NPAs of Indian Commercial Banks: An Empirical Study

Abstract

Non-performing assets (NPAs) are the key factors to decide the financial health of Indian commercial banks. They affect the operational efficiency, which in turn influences the liquidity, efficiency, solvency and profitability position of the banks. The study investigates the relationships between the NPAs and six ratios representing liquidity, efficiency, solvency and profitability over the period of 2005–2014. Johansen's co-integration test and vector error correction (VEC) model have been applied to explore the long-run equilibrium relationship between NPAs and six variables under the study. The analysis reveals that the NPAs of the Indian commercial banks are negatively co-integrated with the liquidity, efficiency, solvency and profitability position of the banks and hence, a long-run equilibrium relationship exists between them. The results VECM revels that the relationship between NPA and profit per employee and return on equity is positive, whereas the relationship between the NPA and cash-deposit ratio, credit-deposit ratio, net interest margin and return on assets is negative. The findings from Granger causality based on the VECM indicate a bi-directional causality between NPAs and all the variables tested. It is observed that the financial health of the Indian commercial banks is significantly affected by the NPAs.