Does competition affect business risk in the Indian banking system? An analysis with information and communication technology as a threshold

Abstract

This study addresses the critical but understudied intersection of business risk (BR), competition, and technological advancements in the Indian banking sector. The aim is to comprehensively examine the impact of digital transformation on the nexus between business risk and competition. The study uses panel data from 23 listed banks in India from 2012 to 2022. The study employs a threshold analysis to identify how technological development causes changes to the business risk. The outcome reveals that threshold model estimates for Models 1 and 2, considering the impact of competition (Lerner Index) on business efficiency and risk, with technology expenditure as the threshold variable. Model 1 (BRC) indicates that post-threshold regimes are statistically significant, reflecting less risk efficiency at increasing competition. Model 2 (BRV) reflects considerable positive effects of competition, though decreasing after the threshold. Control variables, including ROA, market capitalization, and capital adequacy, also significantly influence business risk outcomes. The study identifies cybersecurity problems, system functionality dependency, regulatory compliance, data privacy, etc., as critical dimensions through which technological development escalates business risk in the banking sector. The study explores business risk dimensions in banks, an area that has received scant research attention. It also pioneers in examining the impact of technological development on the interplay between business risk and competition in India. The study does not observe any paper on the technology investment threshold and its impact on business risk.