Financial Performance Sensitivity to Non-Performing Assets in Indian Public Sector Banks

Abstract

Non-Performing Assets (NPAs) have remained a persistent and structural problem in the context of the public sector banking system of India, impacting the financial performance and stability of banks. This research aims at evaluating the sensitivity of some financial performance indicators, namely, ROA, ROE, and NIM to the changes in NPAs using Gross NPA and Net NPA as proxies for asset quality. Four Indian public sector banks, State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), and Canara Bank, have been selected for examination during the five years, i.e., 2020-21 to 2024-25. Secondary data, obtained from the annual reports of banks and RBI publications will be analysed by applying the methods of descriptive statistics, correlation analysis, and multiple regression.

Results show that Gross NPA has a significantly negative correlation with all three financial performance indicators, which is demonstrated by correlation coefficients of -0.867, -0.869, and -0.697 for ROA, ROE, and NIM respectively. Multiple regressions show a statistically significant effect of Gross NPA on ROA with β of -0.116 (p = 0.038) and approximately 75.4% of total variance explained, i.e., R² of 0.754. Despite the same pattern of relationships, Net NPA cannot serve as an independent variable in regressions due to perfect multicollinearity with Gross NPA (r = 0.966). The research demonstrates a general improvement of asset quality and financial performance indicators caused by such regulations as IBC and AQR. Interpretation of results is carried out based on the Bad Management Hypothesis, Signalling Theory, and Agency Theory.