Credit growth and macroprudential regulation: is ownership important?

This paper aims to examine the impact of macroprudential policies (MPPs) on credit growth. Towards this end, the author uses quarterly data on Indian commercial banks for the period 2002:1 to 2012:1 that subsume the imposition of MPPs.

The analysis uses the dynamic panel data (DPD) methodology to test the relevant hypotheses regarding the interlinkage between credit growth, bank ownership and MPPs. The DPD methodology has the advantage of being able to address the endogeneity between credit growth and macroprudential regulation.

The results appear to suggest that MPPs targeted on provisions are relatively more effective in limiting credit expansion. When considered in conjunction with bank ownership, they appear to have much more force in moderating the severity of the credit cycle.

The lack of an extensive database on the relevant variables might hinder the robustness of the results. It is possible that MPPs are effective in curbing loan extension to targeted sectors, which cannot be adequately examined using aggregate loan data.

The role and usefulness of MPPs in limiting the build-up of risk has been widely discussed in recent times. Judged from that standpoint, the paper contributes to this literature by examining the issue for a leading emerging economy.

To the best of the author’s knowledge, this is one of the earliest studies to examine this issue in a systematic manner for India.