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Bank lending and loan quality: an emerging economy perspective

Author

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  • Pallavi Chavan

    (Reserve Bank of India)

  • Leonardo Gambacorta

    (Bank for International Settlements and is affiliated with CEPR)

Abstract

This paper analyses how non-performing loans (NPLs) in the emerging economy of India behave through the cycle. We find that a one-percentage point increase in loan growth is associated with an increase in NPLs over total advances (NPL ratio) of 4.1% in the long run with the response being higher during expansionary phases. Furthermore, NPL ratios of banks are found to be sensitive to the interest rate environment and the overall growth of the economy. Notwithstanding differences in management and governance structures, there is a procyclical risk-taking response to credit growth in the case of both public and private banks with private banks being more reactive to changes in interest rate and business cycle conditions.

Suggested Citation

  • Pallavi Chavan & Leonardo Gambacorta, 2019. "Bank lending and loan quality: an emerging economy perspective," Empirical Economics, Springer, vol. 57(1), pages 1-29, July.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:1:d:10.1007_s00181-018-1436-5
    DOI: 10.1007/s00181-018-1436-5
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    Cited by:

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    2. Kabundi, Alain & De Simone, Francisco Nadal, 2022. "Euro area banking and monetary policy shocks in the QE era," Journal of Financial Stability, Elsevier, vol. 63(C).
    3. Chari, Anusha & Jain, Lakshita & Kulkarni, Nirupama, 2021. "The Unholy Trinity: Regulatory Forbearance, Stressed Banks and Zombie Firms," CEPR Discussion Papers 15773, C.E.P.R. Discussion Papers.
    4. Ardit Gjeçi & Matej Marinč & Vasja Rant, 2023. "Non-performing loans and bank lending behaviour," Risk Management, Palgrave Macmillan, vol. 25(1), pages 1-26, March.
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    6. Carlos Cantu & Leonardo Gambacorta & Ilhyock Shim, 2020. "How effective are macroprudential policies in Asia Pacific? Evidence from a meta-analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Measuring the effectiveness of macroprudential policies using supervisory bank-level data, volume 110, pages 3-15, Bank for International Settlements.
    7. Pancotto, Livia & ap Gwilym, Owain & Williams, Jonathan, 2024. "The evolution and determinants of the non-performing loan burden in Italian banking," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    8. Jibin Jose & Snehal S. Herwadkar & Prabal Bilantu & Shihas Abdul Razak, 2020. "Does Greater Creditor Protection Affect Firm Borrowings? Evidence from IBC," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(2), pages 212-225, May.

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    More about this item

    Keywords

    Procyclicality; Loan quality; Bank lending; Emerging economy; Bank ownership; Moral hazard;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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