The Resiliency of Indian Banks: The Role of Bank-Specific and Macroeconomic Factors

One of the main goals of economic reforms in many economies is to increase the resilience of the banksBanks. Many central banks use econometric modelling based on bank-specific indicators to track financial stability. While bank-specific indicators can be useful for assessing the current state of banks, they cannot account for potential interactions with the macroeconomy or economic policy shocks. This study examines these dynamics by considering macroeconomic environment and bank-specific elements influencing Indian banks’ resilience from 2005 to 2017. This paper makes use of widely used measures of banking resilience such as gross non-performing assets ratio (GNPA) and profitability. Based on the GMM analysis, the results reveal that bank characteristicsBank Characteristics such as last period GNPA, last period ROA, loan size, leverage, liquidity, regulatory capital, and bankBanks competitionCompetition influence current GNPA and current ROAROA. The study provides evidence that macroeconomic factors such as inter-bank rate, economic policy uncertainty, and country’s GDP are significant in explaining the variation in both GNPA and ROA. The developed quantitative models assist banksBanks and regulators in make decisions and design policies for improving bankBanks resilience in terms of performance and stability.