Risks and financial performance of Indian banks: a cursory look at the COVID-19 period

Abstract

PurposeThe novel coronavirus (COVID-19) has caused financial stress and limited their lending agility, resulting in more non-performing loans (NPLs) and lower performance during the II wave of the coronavirus crisis. Therefore, it is essential to identify the risky factors influencing the financial performance of Indian banks spanning 2018–2022.Design/methodology/approachOur sample consists of a balanced panel dataset of 75 scheduled commercial banks from three different ownership groups, including public, private and foreign banks, that were actively engaged in their operations during 2018–2022. Factor identification is performed via a fixed-effects model (FEM) that solves the issue of heterogeneity across different with banks over time. Additionally, to ensure the robustness of our findings, we also identify the risky drivers of the financial performance of Indian banks using an alternative measure, the pooled ordinary least squares (OLS) model.FindingsEmpirical evidence indicates that default risk, solvency risk and COVAR reduce financial performance in India. However, high liquidity, Z-score and the COVID-19 crisis enhance the financial performance of Indian banks. Unsystematic risk and systemic risk factors play an important role in determining the prognosis of COVID-19. The study supports the “bad-management,” “moral hazard” and “tail risk spillover of a single bank to the system” hypotheses. Public sector banks (PSBs) have considerable potential to achieve financial performance while controlling unsystematic risk and exogenous shocks relative to their peer group. Finally, robustness check estimates confirm the coefficients of the main model.Practical implicationsThis study contributes to the knowledge in the banking literature by identifying risk factors that may affect financial performance during a crisis nexus and providing information about preventive measures. These insights are valuable to bankers, academics, managers and regulators for policy formulation. The findings of this paper provide important insights by considering all the risk factors that may be responsible for reducing the probability of financial performance in the banking system of an emerging market economy.Originality/valueThe empirical analysis has been done with a fresh perspective to consider unsystematic risk, systemic risk and exogenous risk (COVID-19) with the financial performance of Indian banks. Furthermore, none of the existing banking literature explicitly explores the drivers of the I and II waves of COVID-19 while considering COVID-19 as a dependent variable. Therefore, the aim of the present study is to make efforts in this direction.