Title: Bank capital buffer, bank credit and economic growth: evidence from India

Authors: Aniruddha Durafe; Ankur Jha

Addresses: AMITY Global Business School, 601, 6th Floor, Metro Tower, AB Road, Scheme No. 54, Vijay Nagar, Indore, Madhya Pradesh 452010, India ' AMITY Global Business School, 601, 6th Floor, Metro Tower, AB Road, Scheme No. 54, Vijay Nagar, Indore, Madhya Pradesh 452010, India

Abstract: This paper studies the procyclical behaviour of bank capital and bank credit by investigating the causal relationship among bank capital, bank credit and economic growth in government-owned public sector banks of India. In this study Granger causality test, cross correlation function and Pearson correlation test are applied. Also, augmented Dickey-Fuller test is used to find out the stationarity of time series data. Using bank level data of 322 observations from 23 banks during 2000-2013, the study found that bank capital buffer and tier-1 capital has a tendency to induce procyclicality in bank credit. Further, the study found that there are bi-directional causality and positive correlation between bank credit and economic growth. The result confirms the presence of causal relationship and provides strong evidence to the presence of procyclicality and its associated risk in the economy. The study suggests that banks should maintain adequate bank capital buffer to mitigate the risk associated with the procyclicality. It provides support to the implementation of RBI guidelines on the countercyclical buffer by all banks in India.

Keywords: bank capital; tier-1 capital; bank credit; economic growth rate; procyclicality; causality; countercyclical buffer.

DOI: 10.1504/AAJFA.2018.093464

Afro-Asian Journal of Finance and Accounting, 2018 Vol.8 No.3, pp.257 - 270

Accepted: 24 Aug 2017
Published online: 26 Jul 2018 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article