An Empirical Study On EFFECT OF NON PERFORMING ASSETS ON PROFITABILITY OF BANK

AN EMPIRICAL STUDY
ON
EFFECT OF NON PERFORMING ASSETS ON

PROFITABILITY OF BANK
Submitted by
BHAVITHA KANIKANTI
15M00433
&
SAKET PRADEEP SANE
15M00438
Under the guidance of

Dr. JASKIRAN ARORA, ASSISTANT DEAN, SOM – BMU
In partial fulfillment for the award of degree

Of
MASTERS OF BUSINESS ADMINISTRATION
IN
ACCOUNTING AND FINANCE
SCHOOL OF MANAGEMENT
BML MUNJAL UNIVERSITY, GURGAON
2015-2017
CERTIFICATE
This is to certify that Bhavitha Kanikanti (15M00433) & Saket Pradeep Sane (15M00438)
students of the program Masters in Business Administration from the institute BML Munjal
University has completed their Empirical Research on Indian Banking Sector from 1st August,
2016 to 21st March, 2017.
This work entitled “EFFECT OF NON PERFORMING ASSETS ON PROFITABILITY OF
BANK” has been completed by Bhavitha Kanikanti & Saket Pradeep Sane for the partial
fulfillment of the course.
Dr. Jaskiran Arora

Assistant Dean
BML Munjal University
EMPIRICAL RESEARCH PAPER | BML MUNJAL UNIVERSITY | MBA 2015-17 2

DECLARATION
We hereby declare that the project titled ‘EFFECT OF NON PERFORMING ASSETS ON
PROFITABILITY OF BANK’ is our own work to the best of our knowledge and belief. It
contains no material which to substantial extent has been accepted for the award of any other
degree, diploma or programme of any other institute, except where due acknowledgement has been
made in text
Bhavitha Kanikanti
15M00433
Saket Pradeep Sane Date: 21st March, 2017

15M00438

ACKNOWLDEGEMENT
We take this opportunity with pleasure to thank everyone who has helped us throughout the course
of our journey towards completing the project ‘EFFECT OF NON PERFORMING ASSETS
ON PROFITABILITY OF BANK’. We sincerely thank our faculty mentor Dr. Jaskiran Arora
(Professor– Accounting and Finance), Assistant Dean, BML Munjal University for having the
faith in us for the completion of this project and also for her guidance, help and constant review.
We would also like to take this opportunity to thank Dr. Anil Kumar (Professor – Decision
Sciences) for giving us guidance during the process of research, and we are sincerely tankful
toward this esteemed university for providing such wonderful & enlightening opportunity.
Bhavitha Kanikanti
15M00433
Saket Pradeep Sane Date: 21st March, 2017

15M00438

ABSTRACT
The purpose of this study is to correlate and quantify the impact of non-performing assets over
profitability of Indian scheduled banks. Secondary data was acquired in order to perform
regression analysis from the period 2004-05 to 2014-15, for finding out the result it was
necessary to assess the variables that projects the profitability of banks they are – Net Interest
Margin, Return on Assets and Return on Equity which were dependent and independent variables
were Net NPA to Net advances ratio & Gross NPA to Gross advances ratio. From this study it
was found that NPA has an adverse effect on profitability of banks as the ratios of independent
variables sores it decreases the ratios of dependent variable.
Keywords: Return on Assets, Asset Quality, Non-performing assets, Banks, Return on Equity, India,
Scheduled Banks, Net Interest Margin, Profitability

