Post-Crash Development in the Indian Banking Sector

Rachita Gulati is an Associate Professor at the Indian Institute of Technology (IIT) Roorkee, India, and Research Economist at the Asian Development Bank Institute (ADBI), Tokyo, since May 2024. She previously held the prestigious Subir Chowdhury Visiting Fellowship (2017–2018) at the India Observatory, London School of Economics and Political Science. Her research focuses on banking and financial institutions, financial stability and regulation, corporate governance, and applied econometrics. She has co-authored books on bank deregulation and efficiency, and on banking regulation and supervision in South Asia, and published articles in Omega, Economic Modelling, WIREs Climate Change, Socio-Economic Planning Sciences, and Research in International Business and Finance.Sunil Kumar is a Professor in the Faculty of Economics at South Asian University (SAU), New Delhi, India. With over 29 years of teaching and research experience, his work centres on data envelopment analysis, stochastic frontier analysis, banking efficiency, and industrial productivity, with a particular focus on the performance of financial institutions and public-sector enterprises. He has published in peer-reviewed journals and has authored books on efficiency and productivity in the manufacturing and banking sector in India, contributed to international reports by Asian Productivity Organization, and a study with the Reserve Bank of India on “Governance, Efficiency and Soundness of Indian Banks”.

• AbbreviationsList of FiguresList of TablesList of AppendicesAbout the AuthorsPreface1. INTRODUCTION1.1 Background1.2 Motivation, Objectives, and Research Questions1.2.1 Motivation and Context1.2.2 Research Objectives1.2.3 Research Questions1.3 Contributions1.4 Structure of the Book2. INDIAN BANKING SECTOR: A TRAJECTORY FROM REGULATION TO DEREGULATION TO REREGULATION AND BEYOND2.1 Introduction2.2 The Regulation Phase: Pre-Independence to Early 1990s2.2.1 Pre-Independence Era: Foundation of Formal Banking2.2.2 Post-Independence Development-Oriented Banking (1947–1960s)2.2.3 Nationalisation and Social Banking (1960s–1980s)2.2.4 Financial Repression and Pre-Reform Crisis (1980s–1991)2.3 The Deregulation Phase: Early 1990s to Global Financial Crisis (2007–09)2.3.1 Genesis and Philosophy of Banking Reforms2.3.2 Implementation Framework: The Gradualist Approach2.3.3 Complementary Institutional and Legal Measures2.3.4 Outcomes and Transformation of the Banking Sector2.4 The Reregulation Phase: Post-Global Financial Crisis (2008 Onwards)2.4.1 Indian Banking and the Global Financial Crisis (2007–2009)2.4.2 Shift to Macroprudential Regulation, Institutional Framework, and Basel III Implementation2.4.3 The Domestic Banking Crisis: Non-Performing Asset Surge (2013–2017)2.4.4 Policy Responses to the NPL Crisis and Comprehensive Governance Reforms (2015–Present)2.4.5 Demonetisation and Banking Sector Impact (2016)2.4.6 Banking Sector Response to COVID-19 Pandemic (2020–2022)2.5 Beyond Reregulation: Key Emerging Regulatory Frontiers in the Post-GFC Era2.5.1 Financial Inclusion: The PMJDY Framework and Universal Banking Access2.5.2 Digital Payment Infrastructure and Regulatory Framework2.5.3 Climate Risk Regulation and Sustainable Finance2.6 Conclusion: Lessons from Three Decades of Calibrated Regulatory EvolutionReferences3. POST-CRASH TRANSFORMATION: STRUCTURAL EVOLUTION AND PERFORMANCE DYNAMICS OF INDIAN BANKING3.1 Introduction3.2 Current Structure of the Indian Banking System3.2.1 Composition of Banks in the Indian Banking Industry3.2.2 Public Sector Bank Consolidation and Competitive Dynamics3.2.3 Emergence of Differentiated Banking Entities3.3 Post-Crash Trends in the Indian Banking Industry3.3.1 Bank Earnings and Profitability3.3.2 Exposure to Off-Balance Sheet Activities by Banks3.3.3 Asset Quality of Banks3.3.3.1 Sectoral Composition of NPLs3.3.3.2 NPL Recovery Channels and Regulatory Framework3.3.4 Bank Frauds3.3.4.1 Recent Fraud Patterns across Bank Groups3.3.4.2 Fraud Incidents by Area of Operations3.3.5 Technological Development