International Journal of Business and Management Tomorrow

Vol. 2 No. 1

Non-Performing Assest: Comparative Position of Public and Private Sector Banks in India
Mr. Sandeep Aggarwal, Assistant Professor, Indira Gandhi P.G. Regional Center- Mirpur. Ms. Parul Mittal, Assistant Professor, Indira Gandhi P.G. Regional Center- Mirpur.

Abstract
Today the Indian banking system has undergone significant transformation following financial sector reforms, adopting international best practices. Several prudential, payment, integrating and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system. It is among the best in the world because Indian banks are favorable on growth, asset quality and profitability; RBI and Government have made some notable changes in policies and regulation to strengthen the sector. NPA involves the necessity of provisions, any increase in which bring down the overall profitability of banks; is the indicator of banking health in a country. In this paper, an effort has been made to evaluate the operational performance of the selected PSBs & Private bank in India since 2001, NPAs Trends and issues through secondary data. This paper analyze how efficiently Public and Private sector banks have been managing NPA. All the Indian banks are facing hard time managing their NPA. The magnitude of NPA was comparatively higher in public sectors banks compared to private banks under study but now, they have managed the number at lower end. ICICI bank still do have higher NPA figure compared to PSB under study. Keywords: NPA, Bank, Public, Private, SBI, ICICI, PNB, HDFC.

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1. Introduction
The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, scheduled banks and non-scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its associate banks, regional rural banks and private sector banks (the old/new domestic and foreign). These banks have over 67,000 branches spread across the country. After nationalization, the initial mandate that banks were given was to expand their branch network, saving rate and extend credit to the rural and SSI sectors. This mandate has been achieved admirably. Since the early 90s the focus has shifted towards improving quality of assts and better risk management. The Narasimham committee has recommended prudential norms on income recognition, asset classification and provisioning. In India, banking sector acts as backbone of economy system. Today, Banking Industry is undergoing a transitional phase. Foundation of Indian banking industry is laid by PSBs and they hold 78% + of total assest of banking industry. But they are held back with the excessive Non Performing assets (NPA), high employee cost and somehow lack in intellectual capital.

1.1. Gross NPA and Net NPA

Gross NPA is advance which is considered irrecoverable, for bank has made provisions, and which is still held in banks' books of account. Net NPA is obtained by deducting items like interest due but not recovered, part payment received and kept in suspense account from Gross NPA. The Reserve Bank of India states that, compared to other Asian countries and the US, the gross non-performing asset figures in India seem more alarming than the net NPA figure. The problem of high gross NPAs is simply one of inheritance. Historically, Indian public sector banks have been poor on credit recovery, mainly because of very little legal provision governing foreclosure and bankruptcy, lengthy legal battles, sticky loans made to government public sector undertakings, loan waivers and priority sector lending. Net NPAs are comparatively better on a global basis because of the stringent provisioning norms prescribed for banks in 1991 by Narasimham Committee. In India, even on security taken against loans, provision has to be created. Further, Indian Banks have to make a 100 per cent provision on the amount not covered by the realizable Value of securities in case of ''doubtful'' advance, while in some countries; it is 75 per cent or just 50 per cent. The ASSOCHAM Study titled Solvency Analysis of the Indian Banking sector reveals that on an average 24 per cent rise in net non performing assets have been registered by 25 public sector and commercial banks during the second quarter of the 2009 as against 2008. According to the RBI, "Reduction of NPAs in the Indian banking sector should be treated as a national priority item to make the system stronger, resilient and geared to meet the challenges of globalization. It is necessary that a public debate is started soon on the problem of NPAs and their resolution. " Non performing assets as a major issue and challenge for banking industry in India Non-performing Assets are threatening the stability and demolishing banks profitability through a loss of interest income, write-off of the principal loan amount itself. RBI issued guidelines in 1993 based on recommendations of the Narasimham Committee that mandated identification and reduction of NPAs to be treated as a national priority because NPA direct toward credit risk that bank faces and its efficiency in allocating resources. Profitability and earnings of banks are affected due to NPA numbers. In recent years financial reform led by RBI has helped in reducing NPA numbers. Causes of Problem 1. Legal impediments and time consuming nature of asset disposal process. 2. Manipulation by the debtors using political influence has been a cause for industrial bad debt being so high. 3. Political tool - Directed Credit to SSI and Rural sectors Mechanisms used to solve the problem 1. Strengthening of Legal Norms 2. Aligning of prudential norms with international standards 3. Legal mechanisms including creation of ARCs and partial disbanding of the BIFR

