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Concentration-driven fragility in Indian banking: Evidence from sectoral exposure, earnings volatility, and asset quality

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  • Zeeshan, Mohammad
  • Singh, Manish K.

Abstract

This paper examines the relationship between banking sector concentration and individual bank risk in India from 1998 to 2022, using CMIE ProwessIQ data. Using a two-step system GMM estimator to account for reverse causality and persistence in risk metrics, we find that a 1%-point increase in the top five banks’ asset share reduces the z-score by 5.85% and distance-to-default by 1.77%. We identify three key mechanisms linking concentration to higher risk: (i) increased lending to cyclical sectors, (ii) heightened earnings volatility, and (iii) deterioration in asset quality. Additionally, our findings suggest that concentration is negatively associated with franchise value and market β, suggesting weaker long-term performance and investor confidence. The results provide empirical support for the concentration–fragility hypothesis and offer new evidence on the channels through which structural features of banking markets can shape risk-taking behavior in emerging economies.

Suggested Citation

  • Zeeshan, Mohammad & Singh, Manish K., 2025. "Concentration-driven fragility in Indian banking: Evidence from sectoral exposure, earnings volatility, and asset quality," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001968
    DOI: 10.1016/j.econmod.2025.107201
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    1. Zeeshan, Mohammad & Singh, Manish K., 2025. "Sectoral exposure and its impact on bank risk: Evidence from India," Economic Modelling, Elsevier, vol. 151(C).

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    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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