March-April 2020

ISSN: 0193-4120 Page No. 23600 - 23606

Role of increasing levels of Non-Performing Assets in

Bank’s deteriorating financial position : A review of
literature
CA.Kamakshi Mehta1, Shiv Swaroop Jha2
1,2
Assistant Professor , Amity University , Haryana

Article Info Abstract

Volume 83
Page Number: 23600 - 23606
Publication Issue:
March - April 2020
Article History
Article Received: 24 July 2019
Revised: 12 September 2019
Accepted:15 February 2020
Publication: 30 April 2020
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
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 this context.
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 .

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Dutta. A (2014) The researcher had based his 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 Internal
factors instigating NPA.On the other hand the
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external factors comprises of recession, global
economy , natural calamities etc.
Ugah, (2010). The study has concluded that 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 banking frauds . Many
researchers have established by their researches that
NPAs negatively effect the profitability , liquidity
and solvency of the banks .
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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 major
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 .
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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
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thus having a high negative impact on the
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 in
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NPA is out performing the advantage of the
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
minimizer 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 post
disbursal .
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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
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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
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