The relationship between competition and risk-taking behaviour of Indian banks (original) (raw)
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2016
Academic debate over the ‘competition-fragility view’ and ‘competition-stability view’, in context of the risk shift and franchise value paradigms has lead to study the concept and relationship of competition and riskiness of banks in detail. In this respect, Martinez-Miera Repullo 2010 (MMR model) has even propagated the existence of a non-linear relationship between stability and competition. We test these hypotheses on a sample of Indian banks using measures for stability and riskiness of banks. The paper investigates the impact of bank competition and impact of bank concentration on stability, as well as on the riskiness of their loan portfolios .We find evidence for the presence of non-linear relationship between stability index and competition. It may be pointed out that in case of Indian banks, both concentration and competition work simultaneously to support the competition-fragility view. Both increased concentration and decreased competition may lead to greater riskiness w...
2018
Since, the global financial crisis, the link between Bank competition and Financial Stability is widely discussed and debated among policy makers all over the world. It is quite understanding that the degree of competition among credit institutions will increase the risk taking activities to acquire new market and improve profitability. In this backdrop, now the question arises, what is present state of competition in the Indian banking industry? & whether the financial stability of the banks deteriorate due to competition? Further, with the recent consolidation, what will happen the level of competition in the industry? In this study, we made an attempt to answer the above questions in the post financial crisis period (2007-08 to 2016-17). The post crisis period has chosen as the Indian banks’ balance sheet has increased in a robust manner. To do the analysis, a sample of 55 major nationalised and private sector banks has been selected, based on their balance sheet figures as publi...
Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking
Journal of Central Banking Theory and Practice, 2020
The primary purpose of this paper is to empirically investigate the impact of bank competition on financial stability in India. We use a dynamic panel model to examine whether an increase in bank competition hindrances financial stability of commercial banks in India over the period 1996 to 2016. Findings reveal that in India, a higher degree of bank competition is positively associated with the prevalence of non-performing loans. Additionally, the positive impact of the Lerner index on Z-score lends support to competition-fragility hypothesis. However, we argue that both the views of competition-stability and competition-fragility can coexist in a single banking system like India.
Bank Competition and its Determinants: Evidence from Indian Banking
International Journal of the Economics of Business, 2019
This paper measures the degree of bank competition in India using a sample of 70 commercial banks over the period 1996-2016. To assess the degree of competition, we estimate the market power of each bank in our sample employing three nonstructural measures: the Lerner index, the adjusted Lerner index, and the Boone indicator. Bank-wise and year-wise estimates of the marginal cost required in all these measures are obtained using the semi-parametric method. The paper further attempts to undertake a comprehensive assessment of competition in Indian banking and identifies various bank-specific, macroeconomic, structural, and contestability indicators, which are supposed to explain level and variation of the degree of competition over time. Empirical findings reveal that public-sector banks in India exercise a relatively higher degree of bank competition compared to private and foreign-sector banks. However, aggregate results support that the Indian banking system is competitive in general. Unlike the structure-conduct-performance paradigm, which advocates that a concentrated banking system impairs competitiveness, our findings reveal that concentration measures hardly exert any effect on bank competition. Rather, contestability measures play a significant role in the determination of bank competition.
Competition in the Indian Banking Sector: A Panel Data Approach
Journal of Risk and Financial Management
The paper aims to assess the level of competition in the Indian banking sector overall as well as within the three groups of banks: foreign owned, state owned (public sector), and privately owned. We use panel data for the period from 2005–2018. We found that the overall competition in the Indian banking sector is strong, although there are differences by type of bank ownership. The Indian banking market continues to be characterized by monopolistic competition. The various policy measures taken by the Indian government in recent years appear to have helped boost competition. A policy suggestion would be to further liberalize the banking sector for foreign investment.
Assessment of Competition in Indian Banking
During the post 1991, financial system regulators have initiated many policy measures to enhance competition in the Indian Banking Sector. In the Indian context, competition has not been rigorously studied and hence, there is a need for more comprehensive analysis of competition in Indian banking sector. The article has applied PRH statistic for the panel data involving 36 banks for the period of 1994-2009 after the penetration of private banks. The article has found that there has been improvement in the degree of competition since 1994. Equity capital, as a control variable is influencing the level of competition. Analysis of competition allows the policy formulators to design proper liberalization measures, designing of financial products and business models to ensure greater competition in the banking sector.
Competition in Banking: The Indian Experience
2011
Competition in banking is important, primarily for productivity, efficiency, consumers' welfare and overall economic growth of a country. Since 1991, Indian government and the financial system regulator have initiated many policy measures so as to enhance the efficiency and stability of the Indian Banking Sector. The policy measures have reduced the assets concentration of public sector banks, improved customer services and customer profitability. The article has used PRH statistic and assessed the degree of competition of the Indian Banking Sector after the penetration of private and foreign banks in India. It has used a dynamic panel data involving 75 domestic and foreign banks and found that the Indian Banking Sector is monopolistically competitive having a few bigger size banks, both in Public Sector and Private Sector, influencing the market conditions and pricing system. Keywords-Competition; Indian Banking System; Panel Data Regression; Panzar-Rosse Statistic
Bank Competition and Financial Stability
Journal of Financial Services Research, 2008
Under the traditional "competition-fragility" view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative "competition-stability" view, more market power in the loan market may result in higher bank risk as the higher interest rates charged to loan customers make it harder to repay loans, and exacerbate moral hazard and adverse selection problems. The two strands of the literature need not necessarily yield opposing predictions regarding the effects of competition and market power on stability in banking. Even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. We test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. Our results suggest that-consistent with the traditional "competition-fragility" view-banks with a higher degree of market power also have less overall risk exposure. The data also provides some support for one element of the "competitionstability" view-that market power increases loan portfolio risk. We show that this risk may be offset in part by higher equity capital ratios.