Bank Merger, Credit Growth, and the Great Slowdown in India

The banking crisis that played out post 2008–09 is considered a key factor responsible for economic slowdown in India. Several alternative explanations for the banking crisis are presented in the paper. We find that the crisis was primarily exposure-driven and was due to lack of an appropriate credit appraisal process. While the exposure was bank ownership-driven, the rate or incidence of non-performing assets accumulation was ownership-neutral. We also examine the government’s strategy of bank consolidation using the stochastic frontier approach—an econometric tool that is popularly used for a neoclassical production, cost function, etc, along with an efficiency component. Our empirical analysis shows that the merger decisions were not necessarily on efficiency grounds. Post-merger benefits are minimal, and the deteriorating health of the public sector banks is likely to continue.