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Banking
Banking and credit extension: and credit
does religious diversity matter? extension
Saibal Ghosh
Centre for Advanced Financial Research and Learning, Mumbai, India
2287
Abstract Received 5 July 2016
Purpose – While several facets of credit extension by banks have been extensively studied, one aspect which Revised 22 November 2016
has largely bypassed the attention of researchers is the intrinsic attitude towards risk. To investigate this in Accepted 10 January 2017
detail the purpose of this paper is to employ data on India for an extended time period to understand whether
religious diversity affects bank credit and other ( flow) outcome variables, such as profitability, costs and returns.
Design/methodology/approach – Given the longitudinal nature of the data, the author’s employ fixed
effects regression methodology which enables us to control for unobserved characteristics that might affect
the dependent variable.
Findings – The analysis indicates that religious diversity lowers credit off-take by lowering the number
of accounts, although the number of deposit accounts improves. The behaviour however, differs across
high- and low-income states and during the pre- and post-crisis periods. In addition, the evidence supports the
fact that the overall negative credit response arises from the behaviour of national banks.
Practical implications – The analysis explores an important and hitherto unidentified aspect driving
banking outcomes in the Indian context. This would suggest that any policy intervention that seeks to
influence bank behaviour would need to take on board the intrinsic risk-appetite of key stakeholders.
Originality/value – To the best of the author’s knowledge, this is one of the earliest studies for India to
carefully examine the interface between religious diversity and bank behaviour.
Keywords India, Religion, Banking, Credit
Paper type Research paper

1. Introduction
In the wake of the crisis, a significant volume of research has been undertaken towards
understanding the various facets of bank behaviour. For example, several papers have explored
the role of competition in impacting bank lending (Schaeck et al., 2010; Jimenez et al., 2013).
Other studies have focussed on the role of bank capital (Gambacorta and Mistrulli, 2004) or even
for that matter, the role of banking lending standards (Dell Ariccia et al., 2012). Yet others have
analysed the role of monetary policy in influencing bank lending strategy (Degryse et al., 2009;
Jimenez et al., 2012; De Santis and Surico, 2013).
One aspect which has largely bypassed the attention of researchers is people’s intrinsic
attitude towards risk. As observed by Akerlof (2007), there is a pressing need in
macroeconomics to incorporate norms which capture how decision makers should or should
not behave, instead of merely presuming the constrained maximisation outcomes. He goes on
to remark that “religious identity gives us a good example of such norms” (Akerlof, 2007, p. 8).
Advancing this argument further, it has been contended that norms tied to religious identities
can significantly influence economic outcomes (La Porta et al., 1999; Barro and McCleary,
2003; Guiso et al., 2003, 2006). According to the social identity theory, the process of self-
categorisation which forms an individual’s identity is derived to a large extent from such
membership in a social group as one’s religious denomination (Tajfel and Turner, 1979;
Benjamin et al., 2010). This embeddedness exerts a significant influence on people’s behaviour,
since they internalise the multiple social identities as well as the behavioural norms of their
group (Stets and Burke, 2000). As a result, by providing moral and ethical teachings for
International Journal of Social
their adherents to encourage them to behave in a specific way, religion might directly Economics
influence individual economic behaviour (Barro and McCleary, 2003). Vol. 44 No. 12, 2017
pp. 2287-2301
In this paper, following Akerlof (2007), we capture the intrinsic attitude towards risk by © Emerald Publishing Limited
0306-8293
religious identity. Accordingly, we employ decadal data for India to examine the link DOI 10.1108/IJSE-06-2016-0176
IJSE between religious diversity and banking outcome. More specifically, we address two
44,12 questions: first, does religious diversity matter for banking-related outcomes at the state
level, after holding constant other relevant factors? Second, does the state-level evidence
also resonate in bank-level data? We proxy banking outcomes by both physical (e.g. bank
offices and deposit and credit accounts) and financial (e.g. credit, profitability and cost)
variables. While cost-related variables have been earlier employed as proxy for bank risk
2288 (Hadad et al., 2011; Cubillas et al., 2012), recent research has also employed financial
variables as indicators of bank risk (Berger and Turk-Ariss, 2014). The role of credit as a
risk indicator needs no gainsaying: numerous studies both at the academic (Borio and
Lowe, 2002; Borio and Drehmann, 2009; Jimenez and Saurina, 2006; Saurina et al., 2014) as
well as at the policy level (International Monetary Fund, 2004; Basel Committee for Banking
Supervision, 2010) have persuasively documented its relevance in fomenting bank risk.
We construct an index of religious diversity and examine its proximate association with
these banking outcomes, both at the state-banking as well as at the bank level. Our analysis
appears to suggest that religious diversity matters for banking outcomes and the effect is, in
fact, significant.
We proxy religion by the religious demography of the population. This is consistent with
research which captures religious diversity by the share of religious adherents in total
population (Adhikari and Agrawal, 2016a). Kumar et al. (2011) and Benjamin et al. (2010)
find that Protestants are more risk averse or make safer financial investments than
Catholics, while Dohmen et al. (2011) observe the opposite. Earlier, Barsky et al. (1997) had
demonstrated that risk tolerance varies significantly by religion. Likewise, Halek and
Eisenhauer (2001) also find that the religious leaning of the population affects their attitude
towards risk. These findings are confirmed in Renneboog and Spaenjers (2012) who show
that as compared with more direct measures such as attendance, religious demography is a
much reliable indicator of religious diversity.
The Indian case presents a compelling laboratory to examine this issue for several
reasons. For one, banks have a pan-India presence and have the flexibility to locate across
states depending on their business philosophy, customer orientation and risk appetite,
subject to the overall guidelines prescribed by the Indian central bank. Second, India is a
federal polity with democratically elected government across states. State governments are
the fulcrum at which public policy decisions are made. As a result, political parties compete
intensely for the right to govern at the state level (Chhibber and Nooruddin, 2004).
The states differ widely in terms of their locational advantages, business environment,
economic development and religious demography, providing considerably leeway to banks
in the credit extension decisions. Finally, India is one of the emerging economies for which a
comprehensive and reliable state-level data are available, both at the state level as well as for
religious demography. This time-series, cross-sectional variation in the data for an
elongated time span makes it amenable to rigorous statistical analysis.
The rest of the analysis proceeds as follows. In Section 2, we discuss the literature and set
out the testable hypothesis. Section 3 describes the database and presents some summary
statistics. The results and a discussion are set out in Section 4, while the final section concludes.

