Bank competition and efficiency: empirical evidence from Indian market

Abstract

Purpose – The study aims to investigate the relationship between competition and efficiency. Using bank-level data for Indian banks, relationship between competition and efficiency is examined by applying the Granger causality test for the period 1996 to 2011. Design/methodology/approach – Lerner Index is a measure of market power and is applied for estimation of competition. Data envelopment analysis technique is applied for measuring efficiency in the Indian banking system along with the Granger causality test to look at the relationship between competition and efficiency. Findings – Results show an increasing trend for competition for the period 1996 to 2004, and after that there is fall in competitive levels. Granger causality tests show that competition positively effects efficiency and vice-versa. Practical implications – This study gives an insight into the relationship between competition and efficiency, thus providing an alternative view to the structure–conduct–performance paradigm. An efficient banking system can positively impact the growth of an economy and, hence, competition and efficiency are important decision parameters for regulators and could help them in decision-making and policy formulation. Originality/value – This study has covered more than 90 per cent of the banking assets for looking at competition and efficiency in the banking sector. Policymakers can try to improve competitive levels in banking so as to improve efficiency in the banking sector which can further help in developing the investment-savings cycle.