Comparison Between Public and Private Sector Banks

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University of Connecticut

DigitalCommons@UConn
Economics Working Papers Department of Economics

9-1-2004

Productivity Growth and Efficiency in Indian Banking: A Comparison of Public, Private, and Foreign Banks T.T. Ram Mohan
Indian Institute of Management, Ahmedabad

Subhash C. Ray
University of Connecticut

Recommended Citation
Mohan, T.T. Ram and Ray, Subhash C., "Productivity Growth and Efficiency in Indian Banking: A Comparison of Public, Private, and Foreign Banks" (2004). Economics Working Papers. Paper 200427. http://digitalcommons.uconn.edu/econ_wpapers/200427

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Department of Economics Working Paper Series
Productivity Growth and Efficiency in Indian Banking: A Comparison of Public, Private, and Foreign Banks T. T. Ram Mohan Indian Institute of Management, Ahmedabad

Subhash Ray
University of Connecticut

Working Paper 2004-27 September 2004

341 Mansfield Road, Unit 1063 Storrs, CT 06269–1063 Phone: (860) 486–3022 Fax: (860) 486–4463 http://www.econ.uconn.edu/

Abstract
India’s public sector banks (PSBs) are compared unfavorably with their private sector counterparts, domestic and foreign. This comparison rests, for the most part, on financial measures of performance, and such a comparison provides much of the rationale for privatization of PSBs.In this paper, we attempt a comparison between PSBs and their private sector counterparts based on measures of productivity that use quantities of outputs and inputs. We employ two measures of productivity: Tornqvist and Malmquist total factor productivity growth. We attempt these comparisons over the period 1992-2000, comparing PSBs with both domestic private and foreign banks. Out of a total of four comparisons we have made, there are no differences in three cases, PSBs do better in two, and foreign banks in one. To put it differently, PSBs are seen to be at a disadvantage in only one out of six comparisons. It is difficult, therefore, to sustain the proposition that efficiency and productivity have been lower in public sector banks relative to their peers in the private sector.

PRODUCTIVITY GROWTH AND EFFICIENCY IN INDIAN BANKING: A COMPARISON OF PUBLIC, PRIVATE, AND FOREIGN BANKS

1. Introduction India's public sector enterprises, in general, tend to be unfavorably compared with their private sector counterparts. Apart from ideological and theoretical considerations, it is such comparisons that provide much of the impetus for the current privatization drive in India. While public sector banks (PSBs) are not yet candidates for privatization- the objective at present is merely to lower the government's holdings to 33 per cent-, there is a vocal section that would favor a push towards privatization at PSBs as well, based on their perceived inefficiency relative to the private sector. At least in the popular debate, such perceptions rest on conventional financial indicators of performance.

In this paper, we attempt a comparison between PSBs and their private sector counterparts based on measures of productivity that use quantities of outputs and inputs. There are two reasons why such an exercise would be meaningful. One, it helps validate results obtained through financial analysis. Two, given that accounting norms may vary across firms and over time within a firm, measures of productivity based on output-input quantities may be more reliable. The rest of this paper is organized as follows. Section 2 briefly discusses the measures of performance. In Section 3, we review studies that compared efficiency and productivity in the Indian context and outline the empirical

procedures we have used. In section 4, we present our results. Section 5 concludes....
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