhich is additional cost to the bank.
 Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank
in terms of market credit. It will lose its goodwill and brand image and credit which
have negative impact to the people who are putting their money in the banks.
NORMS FOR TREATING LOANS / ADVANCES AS NPA
 Treatment of agricultural advances In respect of advances granted for agricultural
purposes where interest payment is on half-yearly basis synchronizing with harvest,
banks should adopt the agricultural season as the basis. In other words, if interest has
not been paid during the last two seasons of harvest (covering two half-years) after the
principal has become overdue then such an advance should be treated as NPA. This

23
 norm is applicable to all direct agricultural advances listed in the Annexure. In respect
of agricultural advances other than those specified in the Annexure, identification of
NPA would be done on the same basis as non-agricultural advances which at present
are the 180 days delinquency norm. Crop loans for each season, viz., Rabi and Kharif
has to be treated as separate account and IRAC norms have to be applied accordingly.
Treatment of advances for allied agricultural activities as well as non-farm sector
Credit facilities granted for other allied agricultural activities as well as for non-farm
sector activities should be treated as NPA if amounts of instalments of principal and /
or interest remain outstanding for a period of two quarters from the due date.
 Project / Housing Loans, etc In case of projects (industry, plantation, etc.) where
moratorium is given for payment, [loan becomes due only after moratorium or
gestation period is over] such a loan becomes overdue if instalment is not paid on due
date. Similarly, in the case of housing loans or similar advances granted to staff
members where interest is payable after recovery of principal, such loans should be
classified as NPA when there is a default in repayment of principal on due date of
payment and overdue criteria will be the basis for classification of assets.
 Consortium advances In respect of consortium advances each bank is required to
classify the borrowable accounts according to its own recovery i.e., on the record of
recovery of the individual member banks. The banks participating in the consortium
should therefore, arrange to get their share of recovery transferred from the lead bank
of the consortium.
 ‘Out of order status’ In respect of cash credit / over draft facility an account should be
treated as “out of order”, if the outstanding balance remains continuously in excess of
the sanctioned limit / drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit / drawing power, but there
are no credits continuously for six months as on the date of Balance Sheet or credits
are not enough to cover the interest debited during the same period, these accounts
should be treated as “out of order”.
 ‘Overdue’ any amount due to the bank under any credit facility is “overdue”, if it is
not paid on due date fixed by the bank.

24
NPA MANAGEMENT PRACTICES IN INDIA

 Formation of the Credit Information Bureau (India) Limited (CIBIL)

 Release of Wilful Defaulter’s List. RBI also releases a list of borrowers with
aggregate outstanding of Rs.1crore and above against whom banks have filed suits for
recovery of their funds
 Reporting of Frauds to RBI
 Norms of Lender’s Liability
 framing of Fair Practices Code with regard to lender’s liability to be followed by
banks, which indirectly prevents accounts turning into NPAs on account of bank’s
own failure
 Risk assessment and Risk management
 RBI has advised banks to examine all cases of wilful default of Rs.1crore and above
and file suits in such cases. Board of Directors are required to review NPA accounts
of Rs.1crore and above with special reference to fixing of staff accountability.
 Reporting quick mortality cases
 Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category.

25
DATA ANALYSIS AND INTERPRETATION
To analyse the data, first of all we need to study about what data analysis and
interpretation is. It is the process by which sense and meaning are made of the data
gathered in qualitative research, and by which the emergent knowledge is applied to
clients' problems. Through processes of revisiting the data, complex activities of
structuring, re-framing or otherwise exploring it, the researcher looks for patterns and
insights relevant to the key research issues and uses these to address the client's brief. In
this chapter some comparative analysis has been done to achieve the objectives of the
study. This is accomplished through various ratios analysis and correlation between net
profits and net NPA’s.
NPA RATIOS (COMPARATIVE RATIOS)
TABLE 3.2.1 - FIVE YEAR COMPARISON ON GROSS NPA OF CANARA
BANK & ICICI BANK (IN CRS)
GROSS NON-PERFORMING ASSET
YEAR CANARA BANK ICICI BANK
2015 13,039.96 15,094.69
2016 31,637.83 26,720.93
2017 34,202.04 42,551.54
2018 47,468.47 54,062.51
2019 39,224.12 46,291.63