2. Literature and hypothesis development

Bergan and McConatha (2000) define religious diversity as a number of dimensions
associated with religious beliefs and involvement. They argue that reliance on religious
attendance alone as a measure of religious diversity could lead to incorrect conclusions,
especially in cases where older adults are involved, since attendance might be physical
challenging for them. Other recent studies have emphasised the need for multi-dimensional
focus encompassing varied concepts as the subjective, cognitive, behavioural social, and
cultural dimensions (Chumbler, 1996; Ellison, 1991; Ellison et al., 1989).
 The importance of religious diversity, in both the social and educational realms, Banking
has increasingly been emphasised in recent research. For instance, Bergan and McConatha and credit
(2000) uncover a positive relation between religious diversity and happiness across three extension
broad age groups (adolescents, young adults and adults). Similarly, Walker (2003) also
analyses several aspects of religion and morality and conclude that the religious experience
is important in moral functioning. Subsequently, Roccas (2005) also highlights a high degree
of correlation between religious diversity and moral values. 2289
This argument is reinforced by the social norm theory. The theory postulates that the
religious norms of the local population in which the organisation is established influences
the management perspective towards risk, irrespective of whether management is itself
religious, since the local population is an important element of the environment in which
managers live and operate (Cialdini and Goldstein, 2004; McGuire et al., 2011). In addition,
such influence on the management is amplified by the need of organisations to maintain
organisational legitimacy.
Recent studies indicate that firms operating in different social environments exhibit
different behaviour. This literature links religious adherence to lower risk taking (Hilary
and Hu, 2009; Adhikari and Agrawal, 2016a), lower incidences of financial reporting
irregularities and lower earnings management (Kanagaretnam et al., 2015; Lievenbruck and
Schmid, 2014). However, to the best of our knowledge, no prior study has analysed the
link between religious demography and bank outcomes, especially in the context of an
emerging economy.
Despite scant academic research, it seems generally accepted that human elements, such
as the traits and preferences of managers and investors, play a role in bank risk-taking
(Lo, 2008). The high level of geographic dispersion of banks across states with differing
religious mix makes it imperative for them to balance the expectations of stakeholders with
their appetite for risk. The fact that local religious composition can influence firm innovative
activity has also been highlighted in recent research (Adhikari and Agrawal, 2016b).
Theoretically, religious diversity could influence bank behaviour in three ways. First, from
the demand side, religious people are risk-averse (Miller and Hoffman, 1995; Diaz, 2000;
Miller, 2000) and as a result, banks with more religious customers are likely to have less risky
borrowers. This, in turn, is likely to ensure greater likelihood of loan repayments, lowering the
proclivity of the bank to assume greater risk. Second, in order to promote the business interests
of their organisation while respecting the local requirements, managers will seek to conform to
the social norms of the particular geographical region in which they operate. As a result, not
only will the religiosity of customers influence banks’ attitude towards risk, but additionally,
the bank will also need to rebalance its social values in order to ensure congruence between its
values and those of its customers. This in turn, could lower the inclination of the bank to
“search for yield”, thereby dampening risk. Finally, the religious norms of the local population
in which the bank operates is likely to influence the overall risk profile of the bank, irrespective
of whether the bank employees are themselves religious or not (Dyreng et al., 2012). The effect