TABLE OF CONTENTS
INTRODUCTION .......................................................................................................................... 7
Non-Performing Assets: .............................................................................................................. 8
Gross NPA: ................................................................................................................................. 9
Net NPA: ..................................................................................................................................... 9
Causes for NPA: .......................................................................................................................... 9
LITERATUE REVIEW ................................................................................................................ 11
Objectives of the study: ............................................................................................................. 12
RESEARCH METHODOLOGY.................................................................................................. 13
Null Hypothesis (H01): .............................................................................................................. 13
Null hypothesis (H02): ............................................................................................................... 13
DATA ANALYSIS & INTERPRETATION................................................................................ 16
ROA to Net NPA / Net Advance Ratio: .................................................................................... 16
ROA to Gross NPA/ Gross Advance Ratio: ............................................................................. 17
ROE to Gross NPA/ Gross Advance Ratio: .............................................................................. 18
ROE to Net NPA / Net Advance Ratio: .................................................................................... 19
NIM to Gross NPA/ Gross Advance Ratio: .............................................................................. 21
NIM to Net NPA / Net Advance Ratio: .................................................................................... 22
CONCLUSION ............................................................................................................................. 23
RECOMMENDATIONS .............................................................................................................. 24
LIMITATION OF STUDY........................................................................................................... 25
ABBREVIATIONS ...................................................................................................................... 26
APPENDIX ................................................................................................................................... 27
REFERENCES ............................................................................................................................. 29

INTRODUCTION
Banking and financial sector plays a vital role in the economic development of an economy. This
sector got high priority in the globalization era and due to the global slowdown Indian banking
sector is facing hurdles. For this study we took scheduled banks as they form a major part of
Indian banking sector, a flow is presented below to provide an overview of bifurcation of Indian
banking system.
Reserve Bank of
India (Central
Bank)
Scheduled
Banks
Commercial Co-operative
Banks Banks
Foreign Banks State Co-

operative Banks
Regional Rural Urban Co-

Banks operative Banks
The major concern of banks is Non-Performing assets. Bank’s profitability and earning capacity
is highly affecting because of this NPAs. In 2002 Parliament passed the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act which is meant for
reduction and elimination of NPAs in banks. But this act

doesn’t ensure the full recovery of outstanding dues. Still India is working bankruptcy law to
tackle this issue as these NPAs are major concern for the economic growth of any bank and this
affects the smooth of credit, which is the prime duty of a bank.
NPA has transpired over two decades as an alarm threat to the Indian banking and finance sector
giving painful and stressful signals on the endurability and sustainability of the affected banks.
Earlier focus of banks were majorly on branch networking and extending credit facility, later on
focus diverted to effective risk management and asset quality improvisation. Narasimham
committee-I concluded that profitability of Indian commercial banks were reduced due to
priority sector lending which is finally leaded to NPAs. Narasimham committee-II highlighted
the importance and need of ‘Zero NPAs’ for all banks in India with international presence.
Non-Performing Assets:
Non- Performing asset is an asset which is due by borrower for a period of 180 days i.e. 6
months in the form of principal and interest. But with effect from March 2004, the default status
would be awarded if borrower’s due is for 90 days i.e. 3 months. Therefore NPA will not yield
any income to a bank.
Accordingly, as from 31 March, 2001 NPA shall be an advance where-

st
 Term-loan which is due for more than 180 days whether is interest or principal
installment or both
 An account in respect of cash credit/ overdraft remains out of order for more than 180
days
 In case of bill discount and purchase, if it remains due for more than 180 days
 Advance granted in case of agricultural purpose, if principal or interest or both remained
due for two harvest seasons of a period not exceeding two and half years

 In respect of any other accounts, amount due for more than 180 days
NPAs are classified into two categories:
Gross NPA:
According to the guidelines of RBI, gross NPA is the sum of all loan assets consists of
sub-standard, doubtful and loss assets (which are non-standard assets) as on balance sheet
date. The quality of loans will reflected by gross NPA. The ration for Gross NPA ratio is
calculated as follows:
Gross NPA = Gross NPAs / Gross Advances
Net NPA:
Net NPAs are those NPAs where banks deducts provisions. These are the actual burden
to the banks. Net NPAs are calculated as follows:
Net NPAs= Gross NPAs – Provisions- Provisions/Gross Advances
Causes for NPA:

 Internal Factors:
 Business development failure such as weak marketing about particular products or
services
 Weak or inefficient or careless management
 Product obsolescence
 ·Indiscrete technology
 ·Diversification, new projects undertaking, expansion of business
 · Lack of fraud risk management

