The Indian commercial banking sector is characterised by both a high average non-performing share in total bank advances and a high dispersion between banks. This paper presents the findings of a formal attempt to explain inter-bank variations in NPAs for the year 1996-97. The specification tests for the impact of region of operation on domestically-owned banks, as measured by percentage branches in each of a set of state clusters. One cluster of three eastern and seven north-eastern states carries a robust and statistically significant positive coefficient; another cluster of the southern and some of the northern states carries a significantly negative coefficient. These findings bear out those of Demirguc-Kunt and Huizinga on the significance of the operating environment for bank efficiency. No sustainable improvement in the performing efficiency of domestic banks is possible without prior improvement in the enforcement environment in difficult regions of the country. Another finding of some importance is that it is not foreign ownership in and of itself so much as the banking efficiency and technology correlates of the country of origin of the foreign bank which determine NPA performance in the Indian environment.
