Net Interest Margin, Financial Crisis and Bank Behavior: Experience of Indian Banks..

This is the title of this new RBI WP by Mr Tushar Das.

It looks at how NIMs of banks have changed over the years. It also analyses the impact of 2008 crisis on NIMs of banks. It shows NIMs of banks have declined over the years because of the 1992 reforms.

The global financial crisis that jeopardized the advanced economies is perceived to have had a limited impact on Indian banking system. However, the effect was so severe that the advanced economies are still struggling to achieve stability. In this paper, we attempted to analyze the impact of the financial crisis on the Net Interest Margin (NIM) of Indian banks. Variables considered for the analysis were of three different types: bank specific, those representing the banking industry, and a third category consisting of macro-economic variables. We used a wide range of bank-wise panel data for the period 1992 through 2010. In this paper, we examined the impact of the financial crisis on the variables, considered under the monetary transmission literature, such as size, capital and liquidity. When analyzed from the ownership angle, it has been observed that the public sector banks were affected significantly during the crisis. We find that, during the second half of the crisis, the margin of banks with low capital and poor liquidity was impaired significantly when compared with banks that had sufficient capital and liquidity support.