What affected stressed advances of Indian banks in the early 2000s? An investigation of the role of bank-specific and macroeconomic factors

This paper assesses the relative contribution of bank-specific and macroeconomic factors to the deterioration of asset quality of Indian banks during 2004–2018. We find support for the bad management hypothesis and the institutional memory hypothesis in explaining the non-performing loans of Indian banks. Macroeconomic vulnerabilities, which occurred in the form of increased market borrowing and depreciation of the rupee, also contributed to asset quality deterioration. We further find that, when the different indicators of bank-specific and macroeconomic determinants are combined to create composite indices, the macroeconomic conditions index appears to play a slightly bigger role than the bank-specific index in contributing to stressed advances of Indian banks.