 · Slackness in monitoring and credit management
 External Factors:
 Compulsory sector wise allocation of credit disbursements after nationalization of
banks
 Impelled credit to not very profitable sectors as per Federal policy
 Belief of agricultural sector that successive governments will written off the loans
 Keeping substandard assets as the value which has low realization value
 Insufficient securities to cover loans in calls of timings
 Credit to small scale industries who were not sure of their performance for the extent
of returning the loan
 No or not up to the mark efforts by banks in collection of loans and advances
 Loans and advances to those parties are not capable to payback and have political
support
 Due to lack of vision during sanction of credit limits
 Providing hasty advances and loans to achieve targets
 Changes in economic policies
 Inadequate legal provisions on bankruptcy and foreclosure and lack of proper
corporate culture and corporate governance
 Weak credit appraisal system

LITERATUE REVIEW
Charan Singh’s research papers “Stressed assets and banking in India” states that there is a
substantial increase in stressed assets in public sector banks. Global factors, defencies in
governance, political interferences and ethical issues like mal-intentions, misconduct by
borrowers are the factors which had led to deterioration in assets quality of banks. (Singh &
Brar, Stressed Assets and Banking in India, 2016). Ashis Satpathy, Samir Ranjan Behera,
Sabat Kumar Digal’s research paper “Macroeconomic factors affecting the NPAs in the
Indian Banking System: An Empirical Assessment” states that Fiscal deficit, growth in GDP
of India and an increase in balance of trade reduces NPAs and inflation increases the NPAs
level. (Satpathy, Behera, & Digal, 2015). Kranti Walia, Prabhjot Kaur’s research paper
“Performance evaluation of the Indian banking sector: A study of selected Commercial
banks” states that factors which affect profitability are deposits, advances, operating
expenditure, spread etc. These factors collectively explain 94.5% variance in the net profit as
a percentage of total assets of the banks. (Walia & Kaur, 2015). Research paper “NPA in
Indian banking sector: Impact on Profitability” states that
 Extent of NPAs in public sector banks is high.
 Increase in advances over the period but decline in ratio of NPAs indicates asset
quality improvement.
 The prudential norms and other schemes has rushed banks to improve their
performance. (A., 2012)
Dr. Madan Lal Bhasin’s research paper “An Empirical study of Frauds in the banks” states that
poor employment practices and lack of effective training, overburdened staff, weak internal

control systems and low compliance levels on the part of Bank managers, offices and clerks.
(Bhasin & Lal, 2015). Charan Singh, RBI chair professor. Deepanshu Pattanayak, Divyesh
Satishkumar Dixit, Kiran Antiny, Mohit Agarawala, Ravit Kant’s research paper “Frauds in the
Indian Banking Industry” states that
 In terms of number of frauds, public banks are better than private banks.
 Credit related frauds have maximum impact in all banking frauds in India.
 The root cause identified is lack of specialized financial sleuths with knowledge of
nuances of forensic accounting. (Singh, et al., 2016)
Rosalind Wright's research paper "Developing effective tools to manage the risk of damage
caused by economically motivated crime fraud" states that business does not accord sufficient
recognition to the risks posed by ECM and accordingly fails to manage those risks. Models for a
Fraud Policy and a Fraud Policy Statement are set out and a higher priority for fraud on the
Government agenda for policing is advocated. (Wright, 2007). Nishant Agarwal and Meghna
Sharma's research paper "Fraud Risk Prediction in Merchant-Bank. Relationship using
Regression Modeling” states that the PF model is expected to act as a tool for acquiring banks in
both analyzing as well as strategizing for credit risk arising from the merchant side. (Agarwal &
Sharma, 2013)
Objectives of the study:
i. To analyze the impact of non-performing assets on the profitability of banks.
ii. To evaluate the impact of non-performing assets on profitability with other variables

