Bank Lending and Loan Quality: The Case of India

33 Pages Posted: 19 Dec 2016

See all articles by Pallavi Chavan

Pallavi Chavan

Reserve Bank of India - Department of Economic and Policy Research

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Date Written: December 2016

Abstract

This paper analyses how non-performing loans (NPLs) of Indian banks behave through the cycle. We find that a one-percentage point increase in loan growth is associated with an increase in NPLs over total advances (NPL ratio) of 4.3 per cent in the long run with the response being higher during expansionary phases. Furthermore, NPL ratios of banks are found to be sensitive to the interest rate environment and the overall growth of the economy. Notwithstanding differences in management and governance structures, there is a procyclical risk-taking response to credit growth in the case of both public and private banks with private banks being more reactive to changes in interest rate and business cycle conditions.

Keywords: Procylicality, loan quality, bank lending, bank ownership, moral hazard

JEL Classification: E320, G210, G010

Suggested Citation

Chavan, Pallavi and Gambacorta, Leonardo, Bank Lending and Loan Quality: The Case of India (December 2016). BIS Working Paper No. 595, Available at SSRN: https://ssrn.com/abstract=2886759

Pallavi Chavan (Contact Author)

Reserve Bank of India - Department of Economic and Policy Research ( email )

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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