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Performance and Profitability of Indian Banks in the Post Liberalization Period

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... of Indian Banks in the Post Liberalization Period. Kusum W. Ketkar ... 2008 World Congress on National Accounts and Economic Perfromance Measures for Nations ... – PowerPoint PPT presentation

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Title: Performance and Profitability of Indian Banks in the Post Liberalization Period


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

12

13
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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