Determinants of net interest margin under regulatory requirements: an econometric study

Ghosh, Saibal and Narain, Aditya and Kannan, R (2001): Determinants of net interest margin under regulatory requirements: an econometric study. Published in: Economic and Political Weekly (January 2001): pp. 337-344.

Abstract

Using data for the period 1995-96 to 1999-2000, this paper seeks to identify the factors influencing spreads of Scheduled Commercial Banks in India. Among the explanatory variables, we incorporate, in addition to the standard set of variables, regulatory requirement variables. Our analysis reveals that (i) size does not necessarily correlate with higher spread, and (ii) higher fee income enables banks to tolerate lower spreads. With regard to regulatory requirement variables, it is found that (i) capital plays an important role in affecting spreads of public sector banks, and (ii) non-performing assets is uniformly important across all bank groups in influencing spreads.

• Item Type: MPRA Paper
• Language: English
• Keywords: Net interest margin; regulatory requirements; banking; India
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C23 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Allen, L (1988): 'The Determinants of Bank Interest Margins: A Note', Journal of Financial and Quantitative Analysis, Vol 23, pp 231-35.

Angbazo, L (1997): 'Commercial Bank Net Interest Margins, Default Risk, Interest Rate Risk and Off-Balance Sheet Banking', Journal of Banking and Finance, Vol 21, pp 55-87.

Barajas, A, R Steiner and N Salazar( 1999): 'Interest Spreads in Banking in Columbia, 1974-96', IMF Staff Papers, Vol 46, pp 196-224.

Demirgic-Kunt, A and R Levine (1999): 'Bank- based versus Market-based Financial Systems: Cross-Country Comparisons', World Bank Policy Research Working Paper No 1692, The World Bank: Washington, DC.

Ho, T S Y and A Saunders (1981): 'The Determinants of Bank Interest Margins, Theory and Empirical Evidence', Journal of Financial and Quantitative Analysis, Vol 16, pp 581- 600.

Judge, G, J Griffiths and R Hall (1994): Theory and Practice of Econometrics, Basil Blackwell, UK.

Kannan, R, Aditya Narain and Saibal Ghosh (2001): 'Net Interest Margin, Regulatory Requirements and Bank Behaviour: An Empirical Analysis of Scheduled Commercial Banks', Paper presented at the Bank Economists Conference (BECON), January 15-17, New Delhi.

Reserve Bank of India, Report on Trend and Progress of Banking in India (various years).

Reserve Bank of India, Statistical Tables Relating to Banks in India (various years).

Reserve Bank of India (1998): Handbook of Statistics on Indian Economy, Mumbai.

Sarkar, J, S Sarkar and S K Bhaumik (1998): 'Does Ownership Always Matter? Evidence from the Indian Banking Industry', Journal of Comparative Economics, Vol 26, pp 262-81.

Sarr, A (2000): 'Financial Liberalisation, Bank Market Structure, and Financial Deepening: An Interest Margin Analysis', IMF Working Paper No 38, IMF: Washington.

Williams, B (1998): 'Factors Affecting the Performance of Foreign-owned Banks in Australia', Journal of Banking and Finance, Vol 22, pp 197-219.