Bank Competition in India: Empirical analysis using Price and Efficiency channel

Abstract

This paper examines the relationship between bank competition and credit risk in India using two non-structural measures of competitions which are the Lerner Index and the Boone Indicator. The analysis is conducted using an unbalanced panel of 38 scheduled commercial banks covering the period from 2004-05 to 2024-25. Two-way fixed effects, two-step GMM and a difference-in-difference empirical methodology have been used in this study. After controlling for endogeneity and dynamic persistence, neither of the competition measures provides robust evidence for the occurrence of NPA accumulation. However, efficiency-based competition significantly lowers NPAs within ownership sub-groups, indicating that the competition–risk relationship is moderated by bank ownership. Sub-period analysis reveals divergence in the pre-GFC period, weakening during the NPA crisis and COVID disruption, and convergence following consolidation. Post-merger effects operate primarily through the efficiency channel, suggesting that PSB consolidation improved scale economies without strengthening competitive discipline. Across specifications, asset quality is consistently driven by profitability and bank size. The study contributes by jointly evaluating price and efficiency-based competition measures, highlighting their differential effects in an emerging economy context. The findings suggest that at polict level, regulators should prioritise efficiency-enhancing competition and carefully assess the risks associated with consolidation policies.