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Sectoral exposure and its impact on bank risk: Evidence from India

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  • Zeeshan, Mohammad
  • Singh, Manish K.

Abstract

This study investigates how banks’ sectoral loan exposures affect their risk profiles. We introduce two market-derived measures: Aggregate diversification, which gauges vulnerability to sector-specific shocks, and Differential specialization, indicating how much a bank’s sectoral focus diverges from industry average. Analyzing data from 2006 to 2022 for Indian commercial banks, we find that greater aggregate diversification significantly reduces bank risk, while higher differential specialization increases it. Specifically, a one standard deviation increase in Aggregate diversification improves bank stability by 3.4%, whereas a comparable increase in Differential specialization reduces stability by 7.2%. The stabilizing effect of diversification stems from reduced stock volatility, lower financing costs, and enhanced market valuations. Specialization conversely correlates with higher non-performing loans and diminished shareholder value. These results emphasize the importance of employing high-frequency return data to measure risk and underscore the sectoral context and institutional capacity in shaping the risk-return trade-offs between diversification and specialization.

Suggested Citation

  • Zeeshan, Mohammad & Singh, Manish K., 2025. "Sectoral exposure and its impact on bank risk: Evidence from India," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325002238
    DOI: 10.1016/j.econmod.2025.107228
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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