Deregulation efficiency and productivity in Indian banking

Abstract

The Indian banking industry has witnessed a series of reforms in the past decade. In newlinethis context, this thesis tries to understand the important features of the banking sector newlinein India and attempts to contribute to some of the ongoing policy debates. Accordingly, newlinewe study bank performance by first estimating cost efficiency and total factor productivity newline(TFP) of scheduled commercial banks (SCBs) in India employing the technique of stochastic newlinefrontier analysis using data on 83 SCBs from the period 1986-2000. We find that banks newlinehave improved their performance during the period, both in terms of cost efficiency and newlineTFP. We also estimate profit efficiency and profit productivity and find that they declined newlineduring the sample period. Prior to deregulation, private banks appear to have performed newlinebetter than public banks in terms of all measures. However, subsequent to reforms, public newlinebanks improved their performance indicating that around the time of deregulation, public newlinebanks benefited more from the infusion of competition into the industry. The increase in newlinecompetition occurred along with the changing nature of public banks who became more newlinemarket oriented through the attainment of functional autonomy and divestment of government newlinestakes. Thus there may have been a complementary role of competition and newlinedivestment in improving performance of public banks. In line with this, we undertake a newlinetheoretical analysis of the consequences of divestment in the banking industry and thereby newlinestudy the complementarity between divestment and entry. In terms of a mixed oligopoly newlineset-up, we show that when entry is exogenously given and banks compete in deposits, a newlinelarger scale of entry is associated with higher divestment. Entry deregulation is socially newlineoptimal only when the private entrants are more efficient (but not too efficient) than the newlinepublic incumbent. We also find that if banks compete in deposit rates with product differentiation, newlinethen social welfare may not rise with the degree of public ownership. Lastly newlinewe study the conseque