Reddy, Kallu u Si a; Yada , Raja Singh; Aga wal, Abhi oop
A icle
C edi exposu es and sys emic isk in Indian banks
Asian Jou nal o Economics and Banking (AJEB)
P o ided in Coope a ion wi h:
Ho Chi Minh Uni e si y o Banking (HUB), Ho Chi Minh Ci y
Sugges ed Ci a ion: Reddy, Kallu u Si a; Yada , Raja Singh; Aga wal, Abhi oop (2025) : C edi
exposu es and sys emic isk in Indian banks, Asian Jou nal o Economics and Banking (AJEB), ISSN
2633-7991, Eme ald, Leeds, Vol. 9, Iss. 2, pp. 222-239,
h ps://doi.o g/10.1108/AJEB-12-2024-0148
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/334145
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C edi exposu es and sys emic isk in
Indian banks
Kallu u Si a Reddy, Raja Singh Yada and Abhi oop Aga wal
Gokhale Ins i u e o Poli ics and Economics, Pune, India
Abs ac
Pu pose – The s abili y o a inancial sys em depends no only on indi idual bank isks bu also on he
in e connec edness o banks wi h simila c edi exposu e pa e ns. I banks o m clus e s based on hei liabili ies
and asse simila i ies, he inancial sys em may become agile and ulne able o sys emic isk and con agion e ec s.
This s udy in es iga es he clus e ing o Indian banks based on hei c edi exposu e pa e ns and examines he
implica ions o inancial s abili y in COVID-19 and pos -me ge es uc u ing o public sec o banks (PSBs).
Design/me hodology/app oach – This s udy employs a simila i y ma ix, sugges ed by B echle e al. (2014),
o quan i y he deg ee o esemblance be ween banks’ c edi po olios and applies hie a chical clus e ing
algo i hms o iden i y clus e s o banks wi h simila exposu e s uc u es. The da ase includes inancial
in o ma ion om 2018 o 2023, co e ing p e-pandemic, pandemic and pos -pandemic pe iods o analyze
sys emic isk dynamics.
Findings – The esul s e eal signi ican clus e ing among Indian banks (public sec o and la ge p i a e sec o
banks). These ins i u ions exhibi s ong posi i e co ela ions in hei c edi exposu e pa e ns, indica ing
po en ial sys emic isks. The indings sugges ha highly co ela ed c edi exposu es inc ease con agion isk,
whe e dis ess in one ins i u ion could ha e spillo e e ec s ac oss he clus e , ampli ying inancial ins abili y.
O iginali y/ alue – This esea ch p o ides empi ical e idence o sys emic isk clus e ing in Indian banking,
ex ending he li e a u e on inancial s abili y in eme ging ma ke s. Unlike p io s udies ocusing on de eloped
economies, his s udy emphasizes he challenges aced by eme ging ma ke banking sys ems, pa icula ly du ing
inancial c ises such as COVID-19. The indings o e policy- ele an insigh s o egula o y bodies seeking o
s eng hen inancial esilience in economies wi h simila banking s uc u es.
Keywo ds C edi isk, Simila i ies, In e connec edness, Clus e s, Sec o al c edi
Pape ype Resea ch pape
1. In oduc ion
COVID-19 a ec ed e enues o indus ial and se ice sec o s in India due o p olonged cu bs
on sec o al economic ac i i ies. Du ing he pandemic, he Rese e Bank o India (RBI)
ini ia ed se e al measu es o imp o e c edi disbu semen o suppo businesses and he poo ,
ulne able o lockdown measu es. I also announced a mo a o ium on loan paymen s, which
made loan epaymen o banks by he bo owe s empo a ily op ional. Banks we e ad ised o
inc ease hei c edi o Small and Medium En e p ises (SMEs) and he ulne able popula ion.
