Investigating the Impact of the Announcement of Loan Moratorium on Stock Prices: Evidence from Indian Public Sector Banks

Abstract

The present article applies event study methodology in an attempt to investigate the impact of the announcement of 3-month moratorium by Reserve Bank of India on Indian public sector bank equity returns. For the present study, the estimation period is considered to be 120 trading days while the event window is considered to be 21 trading days. To compute the expected returns, the study uses a single-index model or the market model proposed by Fama [Fama, E., 1976. Foundations of finance. Basic Books]. The findings of the study suggest that the market responded to the news relating to the liquidity infusion by the Reserve Bank of India, falling global indices, development of potential coronavirus vaccine, and the announcement of 3 weeks period lockdown. The study further concluded that the market anticipated that the government may announce loan moratorium since industry bodies like The Associated Chambers of Commerce and Industry of India and The Federation of Indian Chambers of Commerce and Industry have recommended loan moratorium in order to safeguard the business enterprises especially the micro-, small- and medium-enterprise sector. Thus, the adjustment in the bank stock prices occurred before the announcement of the 3-month loan moratorium and as a consequence the average annual return on day ED-0 is found to be insignificant.

Loan Moratorium Announcements and Stock Market Reaction: An Event Study Analysis

“…In other words, we examined how various loan moratorium announcements affected the stock of banks. The earlier research by Bhattacharjee et al (2020) and Mohd Sah and Wong (2021) examining the performance of the banks' stock prices in the wake of loan moratorium announcements is closely related to our study. However, our analysis differs significantly from their studies in two key areas.…”

“…The critical contribution of this study is that it offers new evidence regarding the impacts of government policies during the COVID-19 pandemic (e.g., Demirgüç-Kunt et al (2021)) and of loan moratorium announcements on banks' stock prices (Bhattacharjee et al 2020;Mohd Sah & Wong 2021). In particular, it shows that depending on their salient features, the loan moratorium announcements attracted significant (positive and negative) responses from bank investors.…”

“…However, this study did not isolate the impact of loan moratorium announcements on bank stock prices because the analysis included many other policies in one regression. A more focused study was undertaken by Bhattacharjee et al (2020), who examined the loan moratorium announcement in India.…”