Determinants of Non-Performing Loans: Evidence from Indian Banks

The incessant worsening in the asset quality of Indian banks is one of the prominent concerns for the regulator and policymakers, particularly in the post-global financial crisis era. In this perspective, this chapter examines the gravity of the impact that bank-specific and macroeconomic determinants have on non-performing loans (NPLs) of Indian banks. A balanced panel data set comprising 40 banks which accounted for 96.42% of banking operation in India over a time frame of 10 years (2009–2010 to 2018–2019) has been used for the further analysis through panel regression. The study classified the results in public, private, overall banks classification and big and small banks classification in order to provide comprehensive understanding of banking sector. The results of clustered robust standard error have been employed to deal with the problem of heteroscedasticity. The study finds that credit-deposit ratio, return on assets in bank–specific factors, and inflation in macroeconomic determinates are the highly significant determinants with inverse relationship while exchange rate is highly significant with positive relationship with NPL. The findings of the study concerning macroeconomic variables may be used by the policymakers to control the level of NPAs in the banking sector, which will balance the flow of liquidity in the economy and ultimate objective of economic development will be achieved. Alternatively, the findings of the study concerning bank-specific variables may be used by the government to give more autonomy to the banks for their decision-making, instead of politically pushed and enforced lending.