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A. Prasad is Advisor to Executive Director for India, and Saibal Ghosh is Assistant Adviser in the Department of Economic Analysis, Reserve Bank of India, Mumbai. We are thankful to Anges Belaisch, Kalpana Kochhar, Eswar Prasad, Gianni De Nicolo, Shawn Cole, and Sonali Jain-Chandra for their helpful comments.
The banking system in India consists of commercial and cooperative banks, with the former accounting for around 98 percent of banking system assets. The entire segment is referred to as Scheduled Commercial Banks, because they are included in the Second Schedule of the Reserve Bank of India Act, 1934.
Since the Reserve Bank of India (RBI) paid interest on CRR balances in excess of the legal minimum of 3 percent; the interest income on CRR has been excluded, both from interest income and from total income.
Note that Capital≡(Capital/RWA)×(RWA/TA)×TA, where RWA=risk-weighted assets and TA=total asset, which can be rewritten as: C=R × P × TA, where C=capital, R=risk-weighted capital ratio (=C/RWA), P=portfolio factor (=RWA/TA).
where Ĉ=∆C/C denotes proportionate changes
The expression suggests that to meet a targeted risk-adjusted capital requirement, a bank faces three possible options: (1) increase capital, (2) lower the portfolio factor, or (3) shrink total assets.
As observed by the RBI (2004), “…closure of the loss making branches at rural centres having a single commercial bank branch is not permitted, at centres served by more than one commercial bank branches (excluding that of RRBs) the decision for closure of one of the branches may be taken by the concerned banks by mutual consultation without involving State Government and District Consultative Committee (DCC).”
Public sector banks comprise nearly 70 percent of the wage costs across bank groups.
We also re-estimate the baseline specification (3) using the weighted least squares (WLS) approach, where observations are weighted by the banks’ respective asset shares in a particular year. Intuitively, by providing higher weight to larger banks, the WLS procedure is better suited to capture the behavior of representative banks. The results (not reported) did not provide any significant additional insights and several of the variables had counterintuitive signs. More important, it seems that WLS methodology is more suited to a cross-country framework where the number of reporting banks differ across countries as reported by Levy Yeyati and Micco (2003) in their study of bank competition for several Latin American countries.