Assessing the Relationship between Non-Performing Assets (NPAs) and Profitability of Banks in India

The banking sector plays a pivotal role in the economic development and stability of a country, particularly in developing nations like India, where financial systems are predominantly bank-based. Banks act as primary financial intermediaries, converting deposits into productive investments, which is essential for facilitating economic growth (Ambarkhane et al., 2022). In the 21st century, savers and borrowers have numerous options, such as the share market and mutual funds, which offer high returns but come with significant risks. Despite these alternatives, banks remain crucial for financial stability, although instances of bank failures and scams, such as those involving Punjab National Bank, Yes Bank, and Bank of Baroda, highlight vulnerabilities within the system. The importance of banking in economic development cannot be overstated, as it underpins financial stability, supports economic activities, and enhances growth prospects. Continuous efforts to improve the efficiency and profitability of banks are essential for sustaining economic development and stability (Ambarkhane et al., 2022; Vasudevan, 2018; Al-Homaidi et al., 2018; Almaqtari et al., 2018; Gaur and Mohapatra, 2021). Several reforms have been undertaken to strengthen the banking system in India. The liberalization and privatization efforts have led to increased competition, compelling public sector banks (PSBs) to compete with private and foreign banks under the same regulatory framework (Banerjee and Velamuri, 2015). Profitability in the banking sector can be determined at both micro and macro levels. At the micro level, profit is required to keep banks competitive, while at the macro level, profitability is necessary to absorb external negative shocks and achieve stability (Al-Homaidi et al., 2018). Bank profitability is influenced by a combination of internal and external factors, which can be broadly categorized into bank-specific, industry-specific, and macroeconomic determinants. Non-performing assets (NPAs) negatively affect profitability, as they represent loans that are not generating income and may require provisions for bad debts (Gaur and Mohapatra, 2021; Bapat, 2017). This study analyzes the trend in NPAs and their impact on profitability by considering return on assets (ROA) and return on equity (ROE) as proxies. It examines the variation of NPAs across various bank groups, namely PSBs, private sector banks (PVBs), and foreign banks (FBs), and their impact on profitability. By taking into account other variables, the study aims to determine whether the impact of NPAs on bank profitability is greater compared to other factors.