Abstract:
This article estimates bank-specific profit efficiency of three broad ownership groups
of Indian banks during the period 1995–96 to 2011–12, using the stochastic frontier
methodology. Results reveal that during the post-liberalisation period, public sector
banks in India are the best performers in terms of estimated profit efficiency. Further,
foreign banks operating in India record higher profit efficiency levels compared to
domestic private banks. The introduction of prudential regulations, such as capital
adequacy ratios, has had a significant positive impact on the profit efficiency of Indian
banks, while loan defaults adversely affect their profit efficiency. Market power does not
necessarily lead to an increase in profit efficiency, while bank mergers have had a significant
positive effect. Contrary to the expectation that the Indian banking system is highly
resilient and sufficiently robust to cope with external shocks, the results reveal that the
ongoing global financial crisis has had a significant adverse effect on the profit efficiency
of Indian banks.
