A Study on Non-Performing Assets in Banks and Its Impact on the Performance of the Banking Sector

Abstract

The Indian banking sector plays a crucial role in advancing the nation's socio-economic development, by offering credit facilities to diverse sectors in need of financial assistance, including agriculture, industry, housing, and personal finance. This credit extension promotes growth but also exposes banks to credit risk, potentially leading to the emergence of Non-Performing Assets (NPAs). Non-Performing Assets (NPAs) denote loans that no longer produce income, presenting considerable difficulties for a bank's liquidity, profitability, and overall financial stability. Recently, the banking sector has demonstrated increased prudence in lending owing to the rising incidence of non-performing assets (NPAs). This development highlights the necessity for a comprehensive understanding of NPAs and their impact on the financial stability of banks. The existence of NPAs requires increased provisioning for potential loan losses, negatively affecting a bank's margins and limiting its capacity to offer additional credit. This issue endangers both the quality of a bank's asset portfolio and its long-term viability. The empirical investigation into the effects of credit risk on commercial banks in India reveals critical insights essential for the stability and growth of the banking sector. The study utilizes a comprehensive mixed-method approach, combining quantitative analysis and qualitative insights to explore the complex dynamics of credit risk