Testing SCP hypothesis amid growing consolidation in the Indian banking sector

Abstract This paper investigates market structure, conduct, and performance in the context of the banking industry of India, and, in particular, the effects of consolidation. Using an unbalanced panel dataset comprising 30 banks from 2010 to 2020, the effects of changes in the degree of market concentration, interest rate spreads, and profitability are explored through panel Vector Auto-regression (PVAR) method. By employing Concentration Ratio (CR4) as a measure for consolidation, we analyse how the changes in structure of the sector affect the conduct and performance. Our findings indicate that banks operating in more concentrated markets tend to enjoy sustained profitability in the short term, as reflected by the positive relationship between market concentration (CR4) and interest rate spreads (IRS). However, competition continues to moderate this relationship, and the effects of concentration are not fully captured by market-based performance measures like Tobin’s Q. This suggests that market participants anticipate future competition or regulatory intervention, which could mitigate the benefits of concentration over time. The findings provide important implications for the regulatory policy and managerial strategies of the banking system in view of the ongoing banking consolidation processes.