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DEPOSITOR DISCIPLINE, REGULATORY CONTROL, AND A BANKING CRISIS: A STUDY OF INDIAN URBAN COOPERATIVE BANKS
Author(s) -
CHIPALKATTI Niranjan,
RAMESHA K.,
RISHI Meenakshi
Publication year - 2007
Publication title -
annals of public and cooperative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.526
H-Index - 37
eISSN - 1467-8292
pISSN - 1370-4788
DOI - 10.1111/j.1467-8292.2007.00344.x
Subject(s) - loan , scrutiny , business , financial system , sample (material) , financial crisis , economics , monetary economics , finance , chemistry , chromatography , political science , law , macroeconomics
** : Urban Cooperative banks in India (UCBs) play an important role in mobilizing resources from lower and middle‐income groups and in providing direct finance to small entrepreneurs and traders. Motivated by previous empirical work on depositor disciplining behaviour, this paper examines whether depositors punish weak UCBs by withdrawing deposits during and after a banking crisis. In addition, the paper investigates the impact of tightened prudential standards imposed by the Indian central bank (RBI) on the ratio of investments to loan assets and on the rate of growth of loans. Our sample of 45 UCBs is partitioned into strong and weak banks and subjected to econometric testing. Our analysis reveals that a banking crisis is associated with a contraction in deposits across the sample. However, weak banks appear to be disciplined by depositors during election years. We also find weak support for the contention that banks reduced loans when faced with intensified regulatory scrutiny in the aftermath of a crisis.