Are Banks in India Diversified Enough, Geographically, Across States and Economic Sectors?

Abstract

This article, the first of its kind for the Indian economy, constructs lending environment portfolios of economic activities that banks in India have been faced with, for four Indian banking groups based on the extent of their operations in terms of their deposit shares in each state and the lending-portfolio mix of economic activities in those states. For empirical analysis, data on seven components of gross domestic product and state gross domestic product for 29 states from 1980–1981 to 2016–2017 were taken. The results reveal that the portfolio variances (risk) of the bank groups have declined in the last three decades. Compared to domestic private banks, the State Bank of India group and nationalised banks seem to have significantly reduced their environmental portfolio variability. Simulations to grasp the reasons for this geographic risk reduction show that structural economic reforms introduced in the early 1990s seem to have contributed more than changes in the banking structure in reducing the portfolio risk of banks.