Moral Hazard in Lending Decisions of Indian Public Sector Banks

Focusing on the impact of government capital infusions and existing Non-Performing Loans (NPLs) the research examines how these factors influence Public Sector Banks (PSBs)’ risk-taking behaviour and subsequent lending decisions. Using data from 2009 to 2023 the study employs OLS and panel regression analyses to test hypotheses related to moral hazard. The findings suggest a complex relationship between government support NPLs and lending practices. While government capital infusion is associated with higher NPLs, its impact on lending practices is insignificant. The influence of existing NPLs on subsequent lending decisions varies across different aspects of lending behaviours. These results underscore the complexities in PSB governance and operations, highlighting the need for effective risk management practices and regulatory oversight to mitigate moral hazard risks and ensure sound lending practices in PSBs.