Why Non-Performing Assets Persist: Uncovering the Structural and Macroeconomic Drivers of India’s Banking Stress

Rising non-performing assets (NPAs) remain a persistent threat to banking stability in emerging economies, including India. This study examines the role of conventional macroeconomic determinants in shaping NPA dynamics using annual panel data from 30 Indian banks over the period 2003–2022. Employing Robust Least Squares and dynamic modelling techniques, the analysis evaluates the impact of GDP growth, inflation, exchange rate movements, and repo rates, while addressing heteroscedasticity, autocorrelation, and bank-level heterogeneity. The findings indicate that currency depreciation significantly increases NPAs, whereas inflation and tighter monetary policy exert a moderating effect. GDP, however, does not exhibit a significant influence, suggesting limited macroeconomic transmission to banking asset quality. To ensure appropriate model specification, stationarity tests are conducted, guiding the inclusion of dynamic elements in the analysis. Once the model is adjusted accordingly, the results consistently highlight the relative importance of macroeconomic factors without yielding conflicting interpretations. While broader theoretical perspectives such as institutional memory and balance-sheet effects are acknowledged for contextual relevance, they are not empirically tested in this study. Overall, the findings emphasize that conventional macroeconomic variables play a meaningful, though selective, role in explaining NPA behaviour, offering clearer and more consistent insights for policy and banking practice.