of this on bank risk is not obvious, a priori. We refer to the latter two as the supply motive of
religious diversity on bank risk behaviour. Therefore, the relationship between religious
diversity and bank behaviour at the state level is an issue that remains to be empirically
addressed. Consequently, we postulate the following hypothesis:
H1. State religious diversity is expected to exert a negative impact on bank risk.
We contribute to the extant literature in three-distinct ways. First, we contribute to the
literature on financial economics by linking religion with banking outcomes. Previous
studies have focussed either on non-financial firms (Hilary and Hu, 2009) or even if they
have looked at banks, are based on the experience of developed economies (Adhikari and
Agrawal, 2016a). To illustrate, by combining firm-level with information on religious
IJSE diversity, Hilary and Hu (2009) show that firms headquartered in US counties with high
44,12 religious diversity exhibited lower risk exposure. Similarly, using data on USA, Adhikari
and Agrawal (2016a) find that banks headquartered in counties with higher religious
diversity assume lower risk. More recently, Chircop et al. (2017) use branch level data and
show that it is negatively related to bank risk-taking. Since the social, economic and
institutional characteristics differ significantly across country groupings, it remains a moot
2290 issue whether the impact of religious diversity on banking outcomes as manifest for
developed markets also reverberate in emerging economies. Relatedly, our paper finds echo
in the work of Ellul and Yerramilli (2013) who show that US bank holding companies with
stronger risk management prior to the crisis experienced lower negative stock returns and
has a smaller quantum of delinquent loans. Unlike comparable studies, we focus on bank
lending and related outcomes such as deposit and credit accounts, including costs and
returns. To the best of our knowledge, this is one of the earliest studies for an emerging
economy and most certainly for India to correlate religion with banking outcomes.
Second, we contribute to the literature on regional economics by examining the
interlinkage between banking outcomes and religious diversity at the state level.
Since religious beliefs are likely to be slow moving, we employ decadal data for an extended
time span which allows these influences to play themselves out. Employing variation in
the timing of Ramadan, Schofield (2014) exploits crop-year-district level data for India to
show a negative effect of Ramadan fasting on agricultural output. At the cross-national
level, Campante and Yanagizawa-Drott (2015) show that longer Ramadan fasting hours
exert a negative impact on output growth in Muslim countries. Unlike these studies which
focus on real outcomes, our focus is primarily on banking outcomes.
And finally, we augment the literature on financial inclusion by exploring the role of
religion in influencing banking outcomes. Using cross-country survey data on Central and
Eastern European economies including Turkey, Beck and Brown (2011) show that religious
adherence influences the opening of bank accounts. These findings are echoed in
subsequent research, wherein employing the FINDEX database, the authors show that
religious beliefs influence the opening of accounts with a formal financial institution, after
controlling for individual and country-level characteristics (Demirguc Kunt et al., 2013).
Recent findings using supply side financial inclusion data are however, less compelling: the
link between religious adherence and financial inclusion appears to be valid only for certain
(and, not all) measures of inclusiveness (Naceur et al., 2015). The Reserve Bank of India has
also recently advocated the need for due consideration to interest-free banking as part of its
medium-term path to enhance financial inclusion (Reserve Bank of India, 2015). The present
paper complements these studies by examining the impact of religious diversity on banking
outcomes and the role played by the financial crisis in this regard.

