After playing around with padding options, it seems like anything larger than the default indicator height (22pts) cannot be pushed downward with padding.
If you want to create a smaller back indicator, you can account for an increased padding by adjusting the height (or width) accordingly, like so:
navigation-bar back-indicator {
background-image: url(custom_arrow.png);
background-size: 17 19;
background-bottom-padding: 2;
}
Also, it's worth noting that adding right padding to the back indicator will not move the back button text right, so you won't be able to fix the horizontal overlap in your particular example with padding on the back indicator. However, several examples from Apple drop the text altogether when using large indicators, so you might want to consider this as an option.