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

Abstract

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.

An exploratory review of the fintech influence field

“…According to Malaysian data, financial stability is positively affected regardless of bank size, type (Islamic or conventional) or management style. A study of the stability of the Indian financial system (Verma and Chakarwarty, 2023) confirmed that financial innovation has a positive and significant impact on financial stability, but the development of fintech is closely related to the growth of cybercrime, which undermines the stability of the banking sector. Liem et al (2022) studied the impact of credit-information sharing on banking stability using data from 73 countries.…”

Exploring Growth Trajectories, Performance Dynamics and Future Opportunities for Indian Fintech Start-ups: With Special Reference to One MobiKwik Systems Limited

“…Artificial intelligence has empowered the industry, enhancing predictive intelligence, process efficiency, cost optimization, and client engagement (Ashish Kumar, 2022). Competition in the financial sector has evolved, with non-banking companies and Fintech firms offering innovative financial products and services (Divya Verma, 2023). This competition has led to an increase in Fintech startups in India, focusing on digital innovations and technology-enabled business models.…”

“…The sector has witnessed the emergence of new business models like FinTech 2.0 and FinTech 3.0, which concentrate on providing financial inclusion to MSMEs through fintech. [6][7][8] The industry has witnessed the adoption of innovative financing solutions, such as equipment leasing and rental. Additionally, new financing options like FinTech and LeaseTech have also emerged.…”

Are shadow banks a threat to the financial stability of EMEs?

“…Post the GFC of 2008, various studies highlighted the detrimental effect of shadow banking on the financial stability of economies due to their asset–liability mismatches and lack of explicit government guarantees (Adrian & Ashcraft, 2012; Bengtsson, 2013). Empirical evidence shows them to be dependent on short-term funding and highly interconnected with OFIs (Anshuman & Sharma, 2020; Chaturvedi & Singh, 2022; Verma & Chakarwarty, 2023).…”