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Impact of Liberalization and Globalization on Productivity in Indian Banking: A Comparative Analysis of Public Sector, Private, and Foreign Banks

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  • Subhash Ray

    (University of Connecticut)

Abstract

Although dominated by public sector banks, India already had a significant presence of private domestic banks and foreign banks. What the banking reforms have done is to create a more level playing field where banks of different ownership types compete within a new set of broad (and far more relaxed) regulations. Data on the performance of the three different categories of banks over the past two decades offer an opportunity to assess to what extent the regulatory changes have improved the productive efficiency of the banking sector in India. Apart from analyzing the standard descriptive measures of performance, this paper uses the nonparametric approach of Data Envelopment Analysis to measure total factor productivity growth and its components to assess the impact of liberalization on different ownership categories of banks in India. The broad conclusion is that it is possible to promote financial soundness by introducing proper prudential norms and to improve operational efficiency without wholesale privatization by allowing competition between public, private and foreign banks. This can be a valuable lesson for other developing countries. JEL Classification: G21, C61 Key words: Banking Reforms, Data Envelopment Analysis, Efficiency Analysis

Suggested Citation

  • Subhash Ray, 2011. "Impact of Liberalization and Globalization on Productivity in Indian Banking: A Comparative Analysis of Public Sector, Private, and Foreign Banks," Working papers 2011-27, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2011-27
    Note: This paper was prepared for the WTO-UNCTAD Conference in Delhi in November 2011. The author is grateful to Abhiman Das for providing him the data in a readily usable form and also for valuable comments.
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    References listed on IDEAS

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    1. Abhiman Das & Saibal Ghosh, 2006. "Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period," Review of Financial Economics, John Wiley & Sons, vol. 15(3), pages 193-221.
    2. Kumbhakar, Subal C & Sarkar, Subrata, 2003. "Deregulation, Ownership, and Productivity Growth in the Banking Industry: Evidence from India," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 403-424, June.
    3. Sensarma, Rudra, 2006. "Are foreign banks always the best? Comparison of state-owned, private and foreign banks in India," Economic Modelling, Elsevier, vol. 23(4), pages 717-735, July.
    4. TT Ram Mohan, 2007. "Productivity and Efficiency at Public and Private Sector Banks in India," Working Papers id:991, eSocialSciences.
    5. Silva Portela, Maria Conceicao A. & Thanassoulis, Emmanuel, 2005. "Profitability of a sample of Portuguese bank branches and its decomposition into technical and allocative components," European Journal of Operational Research, Elsevier, vol. 162(3), pages 850-866, May.
    6. Ram Mohan, T. T. & Ray Subhash C, 2003. "Productivity and efficiency at public and private sector banks in India," IIMA Working Papers WP2003-06-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    7. Sarkar, Jayati & Sarkar, Subrata & Bhaumik, Sumon K., 1998. "Does Ownership Always Matter?--Evidence from the Indian Banking Industry," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 262-281, June.
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    More about this item

    Keywords

    banking reforms; data envelopment analysis; efficiency analysis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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