MSC Banking and Finance: Bad Loans in Indian Commercial Banks Report

This report, submitted for an MSc in Banking and Finance at Sheffield Business School, investigates the critical issue of bad loans in the Indian commercial banking sector. It begins with an introduction outlining the problem's significance, contextualizing the research within the Indian banking environment, and establishing the research questions. The study delves into the macroeconomic parameters, the role of non-performing assets (NPAs), and their impact on bank performance. A literature review synthesizes existing research on bad loans, their classification, impacts, and contributing causes, including poor supervision, market uncertainties, and cost consciousness. The methodology section details the research approach, type, and data analysis tools employed. Findings are presented, analyzing the causes that led to rising bad loans. The report then discusses the limitations of the research, before concluding with a summary of the findings and recommendations, including curative measures for addressing the problem. The report considers various banks in the Indian banking industry to understand and provide a solution for the issue of bad loans.

Name of the Student
Name of the University
Author’s Note
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Table of Contents
Chapter 1: Introduction................................................................................................................4
What is the issue/problem?.......................................................................................................5
Why is the issue/problem important?......................................................................................6
Context of Research...................................................................................................................6
Research Questions:....................................................................................................................14
Chapter 2: Literature Review.....................................................................................................14
Summary of Literature............................................................................................................19
Methodology.............................................................................................................................21
Research Type..........................................................................................................................22
Data Analysis Tools..................................................................................................................23
Chapter 4: Findings and Analysis..............................................................................................39
Limitations of the Research....................................................................................................53
Chapter 5: Conclusion & Findings............................................................................................54
Causes that led to rising bad loans.........................................................................................57
Curative Measures...................................................................................................................59
References.....................................................................................................................................62
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Chapter 1: Introduction
The major challenges that are being faced by the Indian banking industry circumscribes
not only issues related to financial statements but also the incorporation of that long and the way
to understand its impact upon the financial health of the firms. Notably there are various
macroeconomic parameters that renders their impact in a significant level due to inter temporal
level of environment of the non-performing assets considered to be bad loans, the market
capitalization and the core competence factors. It is to be understood that the macroeconomic
parametric factors that examines the bad loans in accordance with the four key causes which are
awful supervision, cost consciousness, uncertainties in the market and many more. The feedback
phase is from 2005 to 2017 where various panels of data are being statistically estimated to
understand the Frontier model Garner causality, dynamic panel models, etc. that crucial impact
upon the banks. In this paper, this deterministic approach have been implemented to understand
the outcome of bad loans and their response that impact the banks as well as the macroeconomic
parametric factors that are associated with the commercial banking sector in India.
The non-performing assets are one of the crucial aspect of concern for every Banks is not
only the entire performance but also simultaneously the areas through which the bank can
improve their performance. From a critical point of view, the realistic Sinha you incorporate that
Indian banking division is in the process of experiencing serious issues regarding the non-
performing assets. The NPAs has relatively bigger impact upon ballistic view the credit non
payments as well as upon the liquidity of the banks. Specifically, upon the public division Bank
it has been found that the non-performing assets if handled properly then it enhances the
competence and effectiveness of Banking performance. Various steps are considered by the
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government in order to decrease the non-performing assets as well as the risk associated due to
the nonperformance of banking assets. It is to be understood that 0% non-performing assets is
quite impractical and hence in that case Indian banks must printer their attention to make sure
that the offer loans but most importantly to the creditworthy clients.
What is the issue/problem?
The implication of the bad loans is associated with its importance for which it arises in
the commercial banks of India. Notably every Indian banks needs assets we can provide credit
loans to potential consumer service becomes a matter of worrying if those assets becomes non-
performing for the banks. Non-performing assets are one of the most excellent tool that measures
the effectiveness of the bank and how sound performance it is executing in the market where it
prevail. Bad loans representative of a Bank's performance but also an essential. The towards the
credit risk associated with the banking performance. Bad loans are the allowable stress that every
banking business have to suffer subsequently. However, crucial necessity loans available the cost
of the fact that it remains unutilized or non-performing. Understanding on this aspect focuses on
the reliability of the customers as well as the banks’ ability to strategize the process of
overseeing bad loans. Locate me the public sector banks of demonstrated their greater execution
as compared to the private divisional banks of the country of India to the extent up to which
money that leads to the task under consideration.
The public Centre banks on this respect of non-performing assets have found to
demonstrate their performance coupled with greater outcome. How were the main issue of the
public sector bank without expanding level of non-performing assets despite of the fact that
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segments ok banking industry which non-performing Assets has crucial impact is monotonically
decreasing impact on the NPAs. To emphasize this issue it can be incorporated that the decrease
in the badlands have reinforced the examination of credit system of the consumers as well as
implementation of appropriate regulatory governance over the risk associated with it. The Indian
banking division has confirmed that major issues with the public sector banks in comparison to
thought of the day with division banks when the major aspect of concern is to enhance The
Prophecy and see and success level of the banks which is getting hamper due to improper control
over the non-performing assets.
