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Banks Competition, Managerial Efficiency And The Interest Rate Pass-Through In India

Author

Listed:
  • Jugnu Ansari

    (Centre for Advanced Financial Research and Learning (CAFRAL))

  • Ashima Goyal

    (Indira Gandhi Institute of Development Research (IGIDR))

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

Suggested Citation

  • Jugnu Ansari & Ashima Goyal, 2014. "Banks Competition, Managerial Efficiency And The Interest Rate Pass-Through In India," Working Papers 022339, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022339
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    2. Bhavish SHARMA, 2020. "Monetary policy and exchange rate pass-through in India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(625), W), pages 275-288, Winter.
    3. Shijaku, Gerti, 2016. "Does bank competition affect bank stability after the global financial crisis?," MPRA Paper 79084, University Library of Munich, Germany.
    4. Shijaku, Gerti, 2016. "Does Primary Sovereignty Risk Matter for Bank Fragility? Evidence from Albanian Banking System," MPRA Paper 79097, University Library of Munich, Germany.
    5. Gerti Shijaku, 2017. "How Does Competition Affect Bank Stability After the Global Crises in the Case of the Albanian Banking System?," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 15(2), pages 175-208.
    6. Gerti Shijaku, 2018. "Does Primary Sovereignty Risk Matter for Bank Stability? Evidence from the Albanian Banking System," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 16(2), pages 115-145.

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    Keywords

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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