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Measurement of correlations (NPA and ROA) of different banks and trend analysis of NPAS in Indian banks
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The aim of this project is to analyze the non-performing assets, net NPAs and gross NPAs of 8 banks in India and to see the relation between net profit, net NPAs and gross NPAs.

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Measurement of correlations (NPA and ROA) of different banks and trend analysis of NPAS in Indian banks

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  1. International Journal of Management (IJM)
    Volume 8, Issue 6, Nov–Dec 2017, pp. 81–88, Article ID: IJM_08_06_010
    Available online at
    http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=6
    Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com
    ISSN Print: 0976-6502 and ISSN Online: 0976-6510
    © IAEME Publication

    MEASUREMENT OF CORRELATIONS (NPA
    AND ROA) OF DIFFERENT BANKS AND TREND
    ANALYSIS OF NPAS IN INDIAN BANKS
    Parishwang Piyush
    PGDM First Year (Finance),
    Institute of Management Technology, Ghaziabad, India

    Shalki Goel
    PGDM First Year (Finance),
    Institute of Management Technology, Ghaziabad, India

    ABSTRACT
    A Non-performing asset is a loan or advance for which the principal or interest
    payment remained long overdue over a period of 90 days. NPAs are point of no return
    as they do not generate any income, whereas, the banks are required to make provisions
    such as assets. The aim of this project is to analyze the non-performing assets, net NPAs
    and gross NPAs of 8 banks in India and to see the relation between net profit, net NPAs
    and gross NPAs. The annual reports for the period of 3 years from 2014-2015 to 2016-
    2017 of these banks have been used in this project. Correlation is used for the relation
    between net profit and net NPA. The result is that it is positive for private sector bank
    that is HDFC and negative for public sector banks and they are SBI, PNB, Union Bank,
    United Bank, UCO Bank, Bank of India and Bank of Baroda.
    Key words: Reliability, Spiritual Intelligence, Validity, Work Performance.
    Cite this Article: Parishwang Piyush and Shalki Goel, Measurement of Correlations
    (NPA and ROA) of Different Banks and Trend Analysis of NPAS In Indian Banks.
    International Journal of Management, 8 (6), 2017, pp. 81–88.
    http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=6

    1. INTRODUCTION
    For the management of billions of assets in the world, the banking system is a crucial
    component of the global economy. While money exchange may be as old as money, but the
    banking system dates back to 15th century medieval Italy and played a major role in the rise of
    the Italian states. Ever since, the health of an economy and the health of its banks have been
    interrelated. The number of banks in India in 1951 were the highest-566. In 1960, RBI was
    empowered to force the compulsory merger of the weak banks with the strong ones. This led to
    reduction in the number of banks to 89 in 1969. In 1980, the number of nationalized banks were

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  2. Parishwang Piyush and Shalki Goel

    20. On the suggestions of the Narsimha Committee, the Banking Regulation Act was amended
    in 1993 and thus the gates on new private banks were opened. Banking system performs
    different functions, depending on the network of institutions. For example, payment and loan
    functions at commercial banks allow people to deposit funds and use checking accounts and
    debit cards to pay bills. Central banks distribute currency and establish money-related policies.
    One big cause of concern for the banking industry is growing NPAs. Loans don’t go bad right
    away. Most banks allow customers a certain grace period. After a certain number of days, the
    loan is classified as non-performing. A bank will try to recoup its money by foreclosing on the
    property that secures a loan. This is a highly contentious issue not just with banks but also
    Micro-finance institutions. This project analyses the two types* of NPAs- Gross NPAs and Net
    NPAs and Net Profit and it is done using the annual reports of 2014-2015 to 2016-2017.
    Correlation is used to find the relation between net profit and net NPA. Also trend of the given
    years for Gross NPA and Net NPA is analyzed. Overall result shows that both the Gross NPAs
    and Net NPAs have increased during the given time period. The correlation between Gross
    NPA and Net NPA is negative for all public sector banks whereas it is positive for private sector
    bank.

