Determinants Of Commercial Banks’ Loan Pricing: Empirical Analysis Using Dynamic Panel Data Model

This study investigated the determinants of commercial banks’ lending behaviour in the Indian context. The study aimed to test and confirm the effectiveness of the monetary policy along with common determinants of commercial banks’ lending and how it affects the lending decision of commercial banks in India. An understanding of commercial banks’ loan pricing decisions can be useful for policy purposes in various ways. First, the price discovery in the loan market characterised with loan interest rates and their spreads over deposit interest rate and risk free yield on government securities, can reflect upon the competitiveness and efficiency of banks in financial intermediation through mobilisation of deposits from saving households and allocation of funds to investors for productive activities. Thus, loan interest rates can be associated with economic growth and macroeconomic stability. Second, for successful conduct of monetary policy through the interest rate channel by the authorities, it is required that commercial banks should adjust loan interest rates in tandem with policy actions. The model hypothesizes that there is functional relationship between the dependent variable and the specified independent variables. Using the dynamic panel data methodology and annual data for a sample of major 33 banks including public, private and foreign banks over the period 1996-2014, the study finds significant impact of various bank specific factors, regulatory and supervisory indicators and macroeconomic factors on the banks’ loan interest rates and their spread over deposit interest rates.