Bank Competition, Managerial Efficiency and the Interest Rate Pass-Through in India

Jugnu Ansari and Ashima Goyal

A chapter in Risk Management Post Financial Crisis: A Period of Monetary Easing, 2014, vol. 96, pp 317-339 from Emerald Group Publishing Limited

Abstract: If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and macroeconomic factors can be expected to affect banks’ loan interest rates and their spread over deposit interest rates. To examine interest rate pass-through for Indian banks in a period following extensive financial reform, after controlling for all these factors, we estimate the determinants of commercial banks’ loan pricing decisions, using the dynamic panel data methodology with annual data for a sample of 33 banks over the period 1996–2012. Results show commercial banks consider several factors apart from the policy rate. This limits policy pass-through. More competition reduces policy pass-through by decreasing the loan rate as well as spreads. If managerial efficiency is high then an increase in competition increases the policy pass-through and the vice-versa. Reform has had mixed effects, while managerial inefficiency raised rates and spreads, product diversification reduced both. Costs of deposits are passed on to loan rates. Regulatory requirements raise loan rates and spreads.

Keywords: Banks; panel data; interest rates; net interest income; operating cost (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: Banks Competition, Managerial Efficiency and the Interest Rate Pass-through in India (2014)
Working Paper: Banks competition, managerial efficiency and the interest rate pass-through in India (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:csefzz:s1569-375920140000096013

DOI: 10.1108/S1569-375920140000096013

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