Technological Change and Catching-Up in the Indian Banking Sector: A Time-Dependent Nonparametric Frontier Approach

Sushanta Mallick,Wei Xu,Aarti Rughoo,Nickolaos G Tzeremes

doi:10.1007/s10614-020-09993-1

Abstract

This paper investigates whether there has been any improvement in efficiency convergence of banks in India during the post-reform period considering bank ownership structures, using a balanced panel for 73 banks over the time period 1996–2014. Utilizing nonparametric frontier estimators, we compute time-dependent bank efficiency scores, which allow us to examine the dynamics of technological frontier and catch-up levels of Indian banks, and to explore the convergence patterns in the estimated efficiency levels. Our results signify that the state-owned banks, which dominate the banking activity in India, establish themselves as the best performers, ahead of the private, foreign and cooperative banks during post-2005. Even during the recent global financial crisis period, we find that bank efficiency levels increased, except for foreign banks which have had the greatest adverse impact. The convergence results show that heterogeneity is present in bank efficiency convergence, which points to the presence of club formation suggesting that Indian banks’ efficiency convergence is partly driven by the ownership structure.

Highlights

The first significant systemic changes of the Indian banking system can be traced back to the late 1960s when banks were nationalised
In order to analyse whether convergence in time-dependent efficiency levels is present among the four main types of banks that co-exist in India following the banking reforms of 1991 and 1998, we implement Phillips and Sul (2007)’s panel convergence and club clustering methods
The lack of group convergence over the period 1996–2014 suggests that heterogeneity in Indian banking efficiency is prevalent and secondly, bank structure as a common basis does not seem to be a driving factor for convergence in efficiency

Summary

Introduction

The first significant systemic changes of the Indian banking system can be traced back to the late 1960s when banks were nationalised. It has been argued that these changes were introduced rather chaotically having a weak impact on the reform of Indian banks (Fujii et al 2014). The main aim of the reforms was the promotion of competition and market orientation promoting banks’ efficiency improvements (Kumar 2013). The related literature investigates bank efficiency in India during the last two decades (Kumbhakar and Sarkar 2003; Bhaumik and Dimova 2004; Das and Ghosh 2006; Bhattacharyya and Pal 2013, among others). The empirical investigation of convergence patterns among Indian banks’ efficiency levels is largely an unexplored area in the related literature (Kumar and Gulati 2010; Kumar 2013)

Methods

Results

Conclusion