Why is the issue/problem important?
The issue is important as per Mukherjee (2016), because of the fact that Indian banks are
top list of bad loans has collected by the lenders of the country. Compare to other economy is
like that of United Kingdom, states of America Japan, china, etc. it is been found that India is
consulted with dog challenge regarding non-performing assets being 5TH Nation among the 39
big Economics of the world that is suffered due to improper regulation or methodical
systematization of bad loans as well as non-performing assets.
Context of Research
The research is being performed upon the Indian banking industry and objectives of the
research is associated to create a proper information regarding the performance of the non-
performing assets like bad loans and to understand the extent of impact of it upon the Indian
banking sector. Confrontation with the problem of bad loans that is extensively taking place in
the Indian banking industry dog it is being rent at V nation in the world with such problem there
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is requisition for understanding the industrial scenario of the first Commercial Bank of India and
these financial data and information regarding non-performing assets are being utilized to
conduct the research.
Banking environment in India
The environment of the research circumscribes the Indian banking industry and
specifically the commercial banks of the country. The problems comes under focus due to the
challenges of bad loans confronted by banks. The ranking of the country in terms of faced
problem regarding bad loans is five throughout the world. The growth of the banking sector is
rapid and hence commercial banks are being taken under consideration for a better research to
understand the fast moving complex market scenarios based on fluctuating industrial conditions.
The co-operative banks and the commercial; banks together comprises of the Indian banking
industry in terms of facing challenges regarding the problems of non-performing assets. Hence,
banking industry of India has large involvement of the commercial banks as well as cooperative
banks. The proportion of the commercial banks are segregated with scheduled and non-
scheduled commercial banks upon which the scheduled commercial banks are one of the
commercial banks that incorporates the second schedule of The Reserve Bank of India Act 1934.
This scheduled commercial banks the activity based on certain circumstances where the
connection with paid up capital, reserves, etc. are of crucial importance. On the other hand the
scheduled commercial banks conquerors of the old and new domestic private sector banks, local
rural banks, overseas sector banks, State bank of India and its subsidiaries. The banks in India is
thus state owned specifically in two phases by the year 1969 and 1980 where 14 major private
sector banks were commenced and the remaining other 6 were established by the 1980 followed
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by the era of nationalization. The assessment was done based on the share of the credit for which
90 % of the divisional segment were done for government possessed bank while the rest of the
segment is being done by uniformly segregating them among the foreign banks and that of the
small privately owned banks whose size limit were set by the government as per the protocols of
nationalization. It is being found that from 1980 to 1992 the public sector banks were completely
owned by the government of the country. The first and foremost bank that shifted to become a
public sector bank was State Bank of India (SBI) by the year 1992-1993.
Figure 1: Comparison of different countries in terms of loans borrowed from the financial institutions
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Figure 2: Trends of housing loans Figure 3: Bank wise segmentation of the loans taken by households
Source: Ganapathy, Alagarsamy and Raguraman. (2017)
Since the nationalization of the banks it is been found that the banking sector is booming
based on it expansion in the market. From 1969 to 2015 the commercial banking sector have
found to grow up to 152 from 89. This raised the credibility of the banking financial services and
the products that are being deployed by them in the market. The images reveals that fact that
among the credit enjoyed by the households that are being obtained from various countries
throughout the world a brief comparison is being made between Brazil, China, Germany, India,
Indonesia, Kenya, UK, USA and Russia. There it is been seen that the borrowing from the
financial institutions specifically in India have lessened as compared to other countries. This may
be due to the reason that the company is not able to maintain the balance between acquiring
deposits to make and siphoning them off to the people who are making requisitions for loans.
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Due to this reason the banks are raising their interest rate upon loans within fixed stipulated
periods and the common people are not found to properly repay their loans on time. This
consequently leads to low recovery rate of the bank debts and hence the bad loans becomes
higher and are being considered as the non-preforming assets for the banks. Also another reason
comes out as it is been seen that there are households within the country of India that are not able
to return bank the loans on time due to the reason that accounts of bad loans is getting higher in
case of the commercial banks of the country. These factors altogether is commencing the
provision of bad loans that are not being matched with equally payable amount by the loan takers
from the banks. Based on the problem it is being seen from the other two figures that the share of
the total credits from the banks is lower than the amount that the loan takers have to pay in return
of taking the loans. Moreover, it is also been seen from figure 3 that the common people are thus
getting interested in the foreign banks rather than the commercial banks of the country. The shift
is extracting the consumer share of the commercial banks and siphoning them off to the foreign
banks that are getting more amount of grip upon the country of India in terms of market
capitalization.
