Financial innovation and bank performance: an empirical analysis of Indian commercial banks

The paper intends to investigate the impact of technology-led financial innovation on the financial performance of 52 public and private Indian Scheduled Commercial banks during the time period 2011-2012 to 2016-2017. Banks' performances are measured under four major categories i.e., activity, liquidity, profitability, and solvency. Bank-wise financial innovation index is constructed by using principal component analysis from the variables, usage of credit card and debit card at ATM and point of sale, RTGS and NEFT. On the basis of adoption level of financial innovation, banks are classified into two clusters: high innovation banks and low innovation banks. The cluster analysis exhibits that adoption of technical innovation is relatively low among public sector banks (except State Bank of India) than private sector banks. Panel data estimation explains that financial innovation index helps to improve various indicators of Indian banking performance exclusively for low innovation banks. Hence the adoption of financial innovation is beneficial for the low innovation banks at their early stage of innovation. Empirical estimation shows that financial innovation does not affect banking activity, liquidity and profitability for high innovation banks. In fact, it reduces the solvency of high innovation banks.