An asymmetric analysis of the influence that economic policy uncertainty, institutional quality, and corruption level have on India’s digital banking services and banking stability

Abstract

Motivated by the unprecedented high levels of recent economic policy uncertainty, the current study examines the influence of economic policy uncertainty, institutional quality, and corruption level on the Indian banking stability and the growth of digital financial services. Using the Baker et al.’s economic policy uncertainty index and nonlinear autoregressive distribution lag model on the data set of banking variables from 2004 to 2019, we infer the following findings. The unit root and the structural break tests confirm the presence of structural breaks and mixed order of integrations. Besides, the long-run nonlinear autoregressive distribution lag results substantiate a long-run asymmetric relationship between the explanatory variables (economic policy uncertainty, institutional quality, corruption level) and the outcome variables (digital banking services and banking stability). The study reveals that a 1 percent increase in the economic policy uncertainty increases nonperforming loans (proxy to measure banking stability) by 1.48 percent and decreases Z-score (proxy to measure banking stability) by −1.12 percent. Likewise, a 1 percent increase in policy uncertainty reduces the progress of digital financial services by −1.23 percent in India. In addition, the study also depicts a long-run cointegration between the explanatory and the outcome variables. Overall, the study shows significant evidence that policy uncertainty, corruption, and institutional regulation hampers Indian banking stability and digital growth. The study offers several policy implications to understand the adverse effects of economic policy uncertainty on the Indian banking sector.