Non-Performing Assets and Profitability Dynamics in Indian Banks

Non-Performing Assets and Profitability Dynamics in Indian Banks

Author: Ayush S. Patil

Literature Review

1. Assessing the Relationship between Non-Performing Assets (NPAs) and Profitability of Banks in India.

The role of the banking sector is significant in the economic development and stability of the country; this role is even more significant in the case of the bank-based financial system of India, where the role of the bank is to act as the primary financial intermediary to transform the deposits into productive investments. The paper aims to explore the relationship between the non-performing assets and the profitability of the bank, with the return on assets and return on equity being the parameters to measure the same. The non-performing assets have been identified as the loans to the customers where the payment of the principal amount or the interest was due for 90 days. The non-performing assets have a direct impact on the profitability of the bank due to the increase in the provisioning amount, which ultimately results in the reduction of the net earnings. The study was based on the Scheduled Commercial Banks data from 2004-05 to 2021-22 and included Public Sector Banks, Private Sector Banks, and Foreign Banks. The results showed that the Net Non-Performing Assets had a negative impact on the Return on Assets and Return on Equity; also, the average NNPAs of the Public Sector Banks was higher compared to the Private Sector Banks and Foreign Banks. It was also found that the profitability of the previous years had an impact on the current year’s profitability. The results showed that the higher the non-performing assets, the lower the profitability of the bank (Nikam, 2025).

2. Does Higher NIM Cause Cost Complacency and Credit Delinquency?

Ashish Srivastava (2021) describes that the Net Interest Margin (NIM) is the ratio of net interest income to assets. It is a widely known component of bank earnings and a good indicator of the efficiency of financial intermediation. The study examines the question of whether a rise in NIM results in the ignoring of costs and credit problems. The study covers 150 banks, which include scheduled commercial private sector banks and urban cooperative banks (scheduled and non-scheduled). The study used data from 2016-17 to 2018-19. The results of the study showed that the rise in NIM results in the rise of profitability measured by Return on Assets (ROA). For private sector banks, the rise in gross Non-Performing Assets (GNPA) hurts profitability the most, whereas the rise in the Wage Cost Income Ratio (CIR) hurts the profitability of urban cooperative banks the most. The study also showed that the rise in NIM does not result in the rise of GNPA for the banks that have a rise in NIM. The rise in operating costs per rupee of assets may be a bit more, but the rise is matched by the rise in income also. Hence, the rise in NIM results in the rise of profitability and does not result in the rise of costs or credit delinquency (Srivastava, 2021).

3. Multidimensional Surveillance of the Indian Banking System: A Cluster Approach.

Tasneem Chherawala, Alka Vaidya, and Sanjay Basu (2025) have developed a multidimensional risk ranking model to supervise Indian banks using the k-means clustering technique. The model incorporates size, balance sheet, and market-based variables to measure idiosyncratic and systemic risks from 2005 to 2023. The model classifies the Indian banking system into five clusters based on the k-means clustering technique and ranks the banks based on the overall risk score. The model generates long-run benchmark risk levels for the Indian banking system. The results show that the proportion of banks in the most risky cluster increases significantly before the Global Financial Crisis (2007-2009) and the Non-Performing Asset crisis (2014-2015). Market-based variables are more effective in capturing the effects of external shocks, while size-based variables are more effective in capturing credit cycles. The model also classifies public and private sector banks and finds that public sector banks were more risky during the major crisis periods. The model also finds that the cluster model provides earlier warnings of distress and recovery compared to the regulatory Prompt Corrective Action framework. Overall, the model finds that a multidimensional approach is essential to effectively supervise the banking system to capture financial fragility in the system.

