Modelling the effectiveness of the loan recovery strategy of Indian banks

The loan recovery strategy model for banks in India is based on a two-pronged strategy with dual dimensions: (1) preventive strategy and (2) curative strategy. This paper presents a conceptual two-pronged loan recovery model for Indian banks. The study has proposed a novel model for the analysis of the recovery efforts and recovery strategy of the banks and empirically tested the model through panel GLS regression, a GMM-SYS model, and further through structural equation models (SEM). The objective of the study is to discern if the two-pronged strategic responses (preventive and curative loan recovery strategies) of the bank groups in India have any significant difference, i.e., do the loan recovery strategies of the bank groups have discerning or divergent effects on bad loan management? Through the lens of the proposed model, the study provides a comparative insight into the loan recovery efforts of various bank groups in the Indian banking sector. The insights gained from this study have important implications for bank groups in the evaluation, formulation, and execution of an effective loan recovery strategy. The paper also uses structural equation models to demonstrate the dynamics of the novel model. We empirically determine that gross slippage ratio, cost of funds, return on equity, and return on assets have significant effects on gross non-performing assets, with higher slippage ratios and costs of funds associated with increased non-performing assets and higher return on equity and assets associated with decreased non-performing assets. The research has a future orientation in the sense that it provides the necessary pedestal for banks to analyse and find out what they can do better and how they can formulate loan recovery strategies based on their strengths and competitive advantages. Our proposed model is a significant addition to the scholarship of loan recovery and NPA management globally.