RESEARCH METHODOLOGY
Our study was based data collected from secondary sources i.e. annual publications from the
Reserve Bank of India (RBI) website. The study g-has been made from the financial year 2004-
05 to 2014-15. The methodology used form the analysis is Regression analysis to find out the
impact on profitability of the scheduled commercial banks in India because of NPAs. Different
variables such as Return on Equity, Return on Assets and Net interest margin are considered to
measure the profitability of the scheduled commercial banks. Net NPA to Net Advances ratio
and Gross NPA to Gross Advances ratio are used to measure the NPAs. In this study of
regression model, the dependent variable is profitability while the independent variable is
measures of NPA. The hypothesis which were tested and formulated during the present study are
as follows:
Null Hypothesis (H01):

There is no correlation or relationship between Gross NPA to Gross Advances ratio & Return on
assets.
Regression Model 1
Return on Asset = 𝛼 + 𝛽. Z1 + µ
Here Return on Assets is dependent variable & Z1 is ratio of Gross NPA & Gross Advances
Null hypothesis (H02):

There is no correlation or relationship between Net NPA to Net Advances ratio & Return on
assets.
Regression Model 2:
Return on Asset = 𝛼 + 𝛽. Z1 + µ
Here Return on Assets is dependent variable & Z1 is ratio of Net NPA & Net Advances.

There is no correlation or relationship between Gross NPA to Gross Advances Ratio & Return
on equity.
Regression Model 3:
Return on Equity = 𝛼 + 𝛽. Z1 + µ
Here Return on Equity is dependent variable & Z1 is ratio of Gross NPA & Gross Advances.

There is no correlation or relationship between Net NPA to Net Advances ratio & Return on
equity.
Regression Model 4:
Return on Equity = 𝛼 + 𝛽. Z1 + µ
Here Return on Equity is dependent variable & Z1 is ratio of Net NPA & Net Advances.

There is no correlation or relationship between Gross NPA to Gross Advances ratio & Net
Interest margin.
Regression Model 5:
Net Interest Margin = 𝛼 + 𝛽. Z1 + µ
Here Net Interest Margin is dependent variable & Z1 is ratio of Gross NPA & Gross Advances
ratio.

There is no correlation or relationship between Net NPA to Net Advances ratio & Net Interest
margin.
Regression Model 6:
Net Interest Margin = 𝛼 + 𝛽. Z1 + µ

Here Net Interest Margin is dependent variable & Z1 is ratio of Net NPA & Net Advances ratio.
The analysis of the Data has been carried out using SPSS 20.0 software.

DATA ANALYSIS & INTERPRETATION
Following tables are the output of the analysis performed using data gathered from secondary
source and the interpretation of the output are followed by respective table.
ROA to Net NPA / Net Advance Ratio:
Table 1
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.

Coefficients
B Std. Error Beta
(Constant) 1.275 .105 12.141 .000

1 Net NPA to Net Advance
-16.503 6.922 -.622 -2.384 .041
Ratio
a. Dependent Variable: ROA
Model Summaryb
Model R R Adjusted R Std. Error Change Statistics Durbin-

Square Square of the R Square F df1 df2 Sig. F Watson
Estimate Change Change Change
1 .622a .387 .319 .11235 .387 5.684 1 9 .041 2.127
a. Predictors: (Constant), Net NPA to Net Advance Ratio

b. Dependent Variable: ROA
Interpretation:
Table 1 shows the regression analysis results where Net NPA to Net Advances Ratio is the
independent variable and Return on Assets is the dependent variable. The f value is found to be
5.684 which is significant 5% level of significance. Thus it can be inferred that there is
significant relationship between Net NPA to Net Advances Ratio and Return on Assets. From
this we can infer that a significant regression analysis model has been emerged. The value of R

square is .387 which indicates that the ratio of Net NPA to Net Advances infers that the 38.7% of
the total variance in the value of return on assets. The other factors contribute to the remaining
61.3%. Thus from this we can infer that non- performing asset has a significant effect on Indian
scheduled banks. The negative sign of coefficient in the regression analysis states that there is a
negative relationship between Net NPA to Net Advances to Return on Assets. Thus it can be
concluded that NPA and profitability have an inverse relationship and if the amount of NPAs
increases then it would have reverse effect on profitability of Indian commercial banks.
ROA to Gross NPA/ Gross Advance Ratio:
Table 2
Coefficientsa