The commercial banks of the country are performing salient functions regarding
allowance for deposits made as well as lending loans as required. However, there is no risk
associated with the deposits made by the people as the banks are performing enough responsibly
in repaying the deposits along with the allotted rate of interest. On the other hand, in case of the
lending of the loans there is presence of sufficient amount of risk as there is less amount of
certainty regarding the repayment of loans. These non-repaid loans are no found to again work as
an asset for the banks and due to this reason these assets are not found to add any more amount
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of value in the banking performance and hence get allotted as the non-performing assets for the
banks that are termed as the bad loans. However, if proper emphasize is being given in
understanding the reason behinds such anomaly then it can be seen that the loans are given in
order to earn return from the lend people. However, their ability to repay the loans are not only
the factor in determining their ability to repay the loans bank. The banks are found not to be able
to maintain the balance between the deposits that are being made by people in the banks and
moreover they are raising the rate of interest upon loans. This is creating more gap between the
lending of capital and depositing of capital into the banks. When the mismatch or the imbalance
needs to be covered up then to do so the banks focuses upon raising the rate of interest in order to
cover up the gap. This is leading to further gap in the commercial banking sector and directing
the consumers to shift upon the foreign banks which are to found to be better competitors in
comparison to the commercial banks of the country. The whole scenario is a mismanagement of
the funds as well as a tendency to cover up the risk associated with the borrower and the lenders
at a faster rate without looking forward upon the ill effect of such financial discrepancies and
working strategy of the banks in the sole motive of profit maximization. Since the efficiency of
the banks and the condition of the financial health of the banks are sufficiently reflected by the
amount of bad loans that the banks have hence it is important that the commercial banks of India
should focus upon recovering their non-performing assets without losing customers to foreign
competitors and with accomplishing this activity based upon financially feasible manner that
would not threaten their stability in the industry for the long run. Since the bad loans are key
reflector of the banks financial stability hence the banks should such sort of plans that guarantees
that the loans will be recovered with the constant that loss of consumer share in the industry will
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be low from their side as no customer will feel insecure regarding their investments in the banks
as well as their credibility upon the banks will be intact. Notably, bad loans hinders the revenue
generation process up to the anticipated level if they are not recovered within or by 3 months
from the estimated recovery periods. However, banks faces the pressure of returning back the
deposits to the lenders and hence they have to create provisions for bank loans. When the banks
faces too much of bad loans then the performance of the banks are thus hindered as they are
committed to return the deposits back to the lenders. Moreover, the depositors have deposited
their money in order to gain interest form the banks. So the amount of interest upon the
principles of the deposited amount becomes also a liability for the banks as the banks are not
able to recover the amount due to the non-performing assets that is not able to add value to the
financial performance of the banks. Thus not only the banks but also the overall economy in
which the banks are being performing also gets affected by the bad loans of the commercial
banks. The net worth of the banks falls due to these non-performing assets as the extra amount of
valuation that their performing assets earns gets equally subtracted due to the provision made for
the non-performing assets that uncertainly took place. The account linked with the loans as not
sufficiently supervised due to which the bad loans are increasing followed by playing a key
factor in deteriorating the worth of the bank’s financial performance as well as leading to the
increase in the collateral securities due to the wilful non-repayment made to the borrowers. It is
also been seen that the amount of bad loans are more in the public sector banks in comparison to
that of the private sector banks. This signifies the fact that the banks needs to cover up their
loopholes in order to perform in a better way and lower their non-performing assets. Moreover,
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this will help in increasing the overall productivity of the banks in a short span of time ensuring
financial stability of the banks.
The role of the asset restructuring companies (ARCs) can be considered as a key risk
drawing institutions and support the banks from suffering due to bad debts as these agencies
work sufficiently only keeping in focus the recovering of the loans. A powerful system is the
pillar in stimulating a country and encouraging it towards acquisition of investments as well as
reserves that will support the ill situation of the financial health of the financial institutions. At
the initial stage of the liberalization in 1991 followed by the financial reforms that took place due
to effective economic growth. It is been found that 90 % of the assets of the country is been
owned by the commercial banks and the foreign banks, tiny local banks in the rural areas of the
country possess less amount of market share in the banking system of the country. However, due
to deficit in properly managing the non-performing assets the problem is downgrading the
quality of the banks performance in the banking sector of India. The asset quality is not a big
issue before the era of globalization in India but after the liberalization or globalization took
place in the country the market entry and exist by overseas competitors became high and
consumers within the country prefer to become brand loyal to those foreign banks as they are
found to be more financially safe as compared to that of the domestic commercial banks. Before
1991 the asset quality was not linked with the key goals of the banks. However after
liberalization the banks is faced by the challenge in considering that how much value is being
added by their assets in the market based on which the banks is able to lend loans to the
borrowers and acquire deposits. The banks are now focused much more on the banking
environment from overall perspectives as well as the key factors like diversification, growth in
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