Commercial Banks and Monetary Policy in India

Partha Ray

1.Introduction and Overview

1.1 Banks and Monetary Policy 

1.2 Indian Context 

1.3 Issues 

1.4 Methodology 

1.5 Broad Findings

2.Commercial Banks and Monetary Policy: Some
   Theoretical Considerations

2.1 Introduction 

2.2 The Ability of Central Banks to Constrain
      Bank Lending 

2.3 Extended IS-LM Models with Explicit
      Role for Banks 

    2.3.1 Extended IS-LM Models without an
          Independent Role of Banks 

    2.3.2 Banks in Bernanke and Blinder
            (1988) Model 

2.4 Loan and Deposits Substitutes
      for Banks and Corporates 

    2.4.1 Certificates of Deposit and
             Bank Behaviour 

    2.4.2 Existence of Bank-Dependent
            Borrowers and Commercial Paper 

2.5 Information Asymmetry and
      Bank Behaviour 

    2.5.1 Stein (1998)’s Model 

    2.5.2 Macro-Implications of Credit
            and Equity Rationing 

2.6 Concluding Observations

3.Monetary Policy and Bank Behaviour
   in India: Some Stylised Facts

3.1 Introduction 

3.2 Macroeconomic and Monetary Trends 

3.3 Monetary Policy Actions 

     3.3.1 Direct Measures for Controlling
             Banks’ Balance Sheets 

     3.3.2 Development of Market-related
             Instruments 

     3.3.3 Deregulation of Interest Rates 

     3.3.4 Deregulation of Bank Operations 

     3.3.5 Prudential Regulation 

     3.3.6 Changing Fiscal Scenario 

3.4 Commercial Bank Behaviour 

     3.4.1 Aggregative Parameters 

     3.4.2 Portfolio Composition of
             Commercial Banks 

     3.4.3 Profitability Indicators 

3.5 Concluding Observations

4.Impact of Monetary Policy on Banks’
   Balance Sheet: The Macro Behaviour

4.1 Introduction 

4.2 Monetary Policy and Bank Portfolio:
      A Select Review 

     4.2.1 Methodology of Measuring the
              Impact 

     4.2.2 Monetary VAR Models: A Review 

     4.2.3 Monetary Policy and Bank Portfolios 

4.3 Specification of the VAR and the Variables 

     4.3.1 VAR Specification 

     4.3.2 Choice of Variables and Time Span 

     4.3.3 Treatment of Seasonality 

4.4 Results from the Basic Model 

     4.4.1 Selection of Lag Length 

     4.4.2 Impulse Responses 

     4.4.3 Variance Decomposition 

4.5 Some Robustness Tests 

     4.5.1 How Far are the above Results
             Sensitive to Ordering? 

     4.5.2 Unrestricted Difference VAR 

     4.5.3 Results with Alterative Choice
             of Policy Variable 

     4.5.4 Results in a Five Variable VAR 

     4.5.5 Results with Quarterly GDP 

     4.5.6 Results with Interest Rate as
             an Additional Variable 

4.6 Conclusion

5.The Impact of Monetary Policy: Does
   Ownership Matter? 

5.1 Introduction 

5.2 Heterogeneity in Impact of Monetary Policy
      on Banks: A Select Review of Literature 

     5.2.1 Ownership and Monetary Policy
              Impact on Banks 

     5.2.2 Indian Literature on Ownership
            of Banks 

5.3 Some Stylised Facts 

     5.3.1 Public Sector Banks 

     5.3.2 Foreign Banks 

     5.3.3 Private Sector Banks 

     5.3.4 Old Generation Private
              Sector Banks 

     5.3.5 New Generation Private
              Sector Banks 

     5.3.6 Relative Shares of the Bank
             Groups 

     5.3.7 Performance Indicators of the
              Bank Groups 

     5.3.8 Portfolio Pattern 

5.4 Impact of Monetary Shock on Different
     Types of Banks 

     5.4.1 Methodology and Data Base 

     5.4.2 Impulses from the Level VARs

 
     5.4.3 Variance Decomposition 

5.5 How Robust are these Results? 

     5.5.1 Sensitiveness of the VARs with
             respect to Ordering 

     5.5.2 Impulses from the Difference VAR 

     5.5.3 Results with Alternative Monetary
              Stance Variables 

     5.5.4 Results for a Shorter Time Period 
              (1996-97 through 2003-04)

     5.5.5 Results from a Five Variable VAR 

5.6 Conclusion

6.Size, Liquidity and Capital: How do they
   Influence Bank Credit?

6.1 Introduction 

6.2 Received Literature 

     6.2.1 Size, Liquidity and Bank Credit 

     6.2.2 Capital Constraint and Bank
              Behaviour 

     6.2.3 Indian Evidence 

6.3 A Description of the Panel and
      Some Stylised Facts 

     6.3.1 A Description of the Panel 

     6.3.2 Some Stylised Facts 

6.4 Empirical Methodology and
      the Model 

     6.4.1 Empirical Methodology 

     6.4.2 The Model 

6.5 Empirical Results 

     6.5.1 Base-line Model 

     6.5.2 Results from Specific Attributes of Size,
              Liquidity and Capitalisation 

6.6 Some Robustness Tests 

     6.6.1 Results with Alternative
             Liquidity Variable 

     6.6.2 Results with Alternative
              Stance Variable 

     6.6.3 Results with Normalised Variables 

     6.6.4 Results with Interest Rates 

6.7 Conclusion

7.Conclusion and the Way Forward

7.1 An Overview 

7.2 Broad Contours 

     7.2.1 Theoretical Developments 

     7.2.2 Stylised Facts for India 

     7.2.3 Econometric Evidence 

7.3 Policy Implications and Futuristic
      Scenario 

     7.3.1 Consolidation in Indian Banking 

     7.3.2 Changes in Operating Procedure
             of Monetary Policy 

     7.3.3 Newer Norms of Bank Capital 

7.4 Scope of Further Research