Non-performing assets (NPAs) and its determinants: a study of Indian public sector banks

Abstract

There has been increased concern about the continued deterioration in the asset quality of Indian public sector banks in recent times. Reserve Bank of India’s Financial Stability Report 2017 acknowledged that the risks to the Indian banking sector have been increasing in the post-recession period, particularly, the risk of accumulating non-performing assets (NPAs). In this perspective, the current paper investigates the extent and growth of NPAs and interbank disparity in NPA management among public sector banks. We found that the profitability of public sector banks is declining in the post-crisis period and the amount of NPAs has been on the rise. Further, the recovery mechanisms have proved to be ineffective in containing the problem of bad debts. In a dynamic panel analysis, we also examined the determinants of NPAs in public sector banks and found that factors such as past NPAs, the operating efficiency of the bank, capital adequacy, GDP growth rate, and interest rate are the major determinants of the growth of NPAs in Indian public sector banks.