Endogenous Financial Indicators of Bad Loans: A Panel Data Study on Indian Public Sector Banks

Abstract: Banks and financial markets encompass an ecosystem which facilitates the flow of funds from the surplus sector of the economy to the needy sector. This ecosystem of banks and financial markets has deepened in size, sophistication and complexity over the years. However, in the recent past they have also been subject to failures, economic distress and abuse due to the devastating growth of stressed assets in the banking system which is commonly called Non Performing Assets (NPAs) or termed as bad loans particularly in Indian Public Sector Banks (PSBs). This study investigates endogenous financial indicators of NPA in Indian PSU banks through panel data regression. Database related to NPA and selected variables have been analyzed for the period of March 2011 to March 2020. Net Non Performing Assets of PSU banks in India have been considered dependent variable and selected financial indicators as independent variables. It has been observed that credit to deposit ratio (CD ratio), operating expenses, return on asset and capital adequacy ratio have negatively correlated to net NPA of PSBs and consequently contributed for lower level of NPA. Cash deposit ratio and loan maturity have positive but not statistically significant impact on NPA while priority sector advances and collateral value along with non interest income has shown a positive and statistical significant impact over net NPA and contributes for accumulation in net NPA of Public Sector Banks. Result concludes with suggestions based on findings and limitation of the study. Keywords: Bad Loans, Non Performing Assets, Financial Determinants, Public Sector Banks, Panel Data Regression JEL Classification number: E4, E5, G