Do Financial Sector Reforms Make Commercial Banks More Efficient? A Parametric Exploration of the Indian Case

Abstract

India's financial sector reforms, introduced in 1992, may have influenced the performance of commercial banks through a variety of channels. The present study is an attempt to examine the efficiency levels of Indian banks for the period 1985–2004. We employ stochastic frontier analysis to estimate bank-specific cost, profit and advance efficiencies. Our results show that while loan advance efficiency has not shown much improvement after deregulation, cost and profit efficiencies show varying trends for different bank groups. Public sector banks rank first in two of the three efficiency measures, indicating that, as opposed to the general perception, these banks do not lag behind their private counterparts in efficiency. Our results also show that competition has a significant impact on the efficiency levels of commercial banks across all three efficiency measures. The impact of various factors captured in the study is clearly based on performance in a given setting, and the rapid changes in the financial sector that are underway will keep influencing the performance of the banking industry.