Assessing the effects of cost, revenue and profit efficiency on bank performance: empirical evidence from Indian banking

Purpose

This paper aims to investigate the effects of cost, revenue and profit efficiency on bank profitability in an emerging economy such as India over the period 1997 to 2017. Additionally, this study examines the effect of efficiency on profitability across different ownership groups for a panel of 70 Indian commercial banks.

Design/methodology/approach

In the first stage, using stochastic frontier analysis, we estimate the efficiency scores of cost, revenue and profit over the examined period. In the second stage, this study uses the two-step system generalized-method of moments dynamic panel approach to investigate the impact of several efficiency measures on bank profitability.

Findings

Results estimated through and system generalized-method of moments indicate that a higher level of cost, revenue and efficiency significantly improves India's bank profitability. Regarding ownership groups, this study finds that the public sector banks are most cost-efficient compared to private and foreign banks. Other bank-specific, macroeconomic and institutional variables have played a significant role in determining bank profitability.

Practical implications

The findings of the study extend some important policy implications. In light of the rapid decline in bank profitability, banks should focus on increasing the efficiency of their operations. Improvement in profit, cost and revenue efficiency can ameliorate bank performance significantly. Profit efficiency that takes into account both cost and revenue efficiency should be maintained reasonably to prevent the declining pattern of bank profitability that the industry has witnessed over the years.

Originality/value

To the best of the author's knowledge, this study is a fresh piece of research that fulfils an urgent need of investigating the dynamics between bank efficiency and bank profitability in India. In an emerging economy like India, where the banking sector has witnessed substantial structural transformations over the past two decades, such study demands an immediate empirical investigation.

Competition in the Indian Banking Sector: A Panel Data Approach

The paper aims to assess the level of competition in the Indian banking sector overall as well as within the three groups of banks: foreign owned, state owned (public sector), and privately owned. We use panel data for the period from 2005–2018. We found that the overall competition in the Indian banking sector is strong, although there are differences by type of bank ownership. The Indian banking market continues to be characterized by monopolistic competition. The various policy measures taken by the Indian government in recent years appear to have helped boost competition. A policy suggestion would be to further liberalize the banking sector for foreign investment.

A conjectural variation approach for assessment of competition: a case on Indian commercial banks

Purpose

During the last two decades there have been significant policy changes in the banking system, primarily in the emerging market economies. These changes have impacted the competitive structure of banking. In India, since 1991, gradual reform measures have been initiated to improve efficiency, productivity, competition and stability of the banking sector. There is a requirement for a formal approach to examine level of competition in Indian banking sector after the liberalization. This paper aims to address this issue.

Design/methodology/approach

The article applied the conjectural variation method using 2‐stage least square for assessing the degree of competition in the Indian banking system.

Findings

The paper finds that competitive condition in the Indian banking sector has been improving 1996. However, big banks with market share more than 1 per cent have been exercising some degree of price mark‐up over their marginal cost.

Research limitations/implications

Due to the paucity of data competition at the regional level is not analysed which is a limitation of the article.

Practical implications

Analysis of competition allows the policy formulators to design proper liberalization measures to ensure greater competition in the banking sector so as to prevent any cartel formation.

Social implications

Since the Indian banking sector is monopolistically competitive, the article advocates for more liberalization measures to improve competition in the Indian banking sector.

Originality/value

To assess competition the article has covered 53 banks involving more than 90 per cent banking sector assets of the country. Through Lerner Index the article has found that big banks are able to charge a price which is about 30 per cent more than their marginal cost. The conjectural variation method is a monopolistic market structure prevailing in the Indian banking sector.