Today Non-performing assets are one of the major concerns for all the banks in India. NPAs reflect the overall performance of Indian banks as NPA of the bank increases on the other hand profit of the bank deceases. The issue of Non-Performing Assets is become a hot topic in the financial world in India today. The increase of NPAs is not only affecting the profitability of the banks but also the country’s economy. To improve the profitability, the NPAs have to be scheduled. The problem of losses and lower profitability is because of Non-Performing Assets (NPAs) and liability mismatch in banks and financial sector is totally depending on credit risk management in their business.

Credit Risk Management has got much importance in the Indian Economy in today’s liberalization period. The main challenges for the banking sector are to identifying the risk and how to manage it. The risk is a part of the banking business. The main role of bank is of mediator for those requiring resources and having resources. For risk management various risks like market risk or operational, risk credit risks have to be converted into one single measure. Therefore, it is necessary that measurement of credit risk should be in tandem with other measurements of market risk and operation risk so that the requisite composite estimate can be worked out. So, in banking sector credit risk management is being most important task of all as it directly effect on NPA. An attempt is made in this paper that what is NPAs? And their impact on profitability.

2. NPA: A Non-performing asset (NPA):

Is defined as a bad loan or credit facility for which the interest and/or installment of principal has remained due for a long/specified period of time. In simple terms, an asset is tagged as non-performing asset when it stops to generate income for the financial institutions/lender. When the borrower has failed to pay interest or principle amount for 90 days that loan is considered to be a non-performing asset for the lender. Non-performing assets are problematic for financial institutions like banks as their bigger part of income is depend on interest payments. Troublesome pressure from the economy can lead to a sharp Increase rate of non-performing loans in India is due to troublesome pressure from the economy and often results in massive write-downs.

For better transparency and international best practices, it has been decided in the year 2004 to adopt the ‘90 days’ overdue’ norm for NPA. Accordingly, with effect from March 31, 2004, an advance or a non-performing asset (NPA) is a loan where;

· In respect of term loan: when the Interest and/or installment of principal remain overdue for more than 91 days.

· In respect of an Overdraft/Cash Credit (OD/CC): when the account remains ‘out of order’ for more than 90 days.

· In respect of bills purchased or discounted: when the bill remains overdue for more than 90 days.

· In case of an advance granted for agriculture purpose: when the interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years.

· For other account: when any amount to be remains overdue for a period of more than 90 days.

· In respect of cash credit facility: non submission of Stock Statements for 3 Continuous Quarters.

· For Cash Credit/Over Draft/EPC/PCFC: No active transactions in the account for more than 91days

Further Non-performing assets categories into the three other types of NPA based on the reliability of the dues and period for which the asset has non-performing:

1. Sub-standard assets: NPA for a period not more than 12 months. For sub-standard asset the bank has to maintain 15% of its reserves.

2. Doubtful Assets: NPA for a period more than 12 months.

3. Loss assets: It has been identified by the bank or central bank inspectors, external or internal auditor. But the amount of loan has not been written off, partly or wholly and it is not recoverable.

2.1. Causes of NPA: The reasons for NPAs are “Bad Loans” or defaults. Default, in the financial term, is the non-payment of a loan installment. This is due to the following reasons:

· Bad lending practices/ Usual banking operations

· Recession (as happened in Japan and South Asia)

· External environments (business cycle, natural calamities, Disease Occurrence, etc )

· Incremental component (due to internal management of bank, like terms of credit, credit policy etc)

2.2. Impact of NPA: The impact of NPAs does not just reflect badly in a account books of banks, they also have negative impact the national economy. Following are some of the impact of NPAs:

· Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses

· Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments.

· Liquidity problems may ensue, when bank do not get loan repayment or interest payments.

· Depositors do not get rightful returns and many times may lose uninsured deposits. Bank shareholders are adversely affected

3. REVIEW OF LITERATURE:

Misra and Dhal (2009). In their study “Pro-Cyclical Management of Banks’ Non-Performing Loans by the Indian Public Sector Banks” revealed that NPAs are influenced by three major sets of factors, i.e., bank specific indicators relating to asset size, terms of credit, financial innovations (non-interest income), credit orientation, and the business cycle shocks and regulatory capital requirement. Using regression model, it is found that in the presence of macroeconomic shocks, the terms of credit variables such as maturity, interest rate, collateral and bank specific variables had significant impact on the banks' non-performing loans.