Coefficients
B Std. Error Beta
(Constant) 1.275 .135 9.421 .000

1 Gross NPA to Gross
-7.575 4.159 -.519 -1.822 .102
Advance Ratio
a. Dependent Variable: ROA
Model Summaryb
Model R R Adjusted Std. Error Change Statistics Durbin-

Square R Square of the R Square F df1 df2 Sig. F Watson
1 .519a .269 .188 .12267 .269 3.318 1 9 .102 1.795
a. Predictors: (Constant), Gross NPA to Gross Advance Ratio

b. Dependent Variable: ROA
Interpretation:

Table 2 shows the results of regression analysis where Gross NPA to Gross Advances Ratio is
the independent variable and return on assets is the dependent variable. The f value found to be
3.318 which is significant when compared to 5 % level of significance. Thus from this it can be
inferred that there is significant relationship between Gross NPA to Gross Advances Ratio to
Return on Assets. From this we can infer that a significant regression analysis model has been
emerged. The value of R square is .269 which indicates that the ratio of Net NPA to Net
Advances infers that the 26.9% of the total variance in the value of return on assets. The other
factors contribute to the remaining 73.1%. Thus from this we can infer that non- performing
asset has a significant effect on Indian scheduled banks. The negative sign of coefficient in the
regression analysis states that there is a negative relationship between Gross NPA to Gross
Advances to Return on Assets. Thus it can be concluded that NPA and profitability have an
inverse relationship and if the amount of NPAs increases then it would have reverse effect on
profitability of Indian commercial banks.
ROE to Gross NPA/ Gross Advance Ratio:
Table 3
Coefficientsa

Coefficients
B Std. Error Beta
(Constant) 17.210 2.146 8.020 .000

1 Gross NPA Gross Advance
-87.882 65.916 -.406 -1.333 .215
Ratio
a. Dependent Variable: ROE

Model Summaryb

1 .406a .165 .072 1.94442 .165 1.778 1 9 .215 1.097
a. Predictors: (Constant), Gross NPA Gross Advance Ratio

b. Dependent Variable: ROE
Interpretation:
Table 3 shows the results of regression analysis where Gross NPA to Gross Advances Ratio is
independent variable and return on equity is the dependent variable. The f value found to be
1.778 which is not significant when compared to 5 % level of significance. Thus from this it can
be inferred that there is no significant relationship between Gross NPA to Gross Advances Ratio
to Return on Equity. From this we can infer that a significant regression analysis model has been
emerged. The value of R square is .165 which indicates that the ratio of Gross NPA to Gross
Advances infers that the 16.5% of the total variance in the value of return on equity. The other
factors contribute to the remaining 83.5%. Thus from this we can infer that non- performing
asset has a no significant effect on Indian scheduled banks. The negative sign of coefficient in
the regression analysis states that there is a negative relationship between Gross NPA to Gross
Advances to Return on Equity. Thus it can be concluded that return on equity has a negative but
insignificant relationship with the gross NPA to Gross Advances Ratio.
ROE to Net NPA / Net Advance Ratio:
Table 4
Coefficientsa

Coefficients
B Std. Error Beta
(Constant) 18.421 1.418 12.995 .000

-275.881 93.419 -.702 -2.953 .016
Ratio
a. Dependent Variable: ROE

Model Summaryb

1 .702a .492 .436 1.51636 .492 8.721 1 9 .016 1.844

b. Dependent Variable: ROE
Interpretation:
Table 4 shows the regression model analysis where the return on equity is the dependent variable
and Net NPA to Net advances ratio. The f value is 8.721 which states that it is significant. Thus it
can be inferred that there is a significant relationship between Net NPA to Net advances ratio and
Return on Equity. Thus it can be inferred that significant model has been emerged from the
regression analysis. The value of R square from the analysis is .492 which indicates that the
49.2% of total variance in the value of Return on equity with respect to Net NPA to Net
advances. 50.8% of the total variance in the value of return of equity contributes from the
remaining factors. Thus from this it can be inferred that NPAs has an impact on the profitability
of Indian scheduled banks. The negative sign of regression coefficient indicates that there is a
negative relationship between Net NPA to Net advances ratio and return on equity. Thus from

this we can infer that Net NPA and profitability have an inverse relationship and impact will be
more adverse on profitability of Indian commercial banks with the increase in NPAs.
NIM to Gross NPA/ Gross Advance Ratio:
Table 5
Coefficientsa