and Digital Payments3.3.5.1 Card-Based Payment Systems3.3.5.2 Non-Card-Based Payment Systems3.3.6 Basel III and Capital Adequacy3.3.7 Consolidation and Recapitalisation of Public Sector Banks3.3.7.1 Mergers and Acquisitions of Public Sector Banks3.3.7.2 Recapitalisation and Restructuring of PSBs3.3.8 Banking Performance During Global and Local Disruptions and Regulatory Forbearance3.3.8.1 Regulatory Forbearance following GFC (2008–2015)3.3.8.2 Demonetisation Impact (2016–2018)3.3.8.3 COVID-19 Pandemic Impact (2020–2022)3.4 Synthesis: Connecting Regulatory Evolution to Performance Outcomes3.5 Summary and Conclusions4. CRISES AND BANK EFFICIENCY IN INDIA: A TWO-STAGE METAFRONTIER NETWORK DEA ANALYSIS4.1 Introduction4.2 Relevant Literature Review4.2.1 Bank Efficiency Assessment4.2.2 Crisis and Bank Efficiency4.3 Methodology and Data4.3.1 Two-Stage Network Production Process for a Bank4.3.2 Research Design4.3.2.1 Mathematical Description4.3.2.2 Network Production Technology Set and Network Direction Distance Function4.3.2.3 (In)efficiency Measurement with Respect to Group Frontiers4.3.2.4 Directional Distance Function-Based Network DEA Model for Constructing Metafrontier4.3.3 Econometric Analysis4.3.4 Data4.4 Empirical Results4.4.1 Dynamics of Bank Efficiency Levels in the Indian Banking Industry4.4.2 Efficiency Comparison across Bank Ownership Groups4.4.3 Crisis and Bank Efficiency4.4.3.1 Global Financial Crisis and Bank Efficiency4.4.3.2 Local NPL Crisis and Bank Efficiency4.4.3.3 Currency Note Ban Crisis and Bank Efficiency4.4.3.4 COVID-19 Pandemic and Bank Efficiency4.4.4 Bank Heterogeneity, Inefficiency, and Innovation Gaps during the Crisis4.4.5 Econometric Validation4.5 Conclusions and Policy ImplicationsReferences5. BANK MARKET STRUCTURE AND COMPETITION IN INDIA: DYNAMICS FROM FINANCIAL MELTDOWN TO COVID-19 PANDEMIC5.1 Introduction5.2 Structural Changes in the Indian Banking Industry5.3 Relevant Literature Review5.3.1 Theoretical Literature5.3.2 Empirical Literature on Bank Competition Using the Panzar–Rosse Approach and Its Extensions5.4 Methodology, Variables, and Data5.4.1 Estimation of Yearly H- and E-Statistics5.4.2 Measuring Five-Year Rolling Window H-Statistic5.4.3 Measuring H-Statistic under Dynamic Competitive Market Conditions5.4.4 Estimation of Cost Efficiency5.4.5 Data5.5 Empirical Results5.5.1 Dynamics of Bank Competition in the Short-Run5.5.1.1 Yearly Evolution in the Bank Competition5.5.1.2 Evolution of Bank Competition over Five-Year Rolling Window Periods5.5.2 Long-Run Market Equilibrium Test and Validity of the Dynamic P-R Specification5.5.3 Dynamics of Bank Competition in the Long-Run5.5.3.1 Line of Business Activities and Competitive Behaviour5.5.3.2 Foreign Bank Ownership and Competitive Behaviour5.5.3.3 Bank Size and Competitive Behaviour5.5.3.4 Banking Crises and Competitive Behaviour5.6 Conclusions and Policy ImplicationsReferences6. CREDIT RISK IN INDIA: DETERMINANTS AND CONVERGENCE6.1 Introduction6.2 Literature Review6.2.1 International Evidence on Credit Risk Determinants6.2.2 Studies on the Indian Banking Context6.3 Econometric Methodology and Data6.3.1 Identifying Credit Risk Clubs in the Indian Banking Industry: Phillips and Sul's Club Clustering6.3.2 Dynamic Panel Specification6.4 Variables and Data6.4.1 Specification of Variables and Empirical Hypotheses6.4.2 Data6.5 Empirical Results6.5.1 NPL Trends in the Indian Banking Industry6.5.2 Risk Convergence Clubs6.5.3 Determinants of Credit Risk6.5.3.1 Industry Analysis6.5.3.2 Ownership-Specific Determinants6.5.3.3 Impact of Crisis Episodes on Credit Risk6.6 Conclusion and Policy ImplicationsReferences7. SYNTHESIS, POLICY IMPLICATIONS, AND FUTURE RESEARCH DIRECTIONS7.1 Background7.2 Summary of Key Findings7.3 Interdependencies Among Efficiency, Competition, and Credit Risk7.4 Answering the Central Research Question: Resilience or Vulnerability7.5 Key Policy Implications7.5.1 Implications for Banking Regulators7.5.2 Implications for Bank Management7.6 International Relevance and Comparative Implications7.7 Directions for Future Research7.8 Concluding RemarksINDEX