"From Growth to Grime: How Macroeconomic Shifts Shape Bad Loans in India"

Abstract

This study examines the interplay between macroeconomic factors and Non-Performing Assets (NPAs) in the Indian banking sector, focusing on the mediating role of Gross Domestic Product (GDP). Using panel data from 30 scheduled commercial banks (2004–2024), we analyze the direct and indirect effects of Bank Credit Growth Rate (BCGR) and Consumer Price Index (CPI) on NPAs. Regression results reveal that while BCGR and CPI exhibit negative short-term associations with NPAs, their impact is significantly mediated by GDP, underscoring the importance of economic growth in mitigating credit risk. The study also highlights the persistent nature of NPAs, as evidenced by strong autoregressive effects. Our findings challenge linear assumptions and emphasize the need for coordinated macroeconomic policies to enhance banking stability.