Impact of Competition on the Operational Efficiency of Indian Banks

During the last three decades, the issues & challenges faced by most banking industries worldwide have been widely debated both in academic and policy level circles. Some of the topics more profoundly examined in the banking literature relate to the study of the effect of market power on managerial efficiency. Although there is no dearth of literature, majority of them have been confined to developed economies and the results also are inconclusive. Accordingly, this study tries to address this gap in the literature. In this study, inverse of concentration measure (HHI) is taken as a proxy for competition. For operational efficiency, cost to income ratio for banks is used. Results report that despite addition of more players, operational efficiency of Indian scheduled commercial banks has come down. One solution to enhance their operational efficiency is to shift their focus from traditional banking services to modern banking services. Further, private sector banks seem to be more operationally efficient that government owned banks. On analysing the flow of direction, there exists a causality running from competition to efficiency, thus rejecting the existence of quiet life hypothesis in Indian banking industry.