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H IDDEN DEBT
SOCBs is estimated relative to the control group of similar private banks for our difference-in-differences estimation. The LGD can be estimated based on the monetary value of all the adjustments that happen when a distress occurs. For SOCBs, we focus on the following five categories of adjustments: 1. Percent change in capital 2. Percent change in provisioning 3. Percent change in debt 4. Percent change in lending 5. Percent change in fixed assets (including sale of fixed assets). To estimate the adjustment size for each of these five categories for distressed SOCBs relative to private banks, we regress each variable in categories 1–5 on the distress dummy, the interaction of the distress dummy with the SOCB dummy, and control variables—including bank and time fixed effects (see appendix 3A for a detailed description of the estimation methodology). Overall Results, with a Focus on India Our estimation results, summarized in figure 2.9, suggest that compared with distressed PVTBs (the control group), distressed SOCBs tend to adjust to distress by increasing capital relatively more than
distressed PVTBs (see tables 2B.4 and 2B.5, in annex 2B, for detailed results). This finding could reflect the government’s efforts to promptly recapitalize at least systemically important public banks—most notably, India’s SBI. It can also reflect the softer budget constraints that SOCBs as a group enjoy compared with private banks. These softer budget constraints can then increase moral hazard among SOCBs and distort their incentives to properly manage credit and other risk taking, as well as act in a timely manner to restore their performance when it declines. To a lesser extent, during the initial year of distress, SOCBs tend to increase fixed assets (invest)—or at least do not drop their plans to accumulate fixed assets. This result could be linked to the government capital injections that often come with the conditionality to continue supporting priority lending sectors and government programs and stimulate economic growth. If SOCBs are unable to stimulate growth through lending—for instance, because breaching prudential requirements can trigger regulations that prohibit increasing the lending portfolio—the SOCBs can use their investments to help stimulate growth and meet government conditions of recapitalization.
FIGURE 2.9 Differences in How State-Owned Commercial Banks and Domestically Owned Private Banks Adjust in Times of Distress Capital
Debt
Lending
Investment –4
–3
–2
–1
0
1
2
3
4
5
t statistic PVTBs
SOCBs
Source: Tables 2B.4 and 2B.5, in annex 2B; Kibuuka and Melecky 2020. Note: The bars depict the t statistics of the estimated adjustment coefficients. PVTBs = domestically owned private banks; SOCBs = state-owned commercial banks.
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