Credit Growth, Bank Soundness and Financial Fragility

Abstract

Using data on Indian banks for 1996–2008, the article examines the interconnection among credit growth, bank soundness and financial fragility. The analysis appears to indicate that higher credit growth amplifies bank fragility. Besides, the results point to the fact that sounder banks increase loan supply. Coming to bank ownership, the evidence testifies that credit growth has been rapid in State-owned and de novo private banks. In terms of policy implications, the analysis appears to suggest the need for giving priority to risk-based supervision as a way to contain the potential risks associated with rapid credit growth.

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