Banking sector: interest rate spreads in India

Abstract

The Indian banking sector has been seen declining spreads since the reforms that started in 1992-93. In this document, we explore the reasons for the same historical data and regression analysis. Spreads as a percentage of assets is our dependent variable. This is expressed as a function of various bank specific and sector specific variables that include provisions /loans, market share, officers to staff ratio, operating expenses to assets ratio, investment in government securities as a percent of assets and wholesale price index. Panel regression using Limdep, Version 8.0 was carried out for analysis. It was found that the variables that explained reducing spreads were different for public sector banks and private sector banks. The effect of operating expenses by assets, investment in government securities and WPI were seen to significant for public bank`s spreads. In the case of private banks` besides the above, market share and provisions/loans were also significant variables.