Indian banking sec o is cha ac e ized by a s ong p esence o public sec o banks (PSBs), a
ew dominan p i a e sec o banks, and many egional and coope a i e banks. This
composi ion makes he s udy o sys emic isk pa icula ly ele an , as PSBs ha e his o ically
ollowed go e nmen -di ec ed lending policies while p i a e sec o banks ha e pu sued
comme cial p o i abili y. COVID-19 has inc eased he likelihood o asse downg ades in India
(RBI, 2024). On he o he side, Indian banks a e in consolida ion mode. Ten weake public
sec o banks (PSBs) ha e ecen ly me ged wi h ou be e -pe o ming banks, educing he
numbe o public sec o banks o wel e. The ecen HDFC me ge has also played a
signi ican ole in inc easing he concen a ion o asse s in banking. The RBI Financial
AJEB
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Recei ed 28 Decembe 2024
Re ised 22 Ma ch 2025
27 Ma ch 2025
Accep ed 31 Ma ch 2025
Asian Jou nal o Economics and Banking
Vol. 9 No. 2, 2025
pp. 222-239
Eme ald Publishing Limi ed
e-ISSN: 2633-7991
p-ISSN: 2615-9821
DOI 10.1108/AJEB-12-2024-0148
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S abili y Repo (2021) cau ions ha he isk gene a ed by he ca ego y o me ged PSBs is
compa a i ely highe han he unme ged PSBs. Loans a e consis en ly g owing a a highe a e
han deposi s. Lending o e ail and mic o, small, and medium en e p ises (MSME) sec o has
been highe han ha o la ge indus ies. The C edi o Deposi (CD) a io has inc eased
signi ican ly a e he me ge s in public sec o banks. Do hese de elopmen s lead o inc eased
in e connec edness in Indian banks? E en hough he asse quali y o scheduled comme cial
banks has been imp o ing ecen ly, he main easons behind his educ ion we e w i ing o
and he upg ade o loans (RBI, 2024). The subp ime c isis in he US c ea ed conside able
in e es in he in e linkages and sys emic isks o inancial ins i u ions as i exposed he isks
o he in e connec edness o inancial sys ems. Whe he he me ge s and he pandemic
changed he composi ion o banks’ asse exposu es and changed he numbe o clus e s in
Indian banking is wo h explo ing. Inc easing simila i ies in c edi exposu e o a ew sec o s
will inc ease sys emic isks in Indian banking. This s udy assesses how s uc u al changes in
Indian banking, p ima ily me ge s, and pandemic-d i en lending shi s, ha e in luenced
sys emic isk. Speci ically, i examines whe he hese changes ha e led o inc eased
homogenei y in c edi exposu es among banks, he eby exace ba ing in e connec edness and
inancial ulne abili ies.
Sys emic isk is co- ela ed wi h he size and in e connec edness o inancial i ms [1]. I
banks expand and di e si y ope a ions o become mo e simila o each o he , each bank migh
become sa e indi idually, bu he banking sec o as a whole will become iskie . I he
ope a ions o many banks a e simila , hey could become a “sys emic he d” and ulne able o
he same shocks, leading o heigh ened ola ili y in he agg ega e p o ision o inancial
se ices (S i oh, 2018). Suppose banks ollow simila isk managemen and ading s a egies
and a e exposed o he same ma ke segmen s o e en o he e y same deb o s. In ha case,
hey u n ulne able o s anda d shocks, and hei de aul p obabili ies may co ela e s ongly.
As a esul , hey become ulne able o s anda d shocks, and hei de aul p obabili ies may
co ela e s ongly. Be o e he subp ime c isis, simila i ies among la ge inancial ins i u ions
had isen conside ably (Wagne , 2010).
Simila i ies in banks’ exposu es would agg a a e dimensions o sys emic isk and inc ease
co ela ions among ac o s con ibu ing o sys ema ic isk and complexi ies in he sys em. A
isual ep esen a ion o he simila i y be ween any pai o banks could hin a he p esence o
many clus e s. A clus e , he e, is any g oup o banks whose asse po olios a e simila . By
applying a sui able clus e ing algo i hm, one can g oup banks belonging o di e en clus e s.
In p ac ice, each bank can be ep esen ed by a ec o . The ec o would encompass a ious
cha ac e is ics such as c edi exposu es, unding s uc u es, o -balance-shee i ems, e c. This
s udy concen a es on he asse side o banks’ balance shee s. A high deg ee o simila i y in
c edi exposu es indica es he seeds o po en ial ulne abili ies ha migh s ess (and dis ess)
he inancial sys em in he p esence o ad e se shocks. Exis ing academic wo k associa ed
sys emic isk p ima ily wi h he commonali y o asse s. Al hough many small and mid-sized
banks in a inancial sys em may no be isky indi idually, hey may be exposed o he same isk
om a mac oeconomic pe spec i e.
This pape employs a simila i y measu e, sugges ed by B echle e al. (2014), based on he
cosine o he angle be ween wo banks’ ec o s o asse weigh s and hen u ilizes an
app op ia e clus e ing algo i hm o ind clus e s o banks in India. Thus, i designs a po olio
simila i y measu e a ising om banks’ c edi exposu es o di e en sub-sec o s o he
economy and clus e s o banks based on simila i ies. Two o ms o simila i y can be looked a .
Fi s , a simple simila i y measu e ea s each sec o equally. Second, is he e a isk-adjus ed
simila i y, whe e weigh s o di e en sub-sec o s a e assigned based on isk a ing? This pape
ocuses only on he simple simila i y measu e since sec o -wise da a ega ding he
nonpe o ming asse s o indi idual banks a e no a ailable.
