Revisiting the Impact of NPAs on Profitability, Liquidity and Solvency: Indian Banking System

Abstract

In the light of the fact that non-performing assets (NPAs) in the country are increasing at a very fast pace, this article intends to investigate the outcome of gross NPAs (GNAPs) ratio on profitability, liquidity and solvency in Indian banking system. To study this impact, we have used panel data of 30 Indian banks (12 government sector banks and 18 private sector banks) from 2014 to 2021 (8 years) collected from Prowess (CMIE) and money control. The current study uses four different panel regression models, that is, fixed and panel regression models, pooled regression models and seemingly unrelated regression models. The empirical outcomes of the current study confirm the outcomes of existing studies. The findings of this article confirm the substantial association between the GNPA ratio and profitability ratio, that is, net profit ratio, return on assets ratio and return on equity ratio. Further, the study also confirms the association between the GNPA ratio and liquidity ratios of banks (cash flow margin, current ratio, acid test ratio, cash ratio and operating cash flow ratio). We also found the impact of the GNPA ratio on the capital adequacy ratio.