Loan Loss Provisioning Practices in Indian Banks

Abstract

RBI has started getting stringent on loan loss provisioning in the banks. Today banks are not only maintaining provisions for sub-standard assets, but also they have to keep aside surplus for standard assets. The objective of our study is to find out the factors determining loan loss provisioning in banks in India. Variables considered for our research are loan loss provisions to total assets, loans to total assets, capital adequacy ratio of the banks, bank holding of securities to total assets, earnings before tax to total asset ratio, non-performing assets to total loans, credit growth rate of the bank, and GDP annual growth rate. Our dependent variable is loan loss provisions to total assets. We have taken the data for the past 11 years from 2004–05 to 2014–15. The scope of our study is 46 commercial banks in India, where we have checked the determinants of loan loss provisioning. We have also analyzed whether the loan loss provisioning in Indian banks is procyclical or countercyclical by focusing on the two key variables, i.e., GDP and earnings. The impact of various variables on loan loss provision has been tested and the result indicates that asset size, credit growth, NPA level, earning of the banks, and macroeconomic variable (GDP annual growth rate) have a greater impact on the loan loss provisioning of the banks. The analysis has been done by using OLS regression and dynamic GMM approach. The findings of the study also reveal that Indian banks have shown countercyclical provisioning and the banks tend to increase the provisions with an increase in banks earnings and GDP annual growth rate.