Non-Performing Assets in Indian Banks: Challenges, Impact, and the Road to Financial Resilience

By Mithilesh Ramdayal Gupta

 1. The Growing NPA Crisis in Indian Banks-

The banking industry is the backbone of any financial system, playing a crucial role in economic stability. However, the increasing burden of non-performing assets (NPAs) threatens this stability by reducing credit expansion and profitability. NPAs, which represent poor-quality loans that fail to generate revenue, have significantly risen in India. As of November 2018, the Reserve Bank of India (RBI) reported NPAs exceeding ₹9 lakh crore—four times higher than five years prior.

NPAs are categorized based on the duration of default, including substandard assets (up to 12 months), doubtful assets (beyond 12 months), and loss assets. The rapid increase in NPAs has severely impacted bank balance sheets, necessitating large provisions for bad loans and affecting overall profitability.

This study examines the role of leading private-sector banks, Axis Bank and HDFC Bank, in managing the NPA crisis. While both banks are key players in India’s financial sector, their strategies differ. Axis Bank focuses on diverse financial services through investment banking, financial planning, and insurance, whereas HDFC Bank prioritizes retail and wholesale banking, forex, and debt management.

The article aims to analyze the challenges faced by these banks, their approach to handling NPAs, and broader weaknesses within India’s banking sector. By understanding these issues, the study offers insights into improving financial health and ensuring sustainable banking growth.

2. Axis Bank and HDFC Bank: Growth, Strategies, and Challenges

2.1 Axis Bank: A Rapidly Expanding Financial Powerhouse

Axis Bank, India’s third-largest private-sector bank, has played a significant role in the country’s financial landscape since its establishment in 1994. Serving diverse sectors, including large corporations, MSMEs, and agriculture, the bank has witnessed remarkable growth, with net income soaring from ₹18,531 million in FY20 to ₹141,193 million in FY22. With a workforce exceeding 68,000 employees, Axis Bank focuses on talent development and innovation.

The bank has taken proactive steps to reduce non-performing assets (NPAs), improving financial stability. It has also embraced digital banking, offering one of the industry’s best mobile banking applications. Additionally, its diverse range of savings accounts with attractive benefits has strengthened its customer base.

2.2 HDFC Bank: A Leader in Private Banking and Strategic Expansion

HDFC Bank, founded in 1994 following India’s financial liberalization, has become a dominant force in the banking sector. A landmark merger with HDFC Limited in 2022 solidified its leadership in home finance, enhancing its reach across urban and rural markets. With over 8,143 branches and 20,688 ATMs across India, along with a global presence, the bank caters to a broad customer base, including NRIs.

While HDFC Bank’s growth has been impressive, challenges such as regulatory compliance, technological evolution, and customer expectations require continuous adaptation. The successful integration of HDFC Limited remains a key focus, ensuring operational efficiency and sustained expansion.

Both banks exemplify India’s dynamic banking sector, leveraging innovation, digital transformation, and strategic mergers to maintain growth and stability. However, navigating economic uncertainties and evolving financial landscapes will be crucial to their long-term success.

3. Non-Performing Assets (NPAs) in the Indian Banking Sector:

The rising burden of non-performing assets (NPAs) remains a critical concern for Indian banks, prompting extensive research and policy recommendations. The Reserve Bank of India (RBI) has long emphasized the need for proactive monitoring of borrower activities and asset classification to mitigate NPA risks. Studies over the years have highlighted the negative impact of NPAs on profitability, capital adequacy, and return ratios, stressing the importance of strategic restructuring and recovery measures.

Research on Axis Bank and ICICI Bank has revealed varying degrees of correlation between NPAs and financial performance, with significant repercussions for operating revenues. A 2023 study on HDFC Bank analyzed its NPA trends, noting fluctuations over the years. The highest gross NPA ratio occurred in 2018-2019, followed by an improvement in 2021-2022, when the ratio dropped to 1.18%, the lowest in recent years.

HDFC Bank’s ability to effectively manage NPAs through proactive risk management has reinforced its financial stability and resilience amid economic challenges. These findings underscore the complexity of NPA management and the critical role of monitoring, restructuring, and policy interventions in maintaining a robust banking system.

4. Analysis of Loopholes and Stability in the Indian Banking Sector
5. Inadequate Credit Risk Management

Both Axis Bank and HDFC Bank face challenges in managing credit risk due to their broad business operations. Axis Bank integrates risk management into its business model, using internal rating systems and board-approved risk policies to maintain credit portfolio stability. HDFC Bank also employs strong risk mitigation strategies, including an independent Risk Management Group (RMG) and structured borrower assessments. However, challenges remain—Axis Bank has faced governance issues, while HDFC Bank has a lower rural presence than competitors like ICICI Bank, limiting growth.

1. Ineffective Monitoring and Recovery Mechanisms

Axis Bank has implemented a Sustainable Lending and Project Policy (SLPP) to ensure responsible lending, while HDFC Bank uses the Risk Policy & Monitoring Committee (RPMC) to monitor loan performance. Both banks actively track credit risks and adjust lending strategies to prevent loan concentration risks. HDFC employs stress testing and proactive monitoring of borrowers, while Axis Bank integrates environmental and social risk assessments in credit decisions.

