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Profit Efficiency of Indian Commercial Banks in the Post-liberalisation Period: A Stochastic Frontier Approach

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  • Samaresh Bardhan

    (Samaresh Bardhan is Assistant Professor in Economics, Department of Humanities and Social Sciences, Indian Institute of Technology, Ropar, Punjab, India emails: sbpm1@hotmail.com, samaresh@iitrpr.ac.in)

Abstract

This article estimates bank-specific profit efficiency of three broad ownership groups of Indian banks during the period 1995–96 to 2011–12, using the stochastic frontier methodology. Results reveal that during the post-liberalisation period, public sector banks in India are the best performers in terms of estimated profit efficiency. Further, foreign banks operating in India record higher profit efficiency levels compared to domestic private banks. The introduction of prudential regulations, such as capital adequacy ratios, has had a significant positive impact on the profit efficiency of Indian banks, while loan defaults adversely affect their profit efficiency. Market power does not necessarily lead to an increase in profit efficiency, while bank mergers have had a significant positive effect. Contrary to the expectation that the Indian banking system is highly resilient and sufficiently robust to cope with external shocks, the results reveal that the ongoing global financial crisis has had a significant adverse effect on the profit efficiency of Indian banks. JEL classifications: C14, G21, G28

Suggested Citation

  • 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.
    • Handle: RePEc:sae:mareco:v:7:y:2013:i:4:p:391-415
    DOI: 10.1177/0973801013500132
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    More about this item

    Keywords

    Profit; Efficiency; Banks; Regulations; Government Policy;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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