4. Asset Quality of Commercial Banks in India: An Empirical Analysis.

In the study of K Sriharsha Reddy and Sarath Babu (2021) on the asset quality of commercial banks in India, the researchers note that the problem of Non-Performing Assets (NPAs) has become a major obstacle to the profitability, liquidity, and solvency of commercial banks. NPA results in the erosion of interest income, which affects the bank’s Net Interest Margin (NIM). It also affects the bank’s capital resources through the erosion of interest income and increased provisioning. The study covered 40 public and private sector commercial banks from 2006 to 2019 using bank-specific and macroeconomic variables to analyze the relationship between the variables of bank size, profitability (ROA), credit growth, economic growth, slippage ratio, and priority sector advances on the asset quality of commercial banks in India. The results of the study showed that the slippage ratio has a positive and significant impact on NPAs, whereas bank size, profitability (ROA), credit growth, and economic growth have a negative and significant impact on NPAs. Moreover, priority sector advances have a significant effect on reducing NPAs, which is contrary to the general belief that directed lending results in more bad loans or NPA. The study on the asset quality of commercial banks also showed that the commercial banks of the private sector manage their NPA more efficiently than public sector commercial banks. The asset quality of commercial banks in India is based on the internal management efficiency of the bank and the economic conditions of the country (Reddy et al., 2021).

5. Managing Non-Performing Assets in Indian Banking Industry.

The issue of the rise in Non-Performing Assets (NPAs) in the Indian banking sector is discussed in the article written by Koya Raghunath and Manish Agarwal in 2020. According to the article, the Gross NPAs have increased over the years and touched 10.5 tn in the last fiscal year (FY18), but then came down to 9.24 tn in the subsequent fiscal year (FY19). It has also been discussed in the article how the global financial crisis, fall in commodity prices, willful defaulters, credit appraisal, and risk management led to the rise in NPAs in the Indian banking sector. Various initiatives have been undertaken by the Reserve Bank of India (RBI) and the Government of India (GoI), such as the Asset Quality Review (AQR), Strategic Debt Restructuring (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), new disclosure norms, Prudential Framework for Resolution of Stressed Assets, the Insolvency and Bankruptcy Code (IBC), Project Sashakt, and the 4Rs—recognition, resolution, recapitalization, and reforms—to reduce the NPAs in the Indian banking sector and to strengthen the Indian banking system, which is the key to the Indian economy (Raghunath et al., 2020).

6. A Comparative Analysis of the Non-Performing Assets of Public and Private Sector Banks in India.

D Sreenivasa Chary (2021), in his study on the comparative analysis of Non-Performing Assets (NPAs) in public sector banks and private sector banks in India, has explained how banks need to pay back the deposits on demand, despite the fact that the loans may not be recoverable in the future. Due to the non-recoverability of the loans, banks need to make provisions from their profits and maintain the capital in accordance with the Income Recognition and Asset Classification (IRAC) guidelines issued by the Reserve Bank of India (RBI). Loans are considered standard, sub-standard, doubtful, and loss assets, and banks need to make higher provisions on these assets as the risk increases. This study is based on secondary data from 16 years, from 2005 to 2020, and the data is sourced from RBI publications. It has been observed that private sector banks have higher standard assets and lower sub-standard and doubtful assets in comparison to public sector banks. Gross NPAs are higher in public sector banks in absolute numbers and as a percentage of total advances. Private sector banks have demonstrated better asset management in comparison to public sector banks in the case of NPAs and the provisioning of NPAs (Chary, 2021).

7. Implications of Asset Quality on Financial Performance Across Ownership Structures: A Comparative Study of SCBs.

J Madegowda and Inchara P M Gowda (2024) explain that Scheduled Commercial Banks (SCBs) in India, comprising Public Sector Banks (PSBs), Private Sector Banks (PVSBs) and branches of Foreign Banks (FBs), are facing “a major challenge in the form of deteriorating asset quality, triggering a substantial increase in the amount of non-performing assets (NPAs)”. The paper examines asset quality and its impact on reported profit for the period 2012-13 to 2021-22 using indicators such as standard assets, gross NPAs, substandard assets, doubtful assets, loss assets and provisioning. It explains that “the higher the NPAs, the lower the asset quality and vice versa,” and that provision created against NPAs is charged to the Statement of Profit and Loss, reducing profitability. PSBs show higher Gross NPA ratios compared to PVSBs and FBs, and deterioration in asset quality leads to mounting NPAs and higher provisions. The interrelationship shows that decline in standard assets increases NPAs, raises provision and decreases profit and profitability. Overall, asset quality significantly influences the financial performance of SCBs across ownership structures (Madegowda et al., 2024).