The banking sector has been facing the serious problems of the rising NPAs. In fact PSBs are facing more problems than the private sector banks and foreign banks. The NPAs in PSBs are growing in comparison to other banks due to external as well as internal factors. One of the main causes of NPAs in the banking sector is the Directed loans system under which commercial banks are required to supply 40% percentage of their credit to priority sectors. Most significant sources of NPAs are directed loans supplied to the micro sector are problematic of recoveries especially when some of its units become sick or weak. PSBs 7 percent of net advances were directed to these units. Poverty elevation programs like Integrated Rural Development Program (IRDP), Jawahar Rojgar Yojna (JRY), Prime Ministers Rozgar Yojna (PMRY) etc. , have failed miserably in ISSN: 2249-9962 January|2012 www.ijbmt.com Page | 2

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meeting the objectives. Due to Political interference, manipulation, misuse of fund by & and unreliable customer the amount issued these type of schemes has become unrecoverable by and large. The major cause for the NPA can be attributed to: Improper selection of borrowers activities Weak credit appraisal system Industrial problem Inefficiency in management of borrower Slackness in credit management & monitoring Lack of proper follow up by bank Recession in the market Due to natural calamities and other uncertainties

2. Review of literature
Keeping in view of the importance of NPAs management in banks in the process of reducing NPAs, large number of studies has been carried out by researchers, on the concept, type, impact, reasons and measures for NPAs in banking industry. Prashanth K Reddy (2002) in his study focuses on comparative study of Non Performing Assets in India in the Global context - similarities and dissimilarities, remedial measures and concluded the importance of a sound understanding of the macroeconomic variables and systemic issues pertaining to banks and the economy for solving the NPA problem along with the criticality of a strong legal framework and legislative framework. Foreign experiences must be utilized along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders. Harpreet kaur and J. S. Pasricha,(2004) concluded a research on management of NPAs in Public sector banks over a 8 years period ending 2002 and show that gross NPA has registered a constant increase from 1995-2002. This study point out the sector wise and bank wise position of NPA in PSBs. It was suggested that follow proper policy of appraisal, supervision and follow up of advances be taken up to controlling the NPAs. He Dong, IMF(2004) investigated the procedure of resolving NPAs of the Indian banking system the role of ACRs. Dr. Janardhar G. Naik (2006) pointed out on the problem of NPAs management in banking sector and concluded that government of India has to set ARCs to manage NPAs to face the challenges before the banking sector. Prof. G. V. Bhavani Prasad; D. Veena(2011) studied NPAs in Indian Banking Sector Trends & Issues and concluded that PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs, falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service and adoption of modern technology. Shalu Rani (2011) examined the existing position of banks in SCBs of India in respect of NPAs, the causes and remedial measures thereof and concluded that the level of NPA has increased, eroding whatever reduction was made with the ever increasing level of fresh NPAs and tightening of norms by RBI time to time. Total elimination is not possible in banking business so it is wise to follow the proper policy for appraisal, supervision and follow up of advances to avoid NPAs.

3. Objective of study
The Non-Performing Assets (NPAs) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Like a canker worm, it has been eating the banking system from within, since long. It has grown like a cancer and has infected every limb of the banking system. At macro level, NPAs have choked off the supply line of credit to the potential borrowers, thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has eroded the profitability of banks through reduced interest income and provisioning requirements, besides restricting the recycling of funds leading to serious asset liability mismatches. Unfortunately the high level of NPAs of banks is adversely affecting the profitability, liquidity and solvency position of the banking sector. Therefore NPA should be brought down to internationally accepted level (i. e. 2-3% of loan assets). The objectives of the present study are: Find out trends in NPA Level. Highlight the NPAs position of selected PSBs and Private Banks Assess the comparative position of NPA in selected PSBs & Private banks. Assess the variation of NPA ratio in selected PSBs & Private banks.

