COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA BANK...

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Volume 4, Number 3, July September’ 2015 ISSN (Print):2279-0896, (Online):2279-090X PEZZOTTAITE JOURNALS SJ IF (2012): 2.844, SJ IF (2013): 5.049, SJ IF (2014): 5.81 International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1886 | Page COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA BANK WITH REFERENCE TO NPA, PROFIT AND ADVANCES Kanika Arora 16 Sachin Rohatgi 17 Dr. Preeti Sharma 18 ABSTRACT A well-built banking sector is significant for a prosperous economy. In a bank dominated economy such as India, the quality of assets of the banks is a crucial indicator of the financial health of the banking sector and hence, has important implications for the stability of the overall financial system. The loan portfolio held by banks mirrors the level of credit risk and efficiency in the allocation of bank funds. The general perception about a bank‟s health is greatly determined by the level of non - performing assets (NPAs) held in its books. It is, therefore, not surprising that the current spurt in NPAs in banks has been drawing a lot of attention of the policy makers and academicians alike. The gross non-performing asset (GNPA) ratio inched to 4.45 per cent as on March 15 this year, as compared to 4.1 per cent in March 2014, and the NNPAs have climbed up from 2.2 per cent in March 2014 to 2.36% this year according to the latest data released by the Reserve Bank of India (RBI). According to credit rating firm CRISIL (dated May 13, 2015), the gross NPAs ratio of banks are slated to grow at 0.20 percent to 4.5 percent by March 2016. In this direction, present paper is undertaken to make the comparison of NPAs between Axis Bank and Kotak Mahindra Bank. NPAs have been analyzed using Ratio method and selected statistical tool such as t-test. KEYWORDS Non-Performing Assets (NPAs), Advances, Ratio, Gross NPA, Net NPA etc. INTRODUCTION NPA is defined as a loan or an advance where payment of interest or repayment of installment of principal (in case of term loans) or both remains unpaid for a certain period. In India, the definition of NPAs has changed over time. According to the Narasimham Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of four quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced, and from March 31, 2004 onwards when interest or principle payments due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Hence, NPA‟s are negative assets for a bank and only contribute to the loss. Classification of NPA’s Banks are required to classify non-performing assets further into three categories based on the period for which the asset has remained non-performing and the realisability of the dues. (i) Sub-standard, (ii) Doubtful and (iii) Loss. Broadly, a substandard asset is one which has been classified as NPA for a period less than or equal to 12 months (earlier it was 18 months). All those assets which are considered as non-performing for period of more than 12 months (earlier it was 18 months) are called as Doubtful Assets. All those assets that cannot be recovered are called as Loss Assets. Gross NPA and Net NPA The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on the Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. Gross NPAs Ratio = Gross NPAs Gross Advances Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. 16 Assistant Professor, Amity Global Business School, Noida, India, [email protected] 17 Assistant Professor, Amity Global Business School, Noida, India, [email protected] 18 Assistant Professor, Amity Global Business School, Noida, India, [email protected]

Transcript of COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA BANK...

Page 1: COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA BANK ...pezzottaitejournals.net/pezzottaite/images/ISSUES/V4N3/IJAFMPV4N... · COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA

Volume 4, Number 3, July – September’ 2015

ISSN (Print):2279-0896, (Online):2279-090X

PEZZOTTAITE JOURNALS SJIF (2012): 2.844, SJIF (2013): 5.049, SJIF (2014): 5.81

International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1886 |P a g e

COMPARATIVE ANALYSIS OF AXIS BANK AND KOTAK MAHINDRA BANK

WITH REFERENCE TO NPA, PROFIT AND ADVANCES

Kanika Arora16 Sachin Rohatgi17 Dr. Preeti Sharma18

ABSTRACT

A well-built banking sector is significant for a prosperous economy. In a bank dominated economy such as India, the quality

of assets of the banks is a crucial indicator of the financial health of the banking sector and hence, has important implications

for the stability of the overall financial system. The loan portfolio held by banks mirrors the level of credit risk and efficiency

in the allocation of bank funds. The general perception about a bank‟s health is greatly determined by the level of non-

performing assets (NPAs) held in its books. It is, therefore, not surprising that the current spurt in NPAs in banks has been

drawing a lot of attention of the policy makers and academicians alike.

