Creditor Rights, Bank Ownership and Risk-taking

Abstract This paper contributes to the literature on creditor rights by exploring the impact of the moderating role of ownership in shaping banks’ response to the strengthening of creditor rights. Specifically, it investigates whether such legislations induce excessive risk-taking in Public Sector Banks (government-owned banks) as compared to Non-Public Sector Banks (private, foreign or other ownership). Using a difference-in-differences methodology and panel data of 104 Indian banks over seven years, we evaluate the effects of Insolvency and Bankruptcy Code, 2016 (IBC) on lending institutions in India. We further examine how the change in risk-taking impacts non-performing assets (NPAs), lending, and profitability. Our results reveal that Public Sector Banks (PSBs) significantly increase their risk-taking while reducing their lending, leading to a rise in NPAs and decline in profitability as compared to Non-Public Sector Banks (NPSBs). This paper establishes ownership as a crucial determinant of Banks’ response to creditor rights response. JEL Codes: G33; G21