Analysis of macroeconomic factors causing non-performing loans in India

Abstract

In last six years after the global financial crises Indian banking sector is seeing a phenomenal rise in the level of non-performing loans. It has moved back to the level of 2004-2005 from the lowest level of 2008-2009. In this perspective, this paper investigates the trends in NPL in Indian banks and main macroeconomic factors that may be causing the surge in the level of NPL. The correlation analysis along with pairwise Granger causality test followed by panel regression allows evaluating the impact of selected macroeconomic variables on the NPL. The result indicates that the GDP growth, change in exchange rate and global volatility have major effects on the NPL level of the Indian banking sector. The paper has been organised in four parts: introduction and literature review, methodology, results and conclusion and policy implication. The first section looks at the different studies undertaken at different countries and specifically in India for non-performing loans. The methodology section deals with the different statistical methods used for the analysis of data and the rationale behind choosing those methods. The next section shows and analyses the results. The last section provides the conclusion derived from data analysis and some policy implication.