    2. LITERATURE REVIEW
    The issue of NPAs is not a recent issue and a number of studies have been conducted to analyze
    real time scenario in the Indian economy.
    Vivek Rajbahadur Singh in A Study of Non-Performing Assets of Commercial Banks and its
    recovery in India, status of Non-Performing Assets and of Indian Scheduled Commercial Banks
    and their impact on banks have been studied. Suggestions to avoid future NPAs and recovering
    the existing NPAs through various channels have been given. They have considered NPAs in
    Scheduled Commercial Banks which includes public sector, private sector and foreign banks
    which are listed in the Second Schedule of the Reserve Bank of India Act, 1934.
    Dr. Sonia Narula and Monika Singla in Empirical Study on Non-Performing Assets of Bank
    have assessed the non-performing assets of Punjab National Bank and the impact on
    profitability and the relation between total advance, net profit, gross & net NPA. The study uses
    the annual reports of Punjab National Bank for the period of six years from 2006-07 to 2011-
    12.
    Mayur Rao and Ankita Patel in A Study on Non-Performing Assets Management With
    Reference to Public Sector Banks, Private Sector Banks and Foreign Banks in India have
    considered the aggregate data of public sector, private sector and foreign banks and have
    compared, analyzed and interpreted the NPA management from the year 2009-2013. It is
    revealed that the percentage of Gross NPA to Gross Advances is increasing for the public banks,
    ratio of Loss Advances to Gross Advances are higher in foreign banks, the estimated Gross
    NPA for 2014 is more for public banks as compared to private banks and foreign banks and
    from the ANOVA test, it is concluded that ratio of Gross NPA to Gross Advances for public
    sector, private sector and foreign banks does have significant difference between 2009 to 2013.
    Lavina and Kulbir Singh Guleria in A Study of Non-Performing Assets of Public Sector
    Banks in India have worked on NPA problems, understanding the magnitude and causes of
    NPA problem and its effect on economy. Conclusions have been drawn as to what should be
    done to improve the situation of increasing NPAs in the economy.
    Srinivas K T in A Study on Non-Performing Assets of Commercial Banks in India have studied
    the reasons for advances becoming NPA in the Indian commercial banking sector and have
    given suitable suggestion to overcome the mentioned problem. This study is confined and
    restricted to the boundary of commercial banks and data is analyzed from 1996-97 to 2011-12.

    http://www.iaeme.com/IJM/index.asp 82 editor@iaeme.com

  3. Measurement of Correlations (NPA and ROA) of Different Banks and Trend Analysis of NPAS In
    Indian Banks

    3. OBJECTIVES OF THE STUDY
    Two questions were identified to guide the study:
    • To analyze whether SISRI is a valid measure of spiritual intelligence in the Indian scenario.
    • To identify the relationship, if any, between spiritual intelligence and the organisational
    outcome variable − work performance.

    4. THEORY
    A Non-Performing Asset refers to a classification for loans on the books of financial institutions
    that are in default or are in arrears of scheduled payments of principal or interest. In most cases,
    debt is classified as non-performing when loan payments have not been made for a period of
    90 days. While 90 days of nonpayment is the standard period of time for a debt to be categorized
    as non-performing, the amount of elapsed time may be shorter or longer depending on the terms
    and conditions set forth in each loan. There are many reasons which led to NPA growth in India.
    Time period 2000-2007 was a period of economic boom. Indian economy along with the world
    was going leap and bound during this time. To sustain this economic growth, large amount of
    money was pumped in the energy and infrastructure sector. But these sectors have long
    gestation period. With the advent of 2008 financial crisis, economies around the world slowed
    down. India too did not remain untouched. This economic slowdown adversely affected those
    long gestation periods thus started defaulting. Government slow response and red tapism have
    also aggravated the problem. Profitable projects due to the passage of time and growing cost
    became infeasible and defaulted on loans. Political interference and nepotism have also added
    to the NPAs. Political pressures were misused for getting loans without proper paper work.
    Priority sector lending and loan waiver (mainly to farmers) have also added to the menace. The
    government has over the years enacted and tweaked stringent rules to recover assets of
    defaulters. The Securitization and Reconstruction of Financial Assets and Enforcement of
    Security Interest Act or SARFAESI ACT 2002 was implemented in 2016. Experts have pointed
    out that the NPA problem has to be tackled before the time a company starts defaulting. This
    needs a risk assessment by the lenders and red-flagging the early signs of a possible default.
    RBI has over the past few decades come up with a number of schemes such as corporate
    debt restructuring(CDR), formation of joint lenders’ forum(JLF), flexible structuring for long
    term project loans to infrastructure (or 5/25 scheme), strategic debt restructuring(SDR) scheme
    and sustainable structuring of stressed assets (S4A) to check the menace of NPAs. In many
    cases the companies have failed to make profits and defaulted even after their loans were
    restructured.
    The government is set to promulgate an Ordinance to help banks tackle the menace of
    mounting bad loans, which is denting profits of lenders, slowing credit flow to industry and
    hurting the economy. The cabinet approved promulgation of an ordinance to amend the Banking
    Regulation Act to speed up recovery of bad loans. The move comes after clarion calls from
    lenders who have been jostling with stressed assets mounting to about Rupees 10 lakh crore or
    close to 7% of India’s GDP, as of December,2016 end. The Banking Regulation Act may be
    amended to give RBI more powers to monitor bank accounts of big defaulters. The amendment
    in the banking law will enable setting up of a committee to oversee companies that have been
    the biggest defaulters of loans. Emboldened by the Banking Regulation Amendment
    (Ordinance), the Reserve Bank of India is expected to push for resolution of bad loans worth
    about rupees 8 lakh crore by March 2019, a move that could bring down the non-performing
    assets and improve the financial health of banks, a study by ASSOCHAM said. Although entire
    NPAs could be put on the altar of Insolvency and Bankruptcy Code (IBC) resolution
    mechanism, it has to be seen how much and how fast they actually go out from the balance
    sheets of banks which at this point of time seem very stressed.