FIGURE 3.2.1 FIVE YEAR COMPARISON ON GROSS NPA OF CANARA BANK

& ICICI BANK

60,000.00

50,000.00

40,000.00

CANARA BANK
30,000.00
ICICI BANK
20,000.00

10,000.00

0.00
2015 2016 2017 2018 2019

26
INTERPRETATION
This analysis indicates the Gross NPA of Canara Bank and ICICI Bank from 2015
till 2019. From the above chart we can clearly understand that rate of growth of Gross
NPA of Canara Bank is increasing since 2015 to 2018 and after that in 2019 it decreases
but in ICICI Bank initially it increases since 2015 to 2018 and after that it also start
decreasing in 2019.
TABLE 3.2.2 -FIVE YEAR COMPARISON ON NET NPA OF CANARA BANK &
ICICI BANK (IN CRS)
NET NON-PERFORMING ASSET
YEAR CANARA BANK ICICI BANK
2015 8,740.09 6,255.53
2016 20,832.91 13,296.75
2017 21,648.98 25,451.03
2018 28,542.40 27,886.27
2019 22,955.11 13,577.43

FIGURE 3.2.2 - FIVE YEAR COMPARISON ON NET NPA OF CANARA BANK

& ICICI BANK

30,000.00

25,000.00

20,000.00

CANARA BANK
15,000.00
ICICI BANK
10,000.00

5,000.00

0.00
2015 2016 2017 2018 2019

INTERPRETATION
This analysis indicates the Net NPA of Canara Bank and ICICI Bank from 2015 till 2019.
From the above chart we can clearly understand that rate of growth of Net NPA of Canara
Bank is increasing since 2015 to 2018 and after that in 2019 it decreases but in ICICI

27
Bank initially it increases since 2015 to 2018 and after that it also start decreasing in
2019.
TABLE 3.2.3 FIVE YEAR COMPARISON ON GROSS NPA’S RATIO (%) OF
CANARA BANK & ICICI BANK

28
 Gross NPA′s
Gross NPA Ratio = × 100
Gross Advances

GROSS NPATO GROSS ADVANCES RATIO

YEAR CANARA BANK ICICI BANK

2015 3.89 3.78

2016 9.40 5.21

2017 9.63 7.89

2018 11.84 8.84

2019 8.83 6.70

FIGURE 3.2.3 FIVE YEAR COMPARISON ON GROSS NPA’S RATIO (%) OF

CANARA BANK & ICICI BANK

12

10

8
CANARA BANK
6
ICICI BANK
4

0
2015 2016 2017 2018 2019

INTERPRETATION

This analysis indicates the Gross NPA Ratio of Canara Bank and ICICI Bank from 2015
till 2019. As we know very well that higher this ratio, more dangerous position it is for
the banks. From the above chart we can clearly understand that rate of growth of Gross
NPA of Canara Bank is increasing since 2015 to 2018 which is 3.89% to 11.84% and

29
after that in 2019 it decreases to 8.83% but in ICICI Bank initially it increases since 2015
to 2018 from 3.78% to 8.84% and after that it also start decreasing which falls up to
6.70% in 2019.But we can say that increase in Gross NPA ratio of Canara Bank is very
alarming which has increased from 3.89% to 8.83% whereas in ICICI Bank it rises from
3.78% to 6.70% only from year 2015 to 2019.

TABLE 3.2.4 - FIVE YEAR COMPARISON ON NET NPA’S RATIO (%) OF

CANARA BANK & ICICI BANK
 Net NPA′ s
Net NPA Ratio =
Net Advances × 100

NET NPA TO NET ADVANCES RATIO

YEAR CANARA BANK ICICI BANK

2015 2.65 1.16

2016 6.42 2.67

2017 6.33 4.89

2018 7.48 4.77

2019 5.37 2.06

FIGURE 3.2.4 - FIVE YEAR COMPARISON ON NET NPA’S RATIO (%) OF

CANARA BANK & ICICI BANK

5
Canara Bank
4
ICICI Bank
3

0
2015 2016 2017 2018 2019
INTERPRETATION

This analysis indicates the Net NPA Ratio of Canara Bank and ICICI Bank from 2015 till
2018. As we know very well that higher this ratio, more dangerous position it is for the
banks. From the above chart we can clearly understand that rate of growth of Net NPA of
Canara Bank and ICICI Bank is increasing since 2015 to 2019 which is 2.65% to 5.37%
and 1.16% to 2.06% respectively. But we can say that increase in Net NPA Ratio of
Canara Bank is very alarming which has increased by 2.72% whereas in ICICI Bank it
rises by 0.9% only from year 2015 to 2019.

