Why Non-Performing Assets Are More in Public Sector Banks in India?

Abstract

The paper identifies why there are more non-performing assets (NPAs) in the public sector banks (PSBs) than those in the private sector banks (PVSBs). It evaluates and reviews the policies and practices of scheduled commercial banks (SCBs) in terms of NPA management. It studies the causes of NPAs, such as ownership structure, credit terms, conditions and covenants, nature of loans, kind of borrowers, bank management practices and business cycles. The study suggests that PSBs have adopted liberal and loose credit policies, and have concentrated loans on borrowers and sectors, i.e., huge credit exposures to a few large corporate borrowers and to a few sectors. It also finds that PSBs are subject to weak and mild regulatory and supervisory impacts on their operations and functions as these are owned by the Government of India. The managements of PSBs are indifferent to the success and performance of PSBs as there are no incentives or penalties for their performance and nonperformance. It is suggested that the PSBs should develop both the skills and practices towards credit and credit risk management. The government has to introduce flexible compensation package and incentives to the managements of PSBs linked to the performance so that it will improve profitability and reduce NPAs. The Reserve Bank of India's regulation and supervision should be ownership neutral.

Non-Performing Assets: A Current Overview of Selected Indian Public Banks

“…This finding highlights the need for banks to adopt more nuanced risk assessment and management strategies in sectors prone to higher NPAs, thus filling the literature gap concerning sectorspecific NPA analysis. The yearly growth rate of NPAs in PNB and its impact on profitability in BOI offer practical insights into the direct correlation between NPA levels and bank profitability, a relationship extensively discussed in the literature (Brahmaiah, 2019;Goswami, 2019). These findings reinforce the criticality of effective NPA management to safeguard bank profitability and economic stability, thereby addressing the literature gap related to contemporary analyses of NPA trends and their implications.…”

“…For instance, Hazarika (2019) provides an analytical overview of the rising trend of NPAs across both public and private sector banks, highlighting the inadequate results of various recovery measures despite governmental and regulatory efforts. Brahmaiah (2019) specifically examines why public sector banks (PSBs) exhibit a higher incidence of NPAs compared to their private counterparts, attributing it to more liberal credit policies and weaker regulatory oversight due to government ownership. Garg (2020) emphasizes the impact of NPAs on bank profitability, liquidity, and credit loss, underscoring the systemic nature of the issue and the need for comprehensive remedial measures.…”

Impact of legislation on banks portfolio risk and its failure effects

“…In terms of lending, different banks have different levels of authority and decentralization, as large banks have to define authority for all individuals at all levels. The large bank keeps different levels of authority at all places for better management of lending or asset business at all amounts and all points of time (Brahmaiah 2019). The appraisal process is standardized as per the compliance norms, and the rate of lending is decided as per the case and business-specific strategy.…”

Role of corporate governance in asset quality of banks: comparison between government-owned and private banks

“…The balance sheets of Indian banks show high levels of NPAs (Sengupta and Vardhan, 2017), with PSBs performing worse than PVBs (Brahmaiah, 2019). Bebchuk and Weisbach (2010) emphasize the distinction between the corporate governance environments of PSBs and PVBs arising from differences in ownership.…”