Structure, Conduct and Performance Relationship in Indian Banking

The paper uses annual data of Indian banks for the year 1998 to test the two competing hypotheses of market structure and performance, namely, the structure-conduct-performance (SCP) hypothesis and the efficiency hypothesis. The results support the efficiency hypothesis and reject the traditional SCP and the two intermediate hypotheses. The results suggest that banking market in India is competitive and efficient. The process of deregulation, which removed entry barriers, may have helped the market become competitive and efficient. Continuation of the reforms process may help the system remain so. Secondly, such an empirical investigation has not been conducted in India to date and could encourage further research in this important area. It may also help relevant authorities in dealing with proposals for merger of banks. Where SCP better explains a banking market, authorities are generally reluctant to favourably consider requests for merger. The Indian case appears to be different.