4. Research methodology
The foregoing review indicates that existing studies concentrated on PSBs & comparison of PSBs with private & foreign banks. But the present study has focused on the comparison of NPAs between public and private sector banks. The banks selected for the study are prominent banks among all banks in their respective sector and includes: ISSN: 2249-9962 January|2012 www.ijbmt.com Page | 3

International Journal of Business and Management Tomorrow Public Sector: State bank of India (SBI) & Punjab National Bank (PNB) Private Sector: HDFC Bank & ICICI Bankk

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For the study, secondary data has been collected using annual report of Reserve Bank of India publication including Trend & Progress of banking in India, statistical tables related to banks in India and report on currency and finance. Articles and papers relating to NPA published in different business journals, magazines, newspaper, periodicals were studied and data available on internet and other sources has also been used. Major guidelines issued by RBI from time to time were studied in depth. Along with this assets quality of banks and recommendations also studied. In the present study, various statistical tools ratio, Averages, percentages, ratio analysis, Measure of central tendency, frequency distribution, Standard Deviations, coefficient of variation and ANOVA test have been used to analyze and interpret the data. In the light of objective mentioned above, the present study is confirmed to examine the various aspects of NPAs in PSBs & Private banks of India(selected banks). The study covers the period from 2001-02 to 2010-2011. To study NPA ratio variation data over the year 2010-2011 have been analyzed.

5. Analysis
NPA position is different and present in PSBs & Private Banks of India. Basically, there are many banks but in this study some prominent banks are selected among all in their respective sector. And the data related to NPA of all these banks i. e. SBI, PNB, HDFC, ICICI is collected and their comparison is done on this basis.

5.1. Gross NPA ratio (in %): (position of gross NPA to gross advances)
It is clear from table 1 that there has been marginal decrease in NPAs level over the period in all selected banks. Gross NPAs to Gross Advances ratio of SBI decreased from 11. 95 percent at the end of March 2002 to 3. 28 percent at the end of March 2011. In Case of PNB this ratio decreased from 11. 38 percent at the end of March 2002 to 1. 79 percent at the end of March 2011. And in HDFC Gross NPAs to Gross Advances ratio decreased from 3. 18 percent at the end of March 2002 to 1. 06 percent at the end of March 2011. In improvement term PNB has shown the significant result while in ICICI trend has started reversing from 2006 and its NPA is 5. 80 in 2011. To ascertain the significance difference between NPA ratios of these selected banks ANOVA test by formulating null hypothesis (Ho) is attempted. Ho: There is no significant difference in Gross NPAs to Gross Advances ratio of SBI, PNB, HDFC, and ICICI It is observed from above table 1(b) that the calculated value is less than the table value resulting in accepting of null hypothesis meaning thereby there is no significant difference in GNPAs to Gross Advances ratio of SBI, PNB, HDFC, and ICICI.

5.2. Net NPA ratio (in %age): (position of net NPA to net advances)
It is observed from table-2 that there has been marginal reduction in Net NPAs ratio of all selected banks over the considered period. Net NPAs to Net Advances ratio of SBI reduced from 5.64 percent at the end of March 2002 to 1.63 percent at the end of March 2011.In Case of PNB this ratio decreased from 5.27 percent at the end of March 2002 to 0.85 percent at the end of March 2011. And in HDFC Net NPAs to Net Advances ratio came down from 0.50 percent the end of March 2002 to 0.19percent at the end of March 2011. In improvement term PNB has shown the significant result and control Net NPA while in ICICI since 2001 Net NPAs ratio was decreasing till 2006 but trend has started reversing from 2007and its NPA is 1.11 in 2011.To be compared PNB is better in term of NNPA in PSBs and HDFC in Private sector banks. Ho: There is no significant difference in Net NPAs to Net Advances ratio of SBI, PNB, HDFC, and ICICI Table: 2(a) shows that bank wise Mean, standard deviation & coefficient of variation of NNPAs ratio of selected banks. SBI & ICICI has highest mean value while HDFC has lowest value in comparison to other. Standard deviation of Net NPAs to Net Advances Ratio is 2.09 of PNB with highest coefficient of variation with 154.83percent. HDFC has less Standard Deviation & coefficient of variation than ICICI. It is observed from above table 2(b) that the calculated value is less than the table value resulting in accepting of null hypothesis meaning thereby there is no significant difference in NNPAs to Net Advances ratio of SBI, PNB, HDFC, and ICICI.

