Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/275014 
Year of Publication: 
2022
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 15 [Issue:] 11 [Article No.:] 537 [Year:] 2022 [Pages:] 1-23
Publisher: 
MDPI, Basel
Abstract: 
This study has two objectives, first, to investigate if the lending behaviour of banks exhibits moral hazard in the Indian Banking Industry, and second, to investigate whether banks' moral hazard behaviour changes when the systemic importance of the banks is taken into consideration. We studied banks' moral hazard behaviour by observing the impact of their level of Net Non-Performing Loans (NNPL) on their lending behaviour. This study used threshold panel regression by using 1 year lagged values of NNPL as the threshold variable to find its endogenously determined value that impacts the lending behaviour of the banks. The 1 year lagged value of the NNPL (threshold variable) has been used to depict the level of distress faced by a bank. Assuming that loans may turn bad any year after they are granted, a banks' lending behaviour has been shown through the relationship between various lags of Loan Growth Rate (LGR) and the contemporaneous values of Net Non-Performing Loans (NNPL). As per our analysis, the loan growth ratio raises NPLs with a relatively higher value when banks are experiencing prior sizable loan losses as compared to when banks are relatively safe, indicating moral hazard behaviour in the Indian banking industry. However, when the systemic importance of the bank is considered, the systemically important banks are found to be engaged in risky lending irrespective of their level of distress, whereas the opposite results are found for the least important banks.
Subjects: 
moral hazard
Indian banking industry
systemic importance of the banks
TBTF status
NPLs
LGR
Panel Threshold Regression
JEL: 
E58
G00
G01
G21
G33
G28
G32
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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