Page |1

DHARMASHASTRA NATIONAL LAW UNIVERSITY,

(Session 2021-2022)

Topic

NPA AS A THREAT TO COMMERCIAL BANKS

Submitted To: Submitted By:

Dr. Isha Wadhwa Sanskrati Jain

[Assistant Professor Section B

Of Economics] BALLB/116/20

Semester -IV
 Page |2

ACKNOWLEDGEMENT

The completion of this project required counselling and assistance from many people and I’m
really thankful towards them for their counselling in my project.

I would like to express my deep gratitude towards my teacher asst. professor Dr. Isha
Wadhwa, who took acute interest in my project and guided me all along. I’m feeling
extremely privileged to have her as my instructor in the project. I owe my deep gratitude to
the vice-chancellor Prof. V. Nagraj for his valuable support throughout the project. This
project helped me in gathering a lot of knowledge and becoming more aware of things related
to my topic.

I would like to extend my gratefulness to my parents and friends for their valuable support
and advice.

I am making this project not only to get marks but also to enhance my knowledge. At the end
I would like thank everyone who helped me and invested their valuable time for this project.

Sanskrati Jain
 Page |3

TABLE OF CONTENTS
Acknowledgement................................................................................................2
Abstract.................................................................................................................4
Introduction...........................................................................................................5
Research Objectives..............................................................................................5
Research Questions...............................................................................................6
Research Methodology.........................................................................................6
Literature Review.................................................................................................6
Concept of Non-Performing Assests....................................................................7
Underlying Causes of Rising NPA’s In The Commercial Banks.........................8
Analysis of The Growing Level Of NPA In The Indian Commercial Banks.......9
Findings..............................................................................................................12
References...........................................................................................................13
 Page |4

ABSTRACT

The banking sector contributes a lot to the financial sector of the country but from the past
few decades the problem of NPA has become prevalent in our commercial banks. NPA has
several deleterious effects on the health of the bank. It does not only affect banks but it
adversely affects the economy as a whole. In the present scenario the rising level of NPA is
posing a threat to the Indian commercial banks, reducing its profitability, net-worth, even it is
pushing banks on the brink of insolvency. There are various factors due to which the level of
NPA increases. The government is also trying to minimize the level of NPA but the
mechanisms created by the government are not that effective. The following project tries to
understand the concept of NPA, factors of rising impacts and how it pose threat to Indian
commercial banks.

Keywords – Banking sector, NPA, Commercial banks, Profitability etc.

INTRODUCTION

For the better growth of the economy of a country, it is necessary to have sound financial
institutions in the country. Banking sector is one of the major financial institutions we have.
Banking sector plays a vital role in the economic development and growth of a country. One
of the primary functions of the banks is to lend or channelize money to the deficit sector for
their growth and development. The performance of any industry or business is measured by
the profitability of the industry or business. Similarly in the banking sector, profitability is the
benchmark for the measurement of performance of the banking sector. But from the past few
decades the problem of NPA is emerging as menace to the banks of our country due to which
the profitability or growth of the banks are decreasing. NPA or Non-Performing-Assets are
the assets which did not generate any income for the banks. On the contrary it took a toll on
the banks profitability, net-worth and sometimes pushes banks to the brink of insolvency. The
problem of NPA is not only affecting the banks but also affecting the economy of the country
as a whole. It is close to impossible to bring the NPA to zero but several arrangements had
been setup to minimize it. Government of India had made several legislations and setup
different tribunals to recover the NPA like SAEFAESI ACT 2002 1, DEBT RECOVERY
TRIBUNALS, LOK ADALAT ETC. In this project the author will define what NPA is and
what are the different reasons for the increasing number of NPA and how it pose threat to the
Indian commercial banks. The author will also discuss how the growing number of NPA
affects the economy of a country as a whole and will discuss about the recent surge in the
percentage of NPA in the COVID situation.

RESEARCH OBJECTIVES

 To understand the concept of NPA and the consequences rising NPA on Indian
economy in the recent past.

 To evaluate the underlying causes behind rising NPA in Indian economy.

1
THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT
OF SECURITY INTEREST ACT, 2002
 Page |6

RESEARCH QUESTIONS

 What are the major reasons leading to the increase in the NPA in Indian economy in
recent past?

 Why is this recent increase in the NPA threatening to the Indian economy?

