Bank competition in India: revisiting the application of Panzar–Rosse model

Abstract

Purpose – The paper measures the degree of bank competition in Indian banking over the period 1996–2016. Using bank-level annual data, we revisit the case of banking competitiveness during the prefinancial and postfinancial crisis and examine whether the global financial crisis alters the level of bank competition in India. Additionally, this paper addresses the misspecification issues associated with the widely used Panzar–Rosse model in Indian banking context. Design/methodology/approach – We apply Panzar and Rosse (1987) H-statistic and evaluate the degree of bank competition by estimating the extent to which changes in input prices are reflected in revenues earned by banks. Subsequently, we link this measure of competitiveness to a number of structural indicators (HHI and CRn) to examine the structure-conduct-performance hypothesis, which assumes that a concentrated banking system can impair competition. The simple panel regressionmodel was used to handle the empirical estimations. Findings – findings reveal that the Indian banking system operates under competitive conditions and earns revenues as if under the monopolistic competition. We also find evidence that Indian banks are competitive, even under a concentrated market structure. This observation runs, in contrary, to the prediction of the structure–conduct–performance hypothesis. The findings also indicate the differences in the estimated H-statistic value after considering the misspecifications of the P–R model. Practical implications – From policy perspectives, policymakers should focus more on maintaining an optimal level of bank competition by mitigating entry restrictions, exercising less consolidation and withdrawing overregulation from banking activities. A competitive banking industry ensures both efficiency and stability. Social implications – A competitive banking sector by lowering interest rates margin provides easier access to finance to both households and small and medium enterprises (SMEs). Originality/value – This is the only study that addresses the misspecification of the P–R model while assessing competition in Indian banking and provides a thorough understanding of the role of concentration on bank competition.