Empirical Approach to Analysis of NPAs
This paper explores an empirical approach to the analysis of Non-Performing Assets (NPAs) of public, private, and foreign sector banks in India. The NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. This paper aims to find the fundamental factors which impact NPAs of banks. A model consisting of two types of factors, viz., macroeconomic factors and bank-specific parameters, is developed and the behavior of NPAs of the three categories of banks is observed. This model tries to extend the methodology of widely-known Altman model. The empirical analysis assesses how macroeconomic factors and bank-specific parameters affect NPAs of a particular category of banks. The macroeconomic factors of the model included are GDP growth rate and excise duty, and the bank-specific parameters are Credit Deposit Ratio (CDR), loan exposure to priority sector, Capital Adequacy Ratio (CAR), and liquidity risk. The results show that movement in NPAs over the years can be explained well by the factors considered in the model for the public and private sector banks. The collinearity between independent variables was measured by Durbin-Watson test and VIF characteristic and it was found to be a little for public and private banks. The factors included in the model explains 97.1% (adjusted R-square value of regression results) of variations in NPAs of public banks and 76.9% of the same of private banks. The other important results derived from the analysis include the finding that banks' exposure to priority sector lending reduces NPAs.
