Abstract
The purpose of the study is to examine the performance of Indian banking sector in terms of efficiency, returns to scale, and total factor productivity change. The technique of data envelopment analysis is applied due to its flexibility to incorporate multiple inputs and multiple outputs without any underlying assumption on the functional form. There is growing tendency of public sector banks operating under increasing returns to scale, implying that substantial gains could be obtained from altering scale via either internal growth or consolidation in the sector. In terms of productivity, the results show a positive change in both the sectors due to technological change, possibly as a result of adoption of latest technology and new business practices in post reform period. However, there is an evidence of shrink in the market and negative growth in productivity in both the sectors during the period of global financial crisis. The main contribution of the paper is to empirically provide the evidences to resolve the debate if the global financial crisis had any impact on the performance of banking sector in India.
Highlights
A sound financial system is crucial for an indispensable and vibrant economy
When we look at the contributions of different components towards total factor productivity (TFP) change, we observe that the technological change (TC) has been the dominating source of productivity growth during the entire post reform period with average annual TC for all banks, public sector banks (PSBs) and private banks as 1.16%, 1.49% and 0.70%, respectively
Enticed by the reform in the early 1990s and further slowdown in the economy as a result of global financial crisis in late 2000s, the current study analyzes the performance of Indian banking sector based on ownership during the last 15 years of post liberalization period as well as two sub-periods within it, i.e., pre-global financial crisis (1996–2007) and global financial crisis (2008–2010)
Summary
A sound financial system is crucial for an indispensable and vibrant economy. the performance of any economy to a large extent is dependent on the performance of the banking sector as it being the predominant component of the financial service industry. The Indian banking sector went through structural changes since its independence keeping in view its financial linkages with the rest of the economy and to meet the social and economic objectives of development (Kumbhakar, Sarkar 2005). The Journal of Business Economics and Management, 2016, 17(1): 156–172 closed and strict regulated environment started showing adverse affect on the sector, resulting in under-performance of the banks over the years. Indian banking sector underwent a sea of changes through its liberalization policy in early 1990s with implementation of a series of reforms (see Bhide et al 2001; Reddy 2006; Prasad, Ghosh 2007; Kumar, Charles 2011 for extensive review of the recent banking sector reform) with an objective to make the banking sector more productive and efficient by limiting the state intervention and enhancing the role of market forces
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