BANKS’ PROFITABILITY AND NPAs: AN EMPIRICAL STUDY

Abstract

Banks are credit institutions which act as a mediator between lenders (depositors) and borrowers and assume credit risk.  As per the Reserve Bank of India report, credit risk is, by far, the largest risk faced by banks in India. The non-performing assets (NPAs) are not a recent phenomenon in the Indian banks system. The NPAs are unrecovered loans of the banks. A bank’s NPAs have been an indicator of the level of their credit risk. The present paper studies the NPAs of banking sector in Indian context. The data has been collected for twelve years from 2001 till 2012. Return on Assets (ROA) has been taken to gauge the bank’s profitability. ROA reflects the efficiency with which banks deploy their assets. The paper attempts to establish an empirical relationship between NPAs and ROA. Various observation and statistical tools such as correlation, regression, data representation tools, among others have been deployed in the study. The paper reveals a negative association NPAs and ROA. The F value has been found significant in the model, which indicates that NPAs are predictors of ROA. Thus, better sharing of credit information among lenders, growth in the economy, superior credit monitoring systems, among others, can help banks reduce NPAs and thereby increase their ROA.