Corporate Distress and Non-performing Assets in India

Abstract

The article examines the increasing twin balance sheet problem in India in the post-global financial crisis (GFC). Twin balance sheet problem, the combination of corporate distress and banking sector crisis, is considered to be devastating for economic growth since it creates a vicious cycle wherein a weak corporate balance sheet leads to increased stressed assets in the banking sector, which in turn seriously impairs the ability of the banking sector to lend to even healthy companies, holding back the growth further. In this perspective, this study is an attempt to understand the extent of corporate distress in the post-GFC and its impact on the asset quality of public sector banks (PSBs). The study reports that the corporate distress has increased in the post-GFC, resulting in significant debt at risk. The article also finds that increasing corporate fragility has adversely affected the balance sheet of PSBs in India. In a panel regression analysis, it is found that corporate profit is an important determinant of non-performing assets (NPAs) in PSBs along with other factors such as the efficiency of the bank, corporate sales growth, bank size, lending rate and lending to sensitive sectors.