The relationship between risk, capital and efficiency in Indian banking: Does ownership matter?

Abstract

PurposeThis paper aims to examine the interplay between risk, capital and efficiency of Indian banks and study how their relationship differs across different ownership types.Design/methodology/approachPanel regression techniques are used to analyze a large data set of all Indian scheduled commercial banks operating during the period 2008-2016.FindingsThe results show that lower efficiency is associated with higher credit risk in the case of public sector and old private sector banks (”bad management hypothesis”). However, higher efficiency leads to higher credit risk in the case of foreign banks (“cost skimping hypothesis”). The authors further find that the more efficient institutions among public sector hold more capital. Finally, they find that the better-capitalized banks among those in the public sector have lower risks on their balance sheets (“moral hazard hypothesis”).Originality/valueThere is a paucity of papers on the interplay between risk, capital and efficiency of banks in emerging economies. This paper is the first to study the inter-relationship between risk, capital and efficiency of Indian banks across ownership groups using a number of different measures of risk.