Bank-specific determinants of nonperforming assets of Indian banks

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