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

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.