Post-Crash Development in the Indian Banking Sector Efficiency, Competition, and Credit Risk

Abbreviations
List of Figures
List of Tables
List of Appendices
About the Authors
Preface

1.  INTRODUCTION

1.1  Background

1.2  Motivation, Objectives, and Research Questions

1.2.1  Motivation and Context

1.2.2  Research Objectives

1.2.3  Research Questions

1.3  Contributions

1.4  Structure of the Book

2.  INDIAN BANKING SECTOR: A TRAJECTORY FROM REGULATION TO DEREGULATION TO REREGULATION AND BEYOND

2.1  Introduction

2.2  The Regulation Phase: Pre-Independence to Early 1990s

2.2.1  Pre-Independence Era: Foundation of Formal Banking

2.2.2  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 Reforms

2.3.2  Implementation Framework: The Gradualist Approach

2.3.3  Complementary Institutional and Legal Measures

2.3.4  Outcomes and Transformation of the Banking Sector

2.4  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 Implementation

2.4.3  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 Era

2.5.1  Financial Inclusion: The PMJDY Framework and Universal Banking Access

2.5.2  Digital Payment Infrastructure and Regulatory Framework

2.5.3  Climate Risk Regulation and Sustainable Finance

2.6  Conclusion: Lessons from Three Decades of Calibrated Regulatory Evolution

References

3.  POST-CRASH TRANSFORMATION: STRUCTURAL EVOLUTION AND PERFORMANCE DYNAMICS OF INDIAN BANKING

3.1  Introduction

3.2  Current Structure of the Indian Banking System

3.2.1  Composition of Banks in the Indian Banking Industry

3.2.2  Public Sector Bank Consolidation and Competitive Dynamics

3.2.3  Emergence of Differentiated Banking Entities

3.3  Post-Crash Trends in the Indian Banking Industry

3.3.1  Bank Earnings and Profitability

3.3.2  Exposure to Off-Balance Sheet Activities by Banks

3.3.3  Asset Quality of Banks

3.3.3.1  Sectoral Composition of NPLs

3.3.3.2  NPL Recovery Channels and Regulatory Framework

3.3.4  Bank Frauds

3.3.4.1  Recent Fraud Patterns across Bank Groups

3.3.4.2  Fraud Incidents by Area of Operations

3.3.5  Technological Development and Digital Payments

3.3.5.1  Card-Based Payment Systems

3.3.5.2  Non-Card-Based Payment Systems

3.3.6  Basel III and Capital Adequacy

3.3.7  Consolidation and Recapitalisation of Public Sector Banks

3.3.7.1  Mergers and Acquisitions of Public Sector Banks

3.3.7.2  Recapitalisation and Restructuring of PSBs

3.3.8  Banking Performance During Global and Local Disruptions and Regulatory Forbearance

3.3.8.1  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 Outcomes

3.5  Summary and Conclusions

4.  CRISES AND BANK EFFICIENCY IN INDIA: A TWO-STAGE METAFRONTIER NETWORK DEA ANALYSIS

4.1  Introduction

4.2  Relevant Literature Review

4.2.1  Bank Efficiency Assessment

4.2.2  Crisis and Bank Efficiency

4.3  Methodology and Data

4.3.1  Two-Stage Network Production Process for a Bank

4.3.2  Research Design

4.3.2.1  Mathematical Description

4.3.2.2  Network Production Technology Set and Network Direction Distance Function

4.3.2.3  (In)efficiency Measurement with Respect to Group Frontiers

4.3.2.4  Directional Distance Function-Based Network DEA Model for Constructing Metafrontier

4.3.3  Econometric Analysis

4.3.4  Data

4.4  Empirical Results

4.4.1  Dynamics of Bank Efficiency Levels in the Indian Banking Industry

4.4.2  Efficiency Comparison across Bank Ownership Groups

4.4.3  Crisis and Bank Efficiency

4.4.3.1  Global Financial Crisis and Bank Efficiency

4.4.3.2  Local NPL Crisis and Bank Efficiency

4.4.3.3  Currency Note Ban Crisis and Bank Efficiency

4.4.3.4  COVID-19 Pandemic and Bank Efficiency

4.4.4  Bank Heterogeneity, Inefficiency, and Innovation Gaps during the Crisis

4.4.5  Econometric Validation

4.5  Conclusions and Policy Implications

References

5.  BANK MARKET STRUCTURE AND COMPETITION IN INDIA: DYNAMICS FROM FINANCIAL MELTDOWN TO COVID-19 PANDEMIC

5.1  Introduction

5.2  Structural Changes in the Indian Banking Industry

5.3  Relevant Literature Review

5.3.1  Theoretical Literature

5.3.2  Empirical Literature on Bank Competition Using the Panzar–Rosse Approach and Its Extensions

5.4  Methodology, Variables, and Data

5.4.1  Estimation of Yearly H- and E-Statistics

5.4.2  Measuring Five-Year Rolling Window H-Statistic

5.4.3  Measuring H-Statistic under Dynamic Competitive Market Conditions

5.4.4  Estimation of Cost Efficiency

5.4.5  Data

5.5  Empirical Results

5.5.1  Dynamics of Bank Competition in the Short-Run

5.5.1.1  Yearly Evolution in the Bank Competition

5.5.1.2  Evolution of Bank Competition over Five-Year Rolling Window Periods

5.5.2  Long-Run Market Equilibrium Test and Validity of the Dynamic P-R Specification

5.5.3  Dynamics of Bank Competition in the Long-Run

5.5.3.1  Line of Business Activities and Competitive Behaviour

5.5.3.2  Foreign Bank Ownership and Competitive Behaviour

5.5.3.3  Bank Size and Competitive Behaviour

5.5.3.4  Banking Crises and Competitive Behaviour

5.6  Conclusions and Policy Implications

References

6.  CREDIT RISK IN INDIA: DETERMINANTS AND CONVERGENCE

6.1  Introduction

6.2  Literature Review

6.2.1  International Evidence on Credit Risk Determinants

6.2.2  Studies on the Indian Banking Context

6.3  Econometric Methodology and Data

6.3.1  Identifying Credit Risk Clubs in the Indian Banking Industry: Phillips and Sul's Club Clustering

6.3.2  Dynamic Panel Specification

6.4  Variables and Data

6.4.1  Specification of Variables and Empirical Hypotheses

6.4.2  Data

6.5  Empirical Results

6.5.1  NPL Trends in the Indian Banking Industry

6.5.2  Risk Convergence Clubs

6.5.3  Determinants of Credit Risk

6.5.3.1  Industry Analysis

6.5.3.2  Ownership-Specific Determinants

6.5.3.3  Impact of Crisis Episodes on Credit Risk

6.6  Conclusion and Policy Implications

References

7.  SYNTHESIS, POLICY IMPLICATIONS, AND FUTURE RESEARCH DIRECTIONS

7.1  Background

7.2  Summary of Key Findings

7.3  Interdependencies Among Efficiency, Competition, and Credit Risk

7.4  Answering the Central Research Question: Resilience or Vulnerability

7.5  Key Policy Implications

7.5.1  Implications for Banking Regulators

7.5.2  Implications for Bank Management

7.6  International Relevance and Comparative Implications

7.7  Directions for Future Research

7.8  Concluding Remarks

INDEX

Biography

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”.