Coefficients
B Std. Error Beta
(Constant) 2.767 .207 13.391 .000

1 Gross NPA to Gross
2.974 6.347 .154 .469 .651
Advance Ratio
a. Dependent Variable: NIM

Model Summaryb

Square Square of the Watson
R Square F df1 df2 Sig. F
Estimate
Change Change Change
1 .154a .024 -.085 .18723 .024 .220 1 9 .651 .948
a. Predictors: (Constant), Gross NPA to Gross Advance Ratio
b. Dependent Variable: NIM
Interpretation:
Table 5 shows the regression model analysis where the Net Interest Margin is the dependent
variable and Gross NPA to Gross advances ratio is independent variable. The f value is .220
which states that it is insignificant. So, it can be concluded that there is no significant
relationship between Net Interest Margin and Gross NPA to Gross advances ratio, and even there
is negative relationship between them.

NIM to Net NPA / Net Advance Ratio:
Table 6
Coefficientsa

Coefficients
B Std. Error Beta
(Constant) 2.977 .172 17.278 .000

-8.141 11.355 -.232 -.717 .492
Ratio
Model Summaryb
Model R R Adjusted Std. Error Change Statistics Durbin-

Square R Square of the Watson
R Square F df1 df2 Sig. F
Estimate
Change Change Change
1 .232a .054 -.051 .18431 .054 .514 1 9 .492 .913
b. Dependent Variable: NIM
a. Dependent Variable: NIM
Interpretation:
Table 6 shows the regression model analysis where the Net Interest Margin is the dependent
variable and Net NPA to Net advances ratio is independent variable. The f value is .514 which
states that it is insignificant. So, it can be concluded that there is no significant relationship
between Net Interest Margin and Net NPA to Net advances ratio, and even there is negative
relationship between them.

CONCLUSION
From the study we can conclude that NPA have an adverse effect or impact on the profitability
of the Indian Scheduled banks. The main variable that were used to assess profitability were
return on equity & return on assets which were negatively and significantly related to the ratio of
Net NPA and Net Advances, whereas the relation between NIM and Net NPA to Net Advances
ratio is found to be insignificant but negatively related to each other. In same way, ROA is
negatively related to ratio of Gross NPA & Gross Advances Ratio. Thus in a nutshell it could be
concluded that there is a negative relation between the NPA and the profitability of Banks, so if
the NPAs increases the profitability of banks decreases and vice-versa. It has also been found
form the data and trends that the NPAs of the banks have increased during course of years and
the banks have witnessed the sharp rise in NPAs after 2009 global economic crisis.

RECOMMENDATIONS
1. Loan recovery methods should be improved and strengthened
2. Regular interval checks need to made and follow up with the customers should be in proper
time and regular intervals
3. Monitoring systems and credit appraisals system should be revised by RBI
4. Close monitoring should be done for those who had disbursal of credit
5. Proper and regular monitoring should be made regarding operations
6. Involving low level management in the decision making process will make working of
banking system more effectively
7. Proper training need to be provided to the employees of the bank for the recovery of the
dues
8. Suggesting borrowers and becoming their personal portfolio manager will develop a good
relationship with the customers and as well as banks will be able to track the flow of
funds of an individual
9. RBI should disclose the details of fraudsters and the penalty being imposed on them, which
may cause alarm in banking system and as well in the society.

