International Journal of Advanced Research in Management (IJARM)

Volume 10, Issue 3, September – December 2019, pp. 13–19, Article ID: IJARM_10_03_002
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ISSN Print: 0976 - 6324 and ISSN Online: 0976 – 6332
DOI: https://doi.org/10.17605/OSF.IO/U7TFH
© IAEME Publication

EFFECT OF NON-PERFORMING ASSETS (NPA)

ON PERFORMANCE OF COMMERCIAL BANKS
IN INDIA – ROA & ROCE PERSPECTIVE
R. Devi
MBA, PG Scholar, Osmania University College of Commerce and Business Management
(OCCBM), Osmania University, Hyderabad, India

ABSTRACT
After the liberalization policy of 1991, Indian banking sector change dramatically
and measure were taken for making Indian banking sector as a world standard. There
are many obstacles faced by Indian banks and increasing NPA is one of them. There
are two types of NPA – Gross NPA and Net NPA. For present study Net NPA are
considered. Reserve Bank of India (RBI) is monitoring these phenomena and declaring
guidelines at various times. After the slowdown of 2008, the threat of increasing NPA
and decreasing ROA is witnessed. This paper is an attempt to correlate the NPA and
ROA of Indian commercial Banks. Though the sample size is small but all major 11
banks (6 Public sector banks and 5 Private sector banks) where chosen for the study.
2015-16 to 2018-19 is the study period for this study. It is found that in this study period
of 4 years, NPA increase rate is higher in public sector banks than the private sector
banks. NPA of private sector banks are well under control. This study shows that there
is moderate negative correlation of NPA and ROA of Public sector banks. This means
as the NPA increases it negatively affects the ROA of banks.
Keywords: Nonperforming Assets (NPA), Return on Assets (ROA), Public sector banks,
Private sector banks, Indian banks.
Cite this Article: R. Devi, Effect of Non-Performing Assets (NPA) on Performance of
Commercial Banks in India – ROA & ROCE Perspective. International Journal of
Advanced Research in Management, 10(3), 2019, pp. 13–19.
https://iaeme.com/Home/issue/IJARM?Volume=10&Issue=3

1. INTRODUCTION
Non-performing Assets (NPA’s) plays a crucial role in the assessment of financial performance
of a bank. In simple terms, NPA is the pivotal term for banks by which one can the fitness can
be assessed very easily. NPA’s means the portion of money not received by the banks towards
they disbursed or sanctioned loans. Therefore, banks must be more cautious while sanctioning
the loans because it not only affects the bank but also the overall financial system. Non-
Performing Assets influence the fund establishment as well as the complete budgetary
framework. In this way, a detailed research has been done on public sector banks in India to

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 Effect of Non-Performing Assets (NPA) on Performance of Commercial Banks in India – ROA &
ROCE Perspective

assess the impact of NPA’s on the productivity of banks. Banks today are not made a decision
about just based on number of branches and volume of stores yet additionally based on standard
of benefits. NPAs adversely impact on the gainfulness, liquidity and dissolvability of the banks.
Banking is the backbone of every economy. In India the establishment of Reserve Bank of India
(RBI) (1935), Nationalization of major banks (1969) and liberalization policy (After 1991) are
the major milestones in the development of Indian banking system. Indian government is
monitoring and interferes in banking through policies of RBI. Raising the standard as per
international norms and adapting the new technology are the major challenges in front of Indian
banking sector. But in recent time, mostly after 2001, increasing percentage of Non-Performing
Assets (NPA) is emerging as a major threat to this sector. It is instancing day by day. This
problem is comparatively significant in case of Public Sector Banks than the private Sector
Banks. It is proven fact that increasing NPA is results in lowering Return on Assets (ROA).
This paper is an attempt to verify this fact in case of Indian banking sector. NPA is an issue
coming about in non-execution of a segment of advance portfolio prompting no recuperation
or less recuperation pay to the loan specialist. NPAs speak to the measure "Credit Risk".
Financiers have acknowledged to have powerful NPA the board on their need list. NPA
comprehensively characterized as non-reimbursement of intrigue and portion of chief sum (Das
and Ghosh, 2006). As per the Narasimhan Committee Report (1991), those benefits
(overdraft/money credit) for which the premium stays due for a time of four quarters (180 days)
ought to be considered as NPAs". After, this period had decreased and from March 1995
onwards resources for which intrigue and rule stays unpaid for a time of 90 days were
considered as NPAs. In this way, NPA establishes a significant factor in the financial
framework as it genuinely influences the benefit of the banks. The NPA can extensively be
ordered into Gross NPA and Net NPA. Net NPA mirrors the nature of the credits made by banks
though Net NPA shows the genuine weight of banks.

