Credit Risk and Public and Private Banks’ Performance in India: A Panel Approach

Abstract

The study is mainly concerned with Credit Risk and Public and Private Banks’ Performance in India and uses panel data of 40 commercial banks, comprising of 24 public and 16 private banks which were listed on Bombay Stock Exchange during the study period. The study employs various credit risk ratios as independent variables and three performance indicators as dependent variables for a period of 16 years from 2000-01 to 2015-16. The proxy for credit risk used in the study include Gross Non Performing Asset ratio, Loan Loss Allowance to Total Advances, Capital Adequacy Ratio, Credit Deposit Ratio, Loan Loss Allowance to Non Performing Assets, Loan Loss Allowance to Assets, and Advances to Assets. Deposits and Size have been used as control variables. Return on Assets, Return on Equity and Net Interest Margin have been used as proxy for performance. The result of the Random Effect Model shows that there is positive and significant relationship between Loan Loss Allowance and all the three performance indicators used in the study. Credit Deposit ratio is also significant at varying level and positively influences all the three performance indicators. Loan loss Allowance to Non Performing Asset is significant and inversely influences all three performance indicators. Loan loss Allowance to Total Assets is significant for two performance indicators viz., NIM and ROE and positively influences the same.