3. The database and variables

For our analysis, we employ two sets of data, one at the state-banking level and the other at
the bank level. In case of the former, we construct a data set of both financial (e.g. total
credit) as well as physical (e.g. number of bank offices and deposit as well as credit accounts)
variables for 14 major states, including observations every ten years such as 1960-1961,
1970-1971, 1980-1981, 1990-1991 and 2000-2001 and 2010-2011. The choice of states is
consistent with the practice that compares the performance of non-special category states
(Ahluwalia, 2002; Arulampalam et al., 2009; Ghosh, 2013)[1].
The benefit of employing decadal data is twofold. First, it helps to ascertain the impact of
religious diversity on banking outcomes for an extended time period that is otherwise not
possible for data with short time-series. Second, consistent data on several state-level
variables, particularly for religious diversity, is available only at decadal intervals,
coinciding with the Census.
 Second and consistent with our state-level analysis, we use decadal data on domestic Banking
commercial banks (comprising public and private banks) for the years 1981, 1991, 2001 and credit
and 2011. We are able to extract data on a total of 49 domestic commercial banks, extension
after accounting for mergers and consolidations, which on aggregate, accounted for over
85 per cent of the banking assets in each of these years. To moderate the influence
of extreme observations for the relevant variables, we average the bank-level data for
the five-year window around the given year. Accordingly, the bank-specific data 2291
for 1981 is the average of the relevant variables for the years 1979-1983 and likewise, for
the other years.
Following from the spirit of the empirical framework in Hilary and Hu (2009), we make a
distinction between local (i.e. present primarily in a single state) and national (i.e. having
multi-state presence) banks. To do this, we consider the share of total bank branches in the
state where the bank is headquartered. We designate banks as local if at least 65 per cent of
its branches during these years are in the headquarter state (the median value of the share
of bank branches in the headquarter state across years is much lower, ranging from a
minimum of 31 per cent in 2011 to a maximum of 61 per cent in 1991); otherwise, it is
designated as national. Using this criterion, we have a total of 21 local banks; the remaining
are classified as national banks[2].
Consistent with our state-banking analysis, we employ credit as the major outcome
variable of interest. This stands in contrast to studies which focus on bank risk (Adhikari and
Agrawal, 2016a). In addition, we also examine its sub-components, such as cash credit
and private sector credit. Besides, as mentioned earlier, we also consider other outcome ( flow)
variables, such as profitability, costs and returns.
We rely on several data sources. The bank-specific data are sourced from the Reserve
Bank of India (Statistical Tables relating to Banks), whereas the state-banking data are
obtained from the Basic Statistical Returns. Both of these are annual publications, the
former provides bank-specific balance sheet and profit and loss information, while the latter
provides state-level banking outcomes, including number of accounts (deposits as well as
credit), bank offices as well as total credit.
In addition, for state-level variables, we also employ several other data sources, such
as the Handbook of Statistics on Indian Economy ( for data on state income, SDP)
and Economic Survey ( for information on decadal literacy, population and working
age population).
The key variable of interest is Religiosity. In their analysis of religious demography of
India, Joshi et al. (2003) have provided the state-wise decadal information on religious
