Drivers impacting bank risk in India

Abstract

This paper studies the factors/ drivers influencing bank risk usinga database (panel) of top 30 banks (asset-wise) in India to study the different factors/ drivers that influence bank risk. The data has been sourced from Prowess IQ, Bloomberg and annual report(s) of the respective companies for 5 years, that is, 31 March 2014 to 31 March 2019. The major factors taken into consideration for this study have been banks’ profitability, non-performing assets and regulation. Different proxies like net profit margin, percentage of non-performing loans with respect to the loans in totality and regulatory capital have been considered respectively. The banking sector of India provides a convincing demonstration to be scrutinized for its viewpoint towards risk mitigation. It is true that banks play an important part in the financial and economic development of aneconomy. Because of the process of the reforms in the business sector introduced in 1991, the structure has been easedmoderately, and large amount ofalteration has taken place. The Indian banking system comprises of distinct banks, with stark variations in governance structures and other metrics as well. However, not muchpragmaticcorroboration is available in the backdrop of India in spite of the noteworthy influence of varying types of risk in the banking. The consequence of these factors on the bank’s potential to take risk in India have not been studied in minute detail. Hence, this study strives to achieve its objectives of examining the relationship between bank regulatory and performance metrics and risk exposures.Examination across different time periods helps us make inferences on whether these factors influence risk.

Keywords: Risk, Non-Performing Assets, Net profit margin, Profitability, Basel III norms, Tier 1 Capital