MACROECONOMIC FACTORS, CORRUPTION, NPAS IN 4 PUBLIC SECTOR BANKS: A CROSS STUDY

Abstract

Banks play a vital role in economic development and growth of a country. A sound and healthy financial institution ensures overall stability of the system. Commercial and cooperative banks together constitute the Indian Banking System. Commercial Banks account for more than 90% of the banking sector’s assets. The public sector banks account for a substantial part of the banking activity in India. The growth in banking sector has been burdened and hindered by increasing non-performing assets. In this paper, we aim to understand the influence of macroeconomic factors such as GDP per capita, Real Interest rates and inflation along with some bank factors such as bank size, diversification of assets and priority sector lending on NPAs of four PSBs Punjab National Bank, Andhra Bank, Corporation Bank and Indian Bank. This paper also aims to understand whether corruption could be a determinant for NPAs in these banks. Keyword: Banking sector in India, non-performing assets, corruption, PSBs Introduction 1.1 Banking Sector & PSBs in India Commercial and cooperative banks together constitute the financial framework in India of which the former represent around 90% of the banking framework s assets. The SCBs are classified based on structure of ownership as Public Sector Banks (PSBs), Private Banks under Indian ownership, and Foreign Banks operating in India. The Indian banking system has grown phenomenally over the years. Most of this growth could be credited to PSBs. According to RBI, public sector banks amount to over 60% of the total assets of all SCBs in 2019. This elucidates the importance of PSBs and impact of NPAs on the entire banking system. Figure 1: Gross NPAs in Indian Banking Sector Source: Report on Trend and Progress of Banking in India 2018-19, RBI website PSBs are not in a good shape due to increasing NPAs, huge losses and decrease in credit growth. They have been facing an incredible competition from Private Banks. There has been a dearth of capital for PSBs which led to mergers and recapitalisation initiatives by RBI to strengthen the framework. There are 12 PSBs in India post mergers. The need of the hour is to understand how to reduce NPAs and maintain stability in the financial system. 1.2 Determinants for NPAs The deterioration in asset quality of Indian banks, especially that of PSBs, could be tracked back to the credit explosion of 2006-2011 when bank credit increased at an average rate of more than 20%. Unfavourable macro-financial environment; lenient credit evaluation and post-sanction monitoring benchmarks; project lags and the absence of a strong bankruptcy administration until May 2016. The non-performing assets of the banking industry have been increasing over the years. According to RBI’s Financial Stability Report of 2019, the Gross NPA ratio stood at 9.3% for all SCBs. High NPAs affect the profitability of banks. They lead to capital erosion of banks. Banks face the risk of liquidity crunch if the NPAs increase beyond acceptable threshold. This may cause panic among the public who might have placed their earnings in the form of deposits in these banks. A sudden surge in bank runs could lead to a ripple effect that topples the whole system.