Non-Performing Assets and Capital Adequacy Position: A Study on Selected Public, Private and Foreign Commercial Banks in India

Abstract

Credit acts as a lubricant which keeps the wheels of an economy in motion. Bank lending constitutes the main source of credit generation within an economy. It is imperative on the bank's part to ensure that all the funds disbursed as loans return back to them with the pre-defined levels of interest. This ensures the smooth continuance of bank's lending operations. Defaults on the part of counterparty to repay the loan amount or interest installment(s) lead to serious strain on bank's profitability and capital reserves. Taking cognizance of this situation, Basel Committee prioritizes maintenance of capital adequacy of banks by banking regulators in their respective sovereign jurisdictions. This study considers a sample of top five banks in terms of average asset holding within each of the three categories, that is, public sector, private sector and foreign. The bank categories were tested for differences in terms of Net Non-Performing Assets (NNPA) ratio and Capital to Risk-weighted Assets Ratio (CRAR). Data of three financial years beginning from fiscal year 2014–15 were considered for the study.