International Journal of Banking, Risk and Insurance

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Impact of Competition on the Operational Efficiency of Indian Banks


Affiliations
1 Bhavan’s Royal Institute of Management, Tripunuthira, Cochin, Kerala, India
2 Department of Management Studies, Aligarh Muslim University, Aligarh, Uttar Pradesh, India
     

   Subscribe/Renew Journal


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.

Keywords

Quiet Life Hypothesis, Competition, Operational Efficiency, Granger Causality Test.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Almounsor, A., & Mensi, S. (2016). The implications of market structure and bank efficiency on social welfare: The case of the Saudi Arabian banking system. Middle East Development Journal, 8, 329-357.

  • Al-Muharrami, S., & Matthews, K. (2009). Market power versus efficient-structure in Arab GCC banking. Applied Financial Economics, 19, 1487-1496.

  • Bain, J. S. (1956). Barriers to New Competition. Harvard University Press, Cambridge, Massachusetts.

  • Berger, A. N., & Hannan, T. H. (1998). The efficiency cost of market power in the banking industry: A test of the “quiet life” and related hypotheses. Review of Economics and Statistics, 80, 454-465.

  • Casu, B., & Girardone, C. (2009). Testing the relationship between competition and efficiency in banking: A panel data analysis. Economics Letters, 105, 134-137.

  • Coccorese, P., & Pellecchia, A. (2010). Testing the ‘quiet life’ hypothesis in the Italian banking industry. Economic Notes, 39, 173-202.

  • Demsetz, H. (1973). Industry structure, market rivalry, and public policy. The Journal of Law and Economics, 16, 1-9.

  • Fare, R., Grosskopf, S., Maudos, J., & Tortosa-Ausina, E. (2015). Revisiting the quiet life hypothesis in banking using nonparametric techniques. Journal of Business Economics and Management, 16, 159-187.

  • Fare, R., Grosskopf, S., & Johnson, A. L. (2012). Rational Inefficiency: The Quiet Life. Working Paper, Economic Measurement Group, UNSW Australia.

  • Gharsellaoui, M. (2015). The Extent of Competition and Its Impact on Bank Efficiency: Case of the Tunisian Commercial Banks.

  • Hannan, T. H., & Berger, A. N. (1991). The rigidity of prices: Evidence from the banking industry. The American Economic Review, 81, 938-945.

  • Hicks, J. (1935). Annual survey of economic theory: The theory of monopoly. Econometrica, 3, 1-20.

  • Homma, T., Tsutsui, Y., & Uchida, H. (2014). Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis. Journal of Banking & Finance, 40, 143-153.

  • Huljak, I. (2015). Testing Out the Quiet-Life Hypothesis on Croatian Banking Sector. Economic and Social Development (Book of Proceedings), 5th Eastern European Economic and Social Development, 343.

  • Hunter, W. C., & Timme, S. G. (1986). Technical change, organizational form, and the structure of bank production. Journal of Money, Credit and Banking, 18, 152-166.

  • Koetter, M., & Vins, O. (2008). The Quiet Life Hypothesis in banking: Evidence from German savings banks (No. 190). Working paper series//Johann-Wolfgang-Goethe-Universitat Frankfurt am Main, Fachbereich Wirtschaftswissenschaften Finance & accounting.

  • Kouki, I., & Al-Nasser, A. (2014). The implication of banking competition: Evidence from African countries. Research in International Business and Finance.

  • Maudos, J., & de Guevara, J. F. (2007). The cost of market power in banking: Social welfare loss vs. cost inefficiency. Journal of Banking & Finance, 31, 2103-2125.

  • PTI (February 16, 2017). Government gives green signal to merger of SBI and its five associate banks. The Economic Times. URL accessed on May 3, 2017. http://economictimes.indiatimes.com/articleshow/57170478.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

  • Reuters (March 10, 2016). Fitch: Consolidation Positive in the Long Term. Reuters. Retrieved from https://www.reuters.com/article/idUSFit951841 (Accessed on May 05, 2017).

  • Rhoades, S. A., & Rutz, R. D. (1982). Market power and firm risk: A test of the ‘quiet life’ hypothesis. Journal of Monetary Economics, 9, 73-85.

  • Titko, J., & Dauylbaev, K. (2015). Testing the quiet life hypothesis in the banking sector. In 19th World Multi-Conference on Systemics, Cybernetics and Informatics, WMSCI.


Abstract Views: 366

PDF Views: 0




  • Impact of Competition on the Operational Efficiency of Indian Banks

Abstract Views: 366  |  PDF Views: 0

Authors

R. R. Vinod
Bhavan’s Royal Institute of Management, Tripunuthira, Cochin, Kerala, India
Mohammed Khalid Azam
Department of Management Studies, Aligarh Muslim University, Aligarh, Uttar Pradesh, India

Abstract


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.

Keywords


Quiet Life Hypothesis, Competition, Operational Efficiency, Granger Causality Test.

References