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Is Inefficiency of Banks in India a Cause for Concern? Evidence from the Post-Reforms Era

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  • Goutam Chatterjee

    (Goutam Chatterjee can be contacted at: gchatterjee@rbi.org.in)

Abstract

Cost inefficiency of banks in many countries is quite high. Financial sector reforms in India are also aimed at improving efficiency, productivity and profitability of banks via increased competitiveness. An assessment based on a fairly general framework in the Indian context has found that cost inefficiency of domestic banks in the post-reforms period is not very high. Data also supports a declining trend in inefficiency over time. Slightly higher average inefficiency in public sector banks points to a need for granting more autonomy and instituting a proper incentive structure. Branch rationalisation may also lead to lowering their costs. However, as methodology for efficiency estimation is not fully settled, the need for testing robustness of the results through alternative formulations is stressed.

Suggested Citation

  • Goutam Chatterjee, 2006. "Is Inefficiency of Banks in India a Cause for Concern? Evidence from the Post-Reforms Era," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 5(2), pages 151-182, August.
    • Handle: RePEc:sae:emffin:v:5:y:2006:i:2:p:151-182
    DOI: 10.1177/097265270600500203
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    More about this item

    Keywords

    JEL Classification: C33; JEL Classification: G21; JEL Classification: L11; Banks; cost efficiency; parametric approach; time-varying inefficiency;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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