The gross non-performing asset (GNPA) ratio inched to 4.45 per cent as on March 15 this year, as compared to 4.1 per cent

in March 2014, and the NNPAs have climbed up from 2.2 per cent in March 2014 to 2.36% this year according to the latest

data released by the Reserve Bank of India (RBI). According to credit rating firm CRISIL (dated May 13, 2015), the gross

NPAs ratio of banks are slated to grow at 0.20 percent to 4.5 percent by March 2016. In this direction, present paper is

undertaken to make the comparison of NPAs between Axis Bank and Kotak Mahindra Bank. NPAs have been analyzed using

Ratio method and selected statistical tool such as t-test.

KEYWORDS

Non-Performing Assets (NPAs), Advances, Ratio, Gross NPA, Net NPA etc.

INTRODUCTION

NPA is defined as a loan or an advance where payment of interest or repayment of installment of principal (in case of term loans)

or both remains unpaid for a certain period. In India, the definition of NPAs has changed over time. According to the Narasimham

Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due

for a period of four quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced, and from March

31, 2004 onwards when interest or principle payments due to a bank remains unpaid for more than 90 days, the entire bank loan

automatically turns a non performing asset. An NPA is defined as a loan asset, which has ceased to generate any income for a

bank whether in the form of interest or principal repayment. Non-performing assets are problematic for financial institutions since

they depend on interest payments for income. Hence, NPA‟s are negative assets for a bank and only contribute to the loss.

Classification of NPA’s

Banks are required to classify non-performing assets further into three categories based on the period for which the asset has

remained non-performing and the realisability of the dues. (i) Sub-standard, (ii) Doubtful and (iii) Loss. Broadly, a substandard

asset is one which has been classified as NPA for a period less than or equal to 12 months (earlier it was 18 months). All those

assets which are considered as non-performing for period of more than 12 months (earlier it was 18 months) are called as

Doubtful Assets. All those assets that cannot be recovered are called as Loss Assets.

Gross NPA and Net NPA

The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the sum total of all loan assets that are classified as

NPAs as per RBI guidelines as on the Balance Sheet date.

Gross NPA reflects the quality of the loans made by banks.

Gross NPAs Ratio = Gross NPAs

Gross Advances

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.

16Assistant Professor, Amity Global Business School, Noida, India, [email protected] 17Assistant Professor, Amity Global Business School, Noida, India, [email protected] 18Assistant Professor, Amity Global Business School, Noida, India, [email protected]

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Volume 4, Number 3, July – September’ 2015

ISSN (Print):2279-0896, (Online):2279-090X

PEZZOTTAITE JOURNALS SJIF (2012): 2.844, SJIF (2013): 5.049, SJIF (2014): 5.81

International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1887 |P a g e

Net NPA shows the actual burden of banks.

Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

The Reserve Bank of India defines Gross NPA as the amount outstanding in the borrowable account, in books of the bank other

than the interest, which has been recorded and not debited, to the borrowable account. Net NPAs is the amount of Gross NPAs

less (1) interest debited to borrowal and not recovered and not recognized as income and kept in interest suspense (2) amount of

provisions held in respect of NPAs and (3) amount of claim received and not appropriated. In simple words, Gross NPA is the

amount, which is outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is Gross NPA less

interest debited to borrowal account and not recovered or recognized as income.

IMPLICATIONS OF THE NPAS ON BANKS

The most important implication of the NPA is that a bank can neither credit the income nor debit the loss, unless either recovered

or identified as loss. If a borrower has multiple accounts, all accounts would be considered NPA if one account becomes NPA.

At macro level, NPAs have stifled the supply line of credit to the potential borrowers, thereby having a deleterious effect on

capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has

eroded the profitability of banks through reduced interest income and provisioning requirements, besides restricting the

recycling of funds leading to serious asset liability mismatches. Mounting menace of NPA has raised the cost of credit, made

banks more adverse to risk, squeezed genuine small and medium enterprise from accessing competitive credit, and has

throttled their enterprising spirits as well.

