Bank lending and loan quality: an emerging economy perspective

  • Pallavi Chavan
  • Leonardo Gambacorta


This paper analyses how non-performing loans (NPLs) in the emerging economy of India behave through the cycle. We find that a one-percentage point increase in loan growth is associated with an increase in NPLs over total advances (NPL ratio) of 4.1% in the long run with the response being higher during expansionary phases. Furthermore, NPL ratios of banks are found to be sensitive to the interest rate environment and the overall growth of the economy. Notwithstanding differences in management and governance structures, there is a procyclical risk-taking response to credit growth in the case of both public and private banks with private banks being more reactive to changes in interest rate and business cycle conditions.


Procyclicality Loan quality Bank lending Emerging economy Bank ownership Moral hazard 

JEL Classification

E320 G210 G010 


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Banking SupervisionReserve Bank of IndiaMumbaiIndia
  2. 2.Bank for International Settlements and is affiliated with CEPRBaselSwitzerland

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