The recent revised restructuring norms disallowed Indian banks from recognising restructured assets on their books as standard assets and instead recognise them as non-performing assets (NPA). Indian banks were using this restructured asset window to delay recognition of bad loans on their books, thereby misrepresenting the asset quality. Several researchers have examined NPAs in the Indian context with a focus either on the operational side of banks or on the profitability and capital adequacy facet of banks during the liberalisation era i.e, the 1990s and early 2000s. One issue with considering the effect of each facet separately on bank NPAs is that it may or may not consider the interlinkage that may exist between these facets. Hence, this gives rise to the need to create and examine a comprehensive framework that deters NPAs across Indian banks.
Our study examines 46 Indian banks with 31 bank specific financial ratios over eight years (2007 to 2014). Together, these ratios reflect operating capability, liquidity, solvency, profitability, capital adequacy and business development capacity aspects across Indian banks that deter NPAs. The data was analysed using a generalised method of moments (GMM) model that dealt with endogeneity issues owing to the interlinkages that may be prevalent in the data series. This model captured NPA with an r-square of 85%. We find a negative significant relationship between intermediation cost ratio, return on assets and NPAs. Asset growth, lagged NPAs, and total liabilities by total assets are positively related to NPAs.
