Bank Competition and Financial Stability Relationship in India: Post-bank Consolidation Analysis

Abstract

The discussion of the competition–stability nexus has always been a subject of widespread concern among academicians, but its importance has deepened since the onset of the global financial crisis (GFC) and more so post-bank consolidation reforms of 2016 in India. Bank stability in India noted a surge in early decade of the twenty-first century; however, the same declined continuously after the GFC, and a massive dip was noted post-bank consolidation of 2016 in India. This motivates us to revisit the competition–stability relationship with renewed banking structure. We utilize the dynamic panel models over Indian banks during 1991–2021. The study lends support to the competition–fragility hypothesis and also underlines the role of extraneous factors, including bank-specific and macro-environment, on financial stability. The study also finds that stability behaves in a non-linear fashion and supports an inverted U-shaped relationship. The empirical findings for asymmetric impact across crisis period, ownership and size effects suggest that the Reserve Bank of India’s policy push for increasing concentration through consolidation of public sector banks but enlarging the smaller private banks is key to maintaining financial stability in India.