Cyclicality of Non-Performing Assets: Evidence from Indian Banking Industry

Abstract

Purpose: The paper aims to discern the cyclical appearance of the Non-Performing Assets with special emphasis to the Indian Banking Industry. It further aims to determine what factors cause such behaviour of the Non-Performing Assets. Also, an attempt has been made to make a comparison in between Public sector, private sector and foreign sector banks. Design/Methodology/Approach: Descriptive research is employed to fulfill the said objectives. Both external (macro-economic variables such as business cycle shocks, current state of the economy, expected and unexpected growth of the economy) and internal (bank specific variables such as loan interest rates, proportion of unsecured loans to total loans, size, leverage, term loans, cost conditions, credit to deposit ratio, secured and unsecured lending) variables are regressed on the net performing assets of Indian public sector, private sector and foreign banks. Panel data regression has been applied on three categories of banks for a period of thirteen years from 2004-05 to 2016-17. Practical Implications: The study helps the regulators in estimating that how the macro-economical variables such as business cycle events can change the conduct of NPAs. It also helps banks in determining the important factors that may cause the cyclical behaviour of their non-performing assets and adopt the strategies to mitigate the problem of NPAs accordingly. Research Limitations: The study is restricted to the Indian sector only. A comparison with other emerging nations can also be made. The scope of the study is restricted to limited variables for a specific period of time. Originality/Value: The paper brings the most recent empirical results related to Indian banking industry. The behaviour of NPAs is examined and possible reasons for such conduct is discerned. Additionally, complete banking industry of India including all types of scheduled commercial banks have been taken bringing the most comprehensive picture of the present situation.

Keywords: Non-Performing Assets, Business Cycle, Macro-Economy, Bank Loans

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