The impact of NPAs on the profitability of the banks is summarized in the following points:

Diminishes Earning Capacity of the Assets: NPAs tends to diminish the earning capacity of the assets employed in

the business leading to lower return on assets.

Blocks 100% Capital: As NPAs carry risk weight of 100% and block capital of the bank; it adversely affects the

capital adequacy ratio of the bank.

Additional Cost Incurred: As the banks carry NPA, they need to incur additional cost in Cost of Capital Adequacy,

Cost of funds in NPAs, operating cost of monitoring and recovering NPAs.

Decreases EVA: Cumulative loan loss provision on NPA is considered as capital and because of being treated as capital

the cost of capital increases. This decreases EVA.

Low Return on Advances: Due to NPAs, return on advances shows a lesser figure than actual return on “Standard

Advances”. The reason for the same is that returns are calculated on weekly average total advances including NPAs.

Effect on Return on Assets: NPAs decreases earning capacity of the assets and because of this, ROA gets affected.

Research Objectives

To compare the Profit to NPA ratio of Axis Bank and Kotak Mahindra Bank.

To compare the NPA to Loan Disbursed ratio of Axis Bank and Kotak Mahindra Bank.

RESEARCH METHODOLOGY

Research Hypothesis

Null Hypothesis - H01: There is no significance difference between the Profits to NPA ratios of the two banks. (Ho: μ1-μ2=0)

Null Hypothesis - H02: There is no significance difference between NPA to Loan disbursed ratios of the two banks. (Ho: μ1-

μ2=0)

Sources of Data Collection

The present study is based on secondary data collected from the annual reports of the two banks (Axis Bank and Kotak Mahindra

Bank).

Sample Size

The data of NPA, Net profit and Advances (loan disbursed) have been taken for the banks for 4 years (i.e. from 2011-12 to 2014-

15).

Research Tool Applied

For the current study, t-test (two samples with unequal variances) has been applied.

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Volume 4, Number 3, July – September’ 2015

ISSN (Print):2279-0896, (Online):2279-090X

PEZZOTTAITE JOURNALS SJIF (2012): 2.844, SJIF (2013): 5.049, SJIF (2014): 5.81

International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1888 |P a g e

ANALYSIS AND INTERPRETATION

Testing of Hypothesis 1

Null Hypothesis - H01: There is no significance difference between the Profits to NPA ratios of the two banks. (Ho: μ1-μ2=0)

Table-1

Axis Bank Kotak Mahindra Bank

Year NPA Net Profit Profit to NPA NPA Net Profit Profit to NPA

2012 206.9 4,242.21 20.506 10.7 1085.053 101.406

2013 587.1 5,179.43 8.82 143.92 1360.7172 9.455

2014 753 6,217.67 8.257 301.33 1502.52 4.986

2015 963.8 7,357.82 7.637 177.79 1865.98 10.495

Sources: Authors Compilation

Table-2

Group Statistics

GROUP N Mean Std. Deviation Std. Error Mean

NPAPRR AXIS Bank 4 11.3050 6.15300 3.07650

Kotak Bank 4 31.5855 46.60831 23.30416

Sources: Authors Compilation

The above table gives the descriptive statistics for each of the two banks. The average NPA to Profit ratio is 11.30 in case of Axis

Bank while it is 31.58 in case of Kotak Mahindra Bank with a standard deviation of 6.15 and 46.60 respectively. The table shows

the difference in the NPA to Profit ratio of the two banks.

Table-3: Independent Samples Test

Levene's Test

for Equality

of Variances

t-test for Equality

of Means

F Sig. t d.f. Sig.

