Impact of Non-Performing Assets on Financial Stability: Evidence from the Indian Banking Sector

Abstract

The stability of a nation’s financial system largely depends on the soundness of its financial services sector. In India, the continued prevalence of Non-Performing Assets (NPAs) has posed significant challenges to economic growth and financial resilience. This study evaluates the impact of NPAs on the stability of the financial system in India’s banking sector from 2014 to 2024.Using secondary data sourced from the Reserve Bank of India (RBI), Ministry of Finance, and annual reports of leading banks, the research employs descriptive statistics, correlation, and regression analysis. Crucial financial metrics, including Return on Assets (ROA), Regulatory capital Ratio (CAR), and Credit Growth are analyzed to evaluate the systemic implications of NPAs. The findings reveal a clear inverse association between NPAs and profitability, capital adequacy, and credit expansion. The research also highlights the positive role of policy interventions such as the Insolvency and Bankruptcy Code (IBC) and the SARFAESI Act in strengthening asset soundness and improving loan recovery frameworks. The research concludes that robust NPA management practices essential for ensuring long-term financial stability and sustained economic prosperity in India.