Assessing the impact of the global financial crisis on the profit efficiency of Indian banks

Abstract

With the objective to assess the impact of the global financial crisis on bank efficiency in India, the study focuses on the evolution of profit efficiency before, during and after the crisis. For evaluating and comparing the risk-adjusted alternative profit efficiency of different ownership groups in the Indian banking industry, the study employs a DEA-based meta profit frontier framework that accounts for technological heterogeneity across groups. The results highlight that profit efficiency of banks declined mildly during the global financial crisis, but then recovered quickly after the crisis. However, the global financial crisis had a differentiated impact across ownership groups. New private banks observed largest drag in the profit efficiency during the crisis years. The analysis of technology gap ratio provides that foreign banks employed best-practice production technology, and were observed to be the technology leaders of the Indian banking industry. Overall, we found no long-lasting adverse effect of the global financial crisis on the profit efficiency of the Indian banking sector due to the adoption of accommodative macro policies aiming at injecting sufficient liquidity in the system.