2. REVIEW OF LITERATURE
As per Reserve Bank of India (RBI) clarifies the meaning of NPAs, "an advantage makes non-
performing when it stops to create pay for the bank. As of late an advantage was estimated as
non-performing resource (NPA) remain on the idea of 'Past Due'. A non performing resource
was inspected as credit in regard of which enthusiasm of chief has stayed 'past due' for a specific
time".
Siraj and Sudarsanan Pillai (2016) says that "NPA is an infection influencing banking
area. The investigation inferred that NPA actually stays a significant danger and the steady
segment disclosed through increases to NPA offers an incredible conversation starter mark on
productivity of credit hazard the executives of banks in India".
Debarsh and Sukanya Goyal (2017) underscored "on the board of non-performing
resources in the point of view of the public area banks in India under severe resource
characterization standards, utilization of most recent innovative stage dependent on center
financial arrangement, recuperation methodology and other bank explicit markers with regards
to tough administrative system of the RBI". In the fundamental investigation 'using a loan
strategy, frameworks, and culture',
Reddy (2018) raised different basic issues relating to credit conveyance instrument of the
Indian financial area. Fundamentally analyzed "different issues relating to terms of credit of
Indian banks. In this unique situation, it was seen that 'the component of intensity makes little
difference to the criminal behavior. A default isn't altogether a silly choice. Or maybe a
defaulter considers probabilistic evaluation of different expenses and advantages of his choice".
The issue of NPAs is identified with a few interior and outer variables confronting the
borrowers.

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 R. Devi

Muniappan, (2019) "The inside components are redirection of assets for expansion taking
up new ventures, helping/advancing partner concerns, time/cost invades during the undertaking
usage stage, business (item, showcasing, and so forth) disappointment, wasteful administration,
stressed work relations, unseemly innovation/specialized issues, item oldness, and so on, while
outer variables are downturn, non-installment in different nations, inputs/power lack, value
heightening, mishaps and normal disasters".

3. HYPOTHESIS
Increasing NPA is lowering the ROA of Indian Banks

4. OBJECTIVES
1. To correlate the NPA with the ROA in case of Indian Banks
2. To find out the variation between Public and Private Sector Banks in NPA as well as ROA

5. METHODOLOGY
Data: This work is totally depending on the secondary data published on reliable websites.
Study Period: the data related to NPA and ROA is taken for the period of financial year
2015-16 to 2018-19. (4 years)
Banks: 6 major Banks from Public sector and 5 Banks of Public sector are chosen for the study.
Data is processed with the help of Excel worksheet.
Statistical Tools: Simple statistical tools like average, correlation are widely used to find out
results.

6. RESULT AND DISCUSSION

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 nonstandard assets like as sub-standard, doubtful, and loss assets. 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. This paper is deals with the Net NPA of Indian banks.

Table 1 Increase in NPA of Indian Banks from 2015-16 to 2018-19

Banks NPA 2015- 16 NPA 2018-19 Absolute NPA increase
Public Sector Banks
State Bank of India 1.63 2.12 0.49
Panjab National Bank 0.65 4.06 3.41
Canara Bank 1.11 2.65 1.54
Bank of India 0.91 3.36 2.45
Bank of Baroda 0.35 1.89 1.54
Union Bank of India 1.19 2.71 1.52
Private Sector Banks
ICICI Bank 1.11 1.61 0.50
HDFC 0.2 0.25 0.05
Axis 0.26 0.44 0.18
Yes 0.03 0.12 0.09
Kotak Mahindra 0.72 0.92 0.20
Source: https://www.edelweiss.in

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 Effect of Non-Performing Assets (NPA) on Performance of Commercial Banks in India – ROA &
ROCE Perspective

