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Performance and Profitability of Indian Banks in the Post Liberalization Period

Performance and Profitability of Indian Banks in the Post Liberalization Period. Kusum W. Ketkar 2008 World Congress on National Accounts and Economic Perfromance Measures for Nations. Motivation and Objectives. Financial Sector Reforms and the banking sector

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Performance and Profitability of Indian Banks in the Post Liberalization Period

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  1. Performance and Profitability of Indian Banks in the Post Liberalization Period Kusum W. Ketkar 2008 World Congress on National Accounts and Economic Perfromance Measures for Nations

  2. Motivation and Objectives • Financial Sector Reforms and the banking sector • Estimating bank level efficiency using Data Envelopment Analysis technique from 1996-97 to 2003-04 • Input-output debate in banking • Explain efficiency differentials among banks using fixed and random effect regressions due to regulatory mandates, management structures and external macro environment • Explain profit differentials among banks using fixed and random effect regressions due to NPAs, priority sector lending, wage bill and market power

  3. Banking Sector Reforms • Narasimham Committee Reports of 1992 and 1997 • Reforms: • Increase in competition via more liberal rules for the entry of new domestic and foreign banks • Infusion of Government capital in PSBs followed by Injection of private equity

  4. Reforms (contd) • Deregulation on interest rates except for certain specific classes • Cuts in Statutory Liquidity Requirements (SLR) and Cash Reserve Requirements (CRR) • Reduction in credit controls to 40% from 80% of total credit • Introduction of a broader definition of priority sector lending

  5. Reforms (contd) • Incentives to increase consumer loans • Implementation of micro-prudential measures • Emphasis on performance, transparency and accountability

  6. Table 1: Characteristics of Banks in India

  7. Table 2: Trend in Bank spreads and Profits (% Total Assets) S1 = Net interest, P1 = Net Profits, P2 = Gross Profits

  8. DEA Model Estimation • Specification 1: • Outputs: Loans, Non-interest Income, Deposits • Inputs: No. of Bank Branches, Equity, Total operating expenses • Specification 2: • Outputs: Loans, Non-interest Income • Inputs: No. of Bank Branches, Equity, Total operating expenses, Deposits

  9. Table 3: Efficiency Under Alternative Specifications

  10. Regression Model Specifications: Determinants of Efficiency and Profit Differentials • Efficiency equation: • ES(i) = a1 + a2 RSB(i) + a3 OS(i)+ a4 FA(i) + a5 MSI(i) + a6 CV (i) • Profit equation: • ROA(i) = b1+ b2ES(i)+ b3IS+ b4NPA (i) +b5PSL(i)+b6WS (i)+ b7HHI(i)

  11. Conclusions • DEA results show that the relative efficiency of banks by ownership does not critically depend upon whether deposits are treated as an input or output. In general, we find foreign banks to be the most efficient followed by new private banks. • The regression analysis undertaken to explain efficiency differences among banks shows that the mandates on priority sector lending and the macro environment facing each bank is found to be quite relevant in explaining lower efficiency scores of state-owned and nationalized banks. • Finally, banks profitability is found to be positively affected by efficiency scores and net interest spreads and negatively by NPAs.

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