Bank concentration and its impact on the stability of commercial banks in India an empirical analysis

Abstract

Bank concentration has been the topic of interest amongst the researchers due to its impact on the stability of banks. The two distinct schools of thought viz., Concentration led Stability and Concentration led Instability with opposite ideologies on the relationship between bank concentration and bank stability have emerged over the years. The primary objective of the present study was to empirically assess the impact of bank concentration on bank stability and its associated parameters such as profitability, liquidity, solvency, asset quality and efficiency. For achieving the objectives, the study measured bank concentration using HHI (Herfindahl-Hirschman Index) technique, constructed the bank stability index and estimated the impact of bank concentration on bank stability and its associated parameters by employing panel data regression methodology. The empirical analysis revealed that the commercial banks witnessed a low level of concentration in terms of HHI values from 1999 to 2018. It suggests that the Indian banking sector experienced a high level of competition. The study also indicates that public sector banks experienced a lower level of concentration than that of private sector and foreign banks. Further, the construction of bank stability index provided a composite picture of the commercial banks in context of their performance. All the banks fell under the category of medium level of bank stability, depicting an average healthy structure for Indian banking sector. As indicated by the index values, public sector banks were found to be less stable in comparison to both foreign and private sector banks. The findings signify that none of the commercial banks had achieved a high level of stability. The study revealed that bank concentration had a negative impact on the stability of commercial banks.