Study of mergers and scale economies in the Indian banking industry

Abstract

This study intends to evaluate the presence of scale economies in the Indian banking industry. All banks operating in India have been divided into three groups, viz. public-sector, private sector, and foreign-owned banks. Financial data for these banks was collected for a period between 2005 and 2009. Cobb-Douglas Production Function and Data Envelopment Analysis (DEA) were applied to the data set received. While the Cobb Douglas method revealed no significant results, DEA yielded encouraging results. The three groups of banks were analysed using the DEA method, so as to reveal their respective scale-economies related behaviours. Public sector banks depicted a U-shaped curve, showing that significant diseconomies of scale exist at larger sized banks. Private sector banks as well showed scale economies, but were free of diseconomies of any kind. Foreign-owned banks, on the other hand, had a flat curve, which signified constant returns to scale. Bank mergers have also been looked at from the point of view of economic efficiency, and the feasibility of mergers for public and private sector banks was looked at.