March-April 2020

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23606

Role of increasing levels of Non-Performing Assets

in Bank’s deteriorating financial position : A
review of literature
CA.Kamakshi Mehta', Shiv Swaroop Jha2
” Assistant Professor , Amity University , Haryana

Article
Info
Volume 83
Page Number: 23600 -
23606 Publication Issue:
March - Apr‘il 2020
Article History
Article Received. 24 July
2019
Revised. 12 September 2019
Accepted. 15 February 2020
Publication. 30 April 2020
Abstract
Non Performing Assets (NPA) have witnessed a tremendous increase since the world
wide recession of 2009 . The Reserve Bank of India (RBI) along with the Indian
Government have implemented rules and issued directives to control the rising level of
NPA, but have failed . The ever rising NPA level has resulted in the fall of the income
and profitability level of the bank , further resulting in their failures . The study
comprises of review of literatures published by renowned researchers on Rising NPA’s
and Bank failures . The study comprises of explanation of different views of
academicians and regulators . A total of 105 research papers , published in eminent
journals , have been reviewed . The main purpose of the study is to discuss the various
causes instigating the rising level’s of NPA . It also studies the role of these causes in
the downfall of the various banks .
It is undisputed that the road to recovery is very long but the study recommends the
measures which can be taken to control and reduce the rising NPA levels .
Keywords: Banks, Non-performing assets, Stressed assets, Bad Loans , Assets quality, RBI

INTRODUCTION this context.

The past 10 years have seen a surge in the level of
defaulters in the Indian Banks , has left the
economy struggling . The banking industry has
witnessed a tremendous fall in the profitability
and liquidity levels thus resulting in a threat to the
existence of the Banks . The Indian Government
along with the RBI has repeatedly issued
directives to control this situation . But both the
authorities have failed miserably . The various
Law enforcing agencies have revealed that the
NPA issue is worse in case of Public banks as
compared to Private Banks .This article reviews
20 years’ of Indian Banking literature to evaluate
the current state of knowledge pertaining to the
Role of Non-Performing Assets in Bank’s
deteriorating financial position and to explore the
way in which the concept of NPA’s is used within
1
Published by. The Mattingley Publishing Co., Inc.

Electronic copy available at: https://ssrn.com/abstract=3637398

 March-April 2020
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23606
BACKGROUND

The recent years have seen financial frauds

regularly rising beyond boundaries . In spite
of the fact that financial frauds are a cost of
doing the banking business but these costs
have witnessed a tremendous escalation
during the past decade . Various regulators
like the Indian Government and the Reserve
Bank have issued various corrective measures
to be followed by the banks but all these
efforts have fallen flat time and again and
greediness of the bank employees have
resulted in the failures of all corrective
directives issuedA major dent in the economy
can now be seen clearly .
Rezaee, (2005) The study reveals that the
corporations intentionally prepare misleading
and manipulated financial statements with the
sole intent of deceiving and misleading the
banks , investors , stakeholders or any other
user

2
Published by. The Mattingley Publishing Co., Inc.

Electronic copy available at: https://ssrn.com/abstract=3637398

Dutta. A (2014) The researcher had based his Internal factors instigating NPA.On the other hand the
study on the performance of banks in the
effectiveness of the measures taken in the
management of NPA .The data was collected from
secondary sources of both public and private
sector banks .
Joseph,L.(2014) The research intends to study the
contributory causes of rising trends of NPA . The
researcher has also recommended the measures
which if followed would have reduced NPA
level’s .
Arora, N., Ostwal, N. (2014) Concluding his
study, the researcher has stated that NPA are a
financial threat to all Banks and financial
institutions . This he has arrived at by examining
the loan assets of different banks
Satpal (2014) The study has mainly focussed on
the definition of NPA and the major contributors
to the rising NPA level and their impact on
Banking operations
OBJECTIVES :
The objective of this paper is to identify the gaps
in the previously done studies to lay out a
foundation for future studies .
validate current arguments based on previous
findings

