Impact of NPA and loan write-offs on the profit efficiency of Indian banks

Abstract

In recent years, Indian banks witnessed a huge increase in gross non-performing assets and loan write-offs. In this paper, impact of these two undesirable outputs has been examined on the profit efficiency of the banks using Nerlovian approach, which perhaps is a novel attempt in Indian context. It is found that inclusion of these two undesirable outputs has a significant impact on the profit efficiency of the Indian banks vis-à-vis their non-inclusion, and it is more evident from sharp decline in the profit efficiency of these banks. Also, it is observed that the allocative inefficiency of the banks was the main cause for their profit inefficiency. Further, loan write-offs should not be merely viewed as cleaning of the balance sheet of the banks as it has a noticeable impact on their profit efficiency.