Financial deregulation, competition and cost efficiency of Indian commercial banks: is there any convergence?
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Financial deregulation, competition and cost efficiency of Indian commercial banks: is there any convergence? Mohammad Shahid Zaman1 · Anup Kumar Bhandari1
© Editorial Office, Indian Economic Review 2020
Abstract This paper investigates the convergence in cost efficiency among the Indian commercial banks during 1998–2015. We follow a two-step approach: We first employ the double bootstrap procedure of Simar and Wilson (J Econom 136:31–64, 2007) for estimating the bias-corrected cost efficiency scores. Using a dynamic panel framework, we then apply the concepts of β-convergence and σ-convergence from the growth convergence literature to evaluate the convergence process in the banking industry. Our results indicate large difference in mean efficiency among banks across various ownership categories. Further, we observe strong evidence favouring convergence in cost efficiency, driven by both “catching-up” and “lagging-behind” phenomena. The speed of convergence was found highest in state-owned banks, followed by foreign-owned and domestic private banks. Keywords Convergence · Cost efficiency · Data envelopment analysis · Indian banks JEL Classification D24 · G21 · G28
1 Introduction Since the financial liberalisation of Indian banking industry in 1992, numerous studies have examined the effects of financial deregulation on Indian banking efficiency and productivity, and the relationship between ownership and efficiency. A majority of these studies have focussed mainly on the time period before Global Financial Crisis (GFC) (see Bhandari 2012; Bhattacharyya et al. 1997; Das and Ghosh 2006, 2009; Kumbhakar and Sarkar 2003; Ray and Das 2010; Sahoo and Tone 2009; Sensarma 2005; Zhao et al. 2010, among others). By contrast, only limited number of empirical studies have analysed the changes taken place within the Indian * Mohammad Shahid Zaman [email protected] 1
Department of Humanities and Social Sciences, Indian Institute of Technology Madras, Chennai 600036, India
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banking industry since GFC, i.e. after 2008 (Fujii et al. 2014; Gulati and Kumar 2016; Tzeremes 2015). Although studies on banking efficiency and productivity analysis are voluminous, little attention has been paid to convergence in efficiency among banks. From a regulatory perspective, measurement of convergence process is important, since increase in integration fosters competition which in turn may result in improvement in cost efficiency (Guiso et al. 2004). Also, an integrated financial system plays an important role in promoting savings, investments and subsequently, economic growth of an economy (Mohan 2005). This study aims to fill this gap by investigating the convergence properties among Indian commercial banks during 1998–2015. In particular, we intend inter alia to address the following questions regarding the Indian banking industry. First, what is the overall cost efficiency of Indian commercial banks during the post deregulation period and how has it varied over time? Sec
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