Investigating the Determinants of Non-Performing Assets: The Case of the Indian Banking Sector

Abstract

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The purpose of this paper is to investigate significant macroeconomic and bank-specific determinants of non-performing assets (NPAs) in the Indian banking sector, based on data for a period of more than two decades (1997 to 2017). For the objective in hand, step-up confluence analysis is applied to panel data, with both fixed effects and random effects modelling; the latter has an advantage over the former, based on Hausman’s test. Findings of the study reveal that the significant macroeconomic variables explaining the NPAs include GDP growth rate, external debt, and FDI inflows. Furthermore, bank level determinants, viz. revenue efficiency, return on assets, and return on equity, indicate that better the quality of management, lower the NPAs. The findings of the study have far-reaching implications for banking regulation and policy, as efficiency and performance measures can be the paramount indicators for future management of NPAs. Moreover, the statistically significant macroeconomic variables can manage the effect of economic turbulences on the health of the Indian banking system.

Keywords: Non-Performing Assets, Indian Banking Sector, Bank-Specific and Macroeconomic Variables, Panel Data Estimation, Frisch Confluence Analysis

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