Banks competition, managerial efficiency and the interest rate pass-through in India

Abstract

If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and macroeconomic factors affect banks's loan interest rates and their spread over deposit interest rates. To examine post financial-reform interest rate pass through for Indian banks after controlling for all these factors, we estimate the determinants of commercial banks loan pricing decisions, using dynamic panel methods. The several factors commercial banks consider, apart from the policy rate, limit policy pass through. More competition reduces policy pass-through but it can improve monetary transmission provided it improves managerial efficiency.