The es o he pape is s uc u ed as ollows: Sec ion 2 e iews ea lie s udies abou he
s udy a ea. Sec ion 3 discusses he me hodology and da a. Sec ion 4 p esen s empi ical
indings and discussions. Sec ion 5 discusses Implica ions. Sec ion 6 concludes he pape .
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2. Li e a u e e iew
A g owing numbe o s udies ha e ocused on he sys emic isks o banks. These s udies can be
classi ied in o wo ca ego ies: high- equency measu es, which use inancial ma ke da a, and
low- equency measu es, which ely on balance shee in o ma ion o i ms and
mac oeconomic indica o s. High- equency measu es ha e been u ilized o moni o ma ke
indica o s in eal ime ega ding how sys emic isk ma e ializes in he sys em. S udies such as
Huang e al. (2009), Acha ya e al. (2017), Tobias and B unne meie (2016), and B ownlees
and Engle (2012) de eloped a ious high- equency measu es. Low- equency measu es
cap u e po en ial imbalances a ising om inancial agili y, bo h a he i m le el and in he
economy. S udies by San Jose e al. (2008), Bo io and Lowe (2002), Schwaab e al. (2011),
Blei and E gashe (2014), and B echle e al. (2014) ha e de eloped a se ies o low- equency
measu es. This pape deploys he low- equency sys emic isk measu e B echle e al. (2014)
used and ela es he commonali y o asse exposu es o sys emic isk.
Unde s anding asse commonali y ac oss inancial ins i u ions is essen ial o g asping
sys emic isk. Sys emic isk a ises om he agili y o a inancial sys em. One sou ce o
sys em agili y could be he commonali y o asse s o common exposu e o he same ypes o
isks. Smaga (2014) ex ensi ely e iews sys emic isk and he ac o s causing i . S udies
obse e “he ding beha io ” as one o he easons banks ha e simila asse exposu es in hei
po olios. Empi ical s udies on he ding a e mainly con ined o capi al ma ke s. A ew s udies,
howe e , empi ically ocused on he ding in banks as well. Acha ya and Yo ulmaze (2007)
ind ha in he case o he “ oo-many- o- ail” p oblem, egula o s’ choice o bail ou all banks
o none gi es banks he incen i e o he d, heigh ening he p obabili y o a sys emic c isis.
Hi aka a e al. (2017) explo e he ela ionship be ween CoVaR, he measu e o sys ema ic isk,
and he income sou ces o po olio combina ions o Japanese u al banks. They e eal
e idence o “sys emic as a he d” as g ea e exposu e o ma ke isk and non-in e es -income
ac i i ies linked o ma ke s inc ease sys emic isk, e en hough di e si ica ion educes
s andalone isk. Chen (2011) applied he me hods o Lakonishock, Shlei e , and Vishny (LSV)
and F ey, He bs , and Wal e (FHW) o examine he he ding beha io o US banks ac oss loan
ca ego ies. They ound e idence o he ding inc easing d ama ically du ing he 2008 inancial
c isis and also obse ed ha banks end o he d mo e when hey a e s uggling o pe o m, and
big banks end o he d mo e han small ones.
Examining he impac o di e si ica ion on sys ema ic isk, Wagne (2010) no es ha
di e si ica ion in inancial se ices inc eases he simila i ies ac oss ins i u ions by exposing
hem o he same isk. As a esul , he p obabili y and he cos o a inancial c isis will be high.
Fu he , inadequa e po olio di e si ica ion can be empi ically cap u ed h ough an agg ega e
po olio-simila i y measu e, e en hough such a measu e is a e and possible o bo ow om
o he a eas (B echle e al., 2014). Bloche (2012) de eloped a simila i y index o obse e
capi al- low con agion in inancial ma ke s h ough in e connec ed asse holdings o po olio
manage s, only o ind ha spill-o e e ec s ac oss manage s wi h simila po olios a ec
unds’ e u ns h ough popula sho - e m in es men s a egies. Using a simila concep , The
Bank o Is ael (2012) examined unds-managing o he public’s long- e m sa ings (e.g.
pension unds). I ound a high le el o simila i y in he asse po olios managed ega ding he
selec ion o e y simila asse s and e en he weigh ing o hese asse s in he po olios. All his
is a ibu ed o he limi ed a ailabili y o in es men oppo uni ies in Is ael.
Examining he asse commonali y om asse swaps o ma u i y s uc u e, Allen e al.
