Non-Performing Assets and Financial Performance of Public Sector Banks in India: A Post-IBC 2016 Analysis

Abstract

Purpose: This study examines the relationship between non-performing assets (NPAs) and the financial performance of public sector banks (PSBs) in India during the post-Insolvency and Bankruptcy Code (IBC) 2016 period, spanning financial years 2016–17 to 2023–24. The IBC 2016 is widely considered the most consequential legislative intervention in India's credit recovery architecture and is expected to have materially altered the NPA management landscape of PSBs. This paper empirically assesses whether that legislative expectation has been borne out in the financial performance metrics of PSBs over the ensuing eight-year window.
Design/Methodology/Approach: The study employs a quantitative, secondary-data-based panel data research design. Data were sourced from the Reserve Bank of India's Report on Trend and Progress of Banking in India, individual bank annual reports, and the CAPITALINE financial database for twelve PSBs that maintained continuous operational identity across the study period. Panel regression models — Fixed Effects (FE) and Random Effects (RE) — were estimated, with the appropriate model selected via the Hausman specification test. The dependent variable is financial performance, measured through Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM). The primary independent variable is the Gross NPA ratio (GNPA%), supplemented by Net NPA ratio (NNPA%), Capital Adequacy Ratio (CAR), Credit-Deposit ratio (C-D ratio), and operational efficiency proxied by Cost-to-Income ratio (CIR).
Findings: The panel regression results confirm a significant negative relationship between GNPA ratio and ROA (β = -0.38, p < 0.001) and between GNPA ratio and ROE (β = -0.42, p < 0.001) across the study period, consistent with theoretical predictions. However, a structural break analysis reveals that the magnitude of the NPA-performance nexus moderated meaningfully after FY 2018-19 — the period within which IBC resolutions began reaching financial closure — suggesting a measurable, if gradual, ameliorating effect of the IBC framework. CAR was found to be a significant positive predictor of ROA, while CIR carried a significant negative relationship with all three performance measures.
Practical Implications: The findings carry direct policy relevance for the Reserve Bank of India, the Ministry of Finance, and the boards of PSBs. The evidence supports continued and deepened IBC implementation, accelerated resolution of large stressed accounts, and sustained focus on cost efficiency improvements as the most productive levers for improving PSB financial performance.
Originality/Value: This study contributes original empirical evidence on the post-IBC NPA-performance relationship in Indian PSBs using a comprehensive eight-year panel, structural break analysis, and a multi-indicator financial performance framework — addressing a gap in the predominantly pre-IBC literature on Indian banking sector NPA research.

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