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Economic reforms and bank efficiency in developing countries: the case of the Indian banking industry

  • Ali Ataullah
  • Hang Le
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    Using the Indian banking industry as a case study, this paper proposes and tests hypotheses regarding the possibility of a relationship between three elements of the Economic Reforms (ERs) - namely, fiscal reforms, financial reforms, and private investment liberalisation - and bank efficiency in developing countries. Bank efficiency is measured using data envelopment analysis (DEA); the relationship between the measured efficiency and various bank-specific characteristics and environmental factors associated with the ERs is examined using the OLS and the GMM estimations. Our results show an improvement in the efficiency of banks, especially that of foreign banks, after the ERs. We find a positive relationship between the level of competition and bank efficiency. However, a negative relationship between the presence of foreign banks and bank efficiency is found, which we attribute to a short-run increase in costs due to the introduction of new banking technology by foreign banks. Furthermore, we find that fiscal deficits negatively influence bank efficiency.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500407440
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    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 16 (2006)
    Issue (Month): 9 ()
    Pages: 653-663

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    Handle: RePEc:taf:apfiec:v:16:y:2006:i:9:p:653-663
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    8. Lensink, Robert & Hermes, Niels, 2004. "The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 553-568, March.
    9. Barbara Casu & Philip Molyneux, 2000. "A Comparative Study of Efficiency in European Banking," Center for Financial Institutions Working Papers 00-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
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