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Do Financial Sector Reforms Make Commercial Banks More Efficient? A Parametric Exploration of the Indian Case

Author

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  • H.P. Mahesh

    (H.P. Mahesh is Ph. D. Fellow at the Institute for Social and Economic Change, Nagarbhavi, Bangalore 560072; e-mail: maheshhp@yahoo.com)

  • Shashanka Bhide

    (Shashanka Bhide is Senior Research Counsellor, National Council of Applied Economic Research, Parisala Bhavan, New Delhi 110 002; e-mail: sbhide@ncaer.org.in)

Abstract

India's financial sector reforms, introduced in 1992, may have influenced the performance of commercial banks through a variety of channels. The present study is an attempt to examine the efficiency levels of Indian banks for the period 1985–2004. We employ stochastic frontier analysis to estimate bank-specific cost, profit and advance efficiencies. Our results show that while loan advance efficiency has not shown much improvement after deregulation, cost and profit efficiencies show varying trends for different bank groups. Public sector banks rank first in two of the three efficiency measures, indicating that, as opposed to the general perception, these banks do not lag behind their private counterparts in efficiency. Our results also show that competition has a significant impact on the efficiency levels of commercial banks across all three efficiency measures. The impact of various factors captured in the study is clearly based on performance in a given setting, and the rapid changes in the financial sector that are underway will keep influencing the performance of the banking industry.

Suggested Citation

  • H.P. Mahesh & Shashanka Bhide, 2008. "Do Financial Sector Reforms Make Commercial Banks More Efficient? A Parametric Exploration of the Indian Case," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 2(4), pages 415-441, November.
    • Handle: RePEc:sae:mareco:v:2:y:2008:i:4:p:415-441
    DOI: 10.1177/097380100800200404
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    Cited by:

    1. Sabin Bikram Panta & Devi Prasad Bedari, Ph.D., 2015. "Cost Efficiency of Nepali Commercial Banks in the Context of Regulatory Changes," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 27(2), pages 75-90, October.
    2. K. Ravirajan & K.R. Shanmugam, 2021. "Efficiency of commercial banks in India after global financial crises," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(628), A), pages 65-82, Autumn.
    3. S. S. Rajan & K. L. N. Reddy & V. N. Pandit, 2011. "Efficiency And Productivity Growth In Indian Banking," Working papers 199, Centre for Development Economics, Delhi School of Economics.
    4. Sunil Kumar, 2013. "Banking reforms and the evolution of cost efficiency in Indian public sector banks," Economic Change and Restructuring, Springer, vol. 46(2), pages 143-182, May.
    5. Samaresh Bardhan, 2013. "Profit Efficiency of Indian Commercial Banks in the Post-liberalisation Period: A Stochastic Frontier Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 7(4), pages 391-415, November.
    6. S S Rajan & K L N Reddy & V N Pandit, 2011. "Efficiency and Productivity Growth in Indian Banking," Working Papers id:4359, eSocialSciences.
    7. K. Ravirajan & K. R. Shanmugam, 2023. "Efficiency of Commercial Banks in India after Global Financial Crisis," Working Papers 2023-254, Madras School of Economics,Chennai,India.
    8. Sabin Bikram Panta & Devi Prasad Bedari, Ph.D., 2015. "Cost Efficiency of Nepali Commercial Banks in the Context of Regulatory Changes," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 27(2), pages 1-16, October.

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    More about this item

    Keywords

    Liberalisation; Banking; Frontier Efficiency; JEL Classification: E42; JEL Classification: G21; JEL Classification: D24;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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