




































 American Finance & Banking Review; Vol. 2, No. 2; 2018 

                   ISSN 2576-1226  E-ISSN 2576-1234 

Impact Factor: 4.1 

                        Published by Centre for Research on Islamic Banking & Finance and Business, USA 

 

 

14 

Non Performing Assets in Public Sector Banks: A Cause Analysis 
 

 

R.V. Naveenan
1
, B. Ravi Kumar

2
 & B. Vijaya Lakshmi

3 

 

 

1
Department of Management Studies,Vivekananda Institute of Management, India 

2
Department of MBA-Amrita Sai Institute of Science and Technology, India 

3
Department of Business Management, Sri Pamavati Mahila Visvavidyalayam (Women’s University)-Tirupati,India 

Correspondence: R.V. Naveenan, Department of Management Studies, Vivekananda Institute of Management, India. 

Email: naveenan.08mba@gmail.com 

 

Received: July 19, 2018                       Accepted: August 25, 2018                 Online Published: September 1, 2018  

 

 

 

Abstract 

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. 

 

Keywords: NPAs, NPA Classification, Types of NPA, Causes of NPA. 

 

1. Introduction 

NPA is defined as an advance where payment of interest or repayment of instalment of principal (in case of term 

loans) or both remains unpaid for a certain period. In India, the definition of NPAs has changed over time. 

According to the Narasimham Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash 

credit etc.) for which the interest remains due for a period of four quarters (180 days) should be considered as NPAs. 

Subsequently, this period was reduced, and from March 1995 onwards the assets for which the interest has remained 

unpaid for 90 days were considered as NPAs.  An NPA is defined as a loan asset, which has ceased to generate any 

income for a bank whether in the form of interest or principal repayment 

Classification of NPA 

NPA have been classified into following four types: 

Standard Assets: A standard asset is a performing asset. Standard assets generate continuous income and 

repayments as and when they fall due. 

Sub-Standard Assets: All those assets (loans and advances) which are considered as non-performing for a period of 

12 months. 

Doubtful Assets: All those assets which are considered as non-performing for period of more as 12 months. 

Loss Assets: All those assets which cannot be recovered. 

Causes for Non-Performing Assets  

External causes: Natural calamities and climatic conditions, Recession, changes in Government policies changes in 

economic conditions, Industry related problems, Impact of liberalization on industries, Technical problems. 



 
 

www.cribfb.com/journal/index.php/amfbr               American Finance & Banking Review                    Vol. 2, No. 2; 2018 

  

15 
 

Internal causes: Internal defaulters, Faculty projects, Most of the project reports are ground realities, proper 

linkages, product pricing etc. Some approach for the “heck” of starting adventure, with poor knowledge of product 

risks, over depended on poorly paid killed workers and technicians, Building up pressure for sanctions, Inept 

handling by banker’s lack of professionalism and appraisal standards, Non-observance of system, procedures and 

non-insistence of collaterals etc, Lack of post sanction monitoring, unchecked diversions. 

2. Review of Literature  

This section provides an overview of some of the existing literature with regard to the NPA. This literature review 

helps me to better understanding of both research topics and of the existing gap: 

Meeker Larry G. and Gray Laura (1987) evaluate that information. A regression analysis comparing the non-

performing asset statistics with examiner classifications of assets suggests that the non-performing asset information 

can be a useful aid in analyzing the asset quality of banks, particularly when the information is timely. 

Toor N.S. (1994) stated that recovery of non-performing as-sets through the process of compromise by direct talks 

rather than by the lengthy and costly procedure of litigation. He suggested that by constant monitoring, it is possible 

to detect, the sticky accounts, the incipient sickness of the early stages itself and an attempt could be made to review 

the unit and put it backon the road to recovery  

S.N. Bidani (2002) argued that non-performing Assets are the smoking gun threatening the very stability of Indian 

banks. NPAs wreck a banks’ profitability both through a loss of interest income and write-off of the principal loan 

amount itself. This is definitive book which tackles the subject of managing bank NPAs in it‟s entirely, starling right 

from the stage of their identification till the recovery of dues in such ac-counts. 