Kaur and Singh (2011), in their study revealed that in order to improve the efficiency and profitability, the NPAs have to be scheduled. Various steps have been taken by RBI and central bank to reduce the rate of NPAs in India. And because of this level of NPA of Indian Bank have decline. But more efforts need to be taken. As per the international standards, the NPAs level of our banks is still very high. Both private and public banks showed a declining trend in gross and net NPAs over the study period but public sector banks have higher ratio as compare to private sector banks reason behind that private sector banks have a secured loan policy as compares to public sector banks. Gross and net NPAs have increased in absolute terms till 2002 and started declining after that, yet they have declined significantly in relative terms in the given period.

Gumparthi, Khatri and Manickavasagam (2011), the amount of risk assessed and which is now experienced in respect of these clients were found to be similar in the case of the weighted average model because it has higher predictive power. Clients with low scores and high risks were found to be defaulters on the other hand, while those with high scores and low risk have been prompt payers. The companies which operate in medium risk or in tolerable were having a high risk NPA. The new discriminate model can be used to identify NPAs. This will help the Indian bank to reduce the level of their non-performing assets. For evaluating the credit worthiness of the clients qualitative factors play a major role.

Dash and Kabra (2010), it has been revealed from the study that the large banks are not necessarily more effective in screening loan customers when compared to their smaller counterparts as there is no significant relationship between the size of a banking institution and the level of NPAs it reports.

Uppal (2011) reviewed the banking sector reforms’ policy, crucial issues and agenda for the future on the basis of certain parameters like profitability, productivity and NPAs’ management. In the post-banking sector reforms period, the study concludes that foreign banks and new private sector banks are better in performance and profitability and NPA as compared to our public sector banks.

Arora (2013), it can be revealed that Indian banks efficiently manage credit risk. The results also revealed that there is a significant difference between the Private sector and Indian Public banks in Credit Risk Analysis. Credit Risk Analysis and its management is much better in New Private Sector banks and Old Private sector banks, as compared to its counterpart State Bank of India and its associates and other public sector banks.

4. STATEMENT OF THE PROBLEM:

Non-performing Assets (NPA) has emerged as a biggest threat to banking industry in India for last decades. Despite taking various measurable steps to control the NPA by RBI and Finance Ministry, concrete results are not appearing. The severity of the problem is that almost every branches of PNB have increase rate of NPA. Hence, the present study has focused on the trend of non-performing assets of Punjab National Bank for the last five years and the impact of NPA on Net Profit.

5. OBJECTIVES OF THE STUDY:

1. To study the Total Advances, Net Profit, Gross NPA and Net NPA of PNB.

2. To study the impact of NPA on in PNB’s Net Profit.

3. To examine the gross NPAs and net NPAs of PNB.

4. To compare the total advances, net profits, gross NPA and net NPA. .

5. To suggest measures to control the menace of NPAs in PNB.

6. RESEARCH METHODOLOGY:

Methodology describes the research route to be followed, the instruments to be used, universe and sample of the study for the data to be collected, the tools of analysis used and pattern of deducing conclusions.

6.1 Scope of the Study:

The present study of Non-performing assets is confined and restricted to the boundary of Punjab National Bank only and data is analyzed since 2011up to 2015.

6.2 Data Collection:

Data is gathered from the secondary sources to achieve the aforesaid objectives. The data is collected from the Internet, RBI bulletins, research papers and the annual reports of Punjab National Bank for the period of six years from 2011 to 2015.

6.3 Tools of Data Analysis:

The data collected from the secondary sources relating to NPAs has been analyzed and tabulated and drawn the appropriate tables. Interpretations were made based on table.

6.4 Data Analysis:

The data has been analyzed by using tables and coefficient of correlation. Table is used to compare total advances, gross NPA, net NPA and profits of PNB. By using the coefficient of correlation determine whether there is any relation between Net Profits and Net NPA of PNB or not. Statistical tool like correlation has been used. The study is confined a period of five years i.e., from 2011 to 2015.

7. RESULTS:

Table – 1: Total Advances Compared with Net Profit, Gross NPA andNet NPA of PNB

Year	Total Advances	Gross NPA	Net NPA	Net Profit	% of Gross NPA on Total Advances	% of Net NPA on Total Advances	% of Gross NPA on Net Profit	% of Net NPA on Net Profit
2010 - 2011	242,107.00	4379	2039	4433	1.8	0.84	98.78	46.00
2011 - 2012	293,775.00	8720	4454	4884	3.0	1.52	178.54	91.20
2012 - 2013	308,725.00	13466	7237	4748	4.4	2.34	283.61	152.42
2013 - 2014	349,269.00	18880	9917	3062	5.4	2.84	616.59	323.87
2014 - 2015	380,534.00	25695	15397	3343	6.8	4.05	768.62	460.57

(Source: Annual Report of PNB)

Interpretation: From the above table it is revealed that the coefficient of correlation is equal to -0.9683. It means that there is a high degree of positive correlation between Net NPA and Net Profit. It can be said that when NPA increase, the net profit is also increase. As NPA is directly related to advance through from which banks have earned through this advance and when NPA increase it effect the income of the bank resulted in decrease in profit. The main reason of this is poor credit risk management of the bank.

