Corporate Debt Restructuring, Bank Competition and Stability: Evidence from creditors’ perspective

Abstract

This paper estimates the causal effect of a unique programme of corporate debt restructuring (CDR) on stability of Indian banks over the period 1992-2012. The banks who participated in the programme were extended regulatory forbearance on asset classification and provisioning on the restructured corporate loans. We find that banking stability of the participated banks increases substantially after the implementation of the programme. Using stochastic frontier analysis approach, we estimate two variant measures of market power and investigate the interactive effect of CDR on bank stability. The result shows that the positive effect of CDR on stability declines at higher level of market power, implying that the CDR mechanism is less effective for the participating banks beyond a threshold level of market power. We also find that the second phase of deregulation and the direct effect of market power have significant positive effect on the overall soundness of Indian banks. To provide unbiased treatment effects of CDR eliminating any sample selection bias, we further confirm the positive effect of CDR on bank stability using a number of alternative matching estimators. Our results (both parametric and non-parametric) remain insensitive to an array of robustness tests including quality of matching.