Global and local banking crises and risk-adjusted efficiency of Indian banks: Are the impacts really perspective-dependent?

Abstract

This paper explores the differences in the trajectory of bank efficiency in India in response to two recent episodes of banking crises: the global financial crisis (2007–2009) and local non-performing loans crisis (2013–2017). The study also seeks to find whether the observed impacts of these episodes of banking crises are uniform across two different perspectives of modelling bank efficiency. To obtain risk-adjusted bank efficiency estimates, we intently follow the suggestion of Simper et al. (2017) on choosing an optimum set of internal risk management control variables and employ a non-oriented directional distance function (DDF) model with quasi-fixed inputs. The results suggest that, by and large, public and private banks, irrespective of banking crises, are more efficient in pursuing the regulator’s objective of developing an efficient intermediation process rather than their own objective of profit-maximisation over the sample period from 2001 to 2019. Foreign banks are more adroit in accomplishing the goal of income maximisation. The findings indicate that both exogenous and endogenous banking crises have had distinctive, peculiar, asymmetric impacts on the efficiency levels in realising policy objectives by banks. The global financial crisis essentially has had no hostile effect on the bank’s efficiency in achieving the regulator’s goal. In stark contrast, the local banking crisis has had a significant adverse effect on the income-generating efficiency of all the bank groups. Overall, the impacts of the underlined banking crises are observed to be perspective-dependent.