Mounting of Non-Performing Assets and its Impact on the Performance of Indian Banking Sector (A Comparative Analysis on the Public & Private Sectors and Foreign Banks)

The financial sector reforms initiated in India as part of the broader canvas of economic reforms since 1991 have led to strengthening of the banking sector in the last two and half decades. The entry of new private sector banks and relaxing the policy towards the foreign banks had led to the creation of a more competitive environment in Indian banking sector. With these developments, the banking sector in India is facing two challenges, i.e., higher Non-Performing Assets (NPAs) culminating into banking crisis on one hand and challenges from younger banks and foreign banks offering diversified banking services tailored according to the needs of customers and compatible with their financial stability. In countries, like Philippines, Korea, Thailand, China, etc., banks were restructured or merged or their NPAs were transferred to the Asset Management Companies or Asset Reconstruction Companies. The Indian banking system luckily has escaped this episode, despite having huge NPAs, because of their ownership with the government. However, the NPAs are still high in respect of public sector banks, whereas the new private banks and foreign banks are performing so well that their net profits are at comfortable level after due coverage of losses due to the NPAs. Against this background, this paper attempts to study the trends of NPAs in Indian banking sector, specifically sector-wise, and identify the causes and consequences of NPAs. Thus, the problem of NPAs needs lots of serious efforts; otherwise, they will erode the profitability of banks, which is not desirable for a growing economy like India.