Non Performing Loans and Terms of Credit of Public Sector Banks in India-- an Empirical Assessment

Only available on StudyMode
  • Download(s) : 473
  • Published : January 7, 2012
Open Document
Text Preview
Reserve Bank of India Occasional Papers Vol. 24, No. 3, Winter 2003

Non-Performing Loans and Terms of Credit of Public Sector Banks in India: An Empirical Assessment Rajiv Ranjan and Sarat Chandra Dhal*
This paper explores an empirical approach to the analysis of commercial banks' nonperforming loans (NPLs) in the Indian context. The empirical analysis evaluates as to how banks’ non-performing loans are influenced by three major sets of economic and financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks. The empirical results from panel regression models suggest that terms of credit variables have significant effect on the banks' non-performing loans in the presence of bank size induced risk preferences and macroeconomic shocks. Moreover, alternative measures of bank size could give rise to differential impact on bank's non-performing loans. In regard to terms of credit variables, changes in the cost of credit in terms of expectation of higher interest rate induce rise in NPAs. On the other hand, factors like horizon of maturity of credit, better credit culture, favorable macroeconomic and business conditions lead to lowering of NPAs. Business cycle may have differential implications adducing to differential response of borrowers and lenders. JEL Classification : G21, E51, G11, C23 Key Words : Bank credit, non-performing loans, terms of credit, panel regression.

Introduction Financial stability is considered as sine qua non of sustained and rapid economic progress. Among various indicators of financial stability, banks’ non-performing loan assumes critical importance since it reflects on the asset quality, credit risk and efficiency in the allocation of resources to productive sectors. A common perspective is that the problem of banks’ non-performing loans is ascribed to political, economic, social, technological, legal and environmental * Rajiv Ranjan is Director and Sarat Chandra Dhal is Assistant Adviser in Department of Economic Analysis and Policy, Reserve Bank of India. The authors are extremely thankful to Shri Manoranjan Mishra, for his valuable suggestions and insightful discussions. The responsibility for the views expressed in the paper rests with the authors only.

82

RESERVE BANK OF INDIA OCCASIONAL PAPERS

(PESTLE) factors across countries (2003, Bhide, et.al., 2002, Das and Ghosh). During the last decade, the PESTLE framework has undergone significant changes, largely, due to structural transformation of emerging economies, including India, amidst reform of financial sector, economic integration induced by rapid increase in the pace of globalisation and advances in information technology. Moreover, Government intervention in the credit market has eased considerably. Advances in technology have facilitated rapid exchange of information across markets, creation of newer financial products, and reduction in transaction costs, thus, contributing to enhanced operational efficiency of banks and financial institutions. The institutional infrastructure has been strengthened in various ways. Countries have adopted international best practices pertaining to prudential regulation and supervision. In the sphere of legal environment, several measures have been undertaken in the areas of debt recovery, securitisation and asset reconstruction, resolution of defaults and non-performing loans, besides changes and amendments to the archaic laws pertaining to banking and financial sector. Overall, these developments have led to structural change in the financial sector, which has created conducive environment for market mechanism, in general, and economic factors, in particular, for playing a critical role in influencing the portfolios of banks and financial institutions. It is in this context that this study has undertaken an empirical analysis for evaluating the impact of economic and financial factors on banks’ non-performing loans. The distinguishing feature of...
tracking img