(2-tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

NPAP

RR

Equal variances

assumed 6.597 .042 -.863 6 .421 -20.28050 23.50635 -77.79847 37.23747

Equal variances

not assumed

-.863 3.105 .450 -20.28050 23.50635 -93.68318 53.12218

Sources: Authors Compilation

In above table, the significance (p value) of Levene's test is .042. This value is less than (0.05), and then the null hypothesis that

the variability of the two groups is equal can be rejected, implying that the variances are unequal. As per above table, assuming

unequal variances, the t value is 0.863. (We can ignore the sign of t for a two-tailed t-test.). At 5% significance level the value of t

statics (-0.862) falls in the rejection region. So the null hypothesis will be rejected.

Testing of Hypothesis 2

Null Hypothesis - H02: There is no significance difference between the NPA to loan disbursed ratios of the two banks. (Ho: μ1-

μ2=0)

Table-4

Axis Bank Kotak Mahindra Bank

Year NPA

Loan

Disbursed

NPA to loan

Disbursed (%) NPA

Loan

Disbursed

NPA to loan

Disbursed (%)

2012 206.88 27,371.71 0.755816863 10.7 9749.92 0.10974449

2013 587.12 27,206.42 2.158020151 143.92 9389.75 1.532735163

2014 752.99 33,100.80 2.27483921 301.33 4558.65 6.610070964

2015 963.78 51,016.27 1.889161978 177.79 13133.08 1.353757078

Sources: Authors Compilation

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Volume 4, Number 3, July – September’ 2015

ISSN (Print):2279-0896, (Online):2279-090X

PEZZOTTAITE JOURNALS SJIF (2012): 2.844, SJIF (2013): 5.049, SJIF (2014): 5.81

International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1889 |P a g e

Table-5

Group Statistics

GROUP N Mean Std. Deviation Std. Error Mean

NPAADVANCE AXIS Bank 4 1.7695 .69479 .34739

Kotak Bank 4 2.4016 2.87615 1.43808

Sources: Authors Compilation

The above table gives the descriptive statistics for each of the two banks. The average NPA to loan disbursed ratio is 1.76 in case

of Axis Bank while it is 2.40 in case of Kotak Mahindra Bank with a standard deviation of 0.69 and 2.87 respectively. The table

shows the difference in the NPA to loan disbursed ratio of the two banks.

Table-6: Independent Samples Test

Levene's

Test

for Equality

of Variances

t-test for Equality of Means

F Sig. t d.f. Sig.

(2-tailed)

Mean

Difference

Std. Error

Difference

95% Confidence

Interval of the

Difference

Lower Upper

NPAADV

ANCE

Equal variances

assumed 4.069 .090 -.427 6 .684 -.63212 1.47944 -4.25218 2.98794

Equal variances

not assumed

-.427 3.349 .695 -.63212 1.47944 -5.07464 3.81040

Sources: Authors Compilation

In above table, the significance (p value) of Levene's test is .09. This value is more than (0.05), and then the null hypothesis that

the variability of the two groups is equal can be accepted, implying that the variances are equal. As per above table, assuming

equal variances, the t value is 0.427 (We can ignore the sign of t for a two tailed t-test.). At 5% significance level, the value of t

statics (-0.427) falls in the rejection region. So the null hypothesis will be rejected.

CONCLUSION

From the above discussion it can be said that the Average Profit to NPA ratio and the Average NPA to Loan Disbursed ratio is

comparatively high in case of Kotak Mahindra Bank but the variance is comparatively high (of Mahindra Bank) in

comparison to Axis Bank.

To conclude, Indian banks should take care to ensure that they give loans to credit worthy customers. In this context the dictum,

“Prevention is always better than cure” acts as the golden rule to reduce NPA‟s.

The future of banks would be based on their capability to continuously build good quality assets in an increasingly competitive

environment and maintaining capital adequacy and stringent prudential norms. Reduction of NPAs in banking sector should be

treated as national priority item to make the Indian Banking system more strong, vibrant and geared to meet the challenges of

globalization.

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Volume 4, Number 3, July – September’ 2015

ISSN (Print):2279-0896, (Online):2279-090X

PEZZOTTAITE JOURNALS SJIF (2012): 2.844, SJIF (2013): 5.049, SJIF (2014): 5.81

International Journal of Applied Financial Management Perspectives © Pezzottaite Journals. 1890 |P a g e

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