Impact of NPAs on Bank Profitability: An Empirical Study

Impact of NPAs on Bank Profitability: An Empirical Study

Saurabh Sen (Sunbeam College for Women, India) and Ruchi L. Sen (Sunbeam College for Women, India)
DOI: 10.4018/978-1-4666-6268-1.ch020
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Abstract

NPA is a “termite” for the banking sector. It affects liquidity and profitability of the bank to a great extent; in addition, it also poses a threat to the quality of asset and survival of banks. The post-reform era has changed the whole structure of the banking sector of India. Now, the economy is not confined to the domestic boundary of the country. The core intention of economic reforms in India was to attract foreign investments and create a sound banking system. This chapter provides an empirical approach to the analysis of profitability indicators with a focal point on Non-Performing Assets (NPAs) of commercial banks in the Indian context. The chapter discusses NPA, factors contributing to NPA, magnitude, and consequences. By using an analytical perspective, the chapter observes that NPAs affected significantly the performance of the banks in the present scenario. On the other hand, factors like better credit culture, managing the risk, and business conditions led to lowering of NPAs. The empirical findings using observation method and statistical tools like correlation, regression, and data representation techniques identify that there is a negative relationship between profitability measure and NPAs.
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Kinds Of Npas

1. Gross NPA

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

Gross NPA ratio = Gross NPAs / Gross Advances

2. Net NPA

Net NPAs are those type of NPAs in which the bank deducts 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.

Net NPAs= Gross NPAs – Provisions/ Gross Advances – Provisions
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Categories Of Npas

The issue of NPA has given due importance after the Narasimham Committee report highlighted its impact on the financial health on the commercial banks and subsequently various asset classification were introduced (Mishra, 2011). It also suggested that for the purpose of provisioning, banks and financial institutions should classify their assets by into four broad groups.

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