Reforms, Productivity, and Efficiency in Banking: The Indian Experience
AbstractIndia embarked on a strategy of economic reforms in the wake of a serious balance-ofpayments crisis in 1991. A central plank of the reforms was reform in the financial sector and, with banks being the mainstay of financial intermediation, the banking sector. The objective of the banking sector reforms was to promote a diversified, efficient and competitive financial system with the ultimate objective of improving the allocative efficiency of resources through operational flexibility, improved financial viability and institutional strengthening. Beginning from 1992, Indian banks were gradually exposed to greater domestic and international competition. India’s approach to banking reforms has been somewhat different from many other countries. Whereas there has not been privatisation of public sector banks, through a process of partial disinvestment a number of public sector banks have been listed in Stock Exchanges and have become subject to market discipline and greater transparency in this manner. Besides, newly opened banks from the private sector and entry and expansion of several foreign banks resulted in greater competition. Consequent to these developments, there has been a consistent decline in the share of public sector banks in total assets of commercial banks and a declining trend of Herfindahl’s concentration index. Improvements in efficiency of the banking system were reflected in a number of indicators, such as, a gradual reduction in cost of intermediation (defined as the ratio of operating expense to total assets) in the post reform period across various bank groups (barring foreign banks), and decline in the non-performing loans. As a result of these changes, there has been an all-around productivity improvement in the Indian banking sector. While the cost income-ratio (i.e., the ratio of operating expenses to total income less interest expense) as well as net interest margin (i.e., the excess of interest income over interest expense, scaled by total bank assets) of Indian banks showed a declining trend during the post-reform period, the business per employee of Indian banks increased over three-fold in real terms exhibiting an annual compound growth rate of nearly 9 percent. At the same time, the profit per employee increased more than five-fold, implying a compound growth of around 17 percent. Branch productivity also recorded concomitant improvements. Such productivity improvements in the banking sector could be driven by two factors: technological improvements, which expands the range of production possibilities and a catching up effect, as peer pressure amongst banks compels them to raise productivity levels. As far as the future of Indian banking is concerned, a number of issues, such as the credit to small and medium enterprises, customers’ interests and financial inclusion, reducing procedural formalities, listing of the public sector banks in the stock exchange and related market discipline are of paramount importance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Pakistan Institute of Development Economics in its journal Pakistan Development Review.
Volume (Year): 44 (2005)
Issue (Month): 4 ()
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Williams, Jonathan & Nguyen, Nghia, 2005. "Financial liberalisation, crisis, and restructuring: A comparative study of bank performance and bank governance in South East Asia," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2119-2154, August.
- Allen N. Berger & David B. Humphrey, 1990.
"Measurement and efficiency issues in commercial banking,"
Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.)
151, Board of Governors of the Federal Reserve System (U.S.).
- Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
- Sarkar, Jayati & Sarkar, Subrata & Bhaumik, Sumon K., 1998. "Does Ownership Always Matter?--Evidence from the Indian Banking Industry," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 262-281, June.
- Maudos, Joaquin & Pastor, Jose M. & Perez, Francisco & Quesada, Javier, 2002.
"Cost and profit efficiency in European banks,"
Journal of International Financial Markets, Institutions and Money,
Elsevier, vol. 12(1), pages 33-58, February.
- Francisco PÃ©rez GarcÃa & Javier Quesada IbaÃ±ez & JoaquÃn Maudos Villarroya & JosÃ© Manuel Pastor MonsÃ¡lvez, 1999. "- Cost And Profit Efficiency In European Banks," Working Papers. Serie EC, Instituto Valenciano de Investigaciones EconÃ³micas, S.A. (Ivie) 1999-12, Instituto Valenciano de Investigaciones EconÃ³micas, S.A. (Ivie).
- J. Stiglitz, 1998. "More Instruments and Broader Goals: Moving toward the PostWashington Consensus," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 8.
- Clive Bell & Peter L. Rousseau, 2000.
"Post-Independence India: A Case of Finance-Led Industrialization?,"
Vanderbilt University Department of Economics Working Papers
0019, Vanderbilt University Department of Economics.
- Bell, Clive & Rousseau, Peter L., 2001. "Post-independence India: a case of finance-led industrialization?," Journal of Development Economics, Elsevier, vol. 65(1), pages 153-175, June.
- Sumon Kumar Bhaumik & Ralitza Dimova, 2003.
"How Important is Ownership in a Market with Level Playing Field? The Indian Banking Sector Revisited,"
William Davidson Institute Working Papers Series
2003-569, William Davidson Institute at the University of Michigan.
- Bhaumik, Sumon Kumar & Dimova, Ralitza, 2004. "How important is ownership in a market with level playing field?: The Indian banking sector revisited," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 165-180, March.
- Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
- Joaquin Maudos & Jose Pastor, 2001. "Cost and profit efficiency in banking: an international comparison of Europe, Japan and the USA," Applied Economics Letters, Taylor & Francis Journals, vol. 8(6), pages 383-387.
- Anup Kumar Bhandari, 2010. "Total Factor Productivity Growth and Its Decomposition: An Assessment of the Indian Banking Sector in the True Liberalised Era," Working Papers id:3181, eSocialSciences.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Khurram Iqbal).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.