Testing co-integration between bank credit and NPA using S&P BSE telecom and S&P banking index as proxies

Abstract

Non-Performing Assets (NPAs) have been the bane of the Indian banking system and the larger economy for some time now. While the imprudence of the banking system can be blamed as the primary cause, it has been observed that certain sectors have had a disproportionately higher share in contributing towards the problem. An analysis of the data about NPA’s reveals that the telecom sector emerges as one of the biggest contributors towards this mess. The aim of this project is to find if there exists a relationship between the performance of the banking sector and the telecom sector. This is done by examining the banking index and the telecom index for cointegration. Further analysis was done to find out whether there is any correlation between Telecom Index and Banking Index apart from the common effect that is derived from the market forces i.e. Sensex. We found out that there exist a negative and significant correlation between Telecom and banking index after controlling the effect of Sensex(taken as a proxy for market forces) on the two variables. By using the Augmented Engle-Granger test for cointegration it is found that there is no cointegration in the S&P BSE Telecom index and the S&P Banking Index. Further on investigating granger causality among Sensex, Banking Index and Telecom Index taking them pair wise it was found that Sensex is not granger causing Banking and Telecom index. Moreover banking is not granger causing telecom index.