(2012) ha e e ealed ha he asse -composi ion s uc u es o banks in e ac wi h unding
ma u i y in de e mining sys emic isk, mainly when banks ely p ima ily on sho - e m
inance. Measu ing asse commonali y o Eu opean banks, Dissem (2019) ound ha 70% o
he simila i y be ween banks’ asse classes was signi ican ly ela ed o a bank’s di e si ica ion,
size, c edi isk, and capi aliza ion. Also, he obse es ha asse commonali y can in luence
e u ns nega i ely and he ola ili y o a bank posi i ely. Cai e al. (2014) obse ed ha hose
banks a e mo e likely o ocus on syndica e loans, and he mo e simila hey become in asse
po olios, he mo e banks di e si y by o ming a syndica e wi h o he banks in he US. They
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simul aneously, howe e , inc ease he concen a ion o he inancial sec o because banks
become mo e simila . The s udy has disco e ed a posi i e and signi ican co ela ion be ween
in e connec edness and a ious ma ke sys emic isk measu es. Liquidi y c ea ion has been
iden i ied as a undamen al de e minan o bank s abili y du ing c ises. The eme gence o
COVID-19 u he unde sco ed he sys emic isks. The pandemic led o signi ican shi s in
c edi exposu e and inc eased inancial agili y. El-Chaa ani e al. (2023) ound ha liquidi y
c ea ion helped banks main ain inancial pe o mance du ing he COVID-19 c isis when
managed e ec i ely alongside asse quali y and bank size. B echle e al. (2014) examined
whe he simila i ies be ween bank asse exposu es could lead o he build-up o sys emic isks
in Czech banks by p oposing a se o isk measu es. The s udy ound e idence o simila i y
lowe han he si ua ion c ea ed by assuming ha banks ully di e si y hei po olios on he
same se o asse s. The e a e mo e simila i ies be ween la ge and es ablished banks; small
banks a e unimpo an indi idually bu can become sys emically signi ican . Thus, he e was
no s udy ela ed o Indian banking. The p esen s udy a emp s o unde s and he simila i ies
and clus e s in Indian banking.
3. Me hodology and da a
The me hodology o his s udy is buil upon hie a chical clus e ing algo i hms o cons uc a
simila i y ma ix based on banks’ c edi exposu e pa e ns. In he li e a u e, a ious
app oaches a e used o measu e simila i y be ween banks, including he Euclidean dis ance,
Jaca d’s coe icien , Manha an dis ance, he Cosine measu e, e c. This pape ollows B echle
e al. (2014) and p e e s o use he cosine simila i y unc ion as i has many ad an ages o e he
o he measu es. One signi ican ad an age is ha i is bounded by [�1, 1]. Since he e can be
no nega i e exposu es in a bank balance shee , he esul s a e bound by [0, 1] and help us be e
in e p e he esul s. All he o he app oaches a e based on dis ance measu es, whe eas he
cosine measu e is based on o ien a ion. Hence, i is also a scale-independen measu e.
The cosine-simila i y coe icien is he cosine o he angle be ween wo ec o s. These wo
can be banks’ balance shee componen s and, in he cu en case, banks’ c edi exposu es.
Gi en wo banks, ep esen ed by he ec o s a and b, he simila i y be ween hem is
exp essed by
simila i y ða; bÞ ¼ cosðθÞ ¼ P
a
i
b
i
i i i i i i i i i i i i i i i i i i i i i
Pa
2
*
iPb
2
i
q (1)
Whe e cosðθÞ he cosine o he angle be ween he wo ec o s a and b o wo banks is, ha
is, he do p oduc o a and b di ided by he magni udes o a and b. He e, 1 indica es he
le el o highes simila i y, whe eas 0 indica es no simila i y be ween he wo banks. Once
he simila i y be ween each pai o banks is calcula ed, we ge an n x n simila i y ma ix.
This ma ix has all he diagonal elemen s equal o 1 as he simila i y be ween i sel would
be 1.
The weigh ed o m o cosine simila i y o measu e he isk-adjus ed simila i y be ween wo
banks, a and b, can be calcula ed as:
simila i y
w;
ða; b; wÞ ¼ P
w
i
a
i
b
i
i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i
P
w
ia
2
i3
P
w
ib
2
i
p (2)
Whe e w
i
is he weigh gi en o each i h sec o (i goes om 1 o n; n is he numbe o sec o s),
his simila i y ma ix is used o h ee pu poses: (a) o compu e a measu e o he o e all
simila i y o he banks in he sys em, (b) o explo e he exis ence o clus e s o banks exposed
o ypical isks, and (c) o use a dis ance ma ix while pe o ming clus e ing algo i hms.
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The a e age simila i y wi hin he banking sys em can be calcula ed in wo ways: (a) a
simple a e age simila i y by gi ing each bank an equal weigh , and (b) a weigh ed a e age
simila i y whe e weigh s o each bank a e gi en acco ding o hei o al exposu e. This pape
elies upon only he simple simila i y measu e.