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  4. Parishwang Piyush and Shalki Goel

    Present NPA Scenario: According to the latest information collated by the government,
    stressed assets which includes both non-performing assets as well as restructured loans of banks
    stood at Rupees 9.64 lakh crore as on December31, 2016. In December, RBI’s financial stability
    report said the gross non-performing advances (GNPAs) ratio of all banks increased to 9.1%
    by September 2016 from 7.8% in March 2016. RBI’s stress test of the banking sector indicated
    that GNPA ratio may increase from 9.1% in September 2016 to 9.8% March 2017 and further
    to 10.1% by March 2018. PSU Banks are worst hit as their GNPA may increase to 12.5% by
    March 2017 and then to 12.9% in March 2018, from 11.8% in September 2016.

    5. ABOUT THIS PROJECT
    This project was started with the aim to study the present situation of non-performing assets in
    India. For this objective, data of 3 consecutive financial years was considered to make a
    comparison of the various banks of the industry in the country. Method of correlation is used
    to find relation between net NPAs and net profit. Also a trend analysis is done for the gross
    NPAs. The result comes out to be positive correlation for private sector bank i.e. HDFC bank
    and negative for public sector banks – SBI, PNB, Union bank, United bank, UCO bank, Bank
    of India and Bank of Baroda. Gross NPAs are continuously increasing for all the banks during
    the given period. There are many reasons for this encumbrance as have been stated above. Now
    the government is looking for the solutions to get the banking industry out of it. There are some
    ways in which both the government and RBI can speed up the NPA recovery process.
    1. Banking Regulation Act: It may be amended to give RBI more powers to monitor bank accounts
    of big defaulters. RBI wants stricter rules for joint lenders’ forum (JLF) and oversight committee
    (OC) to curb NPAs.
    2. Stringent NPA recovery rules: The Securitization and Reconstruction of Financial Assets and
    Enforcement of Security Interest Act (SARFAESI) of 2002 was amended in 2016 as it took
    banks years to recover the assets.
    3. RBI’s loan restructuring schemes: There have been some schemes which RBI came up with
    during the past few decades such as Corporate Debt Restructuring(CDR), Formation of Joint
    Lenders’ Forum(JLF), flexible structuring for long-term project loans to infrastructure (5/25
    scheme), Strategic Debt Restructuring(SDR) scheme and sustainable structuring of stressed
    assets (S4A) to check the menace of NPAs.

    6. RESULTS AND DISCUSSION
    Table 1 SBI gross NPAs and net NPAs

    Table 2 PNB gross NPAs and net NPAs

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  5. Measurement of Correlations (NPA and ROA) of Different Banks and Trend Analysis of NPAS In
    Indian Banks

    Table 3 UNION bank gross NPAs and net NPAs

    Table 4 UNITED bank gross NPAs and net NPAs

    Table 5 HDFC bank gross NPAs and net NPAs

    Table 6 UCO bank gross NPAs and net NPAs

    Table 7 Bank of India gross NPAs and net NPAs

    Table 8 Bank of Maharashtra gross NPAs and net NPAs

    http://www.iaeme.com/IJM/index.asp 85 editor@iaeme.com

  6. Parishwang Piyush and Shalki Goel

    http://www.iaeme.com/IJM/index.asp 86 editor@iaeme.com

  7. Measurement of Correlations (NPA and ROA) of Different Banks and Trend Analysis of NPAS In
    Indian Banks

    Correlation between mean Net NPA and mean Net Profit for the 3 years of the
    following banks:
    Bank Mean Net Profit Mean Net NPA Correlation
    SBI 11178.77333 47225.01333 -0.973360152
    PNB 137.33 27840.39333 -0.797220093
    Union Bank 1229.4833 13259.00333 -0.960548639
    United Bank 64.51 5594.646667 -0.391981081
    HDFC 12353.93667 1353.546667 0.999296929
    UCO Bank -1170.70667 9492.52 -0.995144046
    BOI -1979.543333 22273.00333 -0.904223744
    BOB -204.663333 15185.37667 -0.752137217

    Interpretation of result: Since we have calculated the correlation for all the banks and as seen
    the correlation is positive only for one bank i.e. HDFC bank. It means that as net profit
    increases, net NPA also increases. It shows inaccuracy on the part of the bank because economic
    conditions alone are not responsible for the situation. The ever-greening of loans could be
    avoided by “not renewing loans”. This reasoning certainly points out the banks’ path towards
    NPAs has been a reason for the aggravation of bad loans. The correlation for all other banks is
    negative which shows that as Net Profit increases, net NPA decreases.

