Indian banking industry: a new evidence from a profitability perspective
Abstract
While India is set to become the world’s most populous country by 2050, it is also the home to the world’s largest number of unbanked individuals. This paper aims to investigate the profitability issue with a focus on public banks. Using a new methodology based on comparisons tests and panel analysis that test unobserved heterogeneities between banks. We show that public banks are not low performers, nor can private banks be considered high performers Finally, we show that the proportion of non-performing assets (NPAs) is a real concern and requires urgent attention of government and regulators for Indian banks to serve profitability their home market. Banks that make more profits on non-interest income are not necessarily less profitable than others. Further, outcomes favour the ideas that if public banks are able to clean-up their non-performing assets as well as follow a sound prudential regulation, their profits could strongly grow. Future reforms must consider the public bank’s key role in the growth of the India’s economic outlook, especially when it comes to projects of social importance and national priority. The study is based on 105 banks with cross-sections from 2003–2016; however, India’s government has initiated reforms in the banking segment, which has led to a significant decrease in government stake and the number of banks.
Keyword : Indian banks, profitability, non-performing assets, net operating income, public banks, private banks
How to Cite
Rai, S., Chabot, M., Bertrand, J.-L., & Shaikh, I. (2021). Indian banking industry: a new evidence from a profitability perspective. Business: Theory and Practice, 22(2), 349-360. https://doi.org/10.3846/btp.2021.12982
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Das, A., & Ghosh, S. (2006). Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics, 15(3), 193–221. https://doi.org/10.1016/j.rfe.2005.06.002
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Kapoor, A. (2014). Financial inclusion and the future of the Indian economy. Futures, 56, 35–42. https://doi.org/10.1016/j.futures.2013.10.007
KPMG-CII. (2013). Maneuvering through turbulence: Emerging strategies. KPMG.
Kumbhakar, S., & Sarkar, S. (2005). Theory and application of productivity and efficiency, econometric and DEA approach. Macmillan.
Mueller, D. C. (1977). The persistence of profits above the norm. Economica, 44(176), 369–380. https://doi.org/10.2307/2553570
Narasimham, M., Ghosh, A., Golporia, M. N., Nadkarnl, S. S., Vaghul, N., Shroff, M. R., & Reddy, K. J. (1991). Report of the Committee on the Financial System. RBI.
Park, K. H., & Weber, W. L. (2006). A note on efficiency and productivity growth in the Korean banking industry, 1992–2002. Journal of Banking & Finance, 30(8), 2371–2386. https://doi.org/10.1016/j.jbankfin.2005.09.013
Patti, E. B., & Hardy, D. C. (2005). Financial sector liberalization, bank privatization, and efficiency: Evidence from Pakistan. Journal of Banking & Finance, 29(8–9), 2381–2406. https://doi.org/10.1016/j.jbankfin.2005.03.019
Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203–2215. https://doi.org/10.1016/j.jbankfin.2012.03.021
Prasad, A., & Ghosh, S. (2005). Competition in Indian banking. IMF Working Paper No. 05/141. https://doi.org/10.5089/9781451861600.001
Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297–307. https://doi.org/10.1016/j.ejor.2009.02.030
Sahoo, B. K., & Tone, K. (2009). Decomposing capacity utilization in data envelopment analysis: An application to banks in India. European Journal of Operational Research, 195(2), 575–594. https://doi.org/10.1016/j.ejor.2008.02.017
Sarkar, J., & Bhaumik, S. K. (1998). Deregulation and the limits to banking market competition: some insights from India. International Journal of Development Banking, 16(2), 29–42.
