Non Performing Assets in Public Sector Banks: A Cause Analysis

Lending Funds is considered as the primary function of primary function which provides financial support to various sectors such as agriculture, industry, personal loans etc., but in recent times the banks as taken a cautious stand in lending. The main reason for such an initiative is the mounting issues of non-performing assets (NPAs).A loan asset is considered as non-performing asset when it ceases to generate income for the bank. From 31st March, 2004 NPA was defined as a credit facility in respect of which the interest or installation of principal has remained past due for a specified period of time which was four quarters. NPA in public sector banks is increasing year after year and thus this is becoming a debatable topic. So considering this anglete paper is undertaken to analyze the reasons for advances becoming NPA in Public sector banks and intends to give suitable suggestions to overcome NPA.

studying the overall trends in NPAs. We have used the Structure-Conduct-Performance (S-C-P) approach that shows the relationship between competition and conduct, concentration and growth in NPAS. Our results show that on an average across the banking industry segments, average non-performing assets in the past 11 years have been declining at the rate of 13% p.a. compounded growth rate. The old private sector banks' nonperforming assets have reduced at the rate of 11.98% and that of public sector banks have declined at the rate of 18% and foreign bank sat 11.4%. Though new private sector banks and the foreign banks seem to be more efficient but their conduct does not show consistency and stability. Joseph, Mabvure Tendai Edson, Gwangwava (2012) attempted to find out the causes of non-performing loans in Zimbabwe. Loans form a greater portion of the total assets in banks. These assets generate huge interest income for banks which to a large extent determines the financial performance of banks. However, some of these loans usually fall in ton on-performing status and adversely affect the performance of banks. In view of the critical role banks play in an economy, it is essential to identify problems that affect the performance of these institutions. This is because non-performing loans can affect the ability of banks to play their role in the development of the economy. A case study research design of CBZ Bank Limited was employed. Interviews and questionnaires were used to collect data for the study. Their study revealed that external factors are more prevalent in causing non-performing loans in CBZ Bank Limited. The major factors causing nonperforming loans were natural disasters, government policy and the integrity of the borrower. Debarsh and Sukanya Goyal (2012) emphasized on management of non-performing assets in the perspective of the public sector banks in India under strict asset classification norms, use of latest technological platform based on Core Banking Solution, recovery procedures and other bank specific indicators in the context of stringent regulatory framework of the RBI. Non-performing Asset is an important parameter in the analysis of financial performance of a bank asit results in decreasing margin and higher provisioning requirements for doubtful debts. The reduction of non-per-forming asset is necessary to improve profitability of banks and comply with the capital adequacy norms as per the Basel Accord.3 Kavitha. N (2012), tried to have an assessment of non-performing assets on profitability its magnitude and impact. Credit of total advances was in the form of doubtful assets in the past and has an adverse impact on profitability of all Public Sector Banks affected at very large extent when non-performing assets work with other banking and also affect productivity and efficiency of the banking groups. The study observed that there is increase in advances over the period of the study.

Objectives of the Study
 To study the concept on Non-Performing Assets and its relevance in the banking sector  To identify the loan/bank based components that contribute to NPA.

Formulation of Hypothesis
Hypothesis I: "There is a significant difference between the importances of bank based internal components that contribute to NPA.

Hypothesis II:
"There is a significant difference between the importances of bank based external components that contribute to NPA".

Methodology
In order to achieve the objective of the study an appropriate methodology has been adopted. Research done is descriptive in nature.

Source of Data
The present study is mainly based on Secondary data. The data is taken from the Ph.D Thesis titled "A Study on Handling Non-Performing Assets with special reference to Public Sector Banks in Kanyakumari District".

Statistical Tools Used
Friedman Test: The Friedman Test is a non-parametric test. It is used to test for differences between groups when the dependent variable being measured is ordinal.

Inference:
From the above table, Lack of monitoring pre and post sanction of loan has the highest mean followed by Unsecured loans, Improper selection of borrowers, Improper appraisal of assets, Deficiency in processing and Terms and conditions of credit. Highest standard deviation of Deficiency in processing shows low focus on the particular internal components that contribute to NPA. From the above table, mis-utilization of fund has the highest mean followed by Willful default due to liberal government policy,Political interference and labor unrest,Selection of unsuitable and Unviable scheme,Low income from project,Power failures,Price escalation of inputs,Sluggish legal system,Lack of infrastructure, Modern Technology and marketing facilities,Insolvency or death of borrower . Highest standard deviation of Power failures shows low focus on the particular external components that contribute to NPA.

HYPOTHESIS I Null Hypothesis:
There is no significant difference between mean ranks towards Importance to the Bank based internal components that contribute to NPA. Since P value is less than 0.01, the null hypothesis is rejected at 1 per cent level of significance. Hence it is concluded that there is significant difference between mean ranks towards Importance to the Bank based internal components that contribute to NPA. From the table, based on mean rank, Lack of monitoring pre and post sanction of loan (4.71) is the best internal component that contribute to NPA, followed by Unsecured loans (4.32), Improper selection of borrowers (3.62), Improper appraisal of assets (3.36), Deficiency in processing (3.10) and Terms and conditions of credit (1.89).

HYPOTHESIS II
Null Hypothesis: There is no significant difference between mean ranks towards Importance to the Bank based External components that contribute to NPA. Source: Primary Data ** Denotes significance at 1% level Inference: Since P value is less than 0.01, the null hypothesis is rejected at 1 per cent level of significance. Hence it is concluded that there is a significant difference between mean ranks towards Importance to the Bank based External components that contribute to NPA From the table, based on mean rank, Mis-utilization of fund (8.04), Political interference and labour unrest(7.47),Willful default due to liberal government policy and expectation of debt relief(7.39),Selection of unsuitable and Unviable scheme(6.15),Power failures(5.59),Low income from project(5.75),Price escalation of inputs(4.78),Sluggish legal system(3.95),Insolvency or death of borrower(3.04),Lack of infrastructure, Modern Technology and marketing facilities(2.85).  Table 7.1 Bank based internal components that Contribute to NPA are ranked on the basis of the response and mean score calculated. Lack of monitoring pre and post sanction of loan has the highest mean followed by Unsecured loans, Improper selection of borrowers, Improper appraisal of assets, Deficiency in processing and Terms and conditions of credit.  From Table 7.2, Bank based external components that contribute to NPAare ranked on the basis of the response and mean score calculated.Mis-utilization of fund has the highest mean followed by Willful default due to liberal government policy, Political interference and labor unrest, Selection of unsuitable and Unviable scheme, Low income from project, Power failures, Price escalation of inputs, Sluggish legal system, Lack of infrastructure, Modern Technology and marketing facilities, Insolvency or death of borrower .  From Table 7.3, By Friedman Test it is concluded that there is significant difference between mean ranks towards Importance to the Bank based internal components that contribute to NPA.This shows the validity of ranking based on mean.  From Table 7.4, By Friedman Test it is concluded that there is significant difference between mean ranks towards Importance to the Bank based external components that contribute to NPA. This shows the validity of ranking based on mean.

Conclusion
This paper reveals the NPA and its scenario in all the scheduled commercial banks during the decade. It even depicts the various reasons for the growth of NPA. NPAs reflect the overall performance of the banks. A high level of NPA is a poor indicator of bank performance. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders' value. Careful steps by the bankers like selection of right borrowers, viable economic activity correct end use of funds and timely recovery of loans are absolutely necessary pre conditions for preventing or reducing the incidence of new NPAs which will enhance the credibility of the banks and attain the objective of the sound financial system.