“A STUDY ON NON PERFORMING ASSETS OF PUBLIC SECTOR BANKS IN INDIA WITH SPECIAL REFERENCE TO STATE BANK OF TRAVANCORE” Thesis submitted to Cochin University of Science and Technology for the award of the Degree of Doctor of Philosophy under the Faculty of Social Sciences by SIRAJ.K.K Reg.No.3355 Under the guidance of Prof.(Dr.) P.SUDARSANAN PILLAI Chairman, Board of Studies in Commerce CUSAT SCHOOL OF MANAGEMENT STUDIES COCHIN UNIVERSITY OF SCIENCE AND TECHNOLOGY COCHIN – 682 022 February 2014 A Study on Non Performing Assets of Public Sector Banks in India with Special Reference to State Bank of Travancore Ph.D. Thesis under the Faculty of Social Sciences Author Siraj K.K Research Scholar School of Management Studies Cochin University of Science and Technology Kochi – 682 022 Email: Supervising Guide Prof (Dr.) P. Sudarsanan Pillai Chairman Board of Studies in Commerce Cochin University of Science and Technology Kochi – 682 022 Email: School of Management Studies Cochin University of Science and Technology Kochi – 682 022 February 2014 Prof. (Dr.) P. SUDARSANAN PILLAI School of Management Studies Chairman Cochin University of Science and Technology Board of Studies in Commerce Kochi – 682 022 Date:……………………… This is to certify that the thesis entitled “A Study on Non Performing Assets of Public Sector Banks in India With Special Reference to State Bank of Travancore” submitted by Mr. Siraj. K. K. to Cochin University of Science and Technology, for the award of the Degree of Doctor of Philosophy under the Faculty of Social Science is a record of bona fide research work carried out under my guidance and supervision and that it has not previously formed the basis for the award of any Degree, Diploma, Associateship, Fellowship or any other similar titles of any University or Institution. Prof. (Dr). P.Sudarsanan Pillai Supervising Guide Resi: ‘Haribhavanam’, Chunangamveli, Erumathala (P.O), Aluva, Ernakulam, Kerala – 683112 Phone: (Off.) 0484 – 2838382, Mob: 09846045655, 09846345654, E-mail: [email protected] | [email protected] Academic Consultant, Kerala University of Fisheries and Ocean Studies Member, Board of Governors, Centre for Management Development, Trivandurm Ex - Dean, Faculty of Social Sciences, CUSAT | Ex – Director, School of Management Studies, CUSAT | Ex- Head, Department of Commerce, CUSAT Ex – Member, Senate & Syndicate, CUSAT | Ex- Dean, Faculty of Commerce, Mahatma Gandhi University, Kottayam | Ex-Dean Faculty of Commerce & Management, Kannur University, Kannur I, Siraj.K.K. hereby declare that the dissertation entitled “A Study on Non Performing Assets of Public Sector Banks in India with Special Reference to State Bank of Travancore” submitted to Cochin University of Science and Technology for the award of the Degree of Doctor of Philosophy is a record of bona fide research done by me under the guidance and supervision of Prof. (Dr). P. Sudarsanan Pillai, Chairman, Board of Studies in Commerce, in the School of Management Studies, Cochin University of Science and Technology and that it has not previously formed the basis for the award of any Degree, Diploma, Associateship, Fellowship, or any other similar title of recognition. Siraj K.K. First of all, I praise the almighty God for his abundant blessings showered upon me without which this research work would never have been possible. I would like to express my sincere gratitude to Prof. (Dr) P. Sudarsanan Pillai, Chairman, Board of Studies in Commerce and Former Dean, Faculty of Social Sciences, Cochin University of Science and Technology, my guide and mentor for accepting me and for his constant encouragement and support which to me is wordless to explain. I am proud to record that his immense knowledge and expertise have benefited me in each and every sphere of the research work. I am grateful to Dr. Rajitha Kumar S, Associate Professor and Member, Doctoral Committee, for his unconditional support at each and every stage of my research. I sincerely thank Dr.M. Bhasi, Director, School of Management Studies, for his timely support and assistance during the research work. I owe gratitude to the faculty members and members of the staff, School of Management Studies for their kind support and valuable comments. Special thanks to Dr. Zakkariya. K.A, Associate Professor, who always encouraged, supported and inspired me. I am extremely grateful to Dr.V.S. Kaveri, National Institute of Bank Management, Pune, who supported me in the initial stages of my research. I am thankful to Dr. Sahadevan, IIM Lucknow for his constant support and encouragement. I am also thankful to all officers working with State Bank of Travancore who helped me with their knowledge and expertise in the subject and for the cooperation extended to me, especially Sri. Varadaraja