Do Technology Advanced Modern Banks Outperform Traditional Banks in India? - an Empirical Insight

Abstract

This research paper examined whether modern banks viz., foreign origin banks in India and the Indian new generation private banks outperform the conventional banks viz., public sector banks and old generation private banks. The modern banks are technology driven and have a upper hand in offering ancillary services vis-à-vis traditional banks. The study explores theperformance of different banking groups by analysing the interconnections among asset quality, financial soundness, profitability and credit growth of different bank groups in India since 2005 to 2018. Asset quality signifies an important role in the financial health of the banks. Reserve Bank of India (RBI) levied severe asset quality measures on banks operating in India during 2015-16.This unfolds the long hidden financial miseries. The regulators and central banks across the world worked persistently towards enhancing the banks’ ability to observe the inherent and external risks. As a result of this, stringent capital norms based on risk-weighted classification of assets were implemented to ensure financial soundness of the banks. These two policy measures brought a drastic changes in the Indian banking sphere. These changes perhaps lead to interesting research questions viz., do they affect profitability and credit growth of the banks? We addressed this research question through empirical analysis. Further, to identify whether the technology-based modern banks performs better in comparison to traditional banks, the paper measures the effect of these norms on different bank groups viz., public sector banks, private old sector banks, private new generation banks and banks from foreign origin by drawing comparisons between pre-implementation period and post-implementation period of these norms. The study comprised all banks in different banking groups which were operating since 2005. The data were collected from CMIE prowess IQ and various Reserve Bank (RBI) reports. The study outcome is expected to disclose possible nexus among the chosen variables with reference to different bank groups and also reveals whether modern banks better than traditional banks.