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Threshold Effect of Bank-specific Determinants of Non-performing Assets: An Application in Indian Banking

Author

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  • Samaresh Bardhan
  • Rajesh Sharma
  • Vivekananda Mukherjee

Abstract

The article investigates role of bank-specific factors on non-performing assets (NPAs) in Indian banking system in a panel threshold framework (Hansen, 1999, Journal of Econometrics, 93(2), 345–368), using an unbalanced panel of 82 scheduled commercial banks over the period of 1995–1996 to 2010–2011. We consider capital to risk-weighted assets ratio (CRAR) and credit growth as alternative threshold variables (and regime dependent) along with relevant bank-specific variables treated as regime independent. Findings reveal that CRAR exerts negative and significant impact on NPAs once it reaches a critical threshold. Possible implication is that banks extend less risky loans in a high CRAR regime than in low CRAR regime that helps reduce NPAs. With credit growth as threshold as well as regime dependent, we observe statistically significant non-linear effect of credit growth on NPAs. Beyond threshold, credit growth exerts significant negative effect on NPAs that may imply that banks extend good quality loans. However, we cannot rule out the possibility of evidence of ‘ever-greening hypothesis’ of bad debts in Indian banking, that is, banks just roll over previous bad debts into fresh performing loans. JEL Classification: G21, G28, C13, C33

Suggested Citation

  • Samaresh Bardhan & Rajesh Sharma & Vivekananda Mukherjee, 2019. "Threshold Effect of Bank-specific Determinants of Non-performing Assets: An Application in Indian Banking," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1_suppl), pages 1-34, April.
    • Handle: RePEc:sae:emffin:v:18:y:2019:i:1_suppl:p:s1-s34
    DOI: 10.1177/0972652719831546
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    2. Robin Thomas & Shailesh Singh Thakur, 2023. "Non-performing Loans and Moral Hazard in the Indian Banking Sector: A Threshold Panel Regression Approach," Global Business Review, International Management Institute, vol. 24(6), pages 1482-1499, December.
    3. Swati Singh & Manpreet Arora, 2023. "Examining and analysing the determinants of non-performing assets in public and private sector banks in India," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 25(4), pages 553-568.

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    More about this item

    Keywords

    Banks; non-performing assets; threshold regression; panel data models;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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