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Credit Growth, Bank Soundness and Financial Fragility

Author

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  • Saibal Ghosh

    (Saibal Ghosh is presently with the Qatar Central Bank, Doha, Qatar, on lien from the Reserve Bank of India. The views expressed and the approach pursued in the article reflects the personal opinion of the author. Email: sai_ghosh@hotmail.com)

Abstract

Using data on Indian banks for 1996–2008, the article examines the interconnection among credit growth, bank soundness and financial fragility. The analysis appears to indicate that higher credit growth amplifies bank fragility. Besides, the results point to the fact that sounder banks increase loan supply. Coming to bank ownership, the evidence testifies that credit growth has been rapid in State-owned and de novo private banks. In terms of policy implications, the analysis appears to suggest the need for giving priority to risk-based supervision as a way to contain the potential risks associated with rapid credit growth.

Suggested Citation

  • Saibal Ghosh, 2010. "Credit Growth, Bank Soundness and Financial Fragility," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 11(1), pages 69-98, March.
    • Handle: RePEc:sae:soueco:v:11:y:2010:i:1:p:69-98
    DOI: 10.1177/139156141001100105
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    4. Dat T. Nguyen & Tu D. Q. Le & Tin H. Ho, 2021. "Intellectual Capital and Bank Risk in Vietnam—A Quantile Regression Approach," JRFM, MDPI, vol. 14(1), pages 1-15, January.
    5. Pavla Vodová, 2013. "Liquidity Ratios of Polish Commercial Banks," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2013(3), pages 24-38.
    6. Rakshit, Bijoy & Bardhan, Samaresh, 2023. "Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India," Journal of Asian Economics, Elsevier, vol. 86(C).
    7. Hao Thi Kim Do & Nguyet Thi Minh Nguyen & Trung Hai Le, 2017. "Effects of the Credit Boom on the Soundness of Vietnamese Commercial Banks," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(3), pages 57-73, July.
    8. Wang Yunyi, 2019. "The Banking Fragility Index Panorama in China," Proceedings of the 14th International RAIS Conference, August 19-20, 2019 031YW, Research Association for Interdisciplinary Studies.

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    More about this item

    Keywords

    Banking; Credit Growth; Z-score; Non-performing Loans; India; JEL: G21; JEL: G24; JEL: P52;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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