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Financial Deregulation in the Indian Banking Industry: Has It Improved Cost Efficiency?

In: Deregulation and Efficiency of Indian Banks

Author

Listed:
  • Sunil Kumar

    (South Asian University)

  • Rachita Gulati

    (Indian Institute of Technology Roorkee)

Abstract

This chapter explores whether the cost efficiency of Indian banks since the launching of deregulation programme in 1992 has improved or not. The results suggest that deregulation programme has had a positive impact on the cost efficiency of Indian banks, and the observed cost efficiency gains are predominantly due to improvements in technical efficiency. Regarding the ranking of ownership groups, the results contradict the property rights hypothesis and public choice theory since public sector banks share the place on the podium along with foreign banks, and are more efficient than private banks. Further, while foreign banks are found to be mostly defining the grand technological frontier of the Indian banking system, public sector banks are closely chasing them to stay competitive. The empirical evidence is also in favour of the prevalence of the global advantage hypothesis in Indian banking industry. We also find that medium banks outperform the banks belonging to other size classes in terms of cost efficiency and its components. Further, Indian banks are operating at sub-optimal scale size. The post-DEA analysis unambiguously indicates that size and exposure to off-balance sheet activities are the key determinants of cost efficiency in Indian banking industry.

Suggested Citation

  • Sunil Kumar & Rachita Gulati, 2014. "Financial Deregulation in the Indian Banking Industry: Has It Improved Cost Efficiency?," India Studies in Business and Economics, in: Deregulation and Efficiency of Indian Banks, edition 127, chapter 0, pages 201-236, Springer.
    • Handle: RePEc:spr:isbchp:978-81-322-1545-5_6
    DOI: 10.1007/978-81-322-1545-5_6
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