Iyer, AGM (Planning Department), , Ms. Jasmi,P.M, Deputy Manager (SARC), Sri. Tojo Alex and Mr. Satheesh Kumar. I am highly obliged to all the respondents who spared their valuable time for me., There are many learned researchers whose works I have referred to, in the process of reviewing the literature. I take this opportunity to express my heartfelt gratitude to them, for guiding me with immense and valuable information. I am indebted to my fellow researchers in the School of Management Studies for their timely support. Special thanks to Mr. Peter Thenekkal and Mr. Maneesh, for supporting me at each and every stage of this research. I remember my family with gratitude, for the love and encouragement I received from them. For my parents Mr. Kunjumuhammed and Mrs. Suhara Beevi, it is a dream coming true. My wife Leji and our kids Faizah and Faiz supported me with their hearts and minds. Lastly, I would like to acknowledge the contribution of those whose names have not been mentioned but who have, nevertheless, played their part in making this research work successful. Siraj.K.K The reforms in Indian banking sector since 1991 is deliberated mostly in terms of the significant measures that were implemented in order to develop a more vibrant, healthy, stable and efficient banking sector in India. The effect of a highly regulated banking environment on asset quality, productivity and performance of banks necessitated the reform process and resulted the incorporation of prudential norms for income recognition, asset classification and provisioning and capital adequacy norms, in line with international best practices. The improvements in asset quality and a reduction in non-performing assets were the primary objective enunciated in the reform measures. In this context, the present research critically evaluates the trend in movement of non- performing assets of public sector banks in India during the period 2000-01 to 2011-12, thereby facilitates an evaluation of the effectiveness of NPA management in the post-millennium period. The non-performing assets is not a function of loan/advance alone, but is influenced by other bank performance indicators and also by the macroeconomic variables. In addition to explaining the trend in the movement of NPA, this research also explained the moderating and mediating role of various bank performance and macroeconomic indicators on incidence of NPA. To achieve the stated objectives, both secondary and primary data are utilized. In order to corroborate the inferences generated from the secondary data analysis, primary data are obtained on the incidence, impact and management of NPA with special reference to State Bank of Travancore. To assess the relative efficiency of public sector banks in Indian banking sector in the management of NPA, a bank group-wise analysis is undertaken. Statistical packages like Microsoft Excel, SPSS and Amos were used to analyze the data and to generate inferences. The research utilized statistical techniques such as Exponential Growth rate (EG Value), Average Annual Growth rate (AAG Rate), correlation and regression, ANOVA, Welch Statistic, Levene Test, Sobel test, Chi-square test, Z value, etc. Structural Equation Modeling is used to explain the causes of NPA. The research findings highlighted the need for improvements in NPA management in Indian public sector banks. Though the PSBs were able to curtail their NPA during the first half of the study period, the trend has reversed in the second half especially since the global financial crisis during 2007. The analysis revealed significant linkages between NPA and selected bank performance indicators and macroeconomic indicators. In a highly competitive, diverse, sophisticated banking environment, NPA can be effectively managed through incorporating more proactive measures, notably an improvement in the credit evaluation, appraisal and monitoring system of banks. Key Words: Non Performing Assets, Asset Quality, Credit risk management List of Tables List of Figures List of Abbreviations Chapter 1 INTRODUCTION ------------------------------------------------------------ 01 - 22 1.1 Background of the Study ---------------------------------------------- 01 1.2 Statement of the Problem ---------------------------------------------- 06 1.3 Research Questions ---------------------------------------------------- 09 1.4 Objectives of the Study ------------------------------------------------ 10 1.5 Hypotheses of the Study ----------------------------------------------- 10 1.6 Scope of the Study ----------------------------------------------------- 11 1.7 State Bank of Travancore: A Profile --------------------------------- 12 1.8 Research Methodology ------------------------------------------------ 14 1.8.1 The