Galloping Non-Performing Assets Bringing a Stress on India's Banking Sector: An Empirical Study of an Asian Country

Abstract

A well-organized and efficient banking system is an essential pre-requisite for the economic growth of every country. Galloping levels of Non-performing assets (NPAs) is one of the biggest problems faced by the Indian banking industry. The “stressed balance-sheet and bad-loan accounts” that have been hidden till now, would keep the NPA levels rising spread over 3-5 years. As on March 2015, gross NPAs stood at 4.6% and 5.17% of advances, while the stressed assets (NPAs restructured loans) were 13.2%. It is estimated that the total quantum of stressed assets is about Rs. 10,000 billion. Undoubtedly, mounting NPAs and bad loans in the banking sector have been the focus of media headlines, which is directly affecting their balance sheets (higher provisions), and impacting the economy as well. Concern about asset quality has been one of the biggest challenges for the Indian regulator too. The extent of the challenge for nationalized banks is that “non-action is no longer an option.” In fact, India is seeing a regulatory upheaval in the way the Government and RBI are addressing the present crisis. The efforts are visible, but the results may be achieved only on a medium- to long-term basis. We feel there is an urgent need to solve the rising levels of NPAs and put a roadmap to control the reasons which lead to creation of such high NPAs. Some estimates suggest that around 35-40% of the stressed assets will require being written-off, and hence, banks need to recapitalize to that extent.

This research paper explores an empirical approach to the analysis of NPA of public, private, and foreign sector banks in India. As part of this study, we have considered NPAs in Scheduled Commercial Banks, which includes 26 public-sector (nationalized) banks (PSBs), 5 private-sector scheduled banks (PVBs) and 10 scheduled foreign-banks (FBs), which are listed in the Second Schedule of the Reserve Bank of India Act, 1934. This study is based on data for sampled banks in India for a period of 5 years, from the FY ended 2010-2011 to FY ended 2015-2016. Some statistical tools have been used for analyzing the trend of NPAs of all banks in India. The present study is primarily qualitative, analytical and descriptive, which is based on secondary sources of data. Findings of our study reveals that “extent of NPAs is very high, specifically in PSBs, as compared to PVB and FBs. Some banks have already started adopting predictive and pre-emptive strategies to improve asset quality to minimize NPA levels, but still a lot needs to be done to curb this vicious problem. We suggested all banks to adopt and implement the regulator policy measures of RBI in “true-spirit and substance”; not just form.” Undoubtedly, the road to recovery is very long and winding, but bankers are optimistic that NPA situation will improve in the near future, albeit at a slow pace.

Keywords: Banks, Non-performing assets, stressed assets, assets quality, bad loans, restructured loans, impaired loans, public, private and foreign sector banks, RBI