Linking NPA to Profitability: The Case of Banking Sector in India

Abstract

In a developing economy like India, the issue of non- performing assets in the banking sector has become a serious concern for the economy. This calls for examining the causes and factors that have led to the rise of non-performing assets in the country. Non-Performing Assets (NPAs)are a threat to the overall growth of financial banking sector as they indicate the health of the banking industry. Rising non-performing assets in the Indian banking sector are directly affecting its liquidity and profitability, hence they become a major concern for the current financial distress in the economy. In the light of the above, the current study attempts to understand the concept, trends in NPAs and how NPAs affect the overall profitability of banks by using secondary data for a period of ten years from 2008 to 2018 for SBI and PNB. The data was analyzed using statistical tools like correlation coefficient and linear regression to examine the impact of NPAs on profitability. Results revealed a strong negative correlation between rising gross NPAs and declining profitability. Moreover, regression analysis revealed significant negative effects of NPA on profitability of the above two banks. It is thus necessary to decrease NPAs to improve the financial health in the banking system.