Determinants of Credit Risk in Indian Banking Sector: Some Panel Results

Abstract

This paper empirically analyses fundamental factors affecting periodic addition to non-performing assets (NPA’s or fresh slippage), taken as proxy for measuring credit risk, in Indian scenario. Panel regression on definitionally uniform data for five-year period, 2005–2009, on fresh slippage rate is performed for 70 banks to investigate variations on ownership dimension, aggressiveness, risk taking behaviour and performance of banks. The study indicates firstly, variations in fresh slippage is inversely related to efficiency of bank performance and directly related to capital-adequacy ratio, results being significant at 99% confidence interval; secondly, credit risk for foreign sector banks is higher than new generation banks for the given time period, result significant at 95% confidence interval. Standard Granger causality test based on quarterly fresh slippage data of a large public sector bank revealed that macroeconomic factor(s) – gross domestic product (GDP) has significant implication on credit risk management of banks – direction of causality established from GDP to NPA while no ‘reverse causation’ was observed.