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5.3. Problem asset ratio (in %age): (position of gross NPA to total assets)
It is clear from table-3 that there has been marginal reduction in Problem Assets ratio over the considered period in all selected banks. Gross NPAs to Total Assets Ratio of SBI reduced from 4.45 percent at the end of March 2002 to 2.06 percent at the end of March 2011.In Case of PNB this ratio decreased from 5.68 percent at the end of March 2002 to 2.06 percent at the end of March 2011. And in HDFC Gross NPAs to Total Assets Ratio came down from 0.94 percent the end of March 2002 to 0.59percent at the end of March 2011. In improvement term PNB has shown the significant result and control NPA & Problem Assets in comparison to other banks while in ICICI since 2001 Problem Assets ratio is decreasing till 2008but trend has started reversing from 2009and its ratio2.41in 2011. In all, PNB has better performance to control their problem assets ratio in comparison to other selected banks. Ho: There is no significant difference in GNPA to Total Assest of SBI, PNB, HDFC, and ICICI Table: 3(a) shows that bank wise Mean, standard deviation & coefficient of variation of Problem Assets ratio of selected banks. PNB has highest mean value while HDFC has lowest value in comparison to other. Standard deviation of Gross NPAs to Total Assets Ratio is 1.58 of PNB with coefficient of variation with 51.08 percent. HDFC has less Standard Deviation & coefficient of variation than ICICI while ICICI has highest variation in this ratio i.e. 61.53. It is observed from above table 3(b) that the calculated value is less than the table value resulting in accepting of null hypothesis meaning thereby there is no significant difference in GNPAs to Total Assets ratio of SBI, PNB, HDFC, and ICICI.

6. Conclusion
The industry is currently in a transition phase. Containing NPAs has been in focus ever since the banking sector reforms were initiated in 1992. All banks have been making efforts to contain the NPAs level and reduce the drag on their profitability. Even as individual banks devised various policies for containment of NPAs, the magnitude of the problem of slippage of performing assets to NPAs category has become a cause of permanent concern. On the one hand, the PSBs, which are the main pillar of the Indian Banking system, are in trouble with excessive manpower, excessive NPAs and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through adoption of latest technology and systems. To be conclude, Gross NPAs ratio of PNB is less and it has been reduced over the period in comparison to SBI. On the other side as far as Private Banks are concerned HDFC has better performance in comparison to ICICI. And also NNPAs Ratio and Problem Assets ratio is reducedof PNB in PSBs & HDFC in Private sector banks. There is more variation in GNPA & NNPA ratio of PNB while in ProblemAssets ratio ICICI has more variability. So, it is very necessary for bank to keep the level of NPA as low as possible. Because NPA is one kind of obstacle in the success of bank and affects the performance of banks negatively so, for that the management of NPA in bank is necessary. And this management can be done by following way: Framing reasonably well documented loan policy and rules. Sound credit appraisal on well-settled banking norms with emphasis on reduction in Gross NPAs rather then Net NPAs Pasting of sale notice/ wall posters on the house pledged as security. Recovery effort should starts from the month of default with prompt legal action. Position of overdue accounts is reviewed on a weekly basis to arrest slippage of fresh account to NPA. Half yearly balance confirmation certificates should be obtained from the borrowers. A committee is constituted at Head Office, to review irregular accounts. Due to lower credit risk and consequent higher profitability, greater encouragement should be given to small borrowers. Recovery competition system should be extended among the staff members. The recovering highest amount should be felicitated. Adopting market intelligence for deciding the credibility of the borrowers Creation of a separate Recovery Department with Special Recovery Officer. YEAR 2001-02 2002-03 2003-04 2004-05 SBI 11. 95 9. 34 7. 75 5. 96 PNB 11. 38 11. 58 9. 35 5. 96 HDFC 3. 18 2. 22 1. 86 1. 69 ICICI 10. 23 8. 72 4. 70 4. 27 Page | 5