Paul Purnendu, Bose,Swapan and Dhalla, Rizwan S.(2011) attempted to measure the relative efficiency of Indian 

PSU banks on overall financial performances. Since, the financial industry in a developing country like India is 

undergoing through a very dynamic paceof restructuring, it is imperative for a bank to continuously monitor their 

efficiency on Non-Performing Assets, Capital Risk-Weighted Asset Ratio, Business per Employee, Return on 

Assetsand Profit per Employee. Here, Non-Performing Assets is a negative financial indicator. To prove 

empirically, we propose a framework to measure efficiency of Indian public sector banks. 

Khedekar Pooja S. (2012) recommends that a strong banking sector is essential for a flourishing economy. Indian 

banking sector emerged stronger during 2010-11 in the aftermath of global financial meltdown of 2008-10 under the 

watchful eye of its regulator. The level of NPAs acts as an indicator showing the credit risks & efficiency of 

allocation of resource. NPA involves the necessity of provisions, any increase in which bring down the overall 

profitability of banks. An excessive rise in interest rates over the past 18 months has led to a sharp increase in non-

performing assets. This not only affects the banks but also the economy as a whole. Pooja also deals with 

understanding the concept of NPA, the causes and overview of different sectors in India. 

Selvarajan B. and Vadivalagan, G. (2012) state that non-Performing Assets is not a dilemma facing exclusively 

the bankers; itis in fact an all pervasive national scourge swaying the entire Indian economy. Non-Performing Asset 

is a sore throat of the Indian economy as a whole. Non-Performing Assets have affected the profitability, liquidity 

and competitive functioning of banks and developmental of financial institutions and finally the psychology of the 

bankers in respect of their disposition towards credit delivery and credit expansion. NPAs do not generate any 

income for the banks, but at the same time banks are required to make provisions for such NPAs from their current 

profits. Apart from internal and external complexities, increases in NPAs directly affects banks' profitability 

sometimes even their existence. 

Veerakumar, K. (2012) mentions that the Indian banking sector has been facing serious problems of raising Non-

Performing Assets (NPAs). Like a canker worm, NPAs have been eating the banking industries from within, since 

nationalization of banks in 1969. NPAs have choked off quantum of credit, restriction the recycling of funds and 

leads to asset-liability mismatches. It also affected profitability, liquidity and solvency position of the Indian 

banking sector. One of the major reasons for NPAs in the banking sector is the 'Direct Lending System' by the RBI 

under social banking motto of the Government, under which scheduled commercial banks are required to lend40% 

of their total credit to priority sector. The banks who have advanced to the priority sector and reached the target 

suffocated on account of raising NPAs, since long. The priority sector NPAs have registered higher growth both in 

percentage and in absolute terms year after year. The present paper is an attempt to study the priority sector 

advances by the public, private and foreign bank group-wise, target achieved by them and a comparative study on 

priority and non-priority sector NPAs over the period of 10 years between 2001-02 and 2010-11.the author also aims 

to find out the categories of priority sector advances which contribute to the growth of total priority sector NPAs 

during the period under study. 

Murthy, K. V. Bhanu Gupta, Lovleen. (2012) studied the impact of liberalization on the non-performing assets of 

the four banking segments, namely, public sector, old private sector, new private sector and foreign banks by 



 
 

www.cribfb.com/journal/index.php/amfbr               American Finance & Banking Review                    Vol. 2, No. 2; 2018 

  

16 
 

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. 

 

3. 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. 

 

4. 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”. 

 

5. 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. 



 
 

www.cribfb.com/journal/index.php/amfbr               American Finance & Banking Review                    Vol. 2, No. 2; 2018 

  

17 
 

6. Data Analysis & Interpretation 

Mean and SD of Bank based internal components that contribute to NPA 

 

Table 1. Mean and SD of Bank based internal components that Contribute to NPA 

Sl. No. Importance to the Bank based internal 

components that contribute to NPA 

Mean Std. Deviation 

1 Improper selection of borrowers 2.18 0.872 

2 Deficiency in processing 2.00 0.886 

3 Improper appraisal of assets 2.10 0.834 

4 Lack of monitoring pre and post sanction of loan 2.57 0.680 

5 Terms and conditions of credit 1.59 0.494 

6 Unsecured loans 2.42 0.665 

Source: Primary Data 

 

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. 

