Economics Journals| Applied Economics

The IUP Journal of Applied Economics

Asset Quality of Commercial Banks in India: An Empirical Analysis

Article Details

Pub. Date	: April, 2021
Product Name	: The IUP Journal of Applied Economics
Product Type	: Article
Product Code	: IJAE40421
Author Name	: K Sriharsha Reddy and Sarath Babu
Availability	: YES
Subject/Domain	: Economics
Download Format	: PDF Format
No. of Pages	: 14

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Abstract

Non-Performing Assets (NPAs) have turned out to be a major stumbling block, affecting the performance of Indian banks. Several measures were initiated by the Reserve Bank of India to reduce incidence of NPAs. For the first time in the last several years, public sector banks in India witnessed decline in gross NPAs for the year 2018-19. In this paper, an attempt is made to understand the reasons for the incidence of NPAs during 2006 to 2019 by studying the public sector and private sector banks in India. Dynamic regression model was deployed to understand the influence of past NPAs on incidence of current NPAs. Surprisingly, the influence of previous year asset quality is not significantly influencing current year asset quality. Size of the bank, profitability, credit growth, priority sector lending, accretion of NPAs and economic growth continue to have significant impact on the asset quality of the banks in India.

Introduction

The Indian banking sector accounts for a major portion of financial intermediation and is the main channel of monetary policy transmission, credit delivery and payment systems. The stability and sound health of the banking system hence is a key prerequisite for the overall economic development and financial stability.

Asset quality is an important prudential indicator to assess the financial health of the banking sector. Besides asset quality, Non-Performing Assets (NPAs) epitomize the credit risk management and efficacy in the allocation of resources.

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