RESEARCH METHODOLOGY
The research is based on the method of
exploratory study which comprises of the
explanation of different views of academicians
and regulators . A total of 105 research papers
written by various academicians , published in
eminent journals , have been reviewed
CAUSES
Muniappan, (2002) , The study after an in-depth
study into the causes of NPA’s has classified them
into two broad divisions Internal and External
factors . Diversion of funds or failure of business
or inability of the board are all classified under
external factors comprises of recession, global banking frauds . Many researchers have
economy , natural calamities etc. established by their researches that NPAs
negatively effect the profitability , liquidity and
Ugah, (2010). The study has concluded that
solvency of the banks .
the frauds are materialized by professional
persons who are well conversant with the
banking system with the support of dishonest
members of the bank staff .
Das, S. (2010) and Ahmad, Z.,
Jegadeeshwaran, M. (2013) in their papers
have analysed the parameters which
contribute to the increasing NPA levels . The
list includes market failure, wilful defaults,
poor follow-up and supervision, non-
cooperation from banks, poor Legal
framework, lack of entrepreneurial skills, and
diversion of funds
Ranjan, R., Dhal, S.C. (2013)This paper
critically reviews the extent of influence of the
economic and financial factors on the Non
Performing Loans of Indian commercial banks
using the regression analysis technique
T.R. Radhakrishnan, (2016), The article
highlights that it is the banks which are to be
blamed for the rising NPA’s more than the
corporates . The author promotes the idea that
the level of NPA can be controlled by
exercising making the banking process ie the
process of approving and disbursing loans full
proof In order words policies should be made
and followed to the point by exercising great
skill and diligence .
Impact
Non performing assets ( NPA) refers to those
loans disbursed by the banks which are now
not receivable
. in todays scenario the banks are not only
judged by the number of branches or customer
base but also on the basis of standard of assets
. A total of approximately 22000 crores has
been lost by the Public sector Banks alone in
the last three years on account of various
Balasubramaniam (2001) The study makes an
assessment of the NPA scenario of all the banks
which were found to be very high . It was
recommended that the bank should maintain and
follow strict rules and policies regarding credit
appraisal procedures and excersing proper internal
controls
Kaur(2006) in her thesis has highlighted the
problem of NPA in PSB’s in India . She had
suggested that there is an urgent need for creating
staff awareness about the adverse impact of
NPA’s on the profitability levels of the banks. The
researcher also advocated that these levels could
be controlled by organising frequent meetings
with borrowers . This would not only generate
trust but also better understanding between both
the parties
.Bhatia (2007) The researcher in his study has
listed down the factors which have noted to be
causes initiating Bank NPA’s . A model
consisting of two factors a) macro economic level
b) bank specific parameters should be developed .
Karunakar (2008) , has studied the impact of
mismanagement of risks by the bank officials on
the increasing levels of losses and detiorating
profitability level of banks and financial
institutions
. The only solution advocated by the researcher to
the problem of NPA’s is the propercredit
assessment and risk managementmechanism.
Kaur and Singh (2011) The researchers have
highlighted that NPA’s are not only the major
source of setback to the economic growth of the
country but also prove to be an important factor to
judge and gauge the financial health of the bank .
Prasad and Veena (2011) The study reveals that
since NPA accounts do not generate any interest
income to the bank whereas it proves to be an
extra burden on the banks profitability . Thus it
necessitates to formulates models and strategies to
reduce NPA levels at a war footing pace
Khanna (2012) in her research paper has endorsed
the analysis that a high level of NPA suggests
high level of credit defaults which affect the
liquidity , profitability and net worth of the banks .
The only solution to control this alarming
situation is that the banks become very cautious in
extending loans .
Kumar (2013) in his study highlighted the fact that
NPA’s have increasing become a destroyer of the
Indian Economy and the Indian banking system .
The loan portfolio proves to be of immense
importance in order to control the levels of Bank
NPA’s .
Kumar has also supported the claims made by
other researchers that high level of NPA has
adverse impact on profitability, productivity,
liquidity, solvency, capital adequacy and image of
the bank.
Okeja (2013) . The study has concluded that the
frauds forgeries and insider abuse have resulted in
banks insolvency and failures . All stakeholders ,
public and government agencies are highly
concerned with the issue of bank failures.
Gynedi (2014) The researcher warns that if the
asset quality in Indian banks keeps deteriorating
as was the case in past then it shall pose an
enormous threat not only to the banks but also to
the whole economic structure of India. . 70% of
the Public Sector banks are faced with fear and
anxiety regarding their levels of profitability and
cash liquidity levels
Satpal (2014) The researcher’s main focus had
been on the causes of NPA levels which have over
the years being rising steeply . The study also
evaluated the quantum of impact of NPA on the
liquidity , profitability and survival of the various
banks . This crisis has deeply effected not only the
bank but the economy as a whole .
Kumar et al.,2016,The study of the banking
structure by the researcher reveals that it is a PSB
dominated structure. It has been evident from
the results of the study that the financials of
the banks have been weighed down by the
high level of NPA’s
thus having a high negative impact on the in
profitability of the banks
Nitin,2016 . The study has considered only 4 years
NNPA’s (Net NPA’s ) of 11 banks in the process
of establishing a co-relation between their NPA
and EPS .The result of the research shows that
there is a negative co-relation between the two in
case of PSB and a positive relation in case of PVB
.
Dave,(2016) The researcher intends to analyse and
list down the factors contributing to NPA’s , the
reason to their high NPA and their impact on the
banks profitability and operations . The finding of
the study have highlighted the fact that higher the
level of NPA , higher is the adverse impact on the
banks levels of profitability and net worth
