Foreign Direct Investment, Agricultural Growth and Banking Stability in India: An Empirical Analysis of Credit Risk and Non-Performing Assets

Abstract

Banking stability is closely influenced by broader macroeconomic and financial conditions, including investment flows, sectoral growth, borrower repayment capacity, credit risk, and the quality of banks' loan portfolios. This relationship is particularly significant in India, where foreign direct investment (FDI), agricultural performance, credit expansion, and non-performing assets (NPAs) interact within a rapidly evolving financial system. Despite recent improvements in asset quality and capital adequacy, the mechanisms through which macroeconomic conditions influence banking stability require further empirical examination.

This study investigates the relationships among FDI, agricultural growth, credit risk, NPAs, and banking stability in India. It develops an integrated framework in which FDI and agricultural growth serve as macroeconomic antecedents, while credit risk and NPAs operate as financial transmission mechanisms affecting banking stability. The study adopts a hybrid methodological approach combining Partial Least Squares Structural Equation Modelling (PLS-SEM) and fuzzy-set Qualitative Comparative Analysis (fsQCA). PLS-SEM examines direct, indirect, and mediating relationships, whereas fsQCA identifies alternative combinations of economic and financial conditions associated with high banking stability.

The analysis uses authenticated secondary data from recognised institutional and financial sources, including the Reserve Bank of India, the Department for Promotion of Industry and Internal Trade, and international macroeconomic databases. The study contributes by integrating macroeconomic and banking-risk factors, distinguishing credit risk from realised asset-quality deterioration, and examining both net effects and alternative causal pathways to banking stability.