Earnings Management, Capital Management and Signalling Behaviour of Indian Banks

Abstract

The study aims at analysing whether the earnings are managed in the banking industry in India considering the provisioning standards issued by the RBI. The study also examines the presence of capital management and signalling practices by Indian Banks through the usage of Provision for Non-Performing Assets (PNPA). The study comprises of 84 banks in India which includes nationalised banks, private banks and foreign banks focusing on financial data from FY 2005–2016. The study uses panel data regression model for exploring the presence of earnings management, capital management and signalling. The dependent variable considered is PNPA and the independent variables are lag of dependent variable, return on assets, capital adequacy ratio, and change in operating profit. We have also included certain control variables viz. credit deposit ratio, total assets, closing gross NPA, GDP, real interest rates. The results of our study indicates income smoothing practices by Indian Banks. However, the results do not prove the presence of capital management or signalling practices by Indian Banks through the usage of provision for NPA.