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Dynamics of Operational Efficiency in Credit Lending and Recovery of Stressed Assets: An Alternative Approach with Undesirable By-Products

Author

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  • Gargi Sanati

    (National Institute of Bank Management)

  • Anup Kumar Bhandari

    (Indian Institute of Technology Madras)

Abstract

Our study estimates the operational efficiency of Indian banks during 2009–2010 to 2017–2018, considering advances, and recovery of stressed assets as desirable outputs, while NPAs and slippages are undesirable by-products. Our first stage DEA analyses conclude that public sector banks have significant scope to improve their lending and recovery efficiency, while also reducing their stressed assets. Our analyses also reveal that banks are more efficient in managing credit risks for shorter-term loan portfolios and secured loans, while positive economic externalities are more prominent in determining the efficiency of banks in priority sector lending. We also observe that a competitive scenario within the banking sector, overall macroeconomic growth, and low cost of funds play vital roles in improving banks' operational efficiency and reducing credit risk. Our findings suggest that liquid assets might be more beneficial than illiquid collaterals in improving the recovery of stressed assets.

Suggested Citation

  • Gargi Sanati & Anup Kumar Bhandari, 2024. "Dynamics of Operational Efficiency in Credit Lending and Recovery of Stressed Assets: An Alternative Approach with Undesirable By-Products," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 22(2), pages 365-394, June.
    • Handle: RePEc:spr:jqecon:v:22:y:2024:i:2:d:10.1007_s40953-024-00389-8
    DOI: 10.1007/s40953-024-00389-8
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    More about this item

    Keywords

    Financing Policy; Financial Risk and Risk Management; Banks’ Ownership Structure; Stressed Assets; Slippage;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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