Does leverage influence banks' non-performing loans? Evidence from India

Saibal Ghosh

Applied Economics Letters, 2005, vol. 12, issue 15, pages 913-918

Abstract: The study examines the association between corporate leverage and banks’ non-performing loans. Using data on Indian manufacturing sector in India for 1993--2004, the findings indicate lagged leverage to be an important determinant of bad loans of banks. In terms of magnitudes, a 10 percentage point rise in the corporate leverage is, on average, associated with 1.3 percentage point rise in sticky loans relative to loans, after a one period lag. In terms of policy implications, the analysis suggests that the leverage ratio can serve as a useful signpost of asset quality and second, the analysis points to the need to improve the collection of data from the corporate sector.

Date: 2005
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