Fresh evidence on the relationship between market power and default risk of Indian banks

•Distance-to-Default (DD) and Distance-to-Capital (DC) exhibit an inverse relationship with market power.•Gross Non-performing Assets (GNPAs), economic growth, and stock market volatility are the significant determinants of default risk.•The DC may help monitor PCA measures. In a uniquely designed empirical set-up involving a large set of Indian banks, this study establishes the relationship between market-based measures of default risk represented by Distance-to-Default (DD) and Distance-to-Capital (DC), and the market power reflected through the efficiency-based Lerner index. The results exhibit an inverse relationship between bank market power and bank default risk. Gross Nonperforming Assets (GNPAs), economic growth, and stock market volatility appear as other significant determinants of bank default risk. In the Indian context, this is the first study that utilizes a bank risk measure that incorporates the capital adequacy thresholds embedded under the revised Prompt Corrective Action (PCA) framework.