Non-Performing Loans and Systemic Risk of Indian Banks

Abstract

This study examines the role of non-performing loans in systemic risk for Indian banks using a fixed-effects panel regression model, with bank fixed effects and year fixed effects. The moderator variables considered for the study include bank size, capital adequacy, leverage, deposits, loans & advances, and investments.

The study contributes to the literature by proposing the concept of maximum level of non-performing loans for neutral systemic risk, which is the level of net non-performing loans to net advances for which the systemic risk is non-positive. The results of the study indicate that bank size, capital adequacy, and loans & advances have a significant impact on the maximum level of non-performing loans for neutral systemic risk. Further, the results of the study suggest that the role of non-performing loans in systemic impact was different for public sector and private sector banks.

The study suggests that the model can be used to set maximum levels of non-performing loans for individual banks with estimates or projections of the bank’s characteristics.