Published Online:September 2026
Product Name:The IUP Journal of Financial Risk Management
Product Type:Article
Product Code:IJFRM030926
DOI:10.71329/IUPJFRM/2026.23.3.57-75
Author Name:Subinay Biswas
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:57-75
This study seeks to assess both theoretically and empirically how anticipated and unanticipated inflation dynamics drive the problem of nonperforming assets (NPAs) in the Indian banking system. The analysis was performed on 36 scheduled commercial banks for the period 2004 to 2023, by applying the two-step system generalized method of moments (GMM) techniques. The study employed a set of macroeconomic variables (GDP and inflation) and bank-specific variables (bank credit, return on assets, priority sector lending and credit-to-deposit ratio). GDP growth and bank credit exhibit negative relationships with NPAs in period ‘t’, indicating that surge in GDP and bank credit attenuates NPA levels. However, lagged GDP and bank credit are positively associated with period ‘t–1’, while lagged credit growth has no significant impact on NPAs, highlighting that economic and credit booms may escalate NPAs. The outcomes of this study serve as stepping stones for banking analysts and policymakers to enhance bank productivity, profitability and economic growth.
The banking sector constitutes a cornerstone of the Indian financial architecture and plays a decisive role in determining sustained economic growth (Pradhan, 2009; Sehrawat & Giri, 2015; Singh, 2008). Banks act as an intermediary by accepting savings from surplus units in the form of various deposits, including current, savings, recurring and fixed, and mobilize these short-term liabilities into long-term assets through lending to deficit units, thereby facilitating investment, capital formation and economic growth (Bencivenga & Smith, 1991; Konstantakopoulou, 2023; Levine et al., 2000). Banks also play multiple roles in the economy, such as bank size and maturity transformation, resolving the problem of information asymmetry in the credit market, driving the payment and settlement process, and monetary policy transmission mechanism (Samantaraya, 2025). The banking business is detrimentally influenced by nonperforming assets (NPAs) (Rai et al., 2023; Seenaiah et al., 2015), which can further alter the level of investment, aggregate output and economic growth.