Statistical Tools to Analyze the Relationship between GNPA, NNPA, and ROA
Managing NPAs has a lot to do with managing productive assets and ensuring effective corporate governance. If performing assets are turning into NPAs, it is because there is a change in the quality of assets.
As of now, NPAs in most of the nationalized banks are within the permissible limits. In this backdrop it becomes very important to understand the relationship of Non-performing assets and profitability, whether decrease in NPAs leads to increase in profitability or not. This information is very vital in monitoring, regulating and policy formulation. Correlation is calculated taking GNPA Ratio (Gross Non-Performing Asset Ratio) with the profitability measure as ROA (Return on Assets). Results are exhibited in Table 5 and Figure 6.Table 4. Gross and net NPAS of SCBS (amount in RS. CRORE)
| Years | Gross NPAs Amount | GNPA Ratio as % of G. Advances | GNPA Ratio % of Total Assets | Net NPAs Amount | NNPA Ratio % of N. Advances | NNPA Ratio % of Total Assets |
| 2007 | 50634 | 2.5 | 1.5 | 20101 | 1.0 | 0.6 |
| 2008 | 56668 | 2.3 | 1.3 | 24730 | 1.0 | 0.6 |
| 2009 | 70062 | 2.3 | 1.2 | 31564 | 1.1 | 0.6 |
| 2010 | 84745 | 2.2 | 1.5 | 39126 | 1.1 | 0.7 |
| 2011 | 94084 | 2.4 | 1.6 | 41813 | 1.1 | 0.7 |
| 2012 | 137096 | 3.1 | 1.6 | 64900 | 1.4 | 0.7 |
Source: RBI Publication.
There is negative correlation between GNPA with ROA as shown in above figures. An inverse relationship clearly defines that if nonperforming assets are controlled, it increases the profitability.
The above relationship is also strengthened by the most popular statistical method of regression. To have more clarity on the issue, ROA has been taken as dependent variable and GNPA Ratio as independent variable.Table 6 reveals F value is significant at 0.05 level. It is clearly indicating that the variation caused by independent variables in the value of ROA is significant and cannot be left to chance factors. The above table analyzes the results produced by the Regression Model so as to achieve the objective of analyzing the relationship of NPAs with profitability of banks. The value of Correlation Coefficient (R) and Coefficient of Determination (R square and Adjusted R square) of the finally selected model are less than one which shows the relationship of NPA and profitability is significant at 5% level of significance
Therefore, it is evidently proved that NPAs has an inverse impact on ROA or profitability of banks that means the bank can have an increasing trend of ROA by the effect of the declining trend of GNPAs ratios. This leads us to accept that there is a causal relationship between profitability measure and non-performing ratios. The above analysis would help in improving the quality of assets of banks. In turn the requirement for provisioning would automatically come down and it will directly add to the profit of banks.
Table 6. Model summary and anova (f) results
Table 5. Correlation of NPA and ROA in SCBs
| Variables | Correlation |
| GNPA Ratio with ROA | -0.442 |
in SCBs
| Variables/ Measures | R | R2 | Adjusted R2 | F-Value | Sig. |
| GNPA | 0.982 | 0.964 | 0.965 | 106.25 | .000 |
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