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Dynamics of emerging India's banking sector assets: A simple model

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Abstract

Banking sector loans are the principal source of capital for small and medium business ventures in India, comprising firms that are not large enough to be registered with stock exchanges. Non-performing assets (NPAs) are an important measure of the success of these businesses, as well as of their levels of discretion in carrying out their commercial activities conditional on their role in developing India's entrepreneurship outside the stock markets. In this article we analyze certain properties of NPAs in Indian Banks over the 1990s, when liberalization was introduced by opening up a significant portion of the public sector, allowing private banks to do business. We arrive at three conclusions for emerging India's banking sector. First, NPAs (as a ratio of loans and advances) are significantly sticky over time. Second, larger NPAs are associated with larger advances and vice-versa. Third, NPAs do not seem to have spiraled out of control over the 1990s. A simple cointegration test is carried out and a set of dynamic graphs, using notions of ‘fibration’, is presented to support the results.

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Acknowledgements

The authors thank the Planning Commission of India for financial support. This article has benefited from comments by Kenneth West, Frank Hahn, Darrell Duffie, A. Zaman, M.Gittleman, A. Vinay Kumar, and a referee and participants at an International Conference on Entrepreneurial & Small Business Finance 2006 at IIM Lucknow. The usual disclaimer applies.

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  1. Indian Institute of Social Welfare & Business Management, Management House, College Square West, Kolkata, 700 073, India

    Soumitra K Mallick

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  1. Soumitra K Mallick
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  2. Amitava Sarkar
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  3. Kalyan K Roy
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  4. Tamal Duttachaudhuri
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  5. Anjan Chakrabarti
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Correspondence to Soumitra K Mallick.

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Mallick, S., Sarkar, A., Roy, K. et al. Dynamics of emerging India's banking sector assets: A simple model. J Asset Manag 11, 62–70 (2010). https://doi.org/10.1057/jam.2010.1

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  • DOI: https://doi.org/10.1057/jam.2010.1

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