A ma ix can be plo ed using he “co elog am” package in so wa e R o explo e he
exis ence o clus e s. The algo i hm helps us pu simila banks close o each o he in clus e s,
hus helping us isualize he c edi exposu e o Indian banks. Once he clus e s in he sys em
a e known, a clus e ing algo i hm can be used o ind clus e s o banks exposed o ypical isks.
We use he “Agglome a i e Hie a chical Algo i hm” wi h “comple e linkage” o ind he
banks in di e en clus e s. Hie a chical clus e ing s a s by ea ing each obse a ion as a
sepa a e clus e . Then, i epea edly execu es he ollowing wo s eps: (a) iden i y he wo
clus e s ha a e closes oge he and (b) me ge he wo mos simila clus e s. This p ocess
con inues un il all he clus e s ha e been me ged.
The ad an age o hie a chical clus e ing is ha we do no ha e o speci y he numbe o
clus e s in ad ance, unlike k-means, which assume sphe ical clus e s and equi e p ede ined
clus e numbe s. Hie a chical clus e ing was chosen o e o he me hods, such as k-means
clus e ing, due o i s in e p e abili y and lexibili y in handling di e en clus e sizes wi hou
equi ing a p e-speci ied numbe o clus e s. Hie a chical clus e ing allows o a ee-based
s uc u e (dend og am [2]) ha be e ep esen s he in e connec ed na u e o sys emic isk in
banking. This pape uses he “ o al wi hin-clus e sum o squa es (WSS)” and “Silhoue e”
me hods o choose he op imal numbe o clus e s [3].
While conduc ing he analysis, each bank’s o al c edi exposu e is di ided in o 17 sec o s.
The da a o sec o -wise exposu e o banks a e collec ed om he CMIE (Cen e o
Moni o ing he Indian Economy) P owess IQ. Bank g oup-wise NPAs o h ee sec o s
(ag icul u e, indus y, and se ices) a e aken om EPW Resea ch Founda ion India Time
Se ies. All he scheduled comme cial banks, public and p i a e, o which he da a is a ailable
o he pe iod 2018–2023, ha e been selec ed o analysis. This s udy in oduces a no el
me hodological app oach using hie a chical clus e ing algo i hms o cons uc a simila i y
ma ix o c edi exposu es among Indian banks. While p e ious s udies ha e examined
sys emic isk using high- equency ma ke da a o balance shee indica o s, ou app oach
iden i ies clus e s o banks wi h simila isk p o iles based on hei c edi po olios. This
echnique enables egula o s and policymake s o unde s and be e he con agion isk and
inancial agili y ha may a ise om inc eased asse concen a ion.
4. Empi ical analysis and discussion
Ou analysis is p ima ily based on loan po olios, co e ing sec o al c edi exposu e ac oss 17
di e en sec o s o he economy. Addi ionally, while o -balance-shee i ems such as
gua an ees and le e s o c edi could con ibu e o sys emic isk, hei inclusion in his s udy
was cons ained by da a a ailabili y.
4.1 Be o e he Indian Bank me ge s and he COVID-19 pandemic
A he ou se , o unde s and he banks’ p e e ed lending sec o s in 2018, Figu e 1 p esen s
Indian banks’ asse exposu es o a ious indus ies. The mos signi ican lending
concen a ion is in he “O he Than Indus y” ca ego y, which a exceeds he exposu e
o o he sec o s. Sec o s such as In as uc u e, O he Indus ies, I on & S eel, and
Cons uc ion & Allied Ac i i ies also ecei e no able lending, hough a much lowe le els.
In con as , sec o s like Mining, Elec ici y, Se ices, Enginee ing, and In as uc u e-
Powe exhibi minimal exposu e. The g adien shading ep esen s exposu e in ensi y,
ein o cing ha lending is highly skewed owa d a ew key sec o s, pa icula ly non-
indus ial ca ego ies. This sugges s a s a egic p e e ence by banks o lowe - isk o
di e si ied lending ou side co e indus ial sec o s. These sec o s gene ally p e e long- e m
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loans om banks, leading o ma u i y isks o banks as a signi ican pa o he bank’s
liabili ies a e in he sho - e m ca ego y.
Figu e 2 p esen s he esul s o he simila i y ma ix o Indian banks as o Ma ch 2018.
I s ows and columns indica e indi idual banks in he same o de . The e o e, each cell
deno es he simila i y be ween he co esponding ow and column banks. The da ke he
cell, he g ea e he simila i y o he banks. The diagonal om op-le o bo om- igh
ep esen s he co ela ion o each bank wi h i sel , which is always þ1 (pe ec co ela ion).