7. FINDINGS OF THE STUDY:

1. Gross NPA and Net NPA of PNB are increasing every year at very high rate during the studied period. As shown from the table -1 Gross NPA as compared to 2010-2011(i.e.4379) is increased by 486% in 2014-2015 (i.e.25695). Net NPA is also increased by 655% which is very high as compared with increase in the percentage of total advance (57%) in last five years. It clearly shows the poor credit risk management system of the Punjab National Bank.

2. Total advances given by PNB are increasing continuously but the net profit is decreasing year for the last three years and shown no sign of improvement and reason behind this is increase in NPA at very high rate.

3. Because of mismanagement of credit risk in PNB there is a positive relation between Total Advances, Net Profits and NPA of bank which is not at all good for the future of bank as today’s decrease in profit will very soon converted into loss for the bank and it is not a good sign for any bank.

4. Positive relation between Net NPA and Net profits as the bank is not properly following the KYC laded by the RBI.

5. There is an adverse effect on the Profitability and Liquidity of Punjab National Bank. Because of this bank will be unable to give new credit to customers in market.

8. CONCLUSION:

The increased level of NPA in every coming year and decreasing profit is remained as a area of concern for the Punjab National Bank as it indicates inefficiency of credit risk management. Today PNB should take effective pro-active measures to control Non-Performing Assets along with the assistance of Finance Ministry and the Reserve Bank of India. Indian Bank is doing its level best to trim down its NPA and will definitely succeed by following the right legal and diplomatic ways to recover the same. The NPAs level of PNB is very high as per national or international standards. For any bank it is highly impossible to have zero percentage NPAs with any standard. But at least PNB can try to reduce it in coming year as it competing with foreign banks to maintain international standard. The PNB should ensure before giving any loan they should only give loans to creditworthy customers as prevention is always better than cure and should follow KYC very strictly.

9. SUGGESTIONS:

1. KYC should be strictly followed by the bank to avoid increase in NPA.

2. A proper Credit Risk Management should be developed and evaluate regularly and also credit appraisal and performance evaluation method should be adopted.

3. Procedure of recovery of Loan should be strict.

4. Banks employees should be properly trained on credit risk management system.

10. REFERENCES:

1. Mishra, B. M., and Dhal, S. (2010). Pro-cyclical management of banks’ non-performing loans by the Indian public sector banks. BIS Asian Research Papers.

2. Kaur, K., and Singh, B. (2011). Non-performing assets of public and private sector banks (a comparative study). South Asian Journal of Marketing and Management Research, 1(3), 54-72.

3. Gumparthi, S., Khatri, S., and Manickavasagam, V. (2011). Design and development of credit rating model for public sector banks in India: Special reference to small and medium enterprises. Journal of Accounting and Taxation, 3(3), 105.

4. Dash M. K. and Kabra G., The Determinants of Non-Performing Assets in Indian Commercial Banks – An Econometric Study, Middle Eastern Finance and Economics (Euro journals Publishing Inc.), 2010

5. Uppal, R. K. (2011), “Banking Sector Reforms: Policy Implications and Fresh Outlook”, Information Management and Business Review, Vol. 2, No. 2, pp.55-64.

6. Arora, S. (2013). Credit Risk Analysis in Indian Commercial Banks-An Empirical Investigation. Asia-Pacific Finance and Accounting Review, 1(2), 25.

Received on 07.07.2016 Modified on 15.07.2016

Asian J. Management. 2016; 7(4): 272-276.

DOI: 10.5958/2321-5763.2016.00041.X

Year	X (NPA)	Y (Net Profit)	X²	Y²	XY
2010 - 2011	2039	4433	4157521	19651489	9038887
012 - 2013	7237	4748	52374169	22543504	34361276
2013 - 2014	9917	3062	98346889	9375844	30365854
2014 - 2015	15397	3343	237067609	11175649	51472171
N=5	39044	20470	411784304	86599942	146991524