LIMITATION OF STUDY
The limitation of the study is that it only measures the impact, correlation or relation between
NPA and profitability of the Scheduled banks but it misses out the impact of NPA on NBFCs
which also holds a good share In Indian financial economy. As per this study it provides result
on the basis of ten years data (2004-05 to 2014-15) and there is a possibility that it could provide
different result in future after considering future financial scenarios. This study took few ratios to
reach up to conclusion, which could not be enough as there could be more qualitative factors
which might affects the profitably of banks.

ABBREVIATIONS
 ROA = Return On Assets
 ROE = Return On Equity
 NIM = Net Interest Margin
 NPA = Non Performing Asset
 Net NPA = Gross NPAs – Provisions- Provisions/Gross Advances
 Gross NPA = Gross NPAs / Gross Advances
 RBI = Reserve Bank of India

APPENDIX
Net Advances and Net NPA of Scheduled Banks Amount in (₹ billions)
3000
2500
2000
1500
2001 -02 2002 - 03 2003 -04 2004 - 05 2005 -06 2006 -07 2007 -08 2008 -09 2009 - 10 2010 -11 2011 - 12 2012 - 13 2013 - 14
Gross NPAs (Amount ) Net NPAs (Amount )

Gross Advances and Gross NPA of Scheduled Banks Amount in (₹ billions)
12
10
Gross NPAs (Percentage) Net NPAs (Percentage)

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Ashis Satpathy, S. R. (2015). Macroeconomic factors affecting the NPAs in the Indian Banking System: An
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Modar Adullatif, S. K. (2013). The role of internal auditing in Risk management: Evidence from banks in
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Rupa Rathee, D. K. (2015). Non-Performing assets in State Bank of India. Global Journal of Enterprise
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AN EMPIRICAL STUDY

EFFECT OF NON PERFORMING ASSETS ON

Under the guidance of

In partial fulfillment for the award of degree

2016 to 21st March, 2017.

This work entitled “EFFECT OF NON PERFORMING ASSETS ON PROFITABILITY OF

fulfillment of the course.

Dr. Jaskiran Arora

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Saket Pradeep Sane Date: 21st March, 2017

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Saket Pradeep Sane Date: 21st March, 2017

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variables sores it decreases the ratios of dependent variable.

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Foreign Banks State Co-

Regional Rural Urban Co-

reduction and elimination of NPAs in banks. But this act

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affects the smooth of credit, which is the prime duty of a bank.

any income to a bank.

Accordingly, as from 31 March, 2001 NPA shall be an advance where-

 Advance granted in case of agricultural purpose, if principal or interest or both remained

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NPAs are classified into two categories:

Gross NPA = Gross NPAs / Gross Advances

to the banks. Net NPAs are calculated as follows:

Net NPAs= Gross NPAs – Provisions- Provisions/Gross Advances

Causes for NPA:

 Business development failure such as weak marketing about particular products or

 Weak or inefficient or careless management

 ·Diversification, new projects undertaking, expansion of business

 · Lack of fraud risk management

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 Compulsory sector wise allocation of credit disbursements after nationalization of

 Impelled credit to not very profitable sectors as per Federal policy

 Insufficient securities to cover loans in calls of timings

of returning the loan

 No or not up to the mark efforts by banks in collection of loans and advances

 Due to lack of vision during sanction of credit limits

 Providing hasty advances and loans to achieve targets

 Changes in economic policies

 Inadequate legal provisions on bankruptcy and foreclosure and lack of proper

corporate culture and corporate governance

 Weak credit appraisal system

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governance, political interferences and ethical issues like mal-intentions, misconduct by

“Performance evaluation of the Indian banking sector: A study of selected Commercial

Indian banking sector: Impact on Profitability” states that

 Extent of NPAs in public sector banks is high.

performance. (A., 2012)

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Indian Banking Industry” states that

nuances of forensic accounting. (Singh, et al., 2016)

Sharma's research paper "Fraud Risk Prediction in Merchant-Bank. Relationship using

Objectives of the study:

i. To analyze the impact of non-performing assets on the profitability of banks.

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Null Hypothesis (H01):

Null hypothesis (H02):

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Null hypothesis (H04):