diversity classified under three heads: Indian Religionists, Muslims and Christians. In their
study, the former includes, in addition to Hindus, other religious groups such as Sikhs,
Buddhists and Jains and several smaller groups, such as Parsis and Jews. Using this
information, we compute an index of Religiosity so that higher values of the index indicate
higher levels of religious diversity.
In Table I, we provide a description of the variables, including data sources and
summary statistics. We have two set of outcome variables, one at the state-banking level
and the other at the bank level. In case of the former, we find that total credit equals 4.04; the
number of deposit account per capita is roughly 25 per cent higher as compared with the
corresponding per capita credit accounts.
At the bank level, which includes a shorter period (1981-2011, with data at decadal
frequency), the average credit is quite high, corresponding with the expansion in credit,
post-nationalisation (we pre-fix the bank-level credit outcome by B_ and the state-banking
credit outcome by S_). Average bank profitability has hovered around 0.5 per cent.
Mention needs to be made that we do not take into account current deposits while
calculating the cost of funds, based on the rationale that these accounts do not pay interest.
IJSE Variable Definition Data source No. of Obs. Mean (SD) p. 75 (p. 25)
44,12
Outcome: State level
S_Credit Log [1 + (state-level Data on both credit 83 4.044 (0.754) 4.520 (3.600)
credit/WPI)] and WPI are from
Reserve Bank of India
(RBI)
2292 Bank office Bank offices/100,000 Numerator is from RBI 83 5.688 (3.243) 7.780 (3.160)
persons and denominator is
from Census
Deposit Deposit accounts/100,000 Numerator is from RBI 70 4.419 (0.440) 4.720 (4.110)
account persons
Credit account Deposit accounts/100,000 Numerator is from RBI 70 3.529 (0.593) 3.920 (3.350)
persons
Outcome: Bank level
B_Credit Log(1 + (credit/WPI)] RBI 179 5.532 (1.363) 6.260 (5.180)
B_Cash credit Log(1 + (cash credit/WPI)] RBI 179 5.324 (1.282) 5.960 (4.990)
B_Pvt. credit Log(1 + (private credit/ RBI 139 4.526 (2.224) 6.132 (3.445)
WPI)]
RoA Net profit/Asset RBI 159 0.005 (0.004) 0.008 (0.001)
Lending rate Interest earned of credit/ RBI 118 0.109 (0.023) 0.126 (0.092)
Total credit
Cost of fund Interest expended on RBI 91 0.067 (0.016) 0.082 (0.052)
deposits plus borrowings/
(Total savings and time
deposits plus borrowings)
Independent: State level
Religious 1 – H, where H is the Joshi et al. (2003) 84 0.210 (0.132) 0.260 (0.115)
diversity Herfindahl index of
(RDIV ) religion based on three
major categories: Indian
Religionists, Muslims and
Christians. The
PH is
calculated as j s2j where
s is the share of religious
population of type j
PCNSDP Log (per capita income, Economic and Political 84 4.310 (0.343) 4.545 (4.050)
at constant prices) Weekly Research
Foundation and
Handbook of Statistics
on Indian Economy,
Reserve Bank of
India (RBI)
Literacy Log (literacy rate) Statistical Abstract, 82 3.849 (0.432) 4.220 (3.540)
Government of India
WAS Working age population Indiastat.com 84 0.557 (0.082) 0.600 (0.530)
(age 15-59)/Total
population
DENS Log (state population/ Census of India, 84 0.451 (0.2882) 0.675 (0.235)
1,000 sq. kms) various years
S_MERGER Dummy ¼ 1 for the Wikipedia 196 0.005 (0.071) ..
bifurcated state in the
Table I. year of merger, else zero
Variable definitions,
data source and
summary statistics (continued )
Variable Definition Data source No. of Obs. Mean (SD) p. 75 (p. 25)
Banking
and credit
Independent: Bank level extension
LTA Log (Asset) RBI 172 6.076 (0.763) 6.576 (5.607)
DDEP Demand deposits/Asset RBI 172 0.114 (0.051) 0.143 (0.077)
NINT Non-interest income/Asset RBI 159 0.010 (0.005) 0.012 (0.007)
NATIONAL Dummy ¼ 1 if a bank is Calculated from RBI 196 0.571 (0.496) 1 (0) 2293
national, else zero data
B_MERGER Dummy ¼ 1 for the five- RBI 196 0.092 (0.289) ..
year window around the
merger, else zero Table I.

