Impact Assessment Study of NPAs and Rate of Recovery: Are Private Sector Banks in India Better off?

Abstract

Our study significantly contributes in understanding a comparative framework and the interactions of idiosyncratic and systematic factors for determining non-performing assets (NPA) and rate of recovery for banks in India, as put forward by Basel committee. Although determinants of NPA is very well debated issue, the comparison of public and private sector banks in terms of their assets quality i.e. NPAs and rate of recovery and their determinants like collateral, operational inefficiency, GDP growth rate etc. are the added contribition of this study. We have employed Arrelano–Bond dynamic panel method on 35 banks in India for the period 1998–1999 to 2017–2018 for determinants of NPAs, while determinants of rate of recovery are studied for the period 2003–2004 to 2017–2018. Our findings show that the priority sector loan has significant differences in determining NPA across banks despite them having sufficient collateral. The negative relationship between collateral and recovery, especially for private sector banks, signifies low recovery for illliquid collateral. This study may recommend that a bank with high net interest margin (NIM), high proportion of secured and liquid collateral, and sufficient mix of long- and short-duration loans in line with bank’s asset liability policy can manage their portfolio well.