The esul e eals ha he a e age simila i y in he o al c edi exposu e o Indian banks in
2018 is 0.3075 4, and he a e age simila i y in und-based and non- und-based c edi
exposu e is 0.2816 and 0.3018, espec i ely [4]. The da k blue pa ches in he co elog am
a e he g oups o banks ha a e highly simila . Public Sec o Banks (PSBs) like Punjab
Na ional Bank, Allahabad Bank, UCO Bank, and Union Bank o India show s ong posi i e
co ela ions wi h each o he , indica ing simila exposu e pa e ns. Some P i a e Sec o
Banks like HDFC Bank, ICICI Bank, and Axis Bank also exhibi s ong posi i e
co ela ions, sugges ing hey sha e iden ical exposu e cha ac e is ics. The igu e has wo
clea pa ches: (1) he i s in he uppe le po ion o he iangle and (2) he second in he
lowe igh po ion. Banks wi h la ge ed do s indica e a s ong nega i e co ela ion, bu
mos co ela ions a e posi i e o weak in his ma ix. The whi e pa ches sugges no
simila i y be ween he co esponding banks. Some banks show weak o no signi ican
co ela ions wi h o he s, as indica ed by he mino o whi e do s. Fo example, IDFC Bank
has se e al weak co ela ions wi h o he banks. The e a e also ou lie s; banks wi h ewe
s ong co ela ions wi h o he s migh ha e unique exposu e p o iles. Fo ins ance, Ci y
Union Bank L d and Jammu & Kashmi Bank L d ha e ela i ely ewe la ge blue do s,
Figu e 1. C edi exposu e o banks o selec i e sec o s in India – 2018. Sou ce: Cen e o moni o ing Indian
Economy, 2018
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indica ing hey may ha e dis inc exposu e pa e ns. Banks wi h high co ela ions could be
exposed o simila isks. Regula o y bodies need o moni o his o a oid sys emic isks.
Banks wi h low co ela ions may p o ide di e si ica ion bene i s in a po olio con ex .
The simila i y ma ix co elog am sugges s e idence o clus e s in he Indian banking
sec o , and u he in es iga ion is needed. The e o e, he Agglome a i e Hie a chical
clus e ing wi h comple e linkage is used o ind banks belonging o di e en clus e s. The
cosine simila i y ma ix is sub ac ed om 1 as he dend og am gi es a isual om 0 o 1,
0 indica ing he le el o highes simila i y. The ou pu o he clus e ing analysis is p esen ed as
a dend og am in Figu e 3. The dend og am is a hie a chical clus e ing ep esen a ion o banks
based on hei o al exposu e in 2018. I g oups banks in o clus e s ha sha e simila exposu e
p o iles. The e ical axis (Heigh ) ep esen s he dissimila i y o dis ance be ween clus e s.
Lowe heigh s indica e mo e simila i y, while highe heigh s indica e mo e dissimila i y. Since
deciding on he op imal numbe o clus e s is subjec i e, we use he Wi hin-Clus e Sum o
Squa es (WSS) and Silhoue e me hods [5]. Bo h hese me hods sugges ha he op imal
numbe o clus e s is i e. Acco dingly, he hie a chical ee is g ouped in o i e clus e s. One
big clus e in he middle o he dend og am lies be ween 0 and 0.2. This clus e comp ises mid-
Figu e 2. Simila i y ma ix co elog am o scheduled comme cial banks – 2018. Sou ce: Au ho s’ calcula ion
using CMIE da ase
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sized and small banks ha a e highly simila ega ding c edi exposu e. Thei de aul a es can
be expec ed o be highly co ela ed.
Clus e 1 comp ises Yes Bank L d. and IndusInd Bank L d., which o m a dis inc clus e
indica ing simila exposu e p o iles di e en om o he banks. This simila i y migh s em
om hei agg essi e g ow h s a egies and highe - isk lending p ac ices, as bo h banks we e
known o apid expansion and a ocus on co po a e lending du ing his pe iod.
Clus e 2 includes sizeable public sec o banks such as he Cen al Bank o India, Bank o
India, Punjab Na ional Bank, Bank o Ba oda, Indian O e seas Bank, and Vijaya Bank. This is
he la ges clus e , consis ing mainly o public sec o banks wi h simila exposu e pa e ns
likely due o s anda dized lending p ac ices, go e nmen in luence, and egula o y
amewo ks. Go e nmen policies and sec o al lending manda es hea ily in luence hei
exposu es.
Clus e 3 con ains mid-sized and egional banks such as IDBI Bank L d., Ka na aka Bank
L d., and Union Bank o India. These banks ha e mode a ely simila exposu e p o iles, likely
due o egional ocus and mid-sized ope a ions. They sha e common egional economic
in luences o a mix o e ail and co po a e banking exposu e ha di e en ia es hem om
la ge , mo e di e si ied banks.
