Banking Dynamics and Economic Growth in India : Unveiling the Interplay of Key Performance Indicators
DOI:
https://doi.org/10.17010/ijf/2025/v19i11/174492Keywords:
bank performance, economic output, dynamic interaction, vector autoregression.JEL Classification Codes : C33, G21, O16
Publication Chronology: Paper Submission Date : October 20, 2024 ; Paper sent back for Revision : March 31, 2025 ; Paper Acceptance Date : August 20, 2025 ; Paper Published Online : November 15, 2025
Abstract
Purpose : This study aimed to analyze the influence of bank performance on economic growth. We proposed a framework of banking variables to gain a holistic picture.
Design/Methodology/Approach : To identify the causal relationship, we ran cointegration tests and vector autoregression (VAR). In addition, we used the impulse response function test. This helped in analyzing the response of GDP growth to banking shocks.
Findings : We identified that banking variables like domestic credit (DC), return on equity, and capital adequacy ratio can stimulate economic growth. Long-term and short-term influence of banking performance on economic growth. Improved performance of banks can translate to economic growth. Our results also indicated that well-capitalized banking, high return on equity, and increased credit access were critical drivers of GDP growth.
Practical Implications : This research offered important insights into the role of banking performance in influencing economic growth. We recommended that policymakers implement measures to improve capital adequacy, enhance profitability, and increase credit flow for sustained economic success and development.
Originality/Value : This study added to existing research by examining how banking performance influenced economic growth in a developing context. Unlike prior studies that focused mainly on advanced economies, our analysis centered on India, offering evidence from an emerging financial system and providing context-specific insights.
Downloads
Published
How to Cite
Issue
Section
References
1) Adekola, O. A. (2016). The effect of banks profitability on economic growth in Nigeria. IOSR Journal of Business Management, 18(3), 1–9. https://www.iosrjournals.org/iosr-jbm/papers/Vol18-issue3/Version-2/A018320109.pdf
2) Ahmad, N., & Du, L. (2017). Effects of energy production and CO2 emissions on economic growth in Iran: ARDL approach. Energy, 123, 521–537. https://doi.org/10.1016/j.energy.2017.01.144
3) Alkhazaleh, A. M. (2017). Does banking sector performance promote economic growth? Case study of Jordanian commercial banks. Problems and Perspectives in Management, 15(2), 55–64. https://www.ceeol.com/search/article-detail?id=620327
4) Asteriou, D., & Spanos, K. (2022). The mechanisms linking the finance-growth relationship given the financial crisis: An empirical investigation of the EU countries. Journal of Economic Studies, 49(7), 1240–1268. https://doi.org/10.1108/JES-03-2021-0170
5) Barve, P., & Nayak, S. (2023). Strengthening market discipline by depositors: A TISM and MICMAC approach. Indian Journal of Finance, 17(10), 43–63. https://doi.org/10.17010/ijf/2023/v17i10/170558
6) Beck, T., Levine, R., & Loayza, N. (2000). Finance and the source of growth. Journal of Finance and Economics, 58(1–2), 261–300. https://doi.org/10.1016/S0304-405X(00)00072-6
7) Brogi, M., Lagasio, V., & Porretta, P. (2022). Be good to be wise: Environmental, social, and governance awareness as a potential credit risk mitigation factor. Journal of International Financial Management & Accounting, 33(3), 522–547. https://doi.org/10.1111/jifm.12156
8) Chakraborty, B. (2024). Analysis of risk, size, and performance of the banking industry: A South Asian perspective. Indian Journal of Finance, 18(4), 44–59. https://doi.org/10.17010/ijf/2024/v18i4/173726
9) Cong, L. W., Gao, H., Ponticelli, J., & Yang, X. (2019). Credit allocation under economic stimulus: Evidence from China. The Review of Financial Studies, 32(9), 3412–3460. https://doi.org/10.1093/rfs/hhz008
10) Durrani, A., Rosmin, M., & Volz, U. (2020). The role of central banks in scaling up sustainable finance – what do monetary authorities in the Asia-Pacific region think? Journal of Sustainable Finance & Investment, 10(2), 92–112. https://doi.org/10.1080/20430795.2020.1715095
11) Égert, B., Backé, P., & Zumer, T. (2016). Private-sector credit in Central and Eastern Europe: New (over) shooting stars? In J. C. Brada & P. Wachtel (eds.), Global banking crises and emerging markets (pp. 98–129). Palgrave Macmillan. https://doi.org/10.1007/978-1-137-56905-9_6
12) Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276. https://doi.org/10.2307/1913236
13) Ghosh, A. (2017). Impact of non-performing loans on US product and labor markets. Journal of Financial Economic Policy, 9(3), 302–323. https://doi.org/10.1108/JFEP-01-2017-0003
14) Gozgor, G. (2014). Determinants of domestic credit levels in emerging markets: The role of external factors. Emerging Markets Review, 18, 1–18. https://doi.org/10.1016/j.ememar.2013.11.003
15) Gupta, S., Chandel, A., & Bhalla, L. (2023). XBRL adoption and information asymmetry: Evidence from the Indian capital market. Indian Journal of Finance, 17(7), 25–36. https://doi.org/10.17010/ijf/2023/v17i7/170240
16) Gupta, U., & Agarwal, B. (2023). The role of digital financial services on Indian MSMEs. Indian Journal of Finance, 17(2), 8–26. https://doi.org/10.17010/ijf/2023/v17i2/170125
17) Ikpesu, F. (2021). Banking sector credit, inflation and growth in sub-Saharan African countries. Journal of Transnational Management, 26(3), 164–178. https://doi.org/10.1080/15475778.2021.1947170
18) Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2–3), 231–254. https://doi.org/10.1016/0165-1889(88)90041-3
19) Joseph, D., Girish, S., & Suresh, G. (2023). FinTech and financial capability, what do we know and what we do not know: A scoping review. Indian Journal of Finance, 17(12), 40–55. https://doi.org/10.17010/ijf/2023/v17i12/170910
20) Kadanda, D., & Raj, K. (2018). Non-performing assets (NPAs) and its determinants: A study of Indian public sector banks. Journal of Social and Economic Development, 20, 193–212. https://doi.org/10.1007/s40847-018-0068-0
21) Kalifa, W., & Bektaş, E. (2018). The impacts of bank-specific and macroeconomic variables on the capital adequacy ratio: Evidence from Islamic banks. Applied Economics Letters, 25(7), 477–481. https://doi.org/10.1080/13504851.2017.1340559
22) Kuttner, K. N., & Mosser, P. C. (2002). The monetary transmission mechanism: Some answers and further questions. FRBNY Economic Policy Review. https://www.newyorkfed.org/medialibrary/media/research/epr/02v08n1/0205kutt.pdf
23) Lithin, B. M., Chakraborty, S., & Nikhil, M. N. (2023). Are liquidity and credit risk key determinants of corporate credit spreads (CCS) in India? Indian Journal of Finance, 17(6), 8–26. https://doi.org/10.17010/ijf/2023/v17i6/172773
24) Mainrai, G., & Mohania, S. (2023). Redefining risk: Indian Sterling Bank's journey to mitigate concentration risk. Indian Journal of Finance, 17(11), 40–49. https://doi.org/10.17010/ijf/2023/v17i11/173326
25) Rahman, Z., Cai, H., & Ahmad, M. (2023). A new look at the remittances-FDI-energy-environment nexus in the case of selected Asian nations. The Singapore Economic Review, 68(1), 157–175. https://doi.org/10.1142/S0217590819500176
26) Saini, P., & Muniyoor, K. (2022). Does economic development affect public debt accumulation? Empirical evidence from India. Indian Journal of Finance, 16(4), 47–59. https://doi.org/10.17010/ijf/2022/v16i4/169174
27) Sensarma, R., & Bhattacharyya, I. (2016). Measuring monetary policy and its impact on the bond market of an emerging economy. Macroeconomics and Finance in Emerging Market Economies, 9(2), 109–130. https://doi.org/10.1080/17520843.2015.1123743
28) Syed, A. A., & Tripathi, R. (2020). Macroeconomic vulnerabilities and their effect on nonperforming loans in Indian commercial banks. Indian Journal of Finance, 14(2), 34–49. https://doi.org/10.17010/ijf/2020/v14i2/150555
29) Tabassum, & Pande, S. (2021). A study of determinants and their impact on bank debt restructuring in Indian banks. Indian Journal of Finance, 15(9), 8–23. https://doi.org/10.17010/ijf/2021/v15i9/166318
30) Tandon, P., & Singh, A. B. (2021). Antecedents and extent of financial inclusion: A cross-sectional study. Indian Journal of Finance, 15(3), 50–67. https://doi.org/10.17010/ijf/2021/v15i3/158129
31) Vasantha, N. R., Bossman, A., & Iqbal, N. (2025). Empowering energy access: The influence of Islamic banking and Fintech on sustainable energy in MENA. International Journal of Islamic and Middle Eastern Finance and Management. https://doi.org/10.1108/IMEFM-01-2025-0019
32) Vijayalakshmi, D., & Menon, S. K. (2023). Overseas direct investments to the wholly owned subsidiaries and their association with Indian macroeconomic factors. Indian Journal of Finance, 17(7), 37–53. https://doi.org/10.17010/ijf/2023/v17i7/170039
33) Weqar, F., Khan, A. M., & Haque, S. M. (2020). Exploring the effect of intellectual capital on financial performance: A study of Indian banks. Measuring Business Excellence, 24(4), 511–529. https://doi.org/10.1108/mbe-12-2019-0118