TABLE 3.2.5 FIVE YEAR COMPARISON ON PROVISIONS RATIO (%) OF

CANARA BANK & ICICI BANK

Provisions
Provisions ratio =
Gross NPA′s × 100

PROVISIONS RATIO (%)

YEAR CANARA BANK ICICI BANK

2015 51.75 58.2

2016 52.52 50.6

2017 55.62 53.6

2018 58.06 60.5

2019 68.13 70.6

FIGURE 3.2.5 FIVE YEAR COMPARISON ON PROVISIONS RATIO (%) OF
CANARA BANK & ICICI BANK

80

70

60

50
Canara Bank
40
ICICI Bank
30

20

10

0
2015 2016 2017 2018 2019

INTERPRETATION:

This analysis indicates the Provision Ratio of Canara Bank and ICICI Bank from 2015 till
2019. As we know very well that higher this ratio, more safe position for banks. From the
above chart we can clearly understand that due to increasing rate of Gross NPA’s of
Canara Bank and ICICI Bank, provisions made by these banks are decreasing since 2015
to 2019 which is 51.75% to 68.13% and 58.2% to 70.6% respectively.

TABLE 3.2.6 - FIVE YEAR COMPARISON OF GROSS NPA AND NET NPA OF
CANARA BANK

CANARA BANK

YEAR GROSS NPA (%) NET NPA (%)

2015 3.89 2.65

2016 9.40 6.42

2017 9.63 6.33

2018 11.84 7.48

2019 8.83 5.37

FIGURE 3.2.6 - FIVE YEAR COMPARISON OF GROSS NPA AND NET NPA OF
CANARA BANK

12

10

8
GROSS NPA
6
NET NPA
4

0
2015 2016 2017 2018 2019

INTERPRETATION

This analysis indicates the relationship between gross NPA ratio and net NPA ratio.
These both are showing increasing trend from 2015 to 2018 in Canara Bank and
decreases in 2019. Above chart shows that gross NPA’s are more as compared to net
NPA, which means more provisions are made by Canara bank so as to reduce the risk of
non-recovery.

TABLE 3.2.7 - FIVE YEAR COMPARISON OF GROSS NPA AND NET NPA OF
ICICI BANK

ICICI BANK

YEAR GROSS NPA (%) NET NPA (%)

2015 3.78 1.16

2016 5.21 2.67

2017 7.89 4.89

2018 8.84 4.77

2019 6.70 2.06

FIGURE 3.2.7 - FIVE YEAR COMPARISON OF GROSS NPA AND NET NPA OF
ICICI BANK

9
8
7
6
5 GROSS NPA
4 NET NPA
3
2
1
0
2015 2016 2017 2018 2019

INTERPRETATION

This analysis indicates the relationship between gross NPA ratio and net NPA ratio.
These both are showing increasing trend from 2015 to 2018 and decreases in 2019.
Above chart shows that gross NPA’s are more as compared to net NPA, which means
more provisions are made by ICICI Bank so as to reduce the risk of non-recovery.

TABLE 3.2.8 - FIVE YEAR COMPARISON OF RETURN ON ASSET

PERCENTAGE OF CANARA BANK AND ICICI BANK

RETURN ON ASSET (%)

YEAR CANARA BANK ICICI BANK

2015 0.55 1.86

2016 -0.52 1.49

2017 0.20 1.10

2018 -0.75 0.87

2019 0.06 0.39

 FIGURE 3.2.8 - FIVE YEAR COMPARISON OF RETURN ON ASSET
PERCENTAGE OF CANARA BANK AND ICICI BANK

1.5

CANARA BANK
0.5 ICICI BANK

0
2015 2016 2017 2018 2019

-0.5

-1

INTERPRETATION

Return on Assets (ROA) is a profitability ratio that helps determines how a company
efficiently uses its assets. The table of both Canara Bank and ICICI Bank shows that
ROA of them is significantly decreasing. It indicates that the bank performance is
deteriorating. Again, from 2015-16 to 2017-18 ROA is negative, it indicates that the bank
trended towards having more invested capital and there is negative profit.

