ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

Articles by Abhiman DasSubscribe to Abhiman Das

Bank Merger, Credit Growth, and the Great Slowdown in India

The banking crisis that played out post 2008–09 is considered a key factor responsible for economic slowdown in India. Several alternative explanations for the banking crisis are presented in the paper. We find that the crisis was primarily exposure-driven and was due to lack of an appropriate credit appraisal process. While the exposure was bank ownership-driven, the rate or incidence of non-performing assets accumulation was ownership-neutral. We also examine the government’s strategy of bank consolidation using the stochastic frontier approach—an econometric tool that is popularly used for a neoclassical production, cost function, etc, along with an efficiency component. Our empirical analysis shows that the merger decisions were not necessarily on efficiency grounds. Post-merger benefits are minimal, and the deteriorating health of the public sector banks is likely to continue.

Financial Misconduct, Fear of Prosecution and Bank Lending

The issue and relevance of financial misconduct and fear of prosecution on the lending behaviour of Indian banks is investigated by combining bank-level financial and prudential variables during 2008–18 with a unique hand-collected data set on financial misconduct and fear of prosecution. The findings indicate that, in the presence of financial misconduct, state-owned banks typically cut back on credit creation and instead increase their quantum of risk-free investment. In terms of magnitude, a 10% increase in financial misconduct lowers lending by 0.2% along with a roughly commensurate increase in investment. In terms of the channels, it is found that private banks increase provisioning to maintain their credit growth, although the evidence for state-owned banks is less persuasive.

Banking Sector's Output in National Accounts: Measurement Issues

The revision of the system of national accounts of 1993, due by 2007-08, is expected to bring about several conceptual and computational changes. The impact of such changes on the financial sector's contribution to the gross domestic product seems to be quite significant. These changes are conceptually intricate and their implementation would also be challenging. This paper presents a prospective view of the ensuing changes as debated in international forums. In addition, two key issues, namely, the valuation of GDP of the banking sector at constant prices and the treatment of non-performing loans of banks in national accounts are discussed. The paper also highlights that the adjustment of financial intermediation services, indirectly measured, for the incidence of non-performing loans will have significant effects on the estimated macroeconomic aggregates on financial activities.

Commercial Bank Lending to Small-Scale Industry

It is believed that the working capital support extended by commercial banks to small-scale industry is far from adequate. Although the SSI is a part of the priority sector, its share in total priority sector advances of all scheduled commercial banks has been falling consistently from around 39 per cent in 1992 to around 24 per cent in 2004. This paper examines the trends in sectoral allocation of bank credit to the SSI vis-Ã -vis the non-SSI sector in the post-reform period. The paper also makes an attempt to understand the variations in bank credit to the SSI sector across bank groups, and also the influence of the size and performance of banks on credit to the SSI sector. The results indicate that the high incidence of bad loans arising out of SSI advances could be one of the reasons for the declining share of SSI loans of the commercial banks.

Liberalisation, Ownership and Efficiency in Indian Banking

This paper empirically estimates and analyses various efficiency scores of Indian banks during 1997-2003 using data envelopment analysis (DEA). In spite of gradual liberalisation aimed at strengthening the operational efficiency of the financial system in the 1990s, it is observed that Indian banks are still not much differentiated in terms of input- or output-oriented technical efficiency and cost efficiency. However, they differ sharply in respect of revenue and profit efficiencies. Bank size, ownership, and being listed on the stock exchange are some of the factors that have a positive impact on average profit efficiency, and to some extent, revenue efficiency scores. Finally, the median efficiency scores of Indian banks, in general, and of bigger banks, in particular, have improved during the post-reform period.

Market Discipline, Capital Adequacy

The policy debate with regard to financial intermediaries has focused on whether, and to what extent, governments should impose capital adequacy requirements on banks, or alternately, whether market forces could also ensure the stability of banking systems. This paper contributes to the debate by showing how market forces may motivate banks to select high capital adequacy ratios as a means of lowering their borrowing costs. If the effect of competition among banks is strong, then it may overcome the tendency for bank under-capitalisation that arises from systemic effects. If systemic effects are strong, regulation is required. An empirical test for Indian public sector banks during the 1990s demonstrates that better capitalised banks experienced lower borrowing costs. These findings suggest that ongoing reform efforts at the international level should primarily focus on increasing transparency and strengthening competition among banks.

Corporate Governance in Banking System

The paper examines the issue of corporate governance in the Indian banking system. Using data on banking systems for the period 1996-2003, the findings reveal that CEOs of poorly performing banks are likely to face higher turnover than CEOs of well performing ones.

Credit Growth and Response to Capital Requirements

This paper makes an attempt to assess the impact of imposition of uniform capital requirement norm on flow of credit to the business sector by the most important segment of the Indian banking sector, i e, Indian public sector banks. A simple decomposition analysis of growth in assets portfolio as well as a model based analysis of credit growth for the Indian public sector banks corroborated that (a) in the post reform period, public sector banks did shift their portfolio in a way that reduce their capital requirements and (b) adoption of stricter risk management practice in respect of bank lending in the post reform period and its interplay with minimum capital requirements (regulatory pressure) have had a dampening effect on the overall credit supply.

Risk and Productivity Change of Public Sector Banks

While the relationship between portfolio risk and capital and its interrelationship with operating efficiency has been explored elsewhere, limited evidence has been forthcoming on the interrelationships among capital, non-performing loans and productivity. The paper makes an attempt to examine the same in the Indian context. Using data on public sector banks (PSBs) for the period 1995-96 through 2000-2001, the paper finds capital, risk and productivity change to be intertwined, with each reinforcing and to a degree, complementing the other. The results imply that inadequately capitalised banks have lower productivity and are subject to a higher degree of regulatory pressure than adequately capitalised ones. Finally, the results lend some credence to the belief that lowering government ownership tends to improve productivity.
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