Abstract:
The paper examines the role of bank-specific variables in explaining the
dynamics of non-performing assets (NPAs) of Indian banks in a panel data framework
over the post liberalisation period, 1995–2011. The results have been derived after
controlling for macroeconomic factors like real GDP, inflation, exchange rate etc.
Applying several variants of Generalized Method of Moments (GMM) technique in
dynamic models, we find that that there is significant time persistence of NPAs in
Indian banking system. We also find that larger banks are more prone to default than
smaller banks. We find support for the ‘bad management hypothesis’ as we observe that
an increase in profit level of the banks reduces NPAs in the next period. Lagged capital
adequacy ratio as an important prudential indicator also significantly reduces current
NPAs of banks. The paper also draws some important policy implications about NPA
management
