Does the Performance of Banking Sector Promote Economic Growth? A Time Series Analysis

Abstract

Purpose: In terms of stimulating the economy, banks play an essential role. These banks directly or indirectly influence the economic growth (GDP) of a country. This study analyses the association between banks' performance and GDP growth. Theoretical Framework: The banking sector acts as an effective mechanism that funds various projects all over the country. The majority of such studies focus on developed nations. Although there is a great deal of literature on this issue concerning developed markets, there is a lack of literature related to emerging and developing economies (Sensarma & Bhattacharyya, 2016). This study has been undertaken to analyse the influence of banks on India's economy, which is a developing economy Design/Methodology: The data of the study includes the independent variables that indicate banking performance. The proxies used for the bank's performance are: bank nonperforming loans to total gross loans (%) (NPL), domestic credit provided by the financial sector (% of GDP) (DC), Return on Equity (ROE), bank capital to assets ratio (%) (CAP), and regulatory capital to risk-weighted assets (CAR). At the same time, the substitute for economic growth is growth in domestic product (GDP). All organised banks operating in India form the sample of the study. The period of study is from 1990 to 2029. To test the hypotheses, simple regression, multicollinearity tests, and ordinary least square (POLS) are performed. Findings: The findings indicate that a few of the variables such as domestic credit, return on equity, and capital adequacy ratio, which are linked to the bank's operational and financial efficiency, are correlated with India's GDP growth. The study's empirical results recommend that this country's (India's) policymakers should assist the banking sector by laying down new growth and developmental policies that will strengthen the banking sector, which will in turn strengthen the economy. Research, Practical & Social Implications: This study shows that Indian banks have a major impact on Indian economic growth. It also identifies the primary banking attributes that influence GDP. Such a study will help policymakers and researchers understand the significant contributors to economic growth. Originality and Value: There are many studies that have studied the determinants of GDP. But this is the first study that has tried to establish the impact/relationship of banking variables on GDP growth.