A Study on Impact of Regulatory Changes on Bank Performance

• Author(s): Ramachandra D
• Paper ID: 1703203
• Page: 348-358
• Published Date: 28-02-2022
• Published In: Iconic Research And Engineering Journals
• Publisher: IRE Journals
• e-ISSN: 2456-8880
• Volume/Issue: Volume 5 Issue 8 February-2022

Abstract

This study on the impact of regulatory changes on bank performance in the Indian context aims to explore how banks in India adapted to and were affected by significant regulatory transformations during this period, focusing particularly on the implementation of Basel III norms, which introduced more stringent capital requirements, leverage ratios, and liquidity standards to enhance the resilience of banks against financial shocks, with data revealing that Indian banks faced challenges in meeting these new requirements due to existing issues such as high levels of non-performing assets (NPAs) and relatively low capital buffers, prompting many banks to raise additional capital through equity and debt instruments to strengthen their capital base, which consequently impacted their profitability and risk-taking behaviors; the study also examines the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016, aimed at improving the resolution process for distressed assets, which played a crucial role in addressing the high NPA levels by providing a structured framework for the timely resolution of bankruptcies, thereby influencing the asset quality and overall performance of banks, while further regulatory measures, such as the prompt corrective action (PCA) framework imposed by the Reserve Bank of India (RBI), restricted the activities of weaker banks to prevent further deterioration of their financial health, leading to a significant impact on their lending capabilities and operational strategies; additionally, the implementation of the Goods and Services Tax (GST) in 2017, designed to simplify the tax structure and increase compliance, indirectly affected banks by influencing the economic environment in which they operate, with banks needing to adjust their credit and operational strategies to align with the changes in the business activities of their clients; this study also delves into the effects of demonetization in 2016, which saw the withdrawal of high-denomination currency notes from circulation, causing a short-term liquidity crunch that impacted the deposit and credit growth of banks, while also accelerating the adoption of digital banking services as consumers and businesses sought alternative payment methods; by analyzing these regulatory changes, the study seeks to understand their cumulative impact on the performance indicators of banks, such as profitability, asset quality, capital adequacy, and operational efficiency, and to evaluate the strategies employed by banks to navigate these regulatory challenges, including capital raising initiatives, strategic mergers and acquisitions, technological upgrades, and diversification of income sources; furthermore, the study highlights the differential impact of regulatory changes on public sector banks compared to private sector banks, noting that public sector banks, which were more burdened with NPAs and capital constraints, faced greater challenges in complying with the new regulations, whereas private sector banks, with relatively stronger capital positions and better asset quality, were more agile in adapting to the regulatory environment; through a comprehensive analysis of financial data, regulatory policies, and industry reports, this study provides valuable insights into the adaptive mechanisms and strategic responses of Indian banks to regulatory changes, offering a nuanced understanding of the interplay between regulation and bank performance, and concluding with policy recommendations aimed at enhancing the resilience and efficiency of the banking sector in India.

Keywords

Regulatory Changes, Bank Performance, Indian Banking Sector, Basel III, Risk Management, Capital Adequacy, Financial Stability

Citations

IRE Journals:
Ramachandra D "A Study on Impact of Regulatory Changes on Bank Performance" Iconic Research And Engineering Journals Volume 5 Issue 8 2022 Page 348-358

IEEE:
Ramachandra D "A Study on Impact of Regulatory Changes on Bank Performance" Iconic Research And Engineering Journals, 5(8)