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Slowdown in Bank Credit Growth: Aggregate Demand or Bank Non-performing Assets?

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  • Ashima Goyal
  • Akhilesh Verma

Abstract

We estimate the determinants of credit and of non-performing assets (NPAs) using a firm and a bank panel with data up to 2015 in order to test bank lending against the aggregate demand channel as an explanation for slow Indian credit growth. The results support demand as the key constraint. Only demand variables affect corporate credit for a broad set of firms. Balance sheet weakness reduced credit only for a narrow subset of indebted firms in a difference-in-difference type analysis. Even so, sales remained the dominant variable. From the bank panel, the asset quality review (AQR) did have a strong negative effect on advances but gross NPAs did not. While high interest rates and low growth raised NPAs, so did past credit. Low demand not only reduced credit, it also increased NPAs. That the capital adequacy ratio (CAR) significantly reduces NPAs points to the productivity of fund infusion. When other determinants are controlled, bank ownership does not affect NPA ratios, again supporting external shocks as causal. The results suggest that apart from structural reform to clean balance sheets, recovery of demand is necessary for revival of credit growth. JEL Classification: G21, E51

Suggested Citation

  • Ashima Goyal & Akhilesh Verma, 2018. "Slowdown in Bank Credit Growth: Aggregate Demand or Bank Non-performing Assets?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 12(3), pages 257-275, August.
    • Handle: RePEc:sae:mareco:v:12:y:2018:i:3:p:257-275
    DOI: 10.1177/0973801018768985
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    Cited by:

    1. Ashima Goyal, 2020. "Post Covid-19: recovering and sustaining India’s growth," Indian Economic Review, Springer, vol. 55(1), pages 161-181, November.
    2. Das, Abhiman & Mohapatra, Sanket & Nigania, Akshita, 2022. "State-owned banks and credit allocation in India: Evidence from an asset quality review," IIMA Working Papers WP 2022-02-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Ashima Goyal, 2018. "The Growth slowdown and the working of inflation targeting in India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-007, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Aswini Kumar Mishra & Shikhar Jain & Mohammad Abid & Manogna R L, 2021. "Macro‐economic determinants of non‐performing assets in the Indian banking system: A panel data analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3819-3834, July.
    5. Ashima Goyal, 2023. "Lessons from outperformance in the Indian financial sector," Global Policy, London School of Economics and Political Science, vol. 14(5), pages 805-817, November.

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    More about this item

    Keywords

    Credit slowdown; Aggregate demand; Bank lending; Non-performing assets; Firm debt;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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