Clus e 4 consis s solely o Lakshmi Vilas Bank L d., which s ands alone a a highe heigh ,
indica ing a dis inc exposu e p o ile. This uniqueness could be a ibu ed o i s speci ic ma ke
niche, egional ocus, o unique s a egic app oach, po en ially in ol ing highe
concen a ions in pa icula sec o s o di e en isk managemen p ac ices.
Clus e 5 includes cen al p i a e sec o banks such as HDFC Bank, ICICI Bank L d., IDFC
Fi s Bank L d., and Fede al Bank L d. These banks o m a dis inc clus e , possibly due o hei
Figu e 3. Simila i y ma ix dend og am o scheduled comme cial banks – 2018. Sou ce: Au ho s’ calcula ion
using CMIE da ase
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capi al adequacy equi emen s helped cushion banks agains he pandemic’s economic shock
(Danisman e al., 2021), Indian banks, pa icula ly PSBs, emained highly ulne able due o
concen a ed exposu es.
5. Implica ions
5.1 Theo e ical implica ions
Ou empi ical indings e eal he exis ence o signi ican clus e s wi hin he Indian banking
sec o , sugges ing ha sys emic isk is no uni o mly dis ibu ed bu concen a ed wi hin
speci ic g oups o banks. The hie a chical clus e ing esul s indica e ha PSBs end o o m
igh ly connec ed clus e s, likely due o hei simila lending pa e ns and go e nmen -
d i en manda es. P i a e sec o banks, in con as , exhibi mo e di e se clus e ing beha io ,
wi h some aligning closely wi h PSBs and o he s main aining dis inc c edi exposu e
p o iles.
5.2 P ac ical implica ions
One o he key implica ions o hese indings is he inc eased isk o inancial con agion wi hin
PSBs pos -me ge . The educ ion in he numbe o PSBs has led o g ea e homogenei y in hei
asse exposu es, meaning ha a shock a ec ing one majo PSB could ha e ipple e ec s ac oss
he en i e public banking segmen . On he o he hand, la ge p i a e sec o banks such as HDFC
Bank and ICICI Bank, while clus e ed oge he , main ain some deg ee o di e en ia ion in
hei c edi exposu e pa e ns, which may p o ide a bu e agains sys emic isk. The simila i y
Figu e 10. Simila i y ma ix dend og am o scheduled comme cial banks – 2023. Sou ce: Au ho s’
calcula ion using CMIE da ase
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ma ix and clus e ing esul s demons a e ha a liquidi y c isis o a signi ican ise in non-
pe o ming asse s (NPAs) in one majo bank, pa icula ly wi hin he PSB segmen could ha e
spillo e e ec s on o he s due o hei in e connec ed balance shee s and simila exposu e
s uc u es. This could lead o c edi supply cons ain s, highe unding cos s, and capi al
adequacy conce ns, pa icula ly du ing economic down u ns. F om a policy pe spec i e,
egula o s can conside implemen ing enhanced s ess es ing amewo ks inco po a ing
clus e ing-based isk assessmen s. Addi ionally, a ge ed mac op uden ial measu es, such as
di e en ia ed capi al equi emen s o liquidi y bu e s o highly co ela ed banks, may help
mi iga e con agion isks.
5.3 Limi a ions and di ec ions o u u e esea ch
While his s udy p o ides impo an insigh s in o sys emic isk and c edi exposu e
clus e ing in Indian banks, ce ain limi a ions should be acknowledged. Fi s , he s udy
co e s a i e-yea pe iod (2018–2023), which may no ully cap u e long- e m s uc u al
shi s in banking sec o isks, especially hose eme ging om economic cycles, egula o y
changes, o echnological ad ancemen s in inancial se ices. Second, while ou analysis
ocuses on Indian banks, simila c edi exposu e pa e ns and clus e ing phenomena ha e
been obse ed in o he eme ging ma ke s. A compa a i e s udy ac oss mul iple economies
wi h simila inancial s uc u es could p o ide b oade insigh s in o how global c edi isk
clus e ing a ec s inancial s abili y. Thi d, ou s udy elies on a ailable da a om banking
sec o epo s and inancial s a emen s, which may no ully accoun o o -balance shee
exposu es, shadow banking ac i i ies, o in o mal c edi channels. Inco po a ing
al e na i e da ase s, such as s ess es esul s o eal- ime ansac ion-le el da a, could
enhance he obus ness o sys emic isk assessmen s. O e all, his s udy con ibu es o
unde s anding sys emic isk in eme ging ma ke economies by demons a ing he
applicabili y o clus e ing me hodologies o banking sec o . Fu u e esea ch could ex end
his app oach by inco po a ing isk-adjus ed simila i y measu es o examining he impac
o egula o y in e en ions on clus e ing dynamics o aking he en i e inancial
in e media ies.
