Analysing the Impact of Macroeconomic Determinants on Asset Quality in Indian Commercial Banks

The Increasing trend of non-performing assets (NPAs) in the Indian finance sector is reducing its profit-earning capacity and efficiency. Non-performing assets (NPAs) are advances or interest dues that borrowers are not capable of repaying due to economic or other reasons. Various factors like bank-specific factors, macroeconomic and institutional factors affect NPAs. In this paper, an empirical study is carried out to examine how macroeconomic variables affect NPAs of scheduled commercial banks of India. For the study, data of 23 years, i.e. from 2000-2001 to 2022-2023 have been taken and an Autoregressive Distributed Lag (ARDL) method and bounded F-test have been used to analyse the effect of macro-economic variables on GNPA of Indian scheduled commercial banks. The macroeconomic variables like FDI, CPI, IIP, GDP and unemployment rate of India was taken. In the study it was concluded that a long-run causal link exists between the macro-economic variables and GNPA. GDP is found to be negatively associated with GNPA, indicating that economic growth helps lower the NPAs of banks. CPI is significantly negatively associated with GNPA, showing that as price level rises, the GNPA of banks decreases, as inflation reduces the real value of money, making loan repayment easier. Furthermore, the unemployment rate and IIP are found to be negatively correlated with GNPA, while FDI shows positive relation.