Sarkar, J., Sarkar, S., & Bhaumik, S. K. (1998). Does ownership always matter? – Evidence from the Indian banking industry. Journal of Comparative Economics, 26(2), 262–281. https://doi.org/10.1006/jcec.1998.1516
Sathye, M. (2003). Efficiency of banks in a developing economy: The case of India. European Journal of Operational Research, 148(3), 662–671. https://doi.org/10.1016/S0377-2217(02)00471-X
Sensarma, R. (2008). Deregulation, ownership and profit performance of banks: evidence from India. Applied Financial Economics, 18(19), 1581–1595. https://doi.org/10.1080/09603100701720385
Tabak, B. M., & Tecles, P. L. (2010). Estimating a Bayesian stochastic frontier for the Indian banking system. International Journal of Production Economics, 125(1), 96–110. https://doi.org/10.1016/j.ijpe.2010.01.008
Tamatam, R., Dutta, P., Dutta, G., & Lessmann, S. (2019). Efficiency analysis of Indian banking industry over the period 2008–2017 using data envelopment analysis. Benchmarking: An International Journal, 26(8), 2417–2442. https://doi.org/10.1108/BIJ-12-2018-0422
Vera-Gilces, P., Camino-Mogro, S., Ordeńana-Rodrķguez, X., & Cornejo-Marcos, G. (2020). A look inside banking profitability: Evidence from a dollarized emerging country. The Quarterly Review of Economics and Finance, 75, 147–166. https://doi.org/10.1016/j.qref.2019.05.002
Zhao, T., Casu, B., & Ferrari, A. (2010). The impact of regulatory reforms on cost structure, ownership and competition in Indian banking. Journal of Banking & Finance, 34(1), 246–254. https://doi.org/10.1016/j.jbankfin.2009.07.022
Altman, E. I., & Sabato, G. (2005). Modeling credit risk for SMEs: Evidence from the US market. Managing and measuring risk: emerging global standards and regulations after the financial crisis. Abacus, 43, 332–357. https://doi.org/10.1142/9789814417501_0009
Altman, E. I., Rijken, H., Watt, M., Balan, D., Forero, J., & Mina, J. (2010). The Z-Metrics™ methodology for estimating company credit ratings and default risk probabilities (pp. 18–21). RiskMetrics Group.
Ammar, N., & Boughrara, A. (2019). The impact of revenue diversification on bank profitability and risk: evidence from MENA banking industry. Macroeconomics and Finance in Emerging Market Economies, 12(1), 36–70. https://doi.org/10.1080/17520843.2018.1535513
Banerjee, S., & Velamuri, M. (2015). The conundrum of profitability versus soundness for banks by ownership type: Evidence from the Indian banking sector. Review of Financial Economics, 26(1), 12–24. https://doi.org/10.1016/j.rfe.2015.04.001
Bawa, J. K., Goyal, V., Mitra, S. K., & Basu, S. (2019). An analysis of NPAs of Indian banks: Using a comprehensive framework of 31 financial ratios. IIMB Management Review, 31(1), 51–62. https://doi.org/10.1016/j.iimb.2018.08.004
Bhaumik, S. K., & Dimova, R. (2004). How important is ownership in a market with level playing field?: The Indian banking sector revisited. Journal of Comparative Economics, 32(1), 165–180. https://doi.org/10.1016/j.jce.2003.12.001
Bhaumik, S. K., & Piesse, J. (2008). Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector. Economic Systems, 32(2), 177–196. https://doi.org/10.1016/j.ecosys.2007.04.004
Bongini, P., Cucinelli, D., Battista, M. L., & Nieri, L. (2019). Profitability shocks and recovery in time of crisis evidence from European banks. Finance Research Letters, 30, 233–239. https://doi.org/10.1016/j.frl.2018.10.003
Casu, B., Ferrari, A., & Zhao, T. (2013). Regulatory reform and productivity change in Indian banking. Review of Economics and Statistics, 95(3), 1066–1077. https://doi.org/10.1162/REST_a_00298
Chen, Z., Li, K., & He, L.-Y. (2019). Has internet finance decreased the profitability of commercial banks?: evidence from China. Emerging Markets Finance and Trade, 56(13), 3015–3032. https://doi.org/10.1080/1540496X.2019.1624159
Cruz-Garcķa, P., Forte, A., & Peiró-Palomino, J. (2020). On the drivers of profitability in the banking industry in restructuring times: a Bayesian perspective. Applied Economic Analysis, 28(83), 111–131. https://doi.org/10.1108/AEA-01-2020-0003
Das, A., & Das, S. (2007). Scale economies, cost complementarities and technical progress in Indian banking: evidence from fourier flexible functional form. Applied Economics, 39(5), 565–580. https://doi.org/10.1080/00036840500428138
Das, A., & Ghosh, S. (2006). Financial deregulation and efficiency: An empirical analysis of Indian banks during the post reform period. Review of Financial Economics, 15(3), 193–221. https://doi.org/10.1016/j.rfe.2005.06.002
Das, A., & Kumbhakar, S. C. (2012). Productivity and efficiency dynamics in Indian banking: An input distance function approach incorporating quality of inputs and outputs. Journal of Applied Econometrics, 27(2), 205–234. https://doi.org/10.1002/jae.1183
ENS. (2017). Privatise viable PSBS, make non-viables narrow banks. In The Indian Express.
