Non-Performing Assets (NPA’s) – Impact on Financial Stability of Indian Commercial Banks

For any economy credit is required for faster growth, but any outstanding advances may turn macroeconomic shocks. There can be various reasons for Non-Performing Assets (NPA) like low scrutiny by banks, wilful defaulter, low earnings affecting ability of entities to pay back loans, economic slowdown, government policies etc. This study aims to bridge this gap by analysing the performance and impact of NPA’s on the State Bank Of India (SBI) top public commercial bank by market capitalisation and HDFC Bank, a top private bank according to market capitalisation. For the current study, HDFC and SBI bank was considered and data for the study was collected using secondary source, i.e. annual reports. The data was collected in a time series format for different financial variables. Keeping Net NPA to Net Advances as an independent variable and Net Profit/Income Ratio and ROA as dependent variable hypothesis was formed. As per the findings, NPA significantly impact profitability of Banks’ and Debt to Asset Ratio. The impact of NPA was found to be more profound in the SBI than HDFC, but it was observed that SBI’s NPA is better managed than that of HDFC, since it made more provisions for NPA, had better loan structures and profitability metrics. It is suggested that Private Commercial Banks can maintain more provisions for NPA and better utilization of assets to reduce their Debt to Asset Ratio to mitigate the negative affect of NPA.