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Original scientific article

IMPACT OF ASSET RESTRUCTURING ON FINANCIAL STABILITY AND BANK PERFORMANCE: EVIDENCE FROM THE INDIAN BANKING SECTOR USING DYNAMIC PANEL ANALYSIS

By
T.M. Rajesha Orcid logo ,
T.M. Rajesha

Research Scholar, Department of Finance and Accounting, Alliance School of Business, Alliance University, Bangalore, India; Lecturer, Department of Finance and Accounting, College of Business Administration, Kingdom University, Riffa, Bahrain

Safika Praveen Sheikh Orcid logo
Safika Praveen Sheikh
Contact Safika Praveen Sheikh

Assistant Professor, Department of Finance, Alliance School of Business, Alliance University , Bangalore , India

Abstract

Asset restructuring has become a key tool for banks to deal with non-performing assets (NPAs) and sustain banking sector health, especially in emerging economies like India where the quality of assets is a persistent issue. This study examines the effect of asset restructuring on financial performance and financial stability of the Indian scheduled commercial banks through a dynamic panel framework. The analysis utilizes panel data of 97 scheduled commercial banks during the time frame 2015–2025 which generates 608 observations. Endogeneity, autocorrelation and heterogeneity issues are tackled by using a two-step system Generalized Method of Moments (GMM) estimation approach. The asset quality, financial stability (measured with Z score), capital adequacy and liquidity are the four major dimensions of banking performance under consideration. The empirical results suggest that restructuring has no    long-term statistically significant impact on asset quality and financial stability, which suggests that restructuring may not be an effective way to increase the fundamental credit risk profile of banks. The results, however, illustrate a strong negative effect on the capital adequacy and liquidity. The two-step system GMM estimation results indicate that asset restructuring results in around 0.5% reduction in capital adequacy and 5.9% reduction in liquidity, which shows the mechanism of the short-term NPA resolution and long-term banking resilience. Moreover, NPA provisioning and operating efficiency have a positive impact on bank stability and bank capitalization and higher profitability has positive impact on liquidity performance. The study findings suggest that restructuring assets can be a short-term solution for the management of distressed assets, but overusing restructuring might cause a decline in long-term sustainability. The results offer valuable policy insights related to the reinforcement of restructuring systems, risk management practices and the enhancement of regulatory oversight in new banking systems.

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Citation

This is an open access article distributed under the  Creative Commons Attribution Non-Commercial License (CC BY-NC) License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. 

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