Assessing the Relationship between Asset Quality and Profitability in Public Sector Banks: Evidence from Canara Bank

Abstract

Asset quality is a key indicator of a bank’s financial health and a critical determinant of its profitability and sustainability over the long term. The significance of Non-Performing Assets (NPAs) in the Indian banking sector has increased exponentially owing to the need for effective management of NPAs especially for public sector banks which have to preserve financial stability while encouraging economic growth. The present study is an attempt to study the relationship between Asset quality and profitability with special reference to Canara bank. The research is based on secondary data gathered from the published annual reports of Canara Bank for the financial years 2020–2021 to 2024–2025. To evaluate the bank’s financial performance, important financial ratios such as Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin, Debt–Equity Ratio, Current Ratio, Interest Coverage Ratio and Asset Turnover Ratio were analysed. Further, regression method was used to analyze the impact of Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) on the profitability of the bank. The analysis finds a strong correlation between improved financial performance and better asset quality. During the study period , Canara Bank showed significant reduction in NPAs along with consistent growth in profitability and operational efficiency . The findings reveal that sound credit risk management, efficient loan recovery procedures and constant monitoring of asset quality are important for improving financial performance and boosting stakeholder confidence. The study concludes that the high asset quality is important to profitability and sustainability of public sector banks in the long run. The findings offer valuable insights for banking professionals, policy makers, researchers and financial institutions in their efforts to improve asset quality management and achieve sustainable financial growth..