Economic policy uncertainty and loan loss provisions: novel evidence from India

Purpose This paper investigates the influence of economic policy uncertainty (EPU) on loan loss provisions (LLP) in the context of an important and fastest-growing emerging economy, i.e. India. Furthermore, it examines the role of bank ownership in moderating the influence of EPU on banks’ LLPs, which has remained unexplored in the existing literature. Design/methodology/approach The sample consists of 42 Indian Scheduled Commercial Banks (SCBs) for the period 2004 to 2024. To examine the EPU–LLP relationship, the study employs OLS and panel fixed effects methods. Lastly, the results are robust to a battery of estimation approaches, including the random effects model, system GMM, instrumental variable approach and different model specifications. Findings Contrary to prior studies, which suggest a positive EPU-LLP relationship, our findings reveal a significant negative association, consistent with the “real-option” and “information asymmetry” theories. The study further provides novel evidence highlighting significant variations in provisioning practices between the public-sector and private-sector banks during periods of high EPU. Originality/value This is one of the early studies that examines the crucial relationship between EPU and LLP in an emerging economy. Moreover, to the best of our knowledge, this is the first study to explore the moderating role of bank ownership in the EPU–LLP relationship.