The interrelationships among default risk, capital ratio and efficiency: evidence from Indian banks

Nguyen, Thanh Pham Thien, and Nghiem, Son Hong (2015) The interrelationships among default risk, capital ratio and efficiency: evidence from Indian banks. Managerial Finance, 41 (5). pp. 507-525.

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Abstract

Purpose: The purpose of this paper is to examine the interrelationships among default risk, capital and efficiency of the Indian banking system over 1990-2011. This study also took into account the impact of ownership on these interrelationships.

Design/methodology/approach: This paper employed Data Envelopment Analysis (DEA) Windows Analysis to estimate efficiency levels and trends of individual banks. This paper then used a model of seemingly unrelated regression equations (SURE) to examine the interrelationships among default risk, capital and efficiency.

Findings: This study found a two-way negative association between efficiency and default risk, and between capital ratio and default risk. However, this study found a two-way positive relationship between capital ratio and only profit efficiency. Public banks behaved differently from private banks regarding the association between capital and efficiency. Moreover, public banks had greater probability of default risk, lower capital ratio but higher efficiency level than private banks. Further, default risk, capital ratio and efficiency of the Indian banking system increased over time, but the two formers were driven by public banks while the latter was driven by private banks.

Practical implications – The findings of this study appear to favour capital ratio as an efficient tool to improve efficiency and reduce default risk of the Indian banking system.

Originality/value – This paper is the first investigating the interrelationships between bank risk, capital and efficiency of the Indian banking system, where bank risk is measured by Z-score value and efficiency is captured by cost, revenue and profit efficiencies, and then considering the impact of agency issues on these interrelationships.

Item ID: 53086
Item Type: Article (Research - C1)
ISSN: 1758-7743
Keywords: India, capital, ownership, efficiency, insolvency risk, SFA, three-stage least squares
Date Deposited: 10 Apr 2018 04:38
FoR Codes: 15 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 1502 Banking, Finance and Investment > 150203 Financial Institutions (incl Banking) @ 100%
SEO Codes: 90 COMMERCIAL SERVICES AND TOURISM > 9001 Financial Services > 900101 Finance Services @ 100%
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