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20-04-2024 | Original Article

Identifying Financial Performance Drivers in the Indian Banking Sector During the COVID-19 Crisis

Authors: Anju Goswami, Pooja Malik

Published in: Journal of Quantitative Economics

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Abstract

In order to shed light on the possible factors responsible for volatility in the financial performance of Indian banks, we primarily consider four novel variables in the study, including the COVID-19 crisis, NPLs, systemic risk, and government response. For this, we employ bank-level observations of 412 Indian commercial banks spanning 2018–2022. Using fixed-effects and 2SLS methods, we find that government response, COVID-19, and income diversification play a significant role in positively affecting the financial performance of Indian banks. However, non-performing loans, provisioning, systemic risk, and bank size are responsible for their poor performance. Projected macro-economic statistics suggest that the GDP growth rate and inflation have significantly increased the strength and resilience of Indian banks. The main evidence mainly supports the ‘bad-management, too-big-too-fail, and diversification opportunity’ hypotheses. The heterogeneity test and robustness check results are nearly identical to those reported in the main evidence. Overall, our findings reduce the concern of policymakers, though not completely eliminated, that tighter government regulation and provisioning for Indian banks may expedite the bank’s ability to withstand their credit risk, systemic risk, and exogenous shocks, which can lead to a rapid improvement in their performance.

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Footnotes
1
The current study uses the terms "COVID-19 pandemic", "COVID-19 crisis" and "pandemic" interchangeably to refer to the economic/financial turmoil associated with COVID-19.
 
2
According to the report prepared by the Government of India (2022) and the Reserve Bank of India (2022) to encourage banks and inject additional money into the system, various initiatives include a 25 basis points (bps) cut in the reserve repo rate, raising repo rates by 50 basis points (bps) to 5.40 per cent from 5.15 per cent to fight inflation, COVID-19 provisions and introduction of new measures to take care of rising non-performing assets in India. Available at: https://​www.​rbi.​org.​in/​Scripts/​BS_​PressReleaseDisp​lay.​aspx?​prid=​54236.
 
3
Two-Stage least squares (2SLS) considers as an extensionn of the OLS method. It is usually use when the dependent variable's error terms are correlate with the independent variables (Chen and Gupta 2009; Tahir and Alam 2022; Burki and Tahir 2022).
 
4
Researchers (Berger and DeYoung 1997; Khemraj and Pasha 2009; Louzis et al. 2012; Messai and Jouini 2013; Khan et al. 2020; Goswami 2021; Goswami 2022; Cao and Chou 2022 among others) consider bank-specific factors (internal or controllable factors or idiosyncratic factors) to be microeconomy factors in the past few decades. Since the financial performance of banks can be affected by internal factors prevailing within an organization. Therefore, they are generally controllable in nature and are considered as micro-economic variables.
 
5
According to the Reserve Bank of India (2021a), PBR is defined as the ratio of market value of equity relative to the total book value of a firm.
 
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Metadata
Title
Identifying Financial Performance Drivers in the Indian Banking Sector During the COVID-19 Crisis
Authors
Anju Goswami
Pooja Malik
Publication date
20-04-2024
Publisher
Springer India
Published in
Journal of Quantitative Economics
Print ISSN: 0971-1554
Electronic ISSN: 2364-1045
DOI
https://doi.org/10.1007/s40953-024-00396-9

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