IMPACT OF NON-PERFORMING ASSETS ON PROFITABILITY

CORRELATION BETWEEN NET PROFIT & NET NPA OF ICICI BANK

NET PROFIT OF NET NPA OF

CANARA CANARA
BANK BANK
NET PROFIT OF CANARA Pearson Correlation 1 .203
BANK Sig. (2-tailed) .744
N 5 5
NET NPA OF CANARA Pearson Correlation .203 1
BANK Sig. (2-tailed) .744
N 5 5
CORRELATION BETWEEN NET PROFIT & NET NPA OF ICICI BANK

NET NET
PROFIT OF NPA OF ICICI
ICICI BANK BANK
NET PROFIT OF ICICI BANK Pearson Correlation 1 .437
Sig. (2-tailed) .462
N 5 5
NET NPA OF ICICI BANK Pearson Correlation .437 1
Sig. (2-tailed) .462
N 5 5

RELATIONSHIP BETWEEN NET PROFIT AND NET NPA

To establish relationship between Net Profit and Net NPA Pearson’s Correlation has been
used. Pearson’s Correlation for Canara Bank is 0.203 and for ICICI Bank is 0.437.

INTERPRETATION:

As we can see that correlation for ICICI Bank is 0.437 and Canara Bank is 0.203. It
means that there is a positive relation between Net Profits and NPA of both banks. It
simply means that as profits increase, NPA also increase. It is because of the
mismanagement on the side of bank. NPA is directly related to Total Advances given by
bank and banks main source of income is interest earned by bank. Since we have seen
earlier that total advances are increasing so interest income is increasing and profits are
also increasing. But as we know there are two types of Customers (good and bad). Good
customers’ leads to increase in profits by paying interest and installments on total
advances timely and Bad customers leads to increase in NPA by not paying interest and
installment on total advances timely. This is because of mismanagement and wrong
choice of client. That is the only reason of positive correlation between NPA and Profit. If
there is good management by bank the correlation between Net Profit and Net NPA will
be negative, which indicates that amount of NPA decreases and Profits will increase more
by the amount not becoming NPA.
FINDINGS
 The percentage change in gross NPA to gross advances ratio & net NPA to net
advances ratio over the years is increasing day in and out.
 It states that ICICI bank makes more provisions in gross NPA & gross advances as
compared to Canara Bank.
 The impact of Gross NPA significantly influences the ROA negatively and Net NPA
positively influences the ROA of both Canara Bank and ICICI bank.
 The impact of ownership (public and private sector banks) significantly influences the
Gross and Net NPA. That is the NPA of public sector banks was higher than that of
private sector banks.
 There is a positive correlation between NPA & profits of Canara Bank and ICICI
bank which is due to wrong choice of clients by Banks.
 Banks are backing out to give loans to the new customers due to lack of funds which
arises due to NPA.
 NPAs causes decrease in the value of share sometimes even below their book value in
the capital market.
 Ineffective recovery, wilful defaults and Defective lending process are the important
factors which are responsible for the rise of NPAs in banks.
 NPAs reduce the earning capacity of banks and badly affect the profitability of banks.

SUGGESTION

 New body like Debt Recovery Tribunal should be established & capacity of DRTs
should be enhanced.
 All banks should keep stringent check on advances being made during the time.
 Public sector should focus more on recovery of doubtful assets.
 Private sector banks should increase their income from sources other than interest, as
rise in NPA due to default in interest income may affect the profits drastically.
 RBI should revise existing credit appraisals and monitoring systems.
 Banks should improve upon and strengthen their loan recovery methods.
 Credit appraisal and post–loan monitoring are crucial steps which need to be
concentrated by all the banks.
 There must be regular follow-up with the customers and it is the duty of banker to
ensure that there is no diversion of funds. This process can be taken up at regular
intervals.
 Personal visits should be made after sanction and disbursal of credit and further close
monitoring of the operations of the accounts of borrowed units should be done
periodically.
 Managers under credit monitoring and recovery department should have dynamism in
their work. Many managers say that “we do not fear to negotiate but we do not
negotiate out of fear. Such fear leads to arbitrary negotiation, which fails.
 Frequent discussions with the staff in the branch and taking their suggestions for
recovery of dues.
 Assisting the borrowers in developing his/her entrepreneurial skill will not only
establish a good relation between the borrowers but also help the bankers to keep a
track of their funds.
 Advances provided by banks need pre-sanctioning evaluation and post-disbursement
control so that NPA can decrease.
 Good management needed on the side of banks to decrease the level of NPA.
 Proper selection of borrowers & follow ups required to get timely payment.

