Money & Finance

State Ownership and Systemic Risk: Evidence from the Indian Financial Sector During 2007-09

  • Blog Post Date 01 April, 2011
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Nirupama Kulkarni

University of California, Berkeley

nirupama_kulkarni@ haas.berkeley.edu

The study analyses the performance of banks in India during 2007-09 in order to study the impact of ownership structure on bank vulnerability to a crisis. Authors find that in the private sector, vulnerable private-sector banks – based on ex-ante measures of exposure to a crisis – performed worse than safer banks; however, the opposite was true for state-owned banks. Authors explain this puzzling result by analysing the behaviour of deposit and lending growth of banks. The vulnerable private-sector banks experienced deposit withdrawals and shortening of deposit maturity relative to other private-sector banks. In contrast, vulnerable state-owned banks relatively grew their deposit base, more so in term deposits, and increased their loan advances, at cheaper rates, and especially to public-sector firms. These results are consistent with greater market discipline on private-sector banks and lack thereof on state-owned banks which are able to access credit cheaply even after underperformance as they have access to stronger government guarantees and forbearance.

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