Page 228 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 13: Non Performing Assets

Notes
To test whether there are significant differences among banks in terms a null hypothesis
has been framed. The null hypothesis that there is no significant difference among the
banks in terms of npa ratios has been framed. From Table 6 it can be inferred that there is
significant difference between the level of operating expenses and earning capacity between
banks at 1% level of significance. Similarly it has been observed that net profit on total
assets and net income on average equity has shown significant difference at 5 percent level
of significance.

Banks 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
259647 297350 352109 414989 480118 548437 632740 854214 1106128 1440146 1797504
Public
Sector
134769 42791 55742 67052 117075 138949 170900 218886 311985 414751 518402
Private
Sector
29313 29523 35617 38792 46757 52018 60507 75318 97555 126338 161133
Foreign
423729 369664 443468 520833 643950 739404 864147 1148418 1515668 1981235 2477039
Total
97425 108425 129034 150391 164537 189204 220516 284727 371679 482270 593722
SBI
Group
However no significant difference has been observed between the NPA ratios. Hence it
can be concluded that there is no significant difference in the level and trend of NPA’s
between SBI and its group.

The banks should retain staff working in NPA management cells for a sufficiency long
period to facilitate continuity in efforts to recover NPAs. Specialized teams should be
deployed for recovery of advances, which have turned in to NPAs. The NPAs can be
avoided at the initial stage of credit consideration by putting rigorous and appropriate
credit appraisal mechanism. This is in order to recover the NPA debt; the judicial systems
should revamp and is essential to enforce the SARFAESI act, with more stringer provisions
to realize the securities and personal assets of the defaulters. Regular training on advanced
techniques is necessary for personnel associated with the management of advances and
NPAs.
Question
Analyse the case and write down the case facts. Also provide a Regression Analysis of
NPAs from the case.
Source: Varde and Singh, “Matching Revenues and Costs in Commercial Banks”, Prajnam (NBM), Bombay
vol.x, no.3, pp.251-270.
13.8 Summary

Managing bad loans and keeping them at the lowest level has become a keyword for the
banking industry in recent years because it affects adversely financial health of a bank.

NPAs in the Indian banking system came into existence consequent to introduction of
prudential accounting norms. However, non-performing loans did exist even before the
introduction of the present norms and its proportion to gross advances stood at 17.91
percent as on March 31, 1994 and this soared to 23.5 percent as on March 31, 1994.

A slew of forces—both external and internal—contributed to high level of NPAs.
In recent years, particularly after economic reforms, there has been substantial decline in
level of NPAs in Indian banking system, touching an all time low level of 2.0 percent in
2009.

LOVELY PROFESSIONAL UNIVERSITY 223