Business Freedom and Financial Development as Leading Determinants of Non-performing Assets: Evidence from the Indian Banking Sector

Abstract

This study is an attempt to enrich the existing literature on the determinants of non-performing assets (NPAs) for the Indian banking sector by explicitly investigating the role of the Business Freedom sub-component of the Economic Freedom Index (EFI) and Financial Development (FD) along with the traditional bank-specific and macroeconomic determinants. The study estimated panel data models for 38 Scheduled Commercial Banks (SCBs) from 2005-2020. The ‘Fixed effect’ regression model and ‘Two-step System GMM’ approach were employed to perform the analysis. The results indicated that business freedom contributes to increased NPAs. It implied that the Indian banking sector could not be left to operate in a free market mechanism. Financial Development (FD) is found to have a negative relationship with the NPAs