Table 2 Comparison of Major Private and Public Sector Banks of India

2016- 2016 NPA 2018-19 NPA Absolute NPA increase
Public Private All Major Public Private All Public Private All
Bank Sector Sector Banks Sector Sector Major Sector Sector Major
Banks Banks Banks Banks Banks Banks Banks Banks
Average 0.97 0.46 0.74 2.80 0.67 1.83 1.82 0.20 1.09
SD 0.45 0.44 0.50 0.80 0.61 1.31 0.99 0.18 1.11
Calculated by researcher

It is observed that Net NPA of the major public and private sector banks has been increased
during last 4 years but this increase is more significant in case of public sector banks than the
private sector banks. The Net NPA of major private banks is more or less constant. Its increase
is mere 0.20%. ICICI bank has highest NPA increase in private sector banks. SBI is showing
good efforts in lowering the speed of NPA increase. The question is why the Net NPA of Public
sector banks is more than the Private sector banks in India? There are many reasons for this
situation. Expert gives the following reasons. First and foremost, it is the social obligations that
are to be met by PSBs which are to be blamed for the inflating bad loans. Unlike the private
banks, the public sector banks have to provide loans to vulnerable sector of the economy,
namely: Infrastructure, Mining, Aviation, Iron-and-steel, and Textiles. Under Reporting of
NPAs by Private Sector Banks. (to avoid, keeping funds aside as a provision as a buffer funds).
Lack of expert officers at higher positions. Granting loans to Unworthy customers. No solid
effective mechanism to recover these bad loans. Hence after a certain period banks restructure
these loans and waive off.
Return on Asset (ROA): The return on assets (ROA) shows the percentage of how profitable
a company's assets are in generating revenue. This number tells you what the company can do
with what it has. ROAs over 5% are generally considered good. It is an indicator of how
profitable a company is relative to its total assets. ROA gives an idea as to how efficient
management is at using its assets to generate earnings. Calculated by dividing a company's
annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred
to as "return on investment". The formula for return on assets is: ROA= Net Income/ Total
assets Whether the increasing Net NPA of Indian banks have affecting their ROA. The ROA of
major banks of India for the period of 2015-16 to 2018-19 is given in next table.

Table 3 Return on Assets of Indian Banks

Bank ROA Change in %
2015-16 2018-19
Public Sector Banks
State Bank of India 0.71 0.76 7.07
Panjab National Bank 1.34 0.53 -60.45
Canara Bank 1.42 0.55 -61.27
Bank of India 0.82 0.03 -96.34
Bank of Baroda 1.33 0.49 -63.16
Union Bank of India 1.05 0.49 -53.33
Private Sector Banks
ICICI Bank 1.35 1.86 37.78
HDFC Bank 1.6 2 25
Axis Bank 1.68 1.83 8.93
Yes Bank 1.5 1.6 6.67
Kotak Mahindra 1.77 1.98 11.86
Source: https://www.edelweiss.in

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 R. Devi

Table 4 Comparison of Return on Assets of Indian Banks

Bank 2015- 2016 ROA 2018-19 ROA Change in ROA (%)
Public Private All Major Public Private All Major Public Private All Major
Sector Sector Banks Sector Sector Banks Sector Sector Banks
Banks Banks Banks Banks Banks Banks
Average 1.11 1.58 1.32 0.48 1.85 1.10 -54.58 18.05 21.57
SD 4.34 1.50 0.34 1.63 2.53 0.75
Calculated by researcher

It is observed that ROA of public sector banks is decreases from 1.11 to 0.48% whereas
ROA of major private sector banks of India is increases from 1.58 to 1.85 % within the study
span. High standard deviation in ROA values of major public sector banks (in 2015-16) shows
that, variability of ROA situation which decrease in 2015-16. We can say that the rate of ROA
is more uniform in Public sector banks than the Private sector banks in 2018-19. The correlation
between the Net NPA (2015-16 and 2018-19) of both the public sector and private sector banks
and their ROA of those respective years is given in table no. 5

Table 5 Correlation between NPA and ROA of Major Indian Banks

All Major Banks Public Sector Banks Private Sector Banks
Correlation between NPA -0.69 -0.64 -0.32
and ROA 2015-16
Correlation between NPA -0.85 -0.41 0.31
and ROA 2018-19
Above table shows that ROA of Public sector Banks is moderately and negatively correlated
with NPA. Means as the NPA increases the ROA of these banks is decreases. The situation is
almost same in case of Private sector banks in 2015-16 but correlation is low. In next 4 Years
Private sector Banks degree of NPA and ROA correlation change (-0.32 to 0.31) whereas this
correlation value decrease in case of Public sector banks (from -0.64 to -0.41). It is indicating
that the correlation of ROA on NPA is lowering.

