Total Quality Management and Assets Quality: The Scenario of Indian Banking Sector

Total Quality Management and Assets Quality: The Scenario of Indian Banking Sector

Dolly Gaur
Copyright: © 2021 |Pages: 20
DOI: 10.4018/IJBAN.2021010103
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The present study aims to examine the relationship between assets quality of banks as represented by non-performing assets (NPA) and management quality. The study has used Fama-MacBeth regression approach to measure management quality, which has been considered as the primary determinant of NPA. A sample comprising of 45 scheduled commercial banks in India has been studied for a time period of 15 years (2004-2019). The findings have revealed that better quality management leads to better asset quality. Banks with above average managerial ability can reduce NPA significantly. The bank managers should focus on their role in controlling problem loans of banks and should implement more efficient monitoring and supervision process for loan portfolios. The policy makers should pay attention towards the managerial ability of banks and stress on enhancing the quality of management. Also, investors may take note of the banks that are showing good management quality because such banks can be a profitable investment avenue.
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1. Introduction

A paramount role is played by commercial banks in the dispensation of financial resources for economic activities, especially in a bank led economy like India. Banks acts as link between investors and borrowers by creating deposits and loan assets. These loans or credit extended by banks makes the major proportion of assets on banks’ balance sheet. Simultaneously, the loan assets exposes banks to the risk of non-repayment by borrowers. For the banks operating in India, the quality of credit or loan assets is raising concerns for the stability of the whole banking sector. Due to inflating Non-Performing Assets (NPA), the banks are facing the issue of deteriorating asset quality. Stating the sub-prime mortgage crisis as example, Demirgüc-Kunt and Detragiache (1997) provided empirical evidence in support that high level of bad loans or NPA are followed by huge banking crisis.

In view of Habib and Hossain (2013), bank failures due to huge losses on account of NPA, brings the efficiency and quality of management under question. During the US financial crisis bank managers were held responsible for not monitoring the quality of their loans and the inability to foresee the impending economic downfall (Banna et al., 2018). To keep the banks afloat, quality performance by their management is required. By managing the asset quality and keeping NPA as low as possible, management can improve the profits of the bank. Better management quality can bring more profits for the banking institutions only if the managers can have improved asset quality by reduce NPA accounts from their loan portfolios. In the long run banks can only depend on their management quality for their survival (Chaudary et al., 2015). By applying better managerial ability for screening of borrowers and supervision of loan disbursals, quality management can enhance asset quality by reducing NPA of individual banking entity. Hence, it is imperative to empirically investigate the significance of management quality for NPA.

In India, banking institutions are the primary financial intermediary and are suffering from declining asset quality due to escalating cases of NPA. For the first time since 1993-94, the banking sector as whole has suffered losses in the last two financial years (Ray, 2019). As informed by RBI through its report on trend and progress of banking sector, the overall loss noted by scheduled commercial banks in India stands at INR 233.97 billion for the FY 2017-18, which reached new height at 324.38 billion in FY 2018-19. Since, interest income generated from loan assets is the major source of revenue for banks, thus, NPA can be seen as the core reason for these heavy losses. As can be seen in Figure 1, according to the IMF report on Financial Soundness Indicators, India is having highest NPA ratio for the year 2017-18, as compared to other BRICS nations, except Russia. Also, for the same FY, other emerging countries like Argentina, Mexico, Saudi Arab, UAE and others have reported lesser NPA as compared to India.

Figure 1.

Country-wise Gross NPA ratio (2017-18)


The data issued by Indian banking regulator RBI, has also provided support in this regard. For the last few years, as shown in Figure 2, the banking industry of India has been facing the issue of unprecedentedly high NPA. After reaching at the peak in FY 2017-18, the situation in respect of gross NPA ratio has changed for good in FY 2018-19. However, the banking industry is still not out of danger and is facing gross NPA of about 9.46 percent.

Figure 2.

Gross NPA ratio in India (2004-2019)


Thus, the present study has been carried out with the motivation to examine if the quality of management has any role to play in the grave situation of rising bad loans. Even after so many attempts at reducing NPA, like huge capital infusion, insolvency and bankruptcy code etc., the problem is still standing tall, eroding banks’ profits and making people lose their confidence in the banking sector. Hence, there is need to find what actually is causing the issue of NPA to escalate or what can contribute in lowering the NPA accounts. Taking Total Quality Management (TQM) given by Banna et al., (2018), as the measure of management quality, the Indian banking sector has been studied over a period of 15 years.

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