An empirical analysis of the off-balance sheet activities of Indian banks

Nachane, D M and Ghosh, Saibal (2007): An empirical analysis of the off-balance sheet activities of Indian banks. Published in: Journal of Emerging Market Finance , Vol. 6, No. 1 (January 2007): pp. 39-59.

Abstract

The paper traces the determinants of off-balance sheet activities in the Indian banking sector. Using data for the period 1996 to 2004, the paper finds that, not only regulatory factors, but also market forces, captured by banks-specific characteristics and macroeconomic conditions are at work in the diffusion pattern of OBS activities. From the regulatory standpoint, while capital adequacy is dominant in case of public sector banks, non-performing assets seem to a prime concern for foreign banks, in addition to the public sector banks. Among others, at the bank-specific level, size is an important consideration for public sector and foreign banks, while profits are a prime mover only for new private banks. Finally, the macroeconomic environment seems to have played an important role in affecting OBS diffusion, more so for public sector and new private banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: Off-balance sheet; regulatory pressure; interest spread; banking; India
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Abrahamson, E. and L.Rosenkopf, 1993, “Institutional and Competitive Bandwagons : Using Mathematical Modeling as a Tool to Explore Innovation Diffusion”, Academy Of Management Review, 18, 487-517

Angbazo, L., 1997, “Commercial Bank Net Interest Margins, Default Risk, Interest Rate Risk and Off-balance Sheet Banking”, Journal of Banking and Finance, 21, 55-87.

Avery, R. and A.Berger, 1991a, “Loan Commitments and Bank Risk Exposure”, Journal of Banking and Finance, 15, 173-192.

Avery, R. and A.Berger, 1991b, “Risk-based Capital and Deposit Insurance Reform”, Journal of Banking and Finance, 15, 847-874.

Baer, H. and C.Pavel, 1987, “Does Regulation Drive Innovation?”, Federal Reserve Bank of Chicago: Economic Perspectives, 3-16.

Benveniste, L. and A.Berger, 1987, “Securitization with Recourse: An Instrument that Offers Uninsured Depositors Sequential Claims”, Journal of Banking and Finance, 11, 403-424.

Berger, A.N., 1995, “The Relationship between Capital and Earnings in Banking” Journal of Money, Credit and Banking, 27, 432-456

Berger, A.N. and G.F.Udell, 1995, “Relationship Lending and Lines of Credit in Small Firm Finance” Journal of Business, 68, 351-382

Bernanke, B.S., 1986, “Alternative Explanations of the Money-Income Correlation”, Carnegie-Rochester Conference Series on Public Policy, 25, 49-100

Boot, A.W.A. and A.V.Thakor, 1991, “Off-balance Sheet Liabilities, Deposit Insurance and Capital Regulation”, Journal of Banking and Finance, 15, 825-846.

Davies, S., 1979, The Diffusion of Process Innovations, Cambridge, Cambridge University Press. Fung, M.K. and A.C.S.Cheng, 2004, “Diffusion of Off-balance Sheet Financial Innovations: Information Complementarity and Market Competition”, Pacific-Basin Finance Journal, 12, 525-540.

Furlong, F.T. and M.C.Keeley, 1989, “Capital Regulation and Bank Risk-taking”, Journal of Banking and Finance, 35, 883-891

Greene, W.H., 1990, Econometric Analysis, Prentice Hall, New Jersey, USA.

Griliches, Z., 1957, “Hybrid Corn: An Exploration in the Economics of Technical Change”, Econometrica, 25, 501-522

Hannan, T.H. and J.M.McDowell, 1987, “Rival Precedence and the Dynamics of Technology Adoption: An Empirical Analysis”, Economica, 54, 155-171.

Jacques, K. and P.Nigro, 1997, “Risk-based Standards, Portfolio Risk and Bank Capital: A Simultaneous Equations Approach”, Journal of Economics and Business, 49, 533-547

Jagtiani, J., A.Saunders and G.Udell, 1995a, “The Effect of Bank Capital Requirements on Bank Off-balance Sheet Financial Innovations”, Journal of Banking and Finance, 19, 647-658.

Jagtiani, J., A.Nathan and G.Sick, 1995b, “Scale Economies and Cost Complementarities in Commercial Banks: On- and Off-balance Sheet Activities”, Journal of Banking and Finance, 19, 1175-1189.

Jagtiani, J., A.Saunders and G.Udell, 1997, “Financial Innovations and the Growth of Bank Derivative Activities”, in B. Schachter (ed.) Derivatives, Regulation and Banking, Elsevier Science, 7-40.

Jeitschko, T.D. and S.D.Jeung, 2005, “Incentives for Risk-taking in Banking – A Unified Approach”, Journal of Banking and Finance, 29, 759-777.

Kim, D and A M Santomero, 1988, “Risk in Banking and Capital Regulation”, Journal of Finance, 43, 1219-33.

Koehn, M and A.M. Santomero, 1980, “Regulation of Bank Capital and Portfolio Risk”, Journal of Finance, 35, 1235-1244.

Koppenhaver, G.D., and R.D.Stover, 1991, “Stand-by Letters of Credit and Large Bank Capital: An Empirical Analysis”, Journal of Banking and Finance, 15, 315-327.

Lewis, M.K., 1987, “Off-balance Sheet Activities and Financial Innovation in Banking”, Banca Nazionale del Lavoro Quarterly Review, 166, 387-410

Mansfield, E., 1961 , “Technical Change and the Rate of Imitation”, Econometrica, 29, 741-766

Molyneux, P and N.Shamroukh, 1999 , Financial Innovation, John Wiley & Sons, New York

Nachane, D M and S. Ghosh, 2002, “Determinants of Off-Balance Sheet Activities: An Empirical Analysis of Public Sector Banks”, Economic and Political Weekly- Special Issue in Money, Banking and Finance, February, 421-428.

Pavel, C. and D.Philis, 1987, “Why Commercial Banks Sell Loans: An Empirical Analysis”, Economic Perspectives, Federal Reserve Bank of Chicago, May/June, 3-14

Reserve Bank of India, Report on Trend and Progress of Banking in India, Reserve Bank of India: Mumbai.

Reserve Bank of India, Statistical Tables Relating to Banks in India, Reserve Bank of India: Mumbai.

Santomero, A.M. and J.J.Trester, 1998, “Financial Innovation and Bank Risk Taking”, Journal of Economic Behavior and Organization, 35, 25-37.