The Impact of Corporate Profitability and Economic Growth on Resolution of Distressed Assets in India

Abstract

Purpose: To study the impact of Indian corporate profitability and overall economic growth on the resolution of stressed assets in India, taking the effect of pandemic into consideration. The rationale behind the analysis has been excessive leverage, particularly in the non - financial Indian corporates with substantial share of domestic and external credit, and consequent rise in stressed assets even prior to the pandemic.

Methodology/Research Design: Multivariate OLS linear regression has been performed using annual recovery rate as dependent variable, whereas, annual profit after tax margin of Indian corporates and annual GDP growth at current prices as independent variables, respectively. Furthermore, a dummy variable has been introduced to the regression equation to study the effect of pandemic on recovery of stressed assets. Data has been sourced from the RBI, EPW and CMIE databases and HP filter has been used for smoothening of time series.

Findings: Findings suggest that, overall economic growth and corporate profitability may have a positive significant impact on the recovery/resolution of stressed assets and may contribute to achieve the desired financial stability. Whereas, pandemic may have a negative impact on the resolution process, however, the continued commitment towards the improvement of resolution may yield positive results.

Originality/Value: Attention towards transparency, accountability, credit monitoring, asset quality, structural evolution in the recovery laws, and improving the resolution framework may ensure achievement of the timely recovery of the stressed assets.

Paper Type: Empirical Research Paper