Asian Journal of Management

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Effect of NPAS on Financial Performance of Public Sector Banks in India:A Study of Changing Scenario


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1 International Institute of Professional Studies, Devi Ahilya University, Indore, India
     

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Banks last year had either taken a hit on their profits or incured losses to accommodate the NPA Cleanup. NPA refers to the Non-Performing Assets which are created if a loan or advance is not paid for 90 days. The purpose of this research is to identify the effect of NPAs on financial performance of Public Sector Banks. As the need to eliminate the proliferating NPAs in financial accounts of Public sector banks has increased, the impact that it will have on their financial performance is unanswered yet. In this study, we have made an effort to find out the estimated effect of NPA on the Public sector banks. Regression models were used to find out the relationship between ROA of banks and their NPAs together with macro variables. The findings from this study shows that NNPA as percentage of total advances and as a percentage of total assets is having a high elasticity i.e. value of elasticity greater than one – inversely proportionate with Return on Assets for UCO Bank and lowest inversely proportionate elasticity (-0.06) for Bank of Maharashtra among the top 10 stressed PSU banks. This confirms an inverse relationship of NPA with ROA, which affirms that escalating NPA will slack the profitability of these banks in near future. This can iron out with the NPA reconstruction. The NPA reconstruction will result in short run denting on profitability, but will be beneficial for their growth and expansion in the long run.

Keywords

NPA, Return on Assets, PSU Banks, RBI, Cleanup.
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  • Effect of NPAS on Financial Performance of Public Sector Banks in India:A Study of Changing Scenario

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Authors

Manminder Singh Saluja
International Institute of Professional Studies, Devi Ahilya University, Indore, India
Sweta Sharma
International Institute of Professional Studies, Devi Ahilya University, Indore, India

Abstract


Banks last year had either taken a hit on their profits or incured losses to accommodate the NPA Cleanup. NPA refers to the Non-Performing Assets which are created if a loan or advance is not paid for 90 days. The purpose of this research is to identify the effect of NPAs on financial performance of Public Sector Banks. As the need to eliminate the proliferating NPAs in financial accounts of Public sector banks has increased, the impact that it will have on their financial performance is unanswered yet. In this study, we have made an effort to find out the estimated effect of NPA on the Public sector banks. Regression models were used to find out the relationship between ROA of banks and their NPAs together with macro variables. The findings from this study shows that NNPA as percentage of total advances and as a percentage of total assets is having a high elasticity i.e. value of elasticity greater than one – inversely proportionate with Return on Assets for UCO Bank and lowest inversely proportionate elasticity (-0.06) for Bank of Maharashtra among the top 10 stressed PSU banks. This confirms an inverse relationship of NPA with ROA, which affirms that escalating NPA will slack the profitability of these banks in near future. This can iron out with the NPA reconstruction. The NPA reconstruction will result in short run denting on profitability, but will be beneficial for their growth and expansion in the long run.

Keywords


NPA, Return on Assets, PSU Banks, RBI, Cleanup.

References