Impact of Non-Performing Assets on Financial Performance of Selected Merged Indian Public Sector Banks

Purpose : The Government of India (GOI) restructured 13 public sector banks (PSBs) into five by amalgamation in recent years. The basis of their merger was not in the public domain. However, it was understood that the underlying reason was to obviate the need for repeated recapitalization of these banks due to the deterioration of their financials and the resultant erosion of their capital. The rising non-performing assets (NPAs) seemed to have impacted the financial performance of banks adversely, necessitating their restructuring. Therefore, the consolidation of the public sector banks aimed to make them bigger and stronger, enabling them to gain operational efficiency and access the market for their capital requirements. This study analyzed the impact of gross NPA (GNPA) on important financial ratios of public sector banks, including profitability ratios like ROA, ROE, and NIM, through correlation and regression analysis. An attempt was also made to find similarities in financial performance among different groups of amalgamated banks.

Methodology : The sample of two merged bank groups with Punjab National Bank and Union Bank of India as anchor banks were put to statistical tests on the basis of secondary data for the period from 2011–2020. Tools like ratio analysis, descriptive stats, Pearson correlation, and linear regression were used to evaluate the extent to which GNPA impacted the financial performance of PSBs.

Findings : The results indicated a negative correlation between the GNPA of PSBs and other key financial variables like CD ratio, NIM, ROA, ROE, and CAR. Also, the study highlighted the merger of weaker public sector banks with stronger ones.

Practical Implications : On the basis of the factors and model of our study, the Government of India can decide to restructure some more banks in the future by way of mergers with banks already restructured or through the privatization route as earlier announced by the Finance Minister in her Budget speech of 2021.

Originality : The earlier studies focused on finding the impact of financial indicators on the growth of NPAs; whereas, this study attempted to explore the negative effect of GNPA on the financial performance of banks.