Demystifying gaps and testing for convergence in bank regulations impacting the competitive environment: a case of India and its peers in BRICS

Abstract

Purpose

This study aims to demystify how the critical regulations affecting the bank competition have instituted, amended and fine-tuned over the years in India and its peers in Brazil, Russia, India, China and South Africa (BRICS). The gaps in the regulatory practices influencing bank contestability and competition in BRICS nations are identified. Also, the regulatory convergence is tested by comparing the policies embraced in India vis-à-vis its peer nations.

Design/methodology/approach

A methodological framework by Barth, Caprio and Levine (2013) is adopted to construct various regulatory indices. The empirical analysis is based on information available in five rounds of the bank regulation and supervision survey conducted in 2000, 2003, 2007, 2011 and 2017 by the World Bank.

Findings

The empirical findings elucidate that although bank entry regulations have been liberalized over time, the bank contestability seems to be low in the BRICS countries, especially in India. This might be due to the substantial government ownership and the presence of notional powers that are conferred to bank supervisors. On comparing the bank regulations in India vis-à-vis its peers, the author find a strong convergence in licensing requirements for entry into the banking business, foreign bank entry mode, restrictions on conglomerate formation and adoption of prompt corrective action framework.

Practical implications

The study suggests that future policy initiatives in India need to focus on redesigning the banking structure by reducing the share of state ownership, permitting joint ventures and liberally allowing the entry of new domestic and foreign banks in the industry. In the years to come, regulators in India will continuously face the challenge of fostering bank contestability without jeopardizing bank efficiency and overall stability.

Originality/value

This study is perhaps first of its kind, which analyzes the inter-temporal changes in regulatory indicators to examine the variations in the competitive environment of the banking markets of BRICS economies in general and India in particular.

Citation

Gulati, R. (2021), "Demystifying gaps and testing for convergence in bank regulations impacting the competitive environment: a case of India and its peers in BRICS", Journal of Financial Regulation and Compliance, Vol. 29 No. 1, pp. 15-43. https://doi.org/10.1108/JFRC-01-2020-0005