RESEARCH METHODOLOGY

Doctrinal research also known as, theory-testing or knowledge building research has been
done to shape the project. The research was done mainly by e-resources. A lot of research has
already been conducted on the same topic. There is no field work required here. For my
research work the data has been collected from various databases, and newspaper articles
from The Hindu, The Indian Express was taken. With the help of internet various books’
summary and their excerpts were read. Various materials that are available on e-sources have
been critically analysed and the similar ideas have been put forward in the project. The
primary as well as secondary documentary sources are utilized to make the study up-to-date,
orderly and scientific. Various reports, books, articles, journals, judicial decision, website,
international, constitutional norms and national measures will be taken as important research
tools. Besides these methods, some other methods will also be applied according to the need
of the study.

LITERATURE REVIEW

Mankanwaljeet Singh & DR. Sanjay Sharma (2018) the present paper analyses the
underlying causes of the rising level of NPA’s in the Indian scheduled commercial banks.
This paper discussed several factors internal as well as external which contributes to the
rising level of NPA’s. This paper concludes that the quality of the assets of most of the Indian
commercial banks has been deteriorated due to the negligent corporate governance and poor
ineffective recovery mechanisms.

Ankit Garg (2016) the present paper is an analysis of how Indian bank manages non-
performing assets. The paper deals with impact of NPA’s on the commercial banks,
preventive measurement of NPA and proper identification of NPA.
 Page |7

DR. Monica Bansal (2019) this paper is an empirical analysis of the growing numbers of
NPA of the scheduled commercial banks. This paper analyses the gross and net NPA of
scheduled commercial banks and study the trends in the number of NPA in the past few
years.

Kaur K. and Singh B. (2011) in their study on non-performing assets of public and private
sector banks (a comparative study) studied that NPAs are considered as an important
parameter to judge the performance and financial health of banks. The level of NPAs is one
of the drivers of financial stability and growth of the banking sector.

CONCEPT OF NON-PERFORMING ASSESTS

The assets which generate income are called performing assets and assets which ceases to
generate income are called non-performing assets. The banks provide advances or loans to
the borrower and when the borrower failed to repay in 90 days, then that amount which
cannot be recovered is known as non-performing assets.

Asset Classification

According to the guideline of the RBI, assets are classified into Standard assets and non-
standard assets.

 Standard assets – An asset in which there is only normal risk attached with bank and
there is no chance of any default then this type of assets are known as standard assets.
 Non-standard assets – the asset which failed to be in the category of standard asset or
the payment is due more than 90 days then it is an NPA. NPA can be further divided
into three heads that is sub-standard assets, Doubtful assets and loss assets.
 Sub-standard assets – an asset will be classified as sub-standard if the asset
remain NPA for less than or equal to 12 months.
 Doubtful assets- if an asset remain NPA for more than 12 month but less than
3 year then the asset will be classified as doubtful asset.
 Loss asset – If an asset remains NPA for the period more than 3 years then the
asset will be classified as loss asset2

2
[Link] (last modified july1, 2009)
 Page |8

UNDERLYING CAUSES OF RISING NPA’S IN THE COMMERCIAL

The level of NPA in the Indian commercial banks is growing due to external as well as
internal factors.

 External factors
 Inefficiency of recovery institute setup by the Government – for the recovery of assets
government has setup different tribunals and act like SARFAESI 2002, Debt recovery
tribunals Etc. but due the negligence or ineffectiveness of these institutions bank has to
suffer the loss of assets and due to which the NPA rises.
 Wilful Defaults – Even if the banks provide loans or advances with proper diligence
there are some corporate borrowers who are able to pay the loan/advances but they
intentionally default the loan which gave increases the number of NPA’s.
 Industrial crisis – there are some industries which are solely depend upon the bank for
the investment of their projects. If the industry is in crisis then it will directly affect the
banking sector and their NPA will rise.3
 Internal factors
 Lenient lending provisions – Banks did not carefully analyse the financial status and
credit rating of a corporate before giving loans to them. Banks provide loans on very
lenient norms to the customers which are not able to pay the loan. The customer
default the loan thus level of NPA increases.
 Improper SWOT analysis – the improper Strength, weakness, opportunity and threat
analysis can lead to increase in the level of NPA. Not carrying SWOT analysis and
providing loan to the corporates on the basis of honesty, integrity and financial
soundness of the borrower will definitely lead to the increase in the level of NPA.
 Faulty credit management system and corrupt practices – defective credit mechanism
system, defective audit and defective recovery mechanism can increase the level of
NPA in the commercial banks. Several corrupt practices in the lending procedure give
rise to the possibility of loan default which adds up to the number of NPA.4

3
Mankanwaljeet Singh & Dr. Sanjay Sharma, “Analysis of underlying causes of NPA’s in Indian scheduled
commercial banks” 8 International journal of Management, IT & Engineering 123 (2018)
4
ID. At 3
 Page |9

ANALYSIS OF THE GROWING LEVEL OF NPA IN THE INDIAN

(Source: [Link]

Indian commercial banks constitute a major portion of the banking sector of India. As its
presence, its contribution in the gross NPA is also in majority.

