ORIGINAL PAPER Bank-specific determinants of nonperforming assets of Indian banks Samaresh Bardhan 1 & Vivekananda Mukherjee 2 # Springer-Verlag Berlin Heidelberg 2016 Abstract The paper examines the role of bank-specific variables in explaining the dynamics of non-performing assets (NPAs) of Indian banks in a panel data framework over the post liberalisation period, 1995–2011. The results have been derived after controlling for macroeconomic factors like real GDP, inflation, exchange rate etc. Applying several variants of Generalized Method of Moments (GMM) technique in dynamic models, we find that that there is significant time persistence of NPAs in Indian banking system. We also find that larger banks are more prone to default than smaller banks. We find support for the ‘bad management hypothesis’ as we observe that an increase in profit level of the banks reduces NPAs in the next period. Lagged capital adequacy ratio as an important prudential indicator also significantly reduces current NPAs of banks. The paper also draws some important policy implications about NPA management. 1 Introduction In a bank-based financial system, the quality of asset of banks is a matter of serious concern to the regulatory authorities both from the point of view of stability in the financial system as well as from the point of view of efficiency of bank management. Deterioration in quality of assets of banks and the subsequent increase of Non- performing Assets (NPAs) severely affects the process of financial intermediation (Berger and Hefeker 2008; Welfens 2008). The consequent financial fragility adversely affects economic growth (Demirguç-Kunt and Detragiache 1998; Gonzalez-Hermosillo 1999; Reinhart and Rogoff 2010). Wilful default and growth of NPAs are also major problems of Indian banking system (Bardhan and Marjit 2005; Bardhan and Mukherjee DOI 10.1007/s10368-016-0344-4 * Samaresh Bardhan samaresh@iitrpr.ac.in 1 Department of Humanities and Social Sciences, Indian institute of Technology, Ropar, Punjab Pin 140001, India 2 Department of Economics, Jadavpur University, Kolkata Pin 700032, India Int Econ Econ Policy (2016) 13:483–498 Published online: 8 June 2016