RESTRUCTURING ASSETS REFORM, 2013: IMPACT OF OPERATIONAL ABILITY, LIQUIDITY, BANK CAPITAL, PROFITABILITY AND CAPITAL ON BANK CREDIT RISK

We analyse and employ a model that captures the inter-temporal relationship between four broad parameters for a sample of 45 Indian banks during the period 2006–2016. These broad parameters are operational ability, bank capital, liquidity and profitability. The year 2013 marked the implementation of the restructuring assets reform. The reform removed the individual banks’ treatment of considering restructured assets as “standard assets” and introduced higher provisioning on restructured assets. The reform also led to moving these restructured assets into the non-performing category when required. We have covered the data period between 2006-2015 where we have divided the data set into three window periods, a) prior (2006-2013) and b) reform implementation 2013–2016 (revised restructuring assets recognition guideline implemented), and c) post implementation --  2015-2016 (deadline to implement revised restructured assets guideline). We employ the generalised method of moments (GMM) model that deals with the endogeneity issues and helps appropriately capture the relationship between bank risk, measured using non-performing assets (NPA), and the explanatory variable, restructured assets. This relationship between NPAs and restructured assets helps us understand the effect of restructured assets on NPAs. 

Our findings suggest that banks with higher restructured assets levels witness higher risk and lower profits. This result is largely suggestive that a bank’s window dressed assets of poor quality under the restructuring window, while maintaining them as   “standard assets”, leads  to misreporting of profitability and  the bank’s financial health.