As of year 2019 Indian commercial banks have seen several trends in the level of NPA but in
the past decade it has seen a rising trend. As of the year 2019 the gross NPA of the
commercial banks stands at 9.36 lakh crore (9.1 %). In the year 2018 the level of NPA was
all time high at 10.39 lakh crore (11.2 %). If we look at the data of commercial banks of past
decade the percentage of NPA has grown from 2.6 % in 2008-09 to 9.1 % in 2018-19.

There are several reasons of the rising level of NPA in the Indian commercial banks. In the
mid 2000 the economy of our country was booming at a rapid pace. The average economic
growth rate in the period of 2000-2010 was 8.8%.5 In this period several big corporations
borrow money from the bank for the upcoming big projects and banks provide them loans on
the basis of their enormous recent growth in that period. The lending norms were also made
lenient at that time due to which big corporations started funding their projects only on the

5
Pragya Shrivastav , “ India’s Economic growth remarkable since 1990’s, never mind quarterly fluctuations:
world bank”, 14 march 2018, available at [Link]
story-remarkable-since-1990s-never-mind-quarterly-fluctuations-world-bank/1098628/ (5-7-2021)
 P a g e | 10

borrowings rather than the intrinsic promoter equity. Following the financial crisis of 2008,
the growth of these corporations fall and the repayment capabilities of these corporations also
decrease.

Aftermaths of this scenario were seen in the next 10 years as the loans given in that period
turns into non-performing assets as the big corporations failed to repay the loan. The level of
NPA increases year by year (refer to the data given in the above table).

Other major reason for the increase in the gross NPA level of commercial banks is several big
corporations pull off big scams on the banks and they wilfully default banks loan like Vijay
Mallya Rs.9000 crore scam, Neerav Modi Rs.11,400 crore scam etc.6

NPA AS A THREAT TO COMMERCIAL BANKS

Earlier we saw that how the growth of NPA increased in the past decade. Ballooning NPA
not only adversely affect the banking sector but also it affects economy as a whole. The
banking sector of our country is like a pillar to the financial sector. If banking sector performs
badly then there will definitely be decline in the growth of corporate sector. Ballooning NPA
has deleterious effect on the commercial banks. In the last 3 years we have seen collapse of
many commercial banks in India such as Yes bank and Lakshmi vilas bank (LVB).

Impact of NPA on the commercial banks

 Profitability – as the definition of NPA says that the assets which cease to generate
income are known as non-performing assets. NPA not only ceasing current profit but it
also affects the future long-term profit. NPA lead to opportunity cost of that much of
profit invested in some other project. Decrease in the profitability of bank further
generates difficulty as such banks struggle to expand and faces negative growth. As the
profitability of the banks decreases the confidence of the shareholders may also erode.
Normally shareholders wants to increase the value of their investment but due to the less
profitability sometimes they did not get the market return on their capital and sometimes
they loss their value of investment.

6
Atibha Paul, “Examining the rise of non-performing assets in India”, PRS , 13 September 2018, available at
[Link] (05-07-2021)
 P a g e | 11

 Liquidity- as we see NPA adversely affected the profitability of market, decreased profit
lead to the decrease in liquidity in the bank. Less liquidity causes several functional issues
as banks faces problems of lending money to other projects, routine money and dues.
 Capital adequacy – for the smooth functioning of the banks, banks have to keep a certain
sum of money or they had to maintain risk-weighted assets on an ongoing basis. When
the level of NPA increases banks have to keep more money with them for the smooth
functioning.
 Public confidence – Due to the higher level of NPA the credibility of Banks also affected
badly because it shakes the confidence of the general public in the banking sector. When
a bank started showing bad sign of collapse due to the ballooning NPA, general public
started withdrawing their money from that bank because of the fear of losing their
money.7

The above deleterious impact can be seen in the recent collapse of the big commercial bank
named Lakshmi vilas bank. In the year 2017 LVM changes its focus from SME’s to large
corporates, they provide loans to several big corporates which turned out to be bad loans. . In
the past 2 years its NPA grows from 17.3 % in 2019 to 25.3 % in 2020. From 2017 the
financial growth of the bank is on steady decline. Ballooning NPA affected its profitability
and net- worth, LVM is not able to raise adequate capital to address the issues. RBI has
decided to put the bank in a moratorium period of 30 days. The image of the bank and the
confidence of the public also declined and people started withdrawing money from the bank
which led to liquidity issues.8

IMPACT OF RISING NPA’S ON THE ECONOMY

For the better growth of the economy a country needs healthy banking sector. An unsound
banking sector will give rise to a fragile economy. Bank provides loans and advance to the
corporates to fund new projects and when this loan turns out to be bad loans it adversely
affected banks profitability. Banks then have less money to lend to other projects, which
directly hampers the growth of different sectors of the economy. Which eventually lead to
several problems like unemployment and declining business confidence.

