A study on loan approval and non‐performing asset—Segment identification

• DOI: http://doi.org/10.1002/pa.2015
• Date: 01 May 2020
• Author: Ambudheesh Parasar,Anjali Sharma
• Published date: 01 May 2020

PRACTITIONER PAPER

A study on loan approval and non-performing asset—Segment

identification

Anjali Sharma

1

| Ambudheesh Parasar

2

1

Department of Marketing, Indian Institute of

Management Indore, Indore, India

2

PGDM (GM), XLRI, Jamshedpur, India

Correspondence

Anjali Sharma, FPM BLOCK, Indian Institute of

Management Indore Prabandh Shikhar,

Rau-Pithampur Road, Indore - 453556,

Madhya Pradesh, India.

Email: f16anjalis@iimidr.ac.in

Nonperforming assets (NPAs) are a huge challenge infront of the Indian economy.

Accumulating NPA is forming a burden and obstacle for economic growth. Financial

institutions are struggling with nonperforming loans, and their efficiency is getting

tremendously impacted. The aims of this study are to find out the critical factors for

granting mortgage loan and to develop a formula that can help financial institutions

in identifying and differentiating a possible loan defaulter from a non-defaulter. The

formula developed and the identification of defaulters could help in reducing NPA of

financial institutions. Managers and loan approvers can use this model to grant loans

to verified borrowers and can also keep an eye on their existing customers.

1|INTRODUCTION

Nonperforming assets (NPAs) are the ones that cease to generate

income for financial institutes (either in the form of interest earned or

the repayment of the principal amount). The NPA occurs when the

borrower defaults to make the repayment of the credit or the loan

amount borrowed either intentionally or unintentionally. In such

cases, the bank's efficiency is adversely impacted due to the partial or

the nonrecovery of the loan amounts, and it is reflected on to the bal-

ance sheet and the profit and loss statement (Bawa, Goyal, Mitra, &

Basu, 2019). Any performing assets is termed as NPA only after a pro-

longed non-payment of the instalments, that is, 90 days past the due

date. The NPAs are also termed as the nonperforming loans (Bhardwaj

& Chaudhary, 2018).

Mortgage is destined to permit individuals to fund their ownership

for their houses. A mortgage is a credit offered out to people by a

bank or other lending institutions intended for the purchase of a

house. It is a security supported loan, implying that when an individual

goes into a bank to get a mortgage, the bank will own the house, and

they will utilize that house as collateral for their credit.

Area of the study is Kolkata, which is one of the metro cities in

India. The study explores the problem of mortgage loan default. Three

consecutive defaults in the payment of equated monthly instalment

lead to NPAs. Till the time the asset generates the income anticipated,

it is treated as a performing asset, but when it is unable to do so, then

it becomes a “non-performing asset,”which is a great concern for the

financial institutions. According to the Reserve Bank of India, the per-

formance of the financial sectors has further worsened in the last few

years.

This study mainly comes up wi th a formula for the financial insti-

tution which can help them to anticipate their future NPAs and help

them to reduce the defaulters with the support of factors such as

age of the borrower, number of dependents on the borrower, his/her

time lag, tenure, interes t rate, per capita residual income (PCRI),

Credit Information Bure au (India) Ltd. (CIBIL) sco re, loan taken by

the borrower, gender, ed ucation qualificatio n, and his/her source of

income. The objectives o f the study is to find the impact of the bor-

rower's profile on loan default and identify the critical factors for

assessing a mortgage l oan. The study aims to deve lop a predictive

formula for evaluating d efaulters and nondefault ers as well as iden-

tify the non-performin g and the performing segment fo r granting

mortgage loans.

2|LITERATURE REVIEW

2.1 |Mortgage loan

Mortgages are prevalent because they are amongst the most funda-

mental monetary instruments on the grounds. Mortgage money-

lenders have sprung up in the world over in light of the fact that in

today's market, individuals are essentially not able to purchase a home

without having a mortgage for it. This implies that individuals are kept

Received: 30 August 2019 Accepted: 1 September 2019

DOI: 10.1002/pa.2015

J Public Affairs. 2019;e2015. wileyonlinelibrary.com/journal/pa © 2019 John Wiley & Sons, Ltd. 1of9

https://doi.org/10.1002/pa.2015

J Public Affairs. 2020;20:e2015. wileyonlinelibrary.com/journal/pa © 2019 John Wiley & Sons, Ltd. 1 of 9

https://doi.org/10.1002/pa.2015