Fujii, H., Managi, S., & Matousek, R. (2014). Indian bank efficiency and productivity changes with undesirable outputs: a disaggregated approach. Journal of Banking & Finance, 38, 41–50. https://doi.org/10.1016/j.jbankfin.2013.09.022
Ghosh, S. (2015). Chastising public sector banks for every failure is a comedy of errors. The Economic Times. https://doi.org/10.1093/acprof:oso/9780199458943.001.0001
Gulati, R., & Kumar, S. (2016). Assessing the impact of the global financial crisis on the profit efficiency of Indian banks. Economic Modelling, 58, 167–181. https://doi.org/10.1016/j.econmod.2016.05.029
Jayaraman, A. R., & Srinivasan, M. R. (2014). Analyzing profit efficiency of banks in India with undesirable output – Nerlovian profit indicator approach. IIMB Management Review, 26(4), 222–233. https://doi.org/10.1016/j.iimb.2014.09.003
Kapoor, A. (2014). Financial inclusion and the future of the Indian economy. Futures, 56, 35–42. https://doi.org/10.1016/j.futures.2013.10.007
KPMG-CII. (2013). Maneuvering through turbulence: Emerging strategies. KPMG.
Kumbhakar, S., & Sarkar, S. (2005). Theory and application of productivity and efficiency, econometric and DEA approach. Macmillan.
Mueller, D. C. (1977). The persistence of profits above the norm. Economica, 44(176), 369–380. https://doi.org/10.2307/2553570
Narasimham, M., Ghosh, A., Golporia, M. N., Nadkarnl, S. S., Vaghul, N., Shroff, M. R., & Reddy, K. J. (1991). Report of the Committee on the Financial System. RBI.
Park, K. H., & Weber, W. L. (2006). A note on efficiency and productivity growth in the Korean banking industry, 1992–2002. Journal of Banking & Finance, 30(8), 2371–2386. https://doi.org/10.1016/j.jbankfin.2005.09.013
Patti, E. B., & Hardy, D. C. (2005). Financial sector liberalization, bank privatization, and efficiency: Evidence from Pakistan. Journal of Banking & Finance, 29(8–9), 2381–2406. https://doi.org/10.1016/j.jbankfin.2005.03.019
Pennathur, A. K., Subrahmanyam, V., & Vishwasrao, S. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking & Finance, 36(8), 2203–2215. https://doi.org/10.1016/j.jbankfin.2012.03.021
Prasad, A., & Ghosh, S. (2005). Competition in Indian banking. IMF Working Paper No. 05/141. https://doi.org/10.5089/9781451861600.001
Ray, S. C., & Das, A. (2010). Distribution of cost and profit efficiency: Evidence from Indian banking. European Journal of Operational Research, 201(1), 297–307. https://doi.org/10.1016/j.ejor.2009.02.030
Sahoo, B. K., & Tone, K. (2009). Decomposing capacity utilization in data envelopment analysis: An application to banks in India. European Journal of Operational Research, 195(2), 575–594. https://doi.org/10.1016/j.ejor.2008.02.017
Sarkar, J., & Bhaumik, S. K. (1998). Deregulation and the limits to banking market competition: some insights from India. International Journal of Development Banking, 16(2), 29–42.
Sarkar, J., Sarkar, S., & Bhaumik, S. K. (1998). Does ownership always matter? – Evidence from the Indian banking industry. Journal of Comparative Economics, 26(2), 262–281. https://doi.org/10.1006/jcec.1998.1516
Sathye, M. (2003). Efficiency of banks in a developing economy: The case of India. European Journal of Operational Research, 148(3), 662–671. https://doi.org/10.1016/S0377-2217(02)00471-X
Sensarma, R. (2008). Deregulation, ownership and profit performance of banks: evidence from India. Applied Financial Economics, 18(19), 1581–1595. https://doi.org/10.1080/09603100701720385
Tabak, B. M., & Tecles, P. L. (2010). Estimating a Bayesian stochastic frontier for the Indian banking system. International Journal of Production Economics, 125(1), 96–110. https://doi.org/10.1016/j.ijpe.2010.01.008
Tamatam, R., Dutta, P., Dutta, G., & Lessmann, S. (2019). Efficiency analysis of Indian banking industry over the period 2008–2017 using data envelopment analysis. Benchmarking: An International Journal, 26(8), 2417–2442. https://doi.org/10.1108/BIJ-12-2018-0422
Vera-Gilces, P., Camino-Mogro, S., Ordeńana-Rodrķguez, X., & Cornejo-Marcos, G. (2020). A look inside banking profitability: Evidence from a dollarized emerging country. The Quarterly Review of Economics and Finance, 75, 147–166. https://doi.org/10.1016/j.qref.2019.05.002
Zhao, T., Casu, B., & Ferrari, A. (2010). The impact of regulatory reforms on cost structure, ownership and competition in Indian banking. Journal of Banking & Finance, 34(1), 246–254. https://doi.org/10.1016/j.jbankfin.2009.07.022