Efficiency change, technological progress and productivity growth of private, public and foreign banks in India: evidence from the post-liberalization era

Abstract

This study uses a nonparametric frontier approach to examine the effects of the ownership on the efficiency, efficiency change, technological progress and productivity growth of the Indian banking industry over the period 1998 to 2003. A host of best practice frontiers are constructed relative to which the performance of foreign-owned banks, private-owned banks and public-owned banks operating in India are assessed. The results indicate that foreign banks are significantly more efficient when compared to other banks, i.e. the privately-owned and publicly owned-banks. The findings also provide evidence to indicate that a large number of Indian banks operate below their optimal scale. Specifically, the Indian banking industry can be characterized by the existence of very few large, but inefficient publicly-owned banks along with many small size banks that would be able to improve their cost efficiency by expanding their scale of operations. Therefore, in order to assist the Indian banking system to function more efficiently and be more competitive in the global marketplace, the Indian policy makers should create policies to encourage private ownership of banks, facilitate the entry of foreign banks and promote mergers and acquisitions among Indian banks. Such policies will help Indian banks increase their scale of operations and improve their cost efficiency.

Efficiency and Productivity of Commercial Banks in Nepal: A Malmquist Index Approach

“…However, in-sample public sector commercial banks exhibited higher Malmquist index than the in-sample private sector banks. Likewise, Rezvanian et al (2008) also used Malmquist index to examine the effects of the ownership on efficiency, efficiency change, technological progress, and productivity growth of the Indian banking industry over the period of 1998-2003 They found that foreign banks were operating significantly more efficient than privately owned and publicly owned banks. Chen et al (2005) employed a non parametric technique to examine the change in the efficiency of 43 Chinese banks between 1993 and 2000 in response to the 1995 banking deregulation.…”

Measuring the Efficiency of Private Sector Banks: Evidence from India

“…The prominence of private sector banks in an economy is enormous for a number of reasons. The top priority goes to maintain competitive environment in order to be able to provide better customer services and to ensure a sustainable economic development (S. Kumar & Gulati, 2008;Rezvanian et al, 2008). Moreover, globalization effect the privatization of national banking system and boost the private banking sector as an easy access to flourish and growth (Chowdhury & Ahmed, 2009;M.…”

“…Private sector banks are of immense need for facilitating the continuity of sustainable economic development (Chowdhury & Ahmed, 2009;Rezvanian, Rao, & Mehdian, 2008). Banks are now offering a wide range of both financial (e.g., deposits, loans, etc.)…”

“…Nowadays, banks may also differ in terms of their objectivity and nature of business operations (e.g., poverty alleviation, facilitating to special community or industry, for any bilateral reasons with international cooperation etc.). Taking care of all these classification, private sector banks possess a unique characteristic which is profit maximization or wealth maximization for the investors (Chowdhury & Ahmed, 2009;Rezvanian et al, 2008). Such issue of maximizing profit, in some cases, scroll to unwanted shutdown of some banks due to their undue operations and business transactions (Brockett, Cooper, Golden, Rousseau, & Wang, 2004).…”

“…The effect from globalization introduces a good number of foreign ownership in the private sector banks in India and as a consequence, the second most important contributor of Indian financial system is now the private sector banks (Min & Smyth, 2014;Sufian & Habibullah, 2012). Research on developed countries is common in recent literature on efficiency (Paradi, Yang, & Zhu, 2011;Rezvanian et al, 2008). However, due to the regional importance, a deeper discussion of Indian bank efficiency is of great requirement for the possible guidelines and policy implications.…”