Over the last few years, the Indian banking sector has been ceaselessly adding increasingly huge piles of non‐performing assets (NPAs), also known as bad loans, to its balance sheet. As of March 2018, gross NPAs for all scheduled commercial banks (SCBs) stood at over ₹10 trillion, compared to merely 4 years back, that is, March 2014, when they were almost one‐fourth of this. Aimed at tackling the NPA problem, the Insolvency and Bankruptcy Code (IBC) was enacted in 2016 by the Parliament of India, which provides for initiation and quick resolution of bankruptcy proceedings against defaulters. In 2017, the RBI identified 12 Mega‐defaulters which accounted for nearly INR 1.75 trillion of the total NPAs of Indian banks. Targeting the NPA problem at the policy level requires extensive research and analysis in order to come up with effective action plans. This study tries to analyse NPAs of Indian banks using panel data regression models and identify their key determinants. It also examines the relative severity of the NPA problem in case of public banks as compared to private banks.

Non‐performing assets (NPAs) in the Indian banking system are currently one of the biggest financial threats to the Indian economy. The gross NPAs for Indian banks have increased by nearly four times from nearly USD 35 billion as of March 2014 to more than USD 150 billion as of March 2018. The factors responsible for this are political, macroeconomic as well as bank‐specific in nature. In this study, we study the determinants of NPAs for Indian banks by using a panel dataset for 40 public and private banks in India, for the period March 2010 to June 2019 (quarterly‐frequency). Among the macro‐economic variables, we find the Index of Industrial Production (IIP), Consumer Price Index (CPI) Inflation, policy repo rate, and exchange rate to be significant determinants of NPAs. Among the bank‐specific variables, we find gross loans and advances, provisions and contingencies, income on investments, and sector of bank (Public vs. Private) to be significant determinants of NPAs. We also find the role of demonetization (2016) towards influencing the NPAs of Indian banks, to be insignificant. Finally, we also provide some policy implications and remedial measures to tackle the problem of NPAs.