    6. CONCLUSION
    The aim of the project was to analyze the annual reports of 8 banks to see the situation of NPAs
    in the country. As we have done the study on Net NPAs, Net Profit and Gross NPAs, we have
    found out the correlation between Net NPAs and Net Profit. It is positive for HDFC Bank and
    is negative for all other banks. Gross NPAs and Net NPAs decreased in the year 2015 and
    increased in the year 2016 for banks SBI and United Bank while they increased by a significant
    percentage. Net Profit has decreased for all banks except for HDFC Bank for which the increase
    in gross profit has been consistent.

    7. LIMITATIONS & FUTURE SCOPE
    This research is based on secondary data. We just made the conclusion on the basis of analyzing
    the data collected through Annual reports of past years. The statistical concept used is limited
    and data very relevant to all the efforts of bank management and government of India is not
    undertaken in the study as the data is not out yet. The research scholars can further do the
    research on the topic related to impact aspect of this trend and as to what has different measures
    taken recently by the government affected the scenario, has the picture beginning to change
    further and does the management of banks like HDFC still getting to understand their
    operational risk exposure and other parametric risk increment to initiate mitigating strategy.

    REFERENCES
    [1] Empirical study on Non-performing assets of bank for the period ended 2012, retrieved
    July 2017, from Google Chrome:
    file:///E:/NPA%20Reseaarch%20Papers/npa%20report%202.pdf
    [2] A study of Non-performing assets of commercial banks and its recovery in India for the
    period ended 2011, retrieved July 2017, from Google Chrome:
    file:///E:/NPA%20Reseaarch%20Papers/npa%20report%201.pdf
    [3] A study on Non-performing assets management with reference to public sector banks,
    private sector banks and foreign banks in India for the period ended 2014, retrieved
    August 2017, from Google Chrome:
    file:///E:/NPA%20Reseaarch%20Papers/npa%20report%204.pdf

    http://www.iaeme.com/IJM/index.asp 87 editor@iaeme.com

  8. Parishwang Piyush and Shalki Goel

    [4] A study on Non-performing assets of commercial banks in India for the period ended june
    2012, retrieved August 2017, from Google Chrome:
    file:///E:/NPA%20Reseaarch%20Papers/npa%20report%206.pdf
    [5] Study of the effect of Non-performing assets(NPA) on Return on Assets(ROA) of major
    Indian commercial banks for the period ended 2015, retrieved from Google Chrome:
    file:///E:/NPA%20Reseaarch%20Papers/The%20Study%20of%20the%20Effect%20of%2
    0Non%20Performing%20Assets%20(NPA)%20on%20Return%20on%20Assets%20(RO
    A)%20of%20Major%20Indian%20Commercial%20banks..pdf
    [6] Comparative study on NPA management of nationalized banks for the period ended 2012,
    retrieved from Google Chrome:
    http://indianresearchjournals.com/pdf/ijmfsmr/2013/august/7.pdf
    [7] Impact of NPAs on profitability of selected banks using David Cole Model for the period
    ended 2016, retrieved from Google Chrome:
    http://icmrr.org/global/pdffiles/IJFRR/f201705003.pdf
    [8] A case study of recovery position of Non-performing assets of Punjab National Bank of
    India and HDFC BANK Limited for the period ended 2011, retrieved from Google
    Chrome: http://www.tjprc.org/publishpapers/2-35-1362029351-
    15..A%20Case%20Study.full.pdf
    [9] Performance of Non-performing assets(NPAs) in Indian commercial banks for the period
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    http://indianresearchjournals.com/pdf/IJMFSMR/2013/September/9.pdf
    [10] Impact of Non-performing assets on Stock Market performance of listed bank stocks in
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    period ended 2013, retrieved from Google Chrome: http://www.iosrjournals.org/iosr-
    jef/papers/SIFICO/Version-1/3.%2016-22.pdf?

    http://www.iaeme.com/IJM/index.asp 88 editor@iaeme.com

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