Commercial Banks

The conventional wisdom is that opening up new branches is the best way to extend outreach of the formal financial sector to rural areas. Using a survey data set, this paper challenges the conventional view by concluding that relatively resource-rich rural households from distant locations availed multiple loans from formal lenders rather than the households located closer to them as often believed.

With the aid of simple theoretical tools used in classroom lectures, the implications of the recent “demonetisation” exercise in India are analysed. It lends support to conclusions reached by other authors on the impact of demonetisation with the aid of available data. Following Robert Lucas’s Nobel lecture, the merits of economic policies that assume the form of random shocks to an economic system are questioned. 

The paper performs a panel regression on the definitionally uniform data now available for a five-year period ending in 1999-2000, on non-performing loans of commercial banks. The exercise is confined to 27 public sector banks, so as to investigate variations within a class that is homogeneous on the ownership dimension. The exercise groups banks with higher than average NPAs into those explained by poor operating efficiency, and those where the operating indicator does not suffice to explain the high level of NPAs, and leaves an unexplained intercept shift. Two of the three weak banks identified by the Varma Committee, Indian Bank and United Bank of India, fall in this category. Recapitalisation of these banks with operational restructuring may therefore not be the solution, since there is clearly a residual problem even after controlling for operating efficiency.