SCOPE OF THE STUDY

The present study of the non-performing assets is confined restricted to the
boundary of Canara bank and ICICI bank. The following are the scope of the study
 To understand the causes & effects of NPA.
 To analyse the past trends of NPA of Canara and ICICI banks in different sector.
 To know the reasons of increase in NPAs.
 This study helps the researcher to improve knowledge about the banking sector,
specifically on account of NPAs.
 This study also helps the banks to know its actual position on NPA management in
last five years.
 This study helps the researcher to know about the steps taken by banks to control
NPA.
LIMITATIONS OF THE STUDY
 NPAs are changing with time. The study is done in the present environment without
foreseeing future developments.
 The study is confined only to the selected and restricted indicators and the study is
 confined only for the period of five years.
 The problems in secondary data will be reflected in the study.
 The time duration of the study was limited, as a result an extensive and detailed study
was not possible.
 Being an outsider the perception and the perceptive may be different.

NEED AND SIGNIFICANCE OF THE STUDY

Among banks based on ownership there are different diversities, among 28 public
sector banks themselves have different regions and different consumers using bank credit.
Similarly NPA concerns of different banks summarized as a whole and mathematically
expressed cannot convey an accurate picture. Lending activities of banks are adversely
affected by NPA as there is no repayment of loans instalment and the principle amount,
these adversely affects the profitability of banks and also banks with higher NPA have to
carry more owned fund by way of capital to create reserve and cop up the situation.
The domestic and global investors will lack confidence which brings disasters in
the economy. The bank’s profitability can be improved only by reducing the level of
NPA. Timely assessment is desirable at different levels. In this background, the present
study has been attempted to make a comparative study of Canara Bank and ICICI Bank.
The basic need of the study is:
 Helps the researcher to improve knowledge about the banking sector, specifically on
account of NPAs.
 Helps the banks to know its actual position on NPA management in last five years.
 Helps the researcher to know about the steps taken by banks to control NPA.

CONCLUSION

The NPA is one of the biggest problems that the Indian Banks are facing in the
current scenario. If the proper management of the NPAs is not carried out it would
hamper the business of the banks. If the concept of NPAs is taken very lightly it would be
dangerous for the Indian banking sector. The NPAs would destroy the current profit;
interest income due to large provisions of the NPAs, and would affect the smooth
functioning of the recycling of the funds. Banks also redistribute losses to other
borrowers by charging higher interest rates. Lower deposit rates and higher lending rates
repress savings and financial markets, which hampers economic growth. Although Public
Sector Banks have good substandard assets when compared with Private Sector banks but
Private Sector Banks are more efficient than public sector banks with regard to all the
other factors which give them a good upper hand. The Non-Performing Assets have
always created a big problem for the banks in India. It is just not only problem for the
banks but for the economy too. The money locked up in NPAs has a direct impact on
profitability of the bank as Indian banks are highly dependent on income from interest on
funds lent. This study shows that extent of NPA is comparatively very high in public
sectors banks. Although various steps have been taken by government to reduce the NPAs
like S4A (Scheme for Sustainable Structuring of Stressed Assets) and Indradhanush
Scheme but still a lot needs to be done to curb this problem. The NPAs level of our banks
is still high. It is not at all possible to have zero NPAs. The bank management should
speed up the recovery process. The problem of recovery is not with small borrowers but
with large borrowers and a strict policy should be followed for solving this problem. The
government should also make more provisions for faster settlement of pending cases and
also it should reduce the mandatory lending to priority sector as this is the major problem
creating area. So the problem of NPA needs lots of serious efforts otherwise NPAs will
keep killing the profitability of banks which is not good for the growing Indian economy
at all.