Urjit Patel, (2017). Urjit Patel former governer of
RBI has revelead in his study that more than 4/5th
of the Public sector banks have been hit hard from
the rising levels of NPA . He has further suggested
the reorganisation of recovery channels and
capital restructuring may be included in the list of
remedial measures
Bhasin , (2017) The study of 26 Banks reveals
that the extent of NPA’s is higher in Public sector
banks as compared to private sector banks .The
study further suggests that a lot more efforts are
required to be put in by the banks to control the
situation and they should adopt and implement the
regulatory policy measures of RBI to the word .
Prasad and Veena (2011) have stated in their study
that NPA’s have a destructive impact on the return
on assets as these assets do not earn any income
and the current profits are eroded due to provision
of doubtful debts and further writing them off as
bad debts .
Naina ,(2018) , Care Ratings, (2017), The study
has revealed that the uncontrollable deterioration
of asset quality has become a threat to the
sustainability of the banks .The study also
underlines the fact that the proportion of increase
NPA is out performing the advantage of the post disbursal .
remedial measures being taken by the bank
Kumar , Rao and Kusuma (2018)in their paper
have laid stress on NPA’s as the major
hinderance faced by the banks today . As per
the study the ever increasing levels of NPA’s
unfavourably impact the financial statements
which in turn discourages the investors from
investing in the concerned banks . The paper
discusses the causes for increase of NPA’s and
they are ranked with the Garrett Ranking
Technique
Naina 2018, The entire financial system will
be inefficient unless followed up by the
structural changes in the thinking of the
Government and RBI rules and policies.
Richmond 2019 ,Frauds can have potentially
weakening effect on self- assurance in
banking system and may affect the stability of
the economy. In such a situation, Forensic
accounting and auditing is therefore not an
option but the bank frauds minimized of the
hour.
Control measures
The study reveals that forensic accounting
combined with various laws will reveal
accounts that should be red flagged . It will
also recommend the application of these laws
to predict the financial stability of the
companies before the Bank extends credit
facilities to the companies .
Murali and Krishna (2006) have observed in
their paper that the banks having their hands
full with surplus funds have noticed their
graphs rising steeply in their lending activities
. The reason of this rise in lending figures can
also be attributed to the high losses suffered
by banks when they have risked investing in
other activities .
The study has further suggested to intensive
monitoring not only pre disbursement but also
Chaudhary and Sharma (2011) in their research
paper have stated that stringent measures should
be taken up including an efficient management
information system , proper documentation and
selection of borrower projects before releasing the
loans . These shall result in keeping NPA’s in
check to a great extent
Gupta(2012) The researcher in her study has
advocated that every bank should have their own
credit agency who would evaluate and rate the
borrowers not only at the time of credit appraisal
but also continously so as to redflag any chances
of future NPA . NPA should be considered as one
of the most impactful parameter thus it should be
considered as a crucial rating factor for any bank
to prevent new NPA’s.
Rai(2012) in her study has laid emphasis on lack
of intensive recovery methods till recent past
making the defaulters fearless . But the
introduction of SARFAECI Act has not only
proved to be a break through in recovery of loans
but also has been able to make a powerful dent on
the fearless attitude of the defaulters .
Chatterjee, Mukherjee and Das (2012) in their
study have laid emphasis that the bank before
advancing the loan should check and verify the
original purpose for which the loan is required .
The study also advocates that a continuous weekly
check should be done on continuing loan accounts
so as to red flag any loans tending to turn sour .
Also, the credentials of the guarantor should be
checked and verified.
Selvarajan & Vadivalagan (2013) The study
covers the growth of Indian bank and other public
sector banks lending to the priority sector . The
study confirms to the slippages made by the
Indian bank in controlling NPA’s , thus it was
concluded by the researchers that proper and
appropriate measures taken by the bank officials
would result in capping the creation of new
NPA’s
Sikadar Pallab ,(2013). The researcher has
concluded ,after an extensive study of secondary
data , that the NPA problem can be tackled with
proper credit assessment and risk management
mechanism being followed by the credit
department of the bank while giving loans .
Nishant Raj (2017) The author has laid emphasis
that the need of the hour is using technology and
analysis to identify the warning signs of NPA and
development of skills for credit assessment . The
author has also advocated the application of
Forensic audit to investigate the borrowers
intention Iliemena, Rachael(2019) in their study
have examined Forensic audit as a panacea to the
Nigerian problem of Bank failures . The study has
based its evaluation on the data collected from
primary sources in the form of questionnaires
filled up by selected banks of Nigeria . The
findings showed that there was a significant
relationship between frauds, bank failures and
investors confidence . It has suggested that
Forensic audit will help the bank in monitoring
and also red flagging the accounts which are
showing signs of default and fraud .
CONCLUSION
After an in-depth study of these research papers
the important points can be summarized as
follows :
Rising level of NPA is a major threat to both
Public sector and Private sector banks
The level of NPA’s is very high in the case of
Public sector banks as compared to private sector
Banks
The major factor attributing to the rising level of
NPA is the poor credit appraisal system of the
banks The continuous monitoring of loans
accounts post disbursal so that they can be
prevented from turning into NPA .
Changes should be made in the legal framework
as well as government policies regarding priority
sector
The banks should have their individual credit Mitigating. International Journal of Advanced
rating agencies who should be responsible for Academic Research, 1(1), 1—25.
rating individual customers before the granting of
loans
Forensic audit of the borrower should be done as a
pre — loan disbursal and post loan disbursal
activity in order to curb the rising NPA .
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