Effect of investments in information technology on bank performance: empirical evidence from Indian public sector banks

Abstract

Investments in information technology IT made in hope of achieving higher profits and returns may not provide anticipated 'gains' within a required time frame giving rise to a 'performance-paradox'. This paper investigates whether huge amounts spent on IT in Indian public sector banks PSBs over the past decade have had an effect on bank performance. Four measures namely, amount of operating profits OP, profits per employee PPE, business per employee BPE and return on assets ROA are taken as indicators of bank performance. The method of first differences regression, two-stage GLS and GMM are used to estimate the parameters of panel data consisting of 27 PSBs over the period 2004 to 2009. We found that investment in IT has had significant positive impacts on OP and PPE. We interpret this result as evidence of higher profits as well as profitability due to IT innovations in bank working. Results are inconclusive as far as impact on BPE is concerned. The study, however, could not find evidence of a significant relationship between investment in IT and ROA. This study thus, finds evidence that heavy investments in IT in Indian PSBs have not been wasteful and have led to enhanced profits.