Macroeconomic Vulnerabilities and their Effect on Nonperforming Loans in Indian Commercial Banks

Abstract

This study explored the panel data of 27 public sector banks, 21 private sector banks, 5 SBI & associate banks along with 49 foreign banks covering the period from 2000-2018. The main objective of this paper was to investigate the impact of macroeconomic variables on nonperforming loans by categorizing the Indian scheduled banks into four categories namely public, private, foreign, and SBI associate banks. Altogether, five macroeconomic variables were taken focusing on economic growth, unemployment, interest rates, inflation, and exchange rate vulnerabilities. Using GMM model, the findings showed that macroeconomic variables differed for all the categories of banks as for public sector banks, including State Bank of India and its associates, all the variables were significant ; whereas, for private banks, inflation, growth rate, and interest rate were significant factors. On the contrary, foreign banks were more affected by exchange rate fluctuations apart from other macroeconomic variables. The findings of the study provided insights about how this relationship between macroeconomic variables and NPAs changed among the different categories of banks on the basis of ownership, thus assisting bankers and policy makers in taking precautionary measures while drafting banking and monetary policies as ownership of the banks plays a key role in the overall banking management, which we can also see from the analysis that over the years, private and foreign banks have considerably reduced their share of nonperforming loans from the overall share of NPAs in Indian commercial banks.