 

Mean and SD of bank based external components that contribute to NPA 

 Table 2. Mean and SD of bank based external components that contribute to NPA 

Sl. No. Importance to the bank based external 

components that contribute to NPA 

Mean Std. Deviation 

1 Selection of unsuitable and Unviable scheme 2.12 0.832 

2 Mis-utilization of fund 2.59 0.678 

3 Insolvency or death of borrower 1.32 0.645 

4 Low income from project 2.01 0.649 

5 Lack of infrastructure, Modern Technology and 

marketing facilities 

1.33 0.493 

6 Political interference and labor unrest 2.40 0.662 

7 Willful default due to liberal government policy and 

expectation of debt relief 

2.42 0.799 

8 Sluggish legal system 1.62 0.673 

9 Price escalation of inputs 1.81 0.755 

10 Power failures 1.99 0.891 

Source: Questionnaire 

Inference: 

 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. 

Table 3. Friedman test for significant difference between mean ranks towards Importance to the Bank based internal 



 
 

www.cribfb.com/journal/index.php/amfbr               American Finance & Banking Review                    Vol. 2, No. 2; 2018 

  

18 
 

components that contribute to NPA 

Sl. No. Importance to the Bank based internal 

components that contribute to NPA 

Mean Rank Chi-

Square 

P value 

1 Improper selection of borrowers 3.62 280.580 0.000** 

2 Deficiency in processing 3.10 

3 Improper appraisal of assets 3.36 

4 Lack of monitoring pre and post sanction of loan 4.71 

5 Terms and conditions of credit 1.89 

6 Unsecured loans 4.32 

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 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. 

 

Table 4. Friedman test for significant difference between mean ranks towards Importance to the Bank based 

External components that contribute to NPA 

Sl.No. Importance to the External components that contribute to 

NPA 

 

Mean Rank Chi-

Square 

P value 

1 Selection of unsuitable and Unviable scheme 6.15 547.007 0.000** 

2 Mis-utilization of fund 8.04 

3 Insolvency or death of borrower 3.04 

4 Low income from project 5.75 

5 Lack of infrastructure, Modern Technology and marketing 

facilities 

2.85 

6 Political interference and labour unrest 7.47 

7 Willful default due to liberal government policy and expectation 

of debt relief 

7.39 

8 Sluggish legal system 3.95 

9 Price escalation of inputs 4.78 

10 Power failures 5.59 

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). 



 
 

www.cribfb.com/journal/index.php/amfbr               American Finance & Banking Review                    Vol. 2, No. 2; 2018 

  

19 
 

7. Findings of the Study 

 From 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. 

8. 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. 

References   

Ammannaya, K.K. (2004), “Indian Banking: 2010”, IBA Bulletin,156. 

Baiju, S. and Tharril, G.S. (2000), “Performance Banks with Non-performing Assets: An  Analysis of NPAs, Yojna, 

5-9.  

Chaitanya V Krishna (2004). Causes of Non-performing Assets in Public Sector Banks. Economic Research, 17(1): 

16-30.  

Dash, MK., &Kabra, G. (2010). The Determinants of Non-Performing Assets in Indian Commercial Banks: an 

Econometric Study, Middle Eastern Finance and Economics,7.  

Kaviths N (2012), “NPAs of Scheduled Commercial Banks in India- A Case Analysis”,Global Journal of Arts and 

Management. 

Naveenan,RV&Vijayakumar,T(2014):”NPA -A Humangous Burdenon Bank’s Shoulders”,Asia Pacific Journal of 

Marketing & Management Review,3(5),7-16. 

Rajaraman, I &Vashistha, G (2002): “Non-Performing Loans of Indian Public Sector Banks -Some Panel Results‟, 

Economic & Political Weekly 

Satpathy and Patnaik, (2012), “Portfolio of NPA- By Classification of Banks”. BVMIR Management Edge. 

Naveenan,RV,”Warning Signals - A Tool to Control NPA in Banks”, International Journal of Advance Research in 

Computer Science and Management Studies,4(7), 280-288. 

Naveenan,R.V.2016.A Study on Handling Non-Performing Assets with Special Reference to Public Sector Banks in 

Kanyakumari District(PhD Thesis).Manonmaniam Sundaranar University, Tirunelveli,Tamil Nadu, India. 

 

 

 

 

Copyrights 

Copyright for this article is retained by the author(s), with first publication rights granted to the journal. 

This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution 

license (http://creativecommons.org/licenses/by/4.0/). 

 