7. RECOMMENDATIONS
To improve the banks’ ability to manage their non-performing assets (NPAs) and restructured
accounts in an effective manner and considering that almost all branches of banks have been
fully computerized, the Reserve bank of India in its Monetary Policy Statement 2018-19
proposed the following measures: To mandate banks to put in place a robust mechanism for
early detection of signs of distress, and measures, including prompt restructuring in the case of
all viable accounts wherever required, with a view to preserving the economic value of such
accounts; and to mandate banks to have proper system generated segment–wise data on their
NPA accounts, write-offs, compromise settlements, recovery and restructured accounts.
Recruitment of highly expert people on higher level post in public sector banks should be
implemented. Measures should be taken for Efficient and fast recovery of bad loans. First of
all, care should be taken at the time of sanction of the loans. Continuous, effective monitoring
of Reserve Bank of India on commercial banks is necessary.

8. CONCLUSION
NPA of Major Indian Banks is increased in the study period of 4 years. NPA increase rate is
high in major Public sector banks than the major private sector banks. NPA is affecting the ROA
of Major Indian Banks. The effect of increasing NPA on ROA is more intense for Major Indian
Public sector Banks. NPAs influence the money related execution of Indian banks also
monetary development of economy. Indian financial framework is confronting the NPAs issue.

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 Effect of Non-Performing Assets (NPA) on Performance of Commercial Banks in India – ROA &
ROCE Perspective

Each nation's monetary development relies on their money related framework. The money
related framework chiefly contains banking area. Particularly open area banks should zero in
on their NPA Management to develop their benefit. The monetary establishments ought to grow
new methodologies wanting to improve the recuperation of credit. Non-performing resources
(NPAs) is influencing the exhibition of money related organizations both monetarily and
mentally. The non-performing resources have become a significant reason for concern.
Retaining the credit, the board aptitudes has become even more significant for improving the
main concern of the financial area. The current NPAs status keeps on upsetting Indian Financial
Sector. A few investigations have been attempted to reduce NPAs however nothing has hit the
imprint in handling NPAs. The Indian financial area confronted a difficult issue of NPAs. A
significant level of NPAs proposes high likelihood of an enormous number of credit defaults
that affect the gainfulness and liquidity of banks. A large portion of the issue identified with
NPA is looked by open area banks. To improve the effectiveness and gainfulness, the NPAs
must be booked. Exacting measures are should have been taken up to battle these NPAs
emergencies. It is profoundly difficult to have zero rate NPAs. Improvement in recuperation
the executives appropriately working of banks relies upon time recuperation of credit. Banks
ought to build up another recuperation programs for over levy, checking accounts, keeping
customary contact with borrowers. In any case, numerous borrowers are defaulters not in view
of low pay yet because of absence of morals. Improving the credit Management-Management
of credit is fundamental for appropriate working of banks. Readiness of credit arranging,
appropriate credit examinations, distributions, post authorize development and need based
credit are the a few zones of credit the executives that needs improvement so as to decrease the
NPAs. Banks ought to decrease reliance on premium pay Indian banks are to a great extent
subject to the loaning and speculation as in contrast with created nations. Indian banks should
search for sources (salary) from charge-based administrations and items. Credit Information
Bureau India LTD (CIBIL) the regulation of data sharing game plan is presently conceivable
through the recently shaped Credit Data Bureau of India Limited (CIBIL) it was set up in the
year 2001, by SBI, HDFC, and two unfamiliar innovation accomplices. This will forestall the
individuals who exploit absence of arrangement of data sharing among driving foundations to
obtain enormous sum against same resources and property, which has in no measures added to
the gradual of NPAs of banks.

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