1. Regulatory and Supervisory Gaps

Regulatory frameworks like the Insolvency and Bankruptcy Code (IBC) and Prompt Corrective Action (PCA) help banks manage NPAs, but gaps persist. The RBI’s Risk Assessment Report (RAR) in 2013 highlighted weak governance at Axis Bank, particularly in credit evaluation and treasury operations, while HDFC Bank witnessed a 28% surge in NPAs in 2013-14. Though HDFC mitigated NPA growth through restructuring and recoveries, regulatory scrutiny remains high for both banks.

1. Comparative Analysis

HDFC Bank has demonstrated stronger risk management capabilities compared to Axis Bank, employing a proactive monitoring system and stress testing to maintain financial stability. Axis Bank, despite its SLPP framework, has struggled with governance and risk evaluation deficiencies. However, both banks continue refining their NPA management strategies to ensure long-term profitability.

1. Consequences of Identified Loopholes

Weak risk assessment and compliance issues threaten financial stability, leading to higher provisioning, regulatory scrutiny, and reduced investor confidence. These loopholes can drain resources and increase borrowing costs, further impacting profitability. Addressing these vulnerabilities is critical for ensuring resilience in times of economic distress.

1. Stability of the Banking Sector

Globally, financial institutions have strengthened capital buffers under Basel III norms, improving Common Equity Tier 1 (CET1) ratios and Net Stable Funding Ratios (NSFRs). Axis Bank and HDFC Bank continue to maintain strong performance, with HDFC Bank reporting a 33% YoY rise in Q3 FY24 profits (₹16,372 crore) and Axis Bank posting a ₹5,864 crore net profit in Q2 FY24. Despite short-term liquidity challenges, both banks focus on sustainable loan growth and risk-aware lending strategies.

5. Recommendations and Conclusion

5.1 Recommendations

1. Improving Credit Risk Assessment
   • Implement machine learning and analytics models for better credit risk identification.
   • Enhance the quality of data collection for accurate financial evaluations.
   • Provide ongoing training for employees on best practices and regulatory changes.
   • Use real-time analytics and alerts to monitor and respond to risks swiftly.

1. Enhancing Monitoring & Recovery Mechanisms
   • Adopt advanced tracking tools with predictive analytics to detect risks early.
   • Strengthen stress testing frameworks for proactive risk management.
   • Collaborate with government agencies and industry peers to improve risk control.
   • Establish clear recovery plans with well-defined response strategies.

1. Regulatory & Supervisory Enhancements
   • Advocate for stricter stress testing to prepare for economic downturns.
   • Increase transparency through better reporting standards.
   • Develop adaptable regulations addressing technological risks and cyber threats.
   • Strengthen collaboration between regulatory bodies and banks to shape effective policies.

1. Mitigating Political & Economic Risks
   • Diversify investments across industries and regions.
   • Maintain proactive relationships with regulators to navigate policy changes.
   • Utilize advanced risk models and statistical analysis for better risk management.
   • Establish strong corporate governance with independent risk committees.

5.2 Lessons Learned

1. Financial Distress & Risk Prediction

• Corporate financial distress impacts investor confidence and financial stability, especially during crises.
• Early risk detection allows for proactive measures, reducing losses for investors.

2. Role of Private Banks in Economic Development

• Private banks drive financial inclusion, competition, and innovation.
• They support infrastructure development, job creation, and responsible financing.
• However, maintaining financial stability, prudent lending, and regulatory compliance is essential.

3. Impact of Identified Loopholes

• Weaknesses in risk management can lead to financial instability and loss of customer trust.
• Security vulnerabilities can cause data breaches, fraud, and identity theft.
• Regulatory scrutiny may result in legal penalties, reputational damage, and financial losses

4. Key Takeaways for the Banking Industry

• Strong risk management frameworks are essential for mitigating NPA risks.
• Strict adherence to regulatory standards ensures transparency and operational security.
• Investment in advanced technology and cybersecurity protects against financial and digital threats.
• Promoting ethical practices, transparency, and accountability builds long-term trust and financial resilience.

By enhancing risk management, regulatory compliance, cybersecurity, and ethical practices, banks can create a more stable and secure financial environment.

5.3 Conclusion

• Axis Bank struggles with risk management deficiencies, weak credit evaluation, and regulatory compliance issues, leading to rising NPAs and financial instability. Addressing these gaps is crucial for restoring investor confidence and ensuring long-term sustainability.
• HDFC Bank, while also facing NPA fluctuations and a limited rural presence, demonstrates stronger risk management and adaptability, reinforcing financial stability.
• Both banks play a crucial role in India’s banking sector, and their response to NPA challenges will influence broader risk management and regulatory compliance trends. Strengthening risk governance and implementing proactive strategies are essential for financial stability, economic growth, and stakeholder confidence.

(The writers is a faculty for Taxation and Finance with St Peter Degree College, Vasai, Maharashtra and research scholar)