Tables and Figures

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International Journal of Business and Management Tomorrow 2005-06 3. 61 4. 10 1. 44 1. 51 2006-07 2. 92 3. 45 1. 39 2. 08 2007-08 3. 04 2. 74 1. 42 3. 30 2008-09 2. 86 1. 60 1. 98 4. 32 2009-10 3. 05 1. 71 1. 44 6. 52 2010-11 3. 28 1. 79 1. 06 5. 80 Gross NPA ratio (%) Table :1 Source: Reports on Trend & Progress of Banking in India Banks Mean Standard Deviation Coefficient of Variation SBI 5. 37 3. 09 57. 53 PNB 5. 36 3. 78 70. 59 HDFC 1. 76 0. 57 32. 24 ICICI 5. 14 2. 60 50. 53 Table: 1(a): Analysis of Mean, Standard Deviation & Coefficient of Variation Source: calculated on the basis of data in Table 1. Source of variation Sum of square Degree of freedom Mean square Between 93. 67 3 31. 22 Within 311. 01 36 0. 64 Total 404. 68 39 31. 86 F value 0. 02 Table value 2. 84 at 5% level of significance Table 1(b): ANOVA Table Source: calculated on the basis of data in Table 1. YEAR SBI PNB HDFC ICICI 2001-02 5. 64 5. 27 0. 50 5. 48 2002-03 4. 49 3. 80 0. 37 5. 21 2003-04 3. 45 0. 98 0. 16 2. 21 2004-05 2. 65 0. 20 0. 24 1. 65 2005-06 1. 88 0. 35 0. 44 0. 72 2006-07 1. 56 0. 76 0. 43 1. 02 2007-08 1. 78 0. 64 0. 47 1. 55 2008-09 1. 79 0. 17 0. 63 2. 09 2009-10 1. 72 0. 53 0. 31 2. 12 2010-11 1. 63 0. 85 0. 19 1. 11 Net NPA ratio Table: 2 Source: Reports on Trend & Progress of Banking in India Banks Mean Standard Deviation Coefficient of Variation SBI 2. 65 1. 87 70. 57 PNB 1. 35 2. 09 154. 83 HDFC 0. 37 0. 14 37. 83 ICICI 2. 31 1. 59 68. 54 Table: 2(a): Analysis of Mean, Standard Deviation & Coefficient of Variation Source: calculated on the basis of data in Table 2. Source of variation Sum of square Degree of freedom Mean square Between 31. 74 3 10. 58 Within 70. 09 36 1. 95 Total 101. 83 39 12. 53 F value 0. 18 Table value 2. 84 at 5% level of significance Table 2(b): ANOVA Table Source: calculated on the basis of data in Table 2. YEAR SBI PNB HDFC ICICI 2001-02 4. 45 5. 68 0. 94 4. 82 2002-03 3. 59 5. 78 0. 87 4. 71 2003-04 3. 11 4. 56 0. 79 2. 43 2004-05 2. 71 2. 96 0. 85 1. 65 ISSN: 2249-9962 January|2012 www.ijbmt.com

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International Journal of Business and Management Tomorrow 2005-06 1. 95 2. 16 0. 69 0. 69 2006-07 1. 76 2. 09 0. 72 0. 72 2007-08 1. 78 1. 67 0. 68 0. 68 2008-09 1. 62 1. 02 0. 89 2. 54 2009-10 1. 85 2. 33 0. 81 2. 60 2010-11 2. 06 2. 71 0. 59 2. 41 Problem assest ratio Table :3 Source: Reports on Trend & Progress of Banking in India Banks Mean Standard Deviation Coefficient of Variation SBI 2. 48 0. 90 36. 32 PNB 3. 09 1. 58 51. 08 HDFC 0. 78 0. 10 13. 39 ICICI 2. 32 1. 43 61. 53 Table: 3(a): Analysis of Mean, Standard Deviation & Coefficient of Variation Source: calculated on the basis of data in Table 3. Source of variation Sum of square Degree of freedom Mean square Between 29. 06 3 9. 69 Within 53. 75 36 1. 49 Total 82. 81 39 11. 18 F value 0. 15 Table value 2. 84 at 5% level of significance Table 3(b): ANOVA Table Source: calculated on the basis of data in Table 3.
Sandeep Aggarwal Assistant Professor Department of Management Imdira Gandhi P.G. Regional Center-Mirpur 111, New Anaj Mandi Rewari 1233401 Haryana, India Sggarwal@gmail.com +91-9896879795

Vol. 2 No. 1

Ms. Parul Mittal Assistant Professor Department of Management Imdira Gandhi P.G. Regional Center-Mirpur 66/6 Main Bazar Tauru - 122105 Haryana, India palakmittal12@yahoo.co.in +91-9729704037

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