Published Online:September 2026
Product Name:The IUP Journal of Financial Risk Management
Product Type:Article
Product Code:IJFRM010926
DOI:10.71329/IUPJFRM/2026.23.3.5-30
Author Name:Rajat Prakash, Satyam Raj and Shikha Malhotra
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:5-30
This study investigates the complex macro-financial linkages determining credit risk in the Indian banking sector over the critical longitudinal period from 2015 to 2025. Utilizing a panel autoregressive distributed lag (ARDL) econometric approach on a balanced panel dataset of major public and private sector banks, the study examines how macroeconomic shocks and idiosyncratic internal vulnerabilities impact the gross nonperforming assets (GNPA) ratio. Uniquely, the study incorporates a formal moderation analysis to test whether a robust liquidity coverage ratio (LCR) acts as a structural “shock absorber” during periods of economic distress. The empirical findings profoundly challenge traditional economic assumptions. Contrary to standard expectations, GDP growth exhibits a highly significant positive long-term impact on GNPA, confirming a “delayed manifestation of risk” that stems from aggressive underwriting during credit booms. Similarly, shortterm inflation artificially suppresses bad loans via the economic mechanism of nominal debt deflation.
The banking sector is often called the engine of a country’s economy. When banks are healthy, businesses grow, and people get loans to buy homes and cars. However, history has shown us that banks can fail, and when they do, it causes severe damage to the entire financial system. This was seen during the global financial crisis of 2008 and more recently during the Covid-19 pandemic (Gallas et al., 2025). Because of these dangers, it is essential to constantly check if banks are strong enough to survive bad times. This process of checking a bank’s health under difficult conditions is called “stress testing” (Lu & Yang, 2012; Vazquez et al., 2012).