ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Bank Merger, Credit Growth, and the Great Slowdown in India

The banking crisis that played out post 2008–09 is considered a key factor responsible for economic slowdown in India. Several alternative explanations for the banking crisis are presented in the paper. We find that the crisis was primarily exposure-driven and was due to lack of an appropriate credit appraisal process. While the exposure was bank ownership-driven, the rate or incidence of non-performing assets accumulation was ownership-neutral. We also examine the government’s strategy of bank consolidation using the stochastic frontier approach—an econometric tool that is popularly used for a neoclassical production, cost function, etc, along with an efficiency component. Our empirical analysis shows that the merger decisions were not necessarily on efficiency grounds. Post-merger benefits are minimal, and the deteriorating health of the public sector banks is likely to continue.

The authors are thankful to an anonymous referee for the comments. They also acknowledge the insightful discussions with Madhusudan Mohanty and Himadri Bhattacharya.


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Updated On : 14th May, 2022
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