The major variable of interest is religious diversity, labelled RDIV. The average value
of the variable during the period was 0.21; the values at the 25th and 75th percentile were
0.12 and 0.26, respectively, signifying moderately high diversity.

4. Empirical strategy
4.1 State-banking level
To examine the impact of religious diversity on banking outcome in state s at time t,
we undertake regressions of the following form:
ys;t ¼ ao þa1 ðRDIVÞt þg0 Xs;t þms þZt þes;t (1)
In (1), y is one of the outcome variables as indicated above. The coefficient of interest is α1,
indicating the impact of religious diversity on banking outcomes.
X is a vector of state-specific variables, such as per capita income (proxy for demand
conditions), logarithm of literacy (proxy for human capital); share of working age population
(proxy for potential labour supply) and population density. μ and η are state- and year-fixed
effects that takes into account all unobservable state – (e.g. changes in state tax laws) and
year – (e.g. changes in monetary policy) factors that are not directly taken on board in the
regression. With data on 14 states for an average of 5.9 years, we have a maximum of
82 state-years.

4.2 Bank level

At the bank level, the regression specification for bank b headquartered in state s at time t
takes the following form:
Y bs;t ¼ aþbðRDIVÞs;t þg01 Mbs;t þg02 Ns;t þms þyb þZt þebs;t (2)
In (2), Y is the outcome variable and the coefficient of interest is b, signifying the impact
of religious diversity on bank behaviour. Following Micco et al. (2007), Beck et al. (2012)
and Berger et al. (2014), M is a vector of bank-specific variables, such as log asset
(proxy for scale economies), demand deposits to asset (proxy for funding structure) and
the share of non-interest income to asset (proxy for business model). The vector N includes
state-level variables such as per capita income and logarithm of population; μ, θ and η
are state-, bank- and year-fixed effects that takes into account all unobservable
state-, bank- (e.g. changes in governance structure) and year- factors that are not directly
taken on board in the regression.
Both these models are estimated using fixed effects with double-clustered standard
errors (Cameron et al., 2011). With information on 49 banks for an average of 3.2 years, we
have a maximum of 159 bank-years.
IJSE 5. Results and discussion
44,12 5.1 State-banking level
Estimation results are reported in Table II. The coefficient of interest is RDIV. In columns 2
and 6, which includes the full set of control variables, the coefficient is statistically significant.
In column 2 for example, the point estimate is −2.8. In other words, greater religious diversity
lowers credit, presumably by dampening the number of credit accounts (column 7).
2294 The magnitude is quite substantial: a one standard deviation increase in religious
diversity lowers credit by 37 per cent. On the other hand, religious diversity improves
financial inclusion by improving the number of deposit accounts per capita: a 1 per cent
increase in religious diversity increases the number of deposit accounts by 1.6 per cent points.
With the average number of deposit account per 100,000 persons being 4.4, this is not so
compelling a difference.
A natural question to ask is: does the response differ across high- and low-income states?
To do this, we classify states based on their median per capita income and re-estimate
Equation (1) separately for these two categories.
The results in Table III show that the negative effect on credit is driven primarily by the
response of low-income states and the positive effect on deposit account is more a
phenomenon of the high income states. In other words, low income states with higher
religious diversity are more likely to witness a decline in credit, whereas high income states
with higher religious diversity are more likely to experience higher deposit account
openings, per capita. It is possible that religious reasons play a role in the choice of banking

Variable S_Credit Bank office Deposit accounts Credit accounts

(1) (2) (3) (4) (5) (6) (7) (8)

RDIV −0.41 −2.83* 0.09 −16.27 0.01 1.61* −0.48** 3.90

(0.35) (1.62) (2.61) (10.84) (0.28) (0.89) (0.23) (2.52)
Controls Yes Yes Yes Yes Yes Yes Yes Yes
State FE No Yes No Yes No Yes No Yes
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
State; No.
of Obs. 14; 82 14; 82 14; 82 14; 82 14; 70 14; 70 14; 70 14; 70
Period 1961-2011 1961-2011 1961-2011 1961-2011 1961-2011 1961-2011 1961-2011 1961-2011
2
Table II. R 0.91 0.97 0.83 0.94 0.89 0.97 0.85 0.92
Religious diversity Notes: Standard errors (clustered by state and year) in parentheses. *,**,***Significant at 10, 5 and 1 per cent
and bank behaviour levels, respectively

Variable S_Credit Bank office Deposit Accounts Credit Accounts

State High Low High Low High Low High Low
category income Income income income income Income income income
(1) (2) (3) (4) (5) (6) (7) (8)

