The nexus of economic growth, priority sector lending and non-performing assets: case of Indian banking sector

Abstract

<jats:sec><jats:title content-type="abstract-subheading">Purpose</jats:title><jats:p>In recent years, the Indian banking sector is facing a major cause of concern in the form of Nonperforming Assets (NPA), and the priority sector lending (PSL) is generally recognized as the major factor contributing to it. Thus, the present study has been carried out with the objective of examining the relationship between priority sector lending and GDP growth. Thereafter, the role of PSL and certain other bank-specific, industry-specific and macroeconomic variables in determining NPA has been studied.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Design/methodology/approach</jats:title><jats:p>Taking a sample of 45 scheduled commercial banks, the study has been carried out for 14 years (2004–2018). Granger causality between PSL and GDP has been examined by applying the Dumitrescu-Hurlin test. For the purpose of investigating the impact of PSL and other determinants on NPA, both static and dynamic panel regression have been performed. Under the dynamic panel, system generalized methods of moments (S-GMM) approach has been followed.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Findings</jats:title><jats:p>The findings show that there exists a positive correlation and bidirectional causal relationship between PSL and GDP, which implies that PSL brings additional growth for the whole economy. In addition to it, PSL is found to be insignificant for the NPA ratio, and thus, it can be inferred that credit extended to government-specified sectors does not bring any major increase in the bad loan portfolio of banks.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Practical implications</jats:title><jats:p>The policymakers and bank management can take a cue from the findings of this study to decrease the exposure to loan nonrepayment issue. The priority sectors are in need of formal credit for their growth, and since the rising population of the country can find employment in these sectors, banks should meet their credit needs while securing their position with regard to the NPA problem.</jats:p></jats:sec><jats:sec><jats:title content-type="abstract-subheading">Originality/value</jats:title><jats:p>The issue of NPA determinants, and in particular, the contribution of priority sector lending in it has not been much explored for Indian banking sector. Also, the present study adds to the literature by using the causality approach for examining the importance of directed credit schemes for economic growth.</jats:p></jats:sec>

Non-Performing Loans and Macroeconomics Factors: The Italian Case

“…Their findings show that unemployment and the exchange rate are the main determinants of NPLs. Gaur and Mohapatra (2020) and Mishra et al (2021) study the nexus between NPLs and macroeconomic variables in the Indian banking system. Both papers document policymakers' importance of monitoring macroeconomic conditions to ensure a more robust Indian financial system.…”

“…First, to our knowledge, it is the first work that studies the impact of the macroeconomic environment in Italy during the recent period. Several papers have analyzed this relationship in the U.S. (Ghosh 2015), European (Makri et al 2014;Rinaldi and Sanchis-Arellano 2006), Greek (Anastasiou et al 2019;Konstantakis et al 2016;Louzis et al 2012), France and Germany (Chaibi and Ftiti 2015), India (Gaur and Mohapatra 2020;Mishra et al 2021), and other world regions (Beck et al 2015;Espinoza and Prasad 2010;Hada et al 2020;Kjosevski et al 2019;Nkusu 2011;Tanasković and Jandrić 2015;Zheng et al 2020;Žunić et al 2021) contexts. However, only Bofondi and Ropele (2011) studied the relationship between macroeconomic variables and bad loans in the Italian context from 1990 to 2010.…”

Audit Committee Independence, Director Ownership, Audit Quality and Non-Performing Loans

“…Conversely, Biekpe (2011) argued that larger banks face lower of loans issue since they have the likelihood of achieving well-diversified loan portfolios. However, Gaur and Mohapatra (2021) did not find any significance of bank size on NPLs. Therefore, this paper assumes-H 5 There is a significant nonlinear impact of size on NPLs.…”

The Linkage Between Fiscal Policy and Non-Performing Household Loans in Turkey

“…From the analysis of the academic literature, it can be concluded that various studies and papers have examined the impact of NPLs on bank lending (Salas and Saurina 2002;Espinoza and Prasad 2010;Bofondi and Ropele 2011;Louzis, Vouldis, and Vasilios 2012;Abid, Nejib-Ouertani, and Zouari-Ghorbel 2014;Bijsterbosch and Falagiarda 2015;Kjosevski, Petkovski, and Naumovska 2019;Gaur and Mohapatra 2020) and economic activity (Baboučak and Jančar 2005;Saurina and Jimenez 2006;Rinaldi and Sanchis-Arellano 2006;Kauko 2012;Klein 2013;Škarica 2014;Beck, Jakubik, and Piloiu 2015;Khan, Siddique, and Sarwar 2020;Kucuk, Ozlu, and Yunculer, 2021). The gap in the literature is that there are not so many papers investigating the linkage between NPLs and fiscal policy (Nurja and Kufo 2016;Dimitrios, Louri, and Tsionas 2016), so this gap was covered.…”