ASSESSING IMPAIRMENT OF BANK LOANS: INDIAN CONTEXT vis-à-vis CROSS COUNTRY ANALYSIS

Abstract

The present thesis examines the causes behind accumulation of non-performing assets (NPAs) in the commercial banks in India beside conducting a cross-country analysis on the same issue. The thesis considers analyzing the issue of NPAs from a four-dimensional perspective by considering different data sets corresponding to different time periods. First, it investigates the two relatively less explored areas of banking sector inefficiency using recent techniques such as network data envelopment analysis (NDEA) and the financial reporting quality of the commercial banks. Next, it identifies the financial distress indicators of the Indian domestic commercial banks. Finally, the thesis conducted a cross-country comparative analysis to find the factors that cause NPAs in the banking firms of the eight countries considered including India. The thesis uses quantitative approach on secondary data. The methods that are used are first, NDEA, for finding inefficiency of domestic Indian public sector banks (PSBs) and private sector banks (PVBs), along with a truncated regression for identifying the factors influencing efficiency. Second, Benford’s law is used for analyzing the financial reporting quality of Indian PSBs and PVBs. Third, logistic regression analysis is used for identifying the financial distress indicators of Indian domestic commercial banks. Finally, dynamic panel regression is used for finding the determinates of NPAs in commercial banks. Upon analyzing the first objective, the results show that most of the PSBs witness inefficiency owing to reduction in the bottom line of profits on account of large NPAs. On the other hand, the PVBs are unable to use their deposits properly for generating revenue. However, the PVBs are better than the PSBs in terms of profitability. The analysis of second objective shows that deposit turns out to be the most misreported financial figure for the PVBs, while the PSBs mostly misrepresent loans and advances. Overall, the PSBs are more into rounding up behavior as compared to the PVBs. The analysis of the third objective shows that tier-1 capital ratio, non-interest expenses to average asset, return on assets, and price to book value ratios are crucial determinants of financial distress of the Indian commercial banks. The results obtained from analyzing the fourth objective suggest that inflation and unemployment rate among the macro-economic factors, and previous years’ NPAs, loan to deposit ratio, profitability, firm size and bank capital among the bank specific factors cause for NPAs in Group 2 countries, which are India, Ireland, Italy and Croatia, countries having NPAs in excess of 10 percent of their gross advances. Among the country governance factors, rule of law, control of corruption, government effectiveness, regulatory quality and political stability, and absence of violence significantly contribute to NPAs in Group 1 countries that include China, Malaysia, Indonesia, and the Philippines. These countries had NPAs amounting to less than three percent of their gross advances. Overall, the analysis showed that NPAs in the banks across all countries including India are mostly caused by internal factors. The findings of the study could be useful for the concerned regulatory authorities for tackling NPA related issues with the Indian banking sector.