Risk, Capital, And Inefficiency: A Study of Public Sector, Private, and Foreign Banks in India

This paper examines the relationships between the risk, capital, and inefficiency of Indian banks across different ownership structures, namely Public Sector Banks (PSBs), private, and foreign banks. The paper considers data for 50 banks of various ownerships during the period 1999-2019. Using the three-stage least squares technique under the simultaneous equations framework, it checks how the relationship varies for different groups of banks. The study finds that the: a) association between risk, capital, and inefficiency is generally the opposite for foreign banks compared to the PSBs and private banks; b) capital is costly and impacts the profitability of Indian banks; c) PSBs experience ill management and moral hazard issues; and d) piling of stressed assets is the result of aggressive lending without proper risk management. The study suggests flexible capital rules for banks as per the economic cycles. It suggests that the regulators should be vigilant about the incremental business and spending habits of banks.