Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector

Abstract

While much has been discussed about the relationship between ownership and financial performance of banks in emerging markets, literature about cross-ownership differences in credit market behaviour of banks in emerging economies is sparse. Using a portfolio choice model and bank-level data from India for 9 years (1995–96 to 2003–04), we examine banks’ behaviour in the context of credit markets of an emerging market economy. Our results indicate that, in India, the data for the domestic banks fit well the aforementioned portfolio-choice model, especially for private banks, but the model cannot explain the behaviour of foreign banks. In general, allocation of assets between risk-free government securities and risky credit is affected by past allocation patterns, stock exchange listing (for private banks), risk averseness of banks, regulations regarding treatment of NPA, and ability of banks to recover doubtful credit. It is also evident that banks deal with changing levels of systematic risk by altering the ratio of securitized to non-securitized credit.