Bank competition and efficiency in transmission of monetary policy through bank lending channel in India since reforms

Abstract

The present study investigates primarily the existence of bank lending channel (BLC) of Monetary policy transmission in India using annual bank level data covering the period 1997-2017 employing Arellano and Bond Generalized Moments Method (GMM). The study adopts a two-stage estimation procedure: the first step includes estimating the degree of competition of Commercial Banks by employing the methodology proposed by Panzar-Rosse H statistic (1987) and efficiency levels of Commercial Banks using Data Envelopment (DEA) methodology as proposed by Charnes, Cooper and Rhodes (1978). The second step includes analyzing the impact of competition and efficiency levels on Bank Lending Channel of Monetary Policy Transmission by constructing a Loan Growth equation using the estimated measures of competition and efficiency as the explanatory variables along with other controlled measures like size, liquidity capitalization and Non-Performing Assets (NPAs). The results reveal that there exists Bank lending channel in India during the time period under study. The results also showed that the bank competition plays a significant role in strengthening BLC whereas the efficiency of banks weakens the BLC. The results of the study have presented evidence that bank-specific characteristics such as size, liquidity, competition and efficiency explain the asymmetrical response of banks to monetary policy alterations. newline