7
Ankit Garg , “ A study of management of non-performing assets in context of Indian banking system” 3
International journal of engineering technologies and management research 21 (2016)
8
Editorial, “What went wrong with Lakshmi vilas Bank? Here is all you need to know” Economic times,
October 01, 2020
 P a g e | 12

Sometimes economic recession also contributes in the rising level of NPAs. In the present
time we are living in pandemic from past 1 year. The COVID situation has affected the
economy of our country very badly. In the year 2019 we have seen a dip in the percentage of
NPA from 11.2 in 2018 to 9.1 in 2019 but the recent economic recession proved fatal for the
banks as several companies are struggling in economy. The recent financial stability report of
the RBI stated that the gross NPA of the scheduled commercial banks may rose from 7.8 % to
9.8 % in base scenario and to 11.22 % in a stress scenario.9

FINDINGS

 As a healthy banking sector transfers savings into investment, it is one of the most
important prerequisites for a thriving economy. A shaky financial sector will
eventually give way to a shaky economy.
 The major sectors of the Indian economy contributing to the NPAs are as under –

Source: RBI’s Handbook on Statistics of the Indian Economy 2013-14

 It is apparent that infrastructure was responsible for the majority of NPAs. Because
of the large quantity of NPA in the infrastructure industry, banks are increasingly
hesitant to support this sector. Because infrastructure is one of the most significant
sectors in the economy, fuelling the growth of other industries, diverting resources to
infrastructure may stifle Indian economic progress.
 Food processing accounted for 5.3 percent of all NPAs among the other industries.
Food processing is one of the most labour-intensive businesses, and its expansion
drives agricultural growth. Any losses in the food processing business would
eventually affect jobs as well as the farm sector.

9
RBI releases the financial stability report, available at:
[Link] (05-07-2021)
 P a g e | 13

 Other sectors will also directly or indirectly affect the overall economic scenario due
to the exposure to the bad loans. Hence, the issue of NPA must be resolved on urgent
basis.

CONCLUSION

This paper concludes that there are rising trends in the level of NPA’s in the past few years.
This is very alarming situation for the commercial banks as well as for the economy of our
country. The rising level of NPA has caused loss to the banks and other financial institutes.
The condition of the various banks was already weak and now the pandemic has made it
worse. Higher NPA’s have been proved to be fatal for the commercial banks of India as the
ballooning NPA reduce profitability, liquidity of the banks and cause harm to the banks
image. As the profitability of bank reduces shareholders and public also loses their
confidence in the bank.

It is the high time for our government to take necessary actions in this regard. Government
had tried and setup several legislations and tribunals like SARFAESI act, Debt Recovery
tribunal etc. there is some progress with the help of these tools but it seems ineffective in
front of huge numbers of NPA’s. Banks should also make effective procedure and take
preventive measures to tackle with this problem. Before giving loan/advances to anyone,
bank should identify the borrower with the genuine intent. The commercial banks have to
take some strategic steps to confront this problem otherwise this problem may affect them
further.

REFERENCES

1. Non-Performing Assets of Indian Banking System and its Impact on Economy Pro.
D.S. Rathore, [Link] Malpani , Sunita Sharma, volume 7, p. 21 – 26 Posted: 2016-
12
2. Annual Research Journal of Symbiosis Centre for Management Studies, Pune Vol.
4, March 2016 125 Chatterjee, C. and Mukherjee, J. and Das, R., “Management of
nonperforming assets – a current scenario”, International Journal of Social Science &
Interdisciplinary Research, Vol.1Issue 11, 2012.
 P a g e | 14

3. Journal of Commerce, Vol.57, No2, 2004 Kaur , K. & Singh, B., “Non-performing
assets of public and private sector banks A comparative study”, South Asian Journal of
Marketing and Management Research, Vol. 1,Issue 3, 2011.
4. Rai, K., “Study on performance of NPAs of Indian commercial banks”, Asian
Journal of Research in Banking and finance, Vol. 2, Issue 12, 2012.