NPAs and profitability in Indian banks: an empirical analysis

Abstract

As financial intermediaries, the commercial banks to a large extent depend on the performance of their lending as a critical source of earning. Due to increasing loan failures, the share of non-performing advances has increased substantially in recent years, thereby adversely impacting their profitability. The paper has examined the NPAs and profitability relationship by estimating the determinants of profitability of 39 public sector and private banks for the time period from 2005 to 2019. Using a set of bank specific and macroeconomic predictors of profitability, we found that NPA has negative impact on the rate of profit of the Indian banks. The study suggests that the banks must reduce their NPAs and operating cost to improve their profitability.