Impact of Non-Performing Assets on Financial Health of Banks

Abstract

The banking sector is a crucial financial service industry that supports development plans by channelling funds for productive purposes, facilitating the flow of funds from surplus to deficit units, and aiding in the implementation of government financial and economic policies. Banks fulfil social objectives through priority sector lending, extensive branch networks, and employment generation. Maintaining asset quality and profitability is essential for the survival and growth of banks. However, a significant challenge faced by the banking sector is the prevalence of Non-Performing Assets (NPAs). The Reserve Bank of India defines an NPA as “an asset, including a leased asset, that ceases to generate income for the bank.” Major causes of NPAs include wilful default, misuse of borrowed funds, and inadequate pre-loan inquiries. As of June 30, 2018, the Gross NPA of Indian banks was ₹10.03 lakh crores, with Public Sector Banks accounting for 88.74% of this total. The top five Public Sector Banks—SBI, PNB, IDBI, BOI, and BOB—make up 46.67% of the Gross NPAs. Private Sector Banks hold 11.26% of the total Gross NPAs, with leading banks being ICICI, AXIS, and HDFC. The primary aim of this paper is to examine the causes and effects of NPAs in the banking sector.