Deleveraging and Bank Resilience: Does Asset Quality Stress Constrain Credit Growth? Evidence from India’s Scheduled Commercial Banks

Abstract : This study examines whether stress in bank loan portfolios constrains subsequent credit growth in India's Scheduled Commercial Banks (SCBs) and how far the banking sector's balance-sheet repair has translated into resilience. Using annual data from 1996–97 to 2024–25, it estimates an Autoregressive Distributed Lag (ARDL) model in which annual growth in gross advances depends on its own lag and the previous year's growth in gross NPAs. The model explains about 61.7 percent of the variation in credit growth. Credit growth is highly persistent (coefficient 0.71, significant at the 1 percent level), whereas lagged gross NPA growth has the expected negative sign but is statistically insignificant (coefficient −0.063, p = 0.136); a robustness check using net NPA growth gives the same conclusion. Descriptive evidence from the 2015–18 clean-up shows a sharp slowdown in lending after the jump in NPAs, suggesting that any credit constraint operates mainly in severe-stress episodes. Banking indicators for 2014–2024 show a near-tripling of credit, a fourfold rise in net profit, a fall in the gross NPA ratio from 8.3 to 2.8 percent between 2020 and 2024, and a rise in provision coverage from 44.7 to 76.4 percent. The findings show that credit dynamics are driven more by momentum and broader factors than by asset-quality stress alone, and that sustained resilience requires continued vigilance.