Behavioural Economics in Loan Defaults: Psychological Triggers of NPAs

Non-Performing Assets (NPAs) are a critical concern for banks and financial institutions, impacting profitability and financial stability. Traditional economic models assume rational decision-making, but behavioral economics suggests that psychological biases influence borrowers' repayment behavior. This study explores the psychological triggers behind loan defaults, applying behavioral economics principles such as present bias, overconfidence, loss aversion, and mental accounting to understand why borrowers default despite financial capacity.

The research combines primary data (surveys/interviews with borrowers and bankers) and secondary data (RBI reports, case studies, and academic literature) to identify key behavioral factors contributing to NPAs. Recommendations include behavioral nudges, improved financial literacy, and risk assessment models incorporating psychological biases to mitigate defaults.

Data Collection (Primary & Secondary)

Behavioural Economics Framework Application