6. Conclusion
This pape explo es he cosine simila i y o asse exposu es o Indian banks o he pe iod
2018–2023 using he me hod applied o Czech banks by B echle e al. (2014). The close
clus e ing o many public sec o banks highligh s high simila i y in hei exposu e pa e ns.
This sugges s sys emic isks o economic condi ions a ec ing one o hese banks could impac
o he s in his clus e . The p i a e sec o banks show mo e a ia ion in hei clus e ing,
indica ing di e se s a egies and ma ke app oaches. This di e si y migh o e esilience o he
banking sec o , as hese banks a e less likely o be uni o mly a ec ed by ma ke changes han
he mo e homogeneous public sec o banks.
Simila i ies in c edi exposu es a e highe in mid-sized banks, while la ge banks such as he
S a e Bank o India and HDFC Bank ha e di e en asse exposu es. Howe e , HDFC Bank
and ICICI Bank all in o he same clus e and ha e simila asse exposu es. Mos public and
es ablished p i a e sec o banks end o be mo e simila and a e in he middle o he cosine
simila i y ma ix. This implies ha a signi ican numbe o banks a e exposed o simila kinds
o isk esul ing om hei loan po olios. The o e all s eng h o co ela ions appea s mo e
p onounced a e he Indian bank’s me ge s, wi h la ge da k blue ci cles indica ing s onge
ela ionships be ween banks’ exposu es han be o e he me ge . This seems isky, as hal o he
banking sys em is ulne able o any change in he pe o mance o he asse s, he eby c ea ing a
po en ial sys emic isk o he en i e banking sys em. Mo eo e , he la ges bank in India and
one o he sys emically impo an banks in India, he S a e Bank o India, is in he same clus e .
Ou esul s show ha he e a e seeds o po en ial ulne abili ies in he Indian banking sec o ,
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leading o s ess and s ain in he inancial sys em om any nega i e shock. The clus e ing
analysis e eals ha banks wi h simila c edi exposu e pa e ns end o be concen a ed in
speci ic sec o s, pa icula ly in as uc u e, eal es a e, and und-based inancial se ices.
Gi en he long- e m na u e o in as uc u e and eal es a e lending, hese clus e s ace
po en ial ma u i y misma ches and asse quali y de e io a ion du ing economic down u ns. I
an ad e se shock a ec s one o hese high-exposu e sec o s, he in e connec ed na u e o hese
clus e s could ampli y inancial dis ess ac oss he banking sys em. The indings indica e ha
inancial s abili y isks in Indian banking s em om homogeneous c edi exposu e a he han
di e si ica ion. The esul s o his s udy highligh he g owing in e connec edness o Indian
banks and he implica ions o inancial s abili y. Ou analysis sugges s sys emic isk conce ns
a e pa icula ly p onounced wi hin he PSB segmen due o hei inc eased clus e ing pos -
me ge . The indings also unde sco e he need o di e en ia ed egula o y in e en ions, as
sys emic ulne abili ies may a y signi ican ly ac oss di e en bank clus e s.
No es
1. The Rese e Bank o India has iden i ied h ee banks, The S a e Bank o India, HDFC Bank and ICICI
Bank, as domes ic sys ema ically impo an banks (D-SIBs) on he basis o ac o s such as size, c oss-
ju isdic ional ac i i ies, complexi y, in e connec edness and lack o subs i u ion.
2. A dend og am is a ype o ee diag am showing hie a chical clus e ing: ela ionships be ween simila
se s o da a.
3. The o al wi hin-clus e sum o squa e (WSS) measu es he compac ness o he clus e ing. The smalle
he WSS alue, he be e he esul s. The silhoue e alue p o ides an unde s anding o how simila
each objec is o i s own clus e , measu ing he quali y o a clus e ing. A highe a e age silhoue e
alue implies good clus e ing.
4. In Indian banking, “ und-based exposu e” deno es he c edi whe e he bank disbu ses ac ual unds o
bo owe s, including loans and cash c edi s, wi h applicable in e es a es. Con e sely, “non- und-
based exposu e” in ol es commi men s o ex end c edi wi hou immedia e disbu semen , such as
gua an ees and le e s o c edi , usually accompanied by ees. The “ o al exposu e” amalgama es und-
based and non- und-based exposu es, comp ehensi ely assessing he bank’s o e all c edi isk o a
bo owe o coun e pa y.
5. R so wa e codes will be p o ided on eques .
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Co esponding au ho
Kallu u Si a Reddy can be con ac ed a : [email p o ec ed]
Fo ins uc ions on how o o de ep in s o his a icle, please isi ou websi e:
www.eme aldg ouppublishing.com/licensing/ ep in s.h m
O con ac us o u he de ails: [email p o ec ed]
Asian Jou nal o
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Banking
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