RDIV −1.98 −4.76* 23.66 −14.07 5.61*** 0.33 −0.47 −11.55***

(4.85) (2.82) (36.29) (22.31) (1.91) (0.98) (0.54) (4.02)
Controls Yes Yes Yes Yes Yes Yes Yes Yes
State FE Yes Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Table III. No. of Obs. 39 43 39 43 39 31 39 31
Religious diversity R2 0.98 0.98 0.96 0.94 0.98 0.95 0.97 0.98
and bank behaviour –
High- vs Low-income Notes: Standard errors (clustered by state and year) in parentheses. *,**,***Significant at 10, 5 and 1 per cent
states levels, respectively
habits, particularly with regard to credit, in these low-income states. To exemplify, an IFC Banking
survey revealed that over 40 per cent of respondents in Syria who had never applied for a and credit
loan cited religious reason as the major factor (International Finance Corporation, 2007). extension
Likewise, a 2006 survey in Algeria revealed that 20 per cent of micro enterprise owners do
not apply for a loan owing to religious considerations (Bankakademie International, 2006).
In contrast, it is possible to envisage that greater religious diversity in states with high
levels of per capita income impels greater account opening (e.g. current accounts), which 2295
could be driving these results.
A related issue of interest is: how did this response evolve in the post-crisis period?
To investigate this empirically, we run regressions as earlier and include an interaction
term of RDIV × Post crisis. Provided greater religious diversity leads to an improvement
in the outcome variables in the post-crisis regime, the coefficient on the interaction term
would be positive.
As observed from Table IV, the coefficient on the interaction term is statistically
significant in columns (2) and (6). In other words, greater religious diversity appears to
have dampened credit off-take (column 2) by lowering the number of credit accounts,
especially in the post-crisis period (column 8) as also lowered the number of deposit
accounts, particularly in low-income states (column 6). It is of interest to note that,
notwithstanding the dampening effect of religious diversity on credit accounts post-crisis,
the net effect was an increase in the number of credit accounts by roughly 5 per cent
points. It is possible to envisage that the global economic headwinds exerted a stronger
negative effect on low-income states by chilling credit appetite in the form of a reduction in
the number of credit accounts.

5.2 Bank level

Akin to the state-level analysis, we conduct similar estimation utilising bank level data.
The results are set out in Table IV. As discussed earlier, we make a distinction between local
and national banks and present the estimation results separately for these two categories.
All specifications include the control variables as earlier in Equation (2), but only the
coefficients of interest are reported for brevity.
In Table V, the coefficient on RDIV is negative and statistically significant in column (1),
but positive and statistically negative in column (2). In other words, the overall negative
response of bank credit to religious diversity is primarily driven by national banks.
Combining this with our earlier discussion on state-banking outcome, it is possible (keeping in

Variable S_Credit Bank office Deposit accounts Credit accounts

High Low High Low High Low High Low
State category income Income income income income income income income
(1) (2) (3) (4) (5) (6) (7) (8)

RDIV −2.31 1.39 20.72 −6.76 5.49*** 4.57 −0.18 23.65***

(5.21) (2.85) (39.65) (38.37) (2.06) (3.19) (3.55) (4.97)
RDIV × Post- −7.81 −9.44*** −68.77 −11.23 −2.76 −6.64** 6.64 −18.92***
crisis (8.34) (3.59) (59.19) (39.72) (5.62) (3.27) (10.03) (6.77)
Controls Yes Yes Yes Yes Yes Yes Yes Yes
State FE Yes Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
No. of Obs. 39 43 39 43 39 31 39 31 Table IV.
R2 0.983 0.984 0.964 0.948 0.990 0.996 0.980 0.986 Religious diversity
Notes: Standard errors (clustered by state and year) in parentheses. *,**,***Significant at 10, 5 and 1 per cent and bank behaviour –
levels, respectively post-crisis
IJSE B_Credit B_cash credit B_Private credit RoA Lending rate Cost of funds
44,12 National Local National Local National Local National Local National Local National Local
banks banks banks banks banks banks banks banks banks banks banks banks
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

RDIV −1.773* 0.065* −4.382** 0.187 −4.601 1.337 −0.074 −0.004 −0.232 −0.457* 1.519 0.062
(1.019) (0.037) (2.063) (0.159) (5.435) (0.924) (0.071) (0.008) (0.427) (0.236) (1.039) (0.609)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
2296 Bank Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
FE
State FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Table V. Year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Religious diversity No. of
and bank behaviour – Obs. 92 67 92 67 73 59 92 67 72 46 53 38
National vs R2 0.903 0.967 0.979 0.971 0.889 0.949 0.722 0.905 0.927 0.954 0.949 0.985
local banks Notes: Standard errors (clustered by bank and year) in parentheses. *,**,***Significant at 10, 5 and 1 per cent levels, respectively

