Determining factors for accumulation of Non performing bank assets: A case of Indian banks during 2000 to 2013

Mani Govil


Abstract: The problem of increasing nonperforming assets has a prominent adverse impact of financial stability which is an important objective of RBI. The slowdown in the economy increases NPA which leads to reduced credit expansion and increase in interest rates. This leads to more of bad loans and thus this is a vicious cycle. There are many studies on internal and external factors affecting NPAs level, but this study attempts to specifically analyze impact of key macro-economic and bank-specific indicators on NPA of Scheduled Commercial Banks of India using Multiple Regression Modeling for the past 14 years. Looking at both macro-variables (e.g. annual percentage growth rate of gross domestic product, government debt as % of gross domestic product, inflation) and bank-specific (e.g. credit to deposits ratio, return on assets, cost of funds), factors determine NPA on aggregate level were analyzed. Overall, the findings reveal moderate correlations between NPA and various macroeconomic (annual percentage growth rate of gross domestic product, inflation rate and government debt to GDP ratio) and strong correlation with bank-specific factors (return on advances, net interest margin, credit deposit ratio, and cost of funds). The study formulates two models, one with macroeconomic factors as the independent variables and the other with bank-specific factors. Factors like return on advances, cost of funds and return on assets were found to be highly significant.

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ISSN : 2251-1555