The Impact of Non-performing Assets on Bank Performance under Basel Regime - Empirical Evidence from India

Banks are the vital financial intermediaries in disbursing credit to deficit units. Their ineffective performance hinders the efficient functioning of an economy. Thus, the present research investigates the effect of non-performing assets (NPAs) on banks’ performance in India. The slowdown in the Indian banking sector has led to subdued growth in the Asian banking sector. The study covers 64 Scheduled Commercial Banks (SCBs) from 2008-2018. The findings suggest that NPAs have been significantly eroding the performance of SCBs in India. It signifies that an increase in NPAs deteriorates banks’ profit margins and increases provisioning requirements. This decline further reduces depositors’ and investors’ confidence in banks. Thus, policymakers need to ensure the efficient management of bad loans. Moreover, the study found the capital adequacy ratio (CAR) and net interest margins (NIM) to be positively related in the case of public and private sector banks. This relationship may be due to further tightening of the capital requirements under Basel III norms.