view the different time horizons) to infer that the overall negative effect on credit at the
state-level is essentially driven by the national banks.
At the disaggregate level, it appears that the negative response of religious diversity on
bank credit essentially pertains to cash credit and much less so for private credit. Looking at
profitability and price-based outcomes, the evidence indicates that greater religious
diversity impels local banks to charge lower lending rates; there does not appear to exist any
perceptible effect on the cost of funds.
As earlier, we investigate the response during the post-crisis period. The evidence
indicates that, national banks experienced a sharper decline in credit in the post-crisis
period, of the order of 2.9 per cent points (column 1) and that this decline was primarily
manifest in case of private credit (column 5) (Table VI).
Among others, although there was no response at the aggregate level, local banks appear
to have lowered their cost of funds in response to religious diversity post-crisis (column 12),
although overall, their cost of funds were actually higher by roughly ten basis points,
entailing a net effect of 9.2 ( ¼ 9.62 − 0.43) basis points (a difference of 5 per cent compared
to the overall period).
To summarise, religious diversity appears to exert a discernible impact on bank credit
extension and costs, an impact that differs across bank categories (national vs local) and
across pre- and post-crisis regimes.

6. Concluding remarks
In the wake of the crisis, a significant volume of research has focussed on the risk-taking
behaviour of banks. In this context, using data for an elongated period, the paper focusses
on a specific intrinsic aspect of risk and correlates it with physical and financial outcomes
for banks. The findings suggest that religious diversity lowers credit off-take by lowering
the number of accounts, although the number of deposit accounts improves.
The behaviour however, differs across high- and low-income states and during the
pre- and post-crisis periods.
Subsequently, we drill down this aggregate behaviour by examining the response of
national vs local banks. The evidence is consistent with the aggregate response and
supports the fact that the overall negative credit response arises from the behaviour of
national banks. Local banks in contrast, lower lending rates.
From a policy perspective, the analysis contributes to the literature by analysing an
important and hitherto unidentified aspect driving banking outcomes in the Indian context.
This would suggest that any policy intervention that seeks to influence bank behaviour
would need to take on board this previously unaddressed risk-appetite of key stakeholders.
 B_Credit B_cash credit B_Private credit RoA Lending rate Cost of funds
National Local National Local National Local National Local National Local National Local
banks banks banks banks banks banks banks banks banks banks banks banks
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

RDIV −2.663** 1.163** −5.056** 0.567 −56.350 40.405*** −0.104 −0.012 −0.070 −0.488* 1.763 9.618***
(1.183) (0.490) (2.145) (1.332) (59.830) (13.304) (0.095) (0.013) (0.597) (0.273) (1.221) (2.549)
RDIV × Post −0.294*** 0.164* −0.182 0.435 −2.388*** −0.513 −0.008* 0.006 0.039 0.017 0.011 −0.425***
crisis (0.119) (0.093) (0.183) (0.408) (0.890) (1.990) (0.004) (0.005) (0.052) (0.016) (0.024) (0.096)
Bank FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
State FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year FE Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
No. of Obs. 92 66 92 66 73 58 92 66 72 46 53 38
R2 0.947 0.905 0.979 0.972 0.890 0.961 0.724 0.907 0.929 0.956 0.950 0.956
Notes: Standard errors (clustered by bank and year) in parentheses. *,**,***Significant at 10, 5 and 1 per cent levels, respectively
extension
Banking

2297
and credit

Table VI.

and bank behaviour –

Post-crisis
Religious diversity
IJSE Notes
44,12 1. These states are: Andhra Pradesh (AP), Karnataka (KAR), Kerala (KER) and Tamil Nadu (TN) in
Southern region, Haryana (HAR), Punjab (PUN), Rajasthan (RAJ) and Uttar Pradesh (UP) in the
Northern region, Bihar (BH), Odisha (ORS), and West Bengal (WB) in the Eastern region and
Gujarat (GUJ) Maharashtra (MAH) and Madhya Pradesh (MP) in the Western region.
2. The average share of local bank branches in the headquarter state is 0.787 (standard deviation of
2298 0.105), whereas for national banks, it equals 0.259 (standard deviation of 0.145). The difference is
statistically significant at the 0.01 level.

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Corresponding author
Saibal Ghosh can be contacted at: emailsaibal@gmail.com

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