What Determines non-Performing Assets of Scheduled Commercial Banks in India?-An Empirical Investigation
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This paper aims at examining as to which concomitants primarily determine Non-performing Assets (NPAs) of Scheduled Commercial Banks (SCBs) in India. The study was based on regular time series data for 17 years (from 1995–1996 to 2011–2012) on a multiplicity of macroeconomic and bank-specific variables. For making an identification of the major concomitants of NPAs, as also the direction of their linkages, we have resorted to step-up confluence analysis due to Frisch (1934. Statistical confluence analysis by means of complete regression systems. Oslo: Publication No. 5 from the University Institute of Economics. pp. 192), as applied to panel data with both fixed effects and random effects modelling. Through Hausman's, 1978 random effects modelling was observed, in general, to have an edge over fixed effects modelling. As per the findings, N PA s were influenced via both macroeconomic and bank-specific variables. Business per employee, provisions and contingencies, operating expenses and net interest spread induced a direct impact on bank asset quality, whereas return on assets, credit-deposit ratio, other income (as a ratio of total assets), employees per branch, capital adequacy ratio and operating profits (as a ratio of total assets) had an indirect influence on the portfolio of bank assets. Further, inflation in the economy induced a positive effect on NPAs, whereas index of industrial production, money supply and gross domestic product growth have induced a negative impact. The findings have the implications for regulatory authorities, which should focus on risk management systems procedures trailed by banks to avert future instability.
Non-performing assets, Scheduled commercial banks, Bank-specific variables, Macroeconomic variables, Panel data estimation, Frisch confluence analysis, Fixed effects and random effects modelling.