Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking

Rakshit, Bijoy; Bardhan, Samaresh

doi:10.2478/jcbtp-2020-0024

Cited by 18 publications

(9 citation statements)

References 74 publications

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“…Therefore, our study supports the viewpoints of both competition stability and competition fragility, and our results are consistent with Rakshit and Bardhan (2020), who argues that both the competition stability and competition fragility views can coexist in a single banking system like India.…”

Section: Discussionsupporting

confidence: 91%

Impact of bank competition on financial stability-a study on Indian banks

Verma

Chakarwarty²

2023

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Purpose Nowadays, the competition is not only emerging from within the banking sector, but nonbanking companies like nonbanking financial companies (NBFCs) and FinTech are also growing in size and numbers, offering innovative financial products and services, giving a stiff competition to Indian banks. Thus, this study aims to investigate whether competition from within and outside the banking sector enhances or reduces the financial stability of the banking industry. Design/methodology/approach The study uses Herfindahl–Hirschman index to measure market share and Z score to measure financial stability. The study further examines the role of NBFCs and FinTech companies in impacting the financial stability by introducing variables like innovation, cybercrimes, systemically important institutions, etc. Thereafter, panel regression has been applied. Findings Empirical results show a positive relation of market share with financial stability, implying that increased competition in the Indian banking industry erodes the market power, adversely affecting the profit margins which encourages banks to take more risk and which may impact financial stability. The study shows a positive impact of innovation on financial stability which implies that the competition is acting as an enabler for banks. The authors find a negative relation of systemic important NBFCs with financial stability. The authors observe a negative association of cybercrimes with financial stability, reflecting that competition emerging from FinTech sector has exposed banks to new risks. Research limitations/implications The policymakers should make sure that the competition of banks with other financial institutions, such as FinTech sector, remains healthy; otherwise, it can jeopardize the entire financial system. It is for the policymakers to define a boundary for FinTech sector, as the development of this sector has exposed the banking industry to new kinds of risks potential to create financial instability. The banks should do a comprehensive check on the company to which it is granting loans, and the government should amend laws. Though big banks have huge potential, consolidations can pose challenges at a macroeconomic level. Originality/value FinTech firms are a new entrant in the financial world which are providing immense competition to the banking sector, and thus radically changing the entire financial system. Therefore, it is extremely vital to study and explore the role of NBFCs and the FinTech industry as the main variable to analyze bank competition, which to the best of the authors’ knowledge is completely missing in the previous studies.

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Section: Discussionsupporting

confidence: 91%

Impact of bank competition on financial stability-a study on Indian banks

Verma

Chakarwarty²

2023

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“…Nain et al 92020) found uncertainty influences the effectiveness of monetary policy shock. Rakshit et al (2020) reveal that in India, a higher degree of bank competition is positively as sociated with the prevalence of non-performing loans. Okpamen et al (2020) said firms needed to encourage adequate interlocking members who have diverse professional training, high social net worth and experience (experience hypothesis) to positively influence effective management and financial performance of listed firms in Nigeria.…”

Section: Entrepreneurship and Sustainability Issuesmentioning

confidence: 98%

Enhancing risk management culture for sustainable growth of Asia commercial bank -ACB in Vietnam under mixed effects of macro factors

Hac¹,

Huy²,

Thạch³

et al. 2021

JESI

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For sustainable growth, macro policy makers will need to look at risk management in banking industry and impacts of macro factors on market risk in order to adjust policies and build risk management culture in banking system. What we need to adjust in trade balance, risk free rate and other policies? This is one of reasons for us to conduct this study.This paper measures the Beta CAPM in famous model under impacts of both macro internal and external variables during low inflation time 2015-2020 in the country. The evidence is the fundamental role of risk management in commercial bank has been increasing with new perspectives in management, corporate governance and risk management models. We will estimate effects in risk measurement of one of big listed Vietnam commercial bank, Asia commercial bank (ACB) during the low inflation period 2015-2020 with semiannual data. Through using analysis, synthesis statistics methods, and dialectical materialism method, combined with econometric model with 9 macro variables, we figure out that CPI has a positive correlation with Beta CAPM of ACB, while Risk free rate (Rf) and lending rate have negative correlation with Beta CAPM of the bank. It implies that increase in inflation, together with decrease in Rf and lending rate will increase market risk.Then, one of its major findings is the suggestion of macro and risk management policies for bank and relevant government agencies. Our recommendation can be used for reference and expand researches in many other emerging markets.

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“…Since the inception of financial liberalization in 1991, India's banking industry has undergone several phases of financial reforms. The reform measures primarily promoted bank competition (Bhattacharya and Das, 2003;Prasad and Ghosh, 2007;Li et al, 2019;Rakshit and Bardhan, 2020a), enhanced stability (Dhal et al, 2011;Sarkar and Sensarma, 2016;Rakshit and Bardhan, 2020b), improved efficiency (Ataullah and Le, 2006;Ray and Das, 2010;Zhao et al, 2010;Gulati and Kumar, 2016) and increased profitability (Seenaiah et al, 2015;Ahamed, 2017) to cater to the needs of higher economic growth. The liberalization policies pursued to increase the functional autonomy at the micro, and Empirical evidence from Indian banking 1867 macro-level remarkably strengthened the health of Indian banking (Das and Ghosh, 2009).…”

Section: Introductionmentioning

confidence: 99%

Assessing the effects of cost, revenue and profit efficiency on bank performance: empirical evidence from Indian banking

Rakshit

2022

IJOA

Self Cite

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Purpose This paper aims to investigate the effects of cost, revenue and profit efficiency on bank profitability in an emerging economy such as India over the period 1997 to 2017. Additionally, this study examines the effect of efficiency on profitability across different ownership groups for a panel of 70 Indian commercial banks. Design/methodology/approach In the first stage, using stochastic frontier analysis, we estimate the efficiency scores of cost, revenue and profit over the examined period. In the second stage, this study uses the two-step system generalized-method of moments dynamic panel approach to investigate the impact of several efficiency measures on bank profitability. Findings Results estimated through and system generalized-method of moments indicate that a higher level of cost, revenue and efficiency significantly improves India's bank profitability. Regarding ownership groups, this study finds that the public sector banks are most cost-efficient compared to private and foreign banks. Other bank-specific, macroeconomic and institutional variables have played a significant role in determining bank profitability. Practical implications The findings of the study extend some important policy implications. In light of the rapid decline in bank profitability, banks should focus on increasing the efficiency of their operations. Improvement in profit, cost and revenue efficiency can ameliorate bank performance significantly. Profit efficiency that takes into account both cost and revenue efficiency should be maintained reasonably to prevent the declining pattern of bank profitability that the industry has witnessed over the years. Originality/value To the best of the author's knowledge, this study is a fresh piece of research that fulfils an urgent need of investigating the dynamics between bank efficiency and bank profitability in India. In an emerging economy like India, where the banking sector has witnessed substantial structural transformations over the past two decades, such study demands an immediate empirical investigation.

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Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking

Cited by 18 publications

References 74 publications

Impact of bank competition on financial stability-a study on Indian banks

Impact of bank competition on financial stability-a study on Indian banks

Enhancing risk management culture for sustainable growth of Asia commercial bank -ACB in Vietnam under mixed effects of macro factors

Assessing the effects of cost, revenue and profit efficiency on bank performance: empirical evidence from Indian banking

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