8. Frauds in Financial Institutions: A Study of Loan Frauds in Indian Banking Industry.

Dr. S.K. Shukla and Dr. Komal Raghav (2022) explain that frauds in financial institutions slow down the functioning of the financial system and worsen the economy. They describe fraud as “a deliberate act of omission or commission by any person” in banking transactions, leading to wrongful gain or loss to the bank. The paper highlights that fraud cases in banks increased by 8% from Rs. 32,178 crore in 2019-20 to Rs. 3,785 crore in 2021-22, along with a rise in the number of fraud cases. Loan frauds form a major portion of total frauds, with corporate loans accounting for nearly 70% of total NPAs. Large cases such as DHFL (Rs. 34,000 crore), Bhushan Power & Steel Ltd (Rs. 37,000 crore), and ABG Shipyard (Rs. 22,842 crore) are cited as major examples. The paper also discusses laws like IPC, Banking Regulation Act, PMLA (2002), and Fugitive Economic Offenders Act (2018), along with RBI measures such as Risk Based Supervision and fraud monitoring systems. Overall, rising loan frauds weaken banks’ financial health and require strict regulation, better coordination, and stronger internal controls to protect the banking system (Shukla et al., 2022).

9. Implications of Slippage, Provisioning and Write-Offs on the Profitability of Scheduled Commercial Banks (SCBs): A Comparative Study.

Inchara P M Gowda explains that the Indian banking industry is “plagued by continuously increasing Non-Performing Assets (NPAs)” and that “fresh accretion to NPAs is an important reason for its poor performance as it requires higher provisioning and also higher write-offs—both affecting the overall performance adversely”. The study examines the financial implications of slippage, provisioning and write-offs on the profitability of public sector banks, private sector banks and branches of foreign banks during 2007-08 to 2018-19. It states that fresh accretion to NPAs reduces standard assets and increases provisioning, and “the increase in provisioning (and also write-offs of loss assets) reduces the amount of profit and profitability”. The analysis shows that the relationship between fresh accretion, provisioning and write-offs on the one hand, and profit/profitability on the other, differs between public sector banks, private sector banks and foreign banks. Overall, Gowda, I. P. M. (2021) conveys that rising slippage, provisioning and write-offs adversely affect the profit and profitability of Scheduled Commercial Banks, especially public sector banks.

10. – Influence of Bank-Specific and Macroeconomic Factors on the Profitability of Indian Commercial Banks.

Sathish Kotte, Irala Lokanandha Reddy and Srinivas Bolagani (2022) examine how bank-specific and macroeconomic factors influence the profitability of Indian scheduled commercial banks using data of 71 banks from 2005 to 2019. Profitability is measured through Return on Assets (ROA). The bank-specific factors include bank size, operating efficiency, credit risk, Non-Performing Assets (NPA), Ratio of Interest Income (RII), cost of funds, capital ratio, deposit ratio, priority sector lending, liquidity and asset management. The macroeconomic factors include GDP, inflation, interest rate, demonetization and financial crisis. Operating efficiency, NPA and RII have a statistically negative impact on ROA, while asset management has a favorable influence. Bank size, credit risk, capital ratio and deposit ratio show negative but insignificant impact, whereas cost of funds, priority sector lending and liquidity show positive but insignificant impact. GDP, interest rate, demonetization and financial crisis negatively affect profitability, and inflation has a negative but insignificant effect. Overall, profitability of Indian commercial banks depends on both internal management factors and overall economic conditions (Kottee al., 2022).

Conclusion

The review of the literature has highlighted that the role of Non-Performing Assets (NPAs) cannot be overlooked in the determination of the profitability of Indian banks. It has also been found that the Public Sector Banks have on average more Non-Performing Assets than the Private Sector Banks and Foreign Banks, which affects their performance to a greater extent.

The review of the literature has also revealed that the deterioration of standard assets results in the increase of Non-Performing Assets, which ultimately affects the profitability of the bank. Slippage, credit risk, loan fraud, and poor asset management have also been found to affect the financial performance of the bank negatively. On the other hand, improved operating efficiency, good asset management practices, and improved Net Interest Margin (NIM) have been found to positively affect the profitability of the bank without negatively impacting the credit risk.

Asset Quality Review (AQR), Insolvency and Bankruptcy Code (IBC), and many regulatory norms have been implemented to control the Non-Performing Assets of the bank, but effective risk management, transparency, and strong internal control practices have to be ensured to improve the profitability of the bank and the overall Indian banking sector.

References

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