Abstract:
The article investigates role of bank-specific factors on non-performing
assets (NPAs) in Indian banking system in a panel threshold framework
(Hansen, 1999, Journal of Econometrics, 93(2), 345–368), using an unbal-
anced panel of 82 scheduled commercial banks over the period of
1995–1996 to 2010–2011. We consider capital to risk-weighted assets
ratio (CRAR) and credit growth as alternative threshold variables (and
regime dependent) along with relevant bank-specific variables treated
as regime independent. Findings reveal that CRAR exerts negative and
significant impact on NPAs once it reaches a critical threshold. Possible
implication is that banks extend less risky loans in a high CRAR regime than in low CRAR regime that helps reduce NPAs. With credit growth
as threshold as well as regime dependent, we observe statistically sig-
nificant non-linear effect of credit growth on NPAs. Beyond threshold,
credit growth exerts significant negative effect on NPAs that may imply
that banks extend good quality loans. However, we cannot rule out
the possibility of evidence of ‘ever-greening hypothesis’ of bad debts in
Indian banking, that is, banks just roll over previous bad debts into fresh
performing loans.
