Non-performing Assets: Magnitude, Status, and Impact (A Comparative Study concerning all public sector, private sector, and foreign banks in India)

Abstract

Banks play a crucial, functional, and dynamic role in every nation's economy to a greater extent as financial intermediaries. The Indian banking sector also contributes to the economic growth and development of the country. Banks channeling the funds from surplus units to deficit units for productive purposes also helps the government formulate financial policies.   The traditional activities of a bank were lending and borrowing money. Due to many factors, the banking sector has been extending its operations and involved in all sorts of modern financial services depending upon the socio-economic conditions of the economy. Therefore, the banking sector can be considered a high-priority constituent in the Indian financial service sector. But during the post-reform period, the Indian banking industry witnessed a decline in operational efficiency, leading to a decrease in profitability, productivity, and efficiency for several reasons. Some specific reasons may be considered as foreign direct investment, various credit programs and credit sanctioning policies, mechanisms, etc., and due to these banks' efficiency deteriorated. Because of all these reasons, banks affected the cost side and health of banks, and the most alarming issue was the quality of assets.

Several reforms were formulated and implemented to address this issue, but this problem of Non-performing assets (NPAs) was not entirely resolved. Banking reforms developed prudential norms focusing on asset classification, income recognition, and provisioning to improve the banks' efficiency. NPAs became a significant area of concern for the banking sector. As of 31st March 2018, gross NPAs stood at Rs. 10.35 lakh crores, out of which 85% arises from the loan assets given by public sector banks, and expect a rise in the volume of NPAs in the years to come. Due to changing dynamics of the business environment, it is essential to assess NPAs periodically to know the exact reasons and the need for re-engineering the banks. Considering this present scenario, this research paper has attempted to examine the status of NPAs and their impact on operational efficiency and profitability by considering all public sector, private sector banks, and foreign banks established in India, based on statistics during the post-millennium period. This paper considers the aggregate data of the three sectors of banks to examine the differences between three groups of banks regarding NPA management from the financial year 2007-08 to 2018-19.