Corporate Distress and Non-performing Assets in India

Abstract

The article examines the increasing twin balance sheet problem in India in the post-global financial crisis (GFC). Twin balance sheet problem, the combination of corporate distress and banking sector crisis, is considered to be devastating for economic growth since it creates a vicious cycle wherein a weak corporate balance sheet leads to increased stressed assets in the banking sector, which in turn seriously impairs the ability of the banking sector to lend to even healthy companies, holding back the growth further. In this perspective, this study is an attempt to understand the extent of corporate distress in the post-GFC and its impact on the asset quality of public sector banks (PSBs). The study reports that the corporate distress has increased in the post-GFC, resulting in significant debt at risk. The article also finds that increasing corporate fragility has adversely affected the balance sheet of PSBs in India. In a panel regression analysis, it is found that corporate profit is an important determinant of non-performing assets (NPAs) in PSBs along with other factors such as the efficiency of the bank, corporate sales growth, bank size, lending rate and lending to sensitive sectors.

Determining Risk Factors that Diminish Asset Quality of Indian Commercial Banks

“…Further, efficient banks tend to adopt new technological innovation even though it may increase operating cost in the short term but in long run they have the relatively higher productivity (Swami et al, 2018). Thus, our results support the ‘Bad management’ hypothesis which is consistent with previous studies (Berger & DeYoung, 1997; Dhananjaya, 2019; Louzis et al, 2012; Podpiera & Weill, 2008). Moreover, findings of our study are in line with the results obtained by Louzis et al (2012), which mention that performance and efficiency variables may serve as proxies for the quality of management and both are important determinants of the higher NPLs.…”

“…This indicates that bank which devotes fewer resources to monitor lending risk will be more cost-efficient in short term, but it will have higher number of NPAs in the future which is known as 'skimping hypotheses' (Berger & DeYoung, 1997;Ghosh, 2015) and becomes cost inefficient in the long run. These findings are also confirmed by the Dr Raguram Rajan, Ex-Governor of RBI who has mentioned that laxity in credit appraisal, lack of skills for specialized projects and improper loan monitoring by banks is one of the factor for high NPAs in Indian commercial banks (Dhananjaya, 2019;Nidugala & Pant, 2017). Furthermore, usually, inefficient banks may have lower profitability and indulge in more risky business activities thus have elevated levels of NPAs (Dhar & Bakshi, 2015).…”

Non-performing Loans and Moral Hazard in the Indian Banking Sector: A Threshold Panel Regression Approach

“…The second explanatory variable is bank size. Multiple studies have argued that bank size substantially impacts NPA ratio (Dhananjaya, 2019; Rajan & Dhal, 2003; Salas & Saurina, 2002). Based on Louzis et al (2012), a positive association between bank size and NPA ratio is expected.…”

Corporate Debt Vulnerability and Non-performing Assets in India

“…Rising NPAs are attributed to the set of macroeconomic and bank-specific factors (Ahmed, 2009; Berger & DeYoung, 1997; Corsetti et al, 1999; Dhananjaya, 2019; Kadanda & Raj, 2018; Krugman, 1998; Patel, 2017; Rajan, 2018; Ramu, 2009; RBI, 2012, 2015; Sahoo, 2015). Berger and DeYoung (1997) explain these factors using four hypotheses; Bad luck Hypothesis, Bad Management Hypothesis, Skimping hypothesis and Moral Hazard Hypothesis.…”