Competitive analysis and performance evaluation of Indian banks

Abstract

The competitiveness of the Indian banking has steadily increased since the early 1990s, following the easing of regulations and entry restrictions during the liberalization era. The period saw the entry of foreign players into the Indian banking sector and the issuance of new licences for private players. In this paper, we provide the statistical evidence for the trend and analyze the efficiency of the banking system. Market concentration being one of the determinants of competitiveness, we examine the relationship between market concentration and competitiveness. To analyze these changes in the market structure over a period of 14 years from 1996, we used the k-Bank Concentration Ratios and Herfindahl-Hirschman Index (HHI). A contrasting method to HHI, called the entropy measure was used too, wherein higher weights were assigned to banks with smaller market shares (of assets and total income). While most of the contemporary research has focused on the performance of banks vis-a-vis deposits, we have taken the assets and total income as the determining factors of concentration and competitiveness. We used the Panzar Rosse H stat to analyze the competitiveness. The statistic shows the degree of monopoly/competitiveness in the industry. A comparison was also drawn against the same statistic for other economies. Our analysis revealed that the starting period of the sample period taken, showed a high concentration of assets in the hands of Public Sector Banks (almost 90%), clearly indicating that the industry was near monopolised by the Nationalized Banks (& State Banks) and heavily regulated by the RBI. However, through the post liberalization period, this ratio steadily decreased. The concentration ratios showed a gradual decrease for the analysed period. The decreasing level of market share of the big players indicated the increasing level of competitiveness in the banking sector. The concentration ratios also indicated low level of concentration in Indian banks compared to most of the emerging economies. HHI and Entropy measures showed a close correlation with the k-concentration ratios and indicated the increasing level of competitiveness. An increase in the Hstat measure indicated a move towards perfect competition. Though the collected data does not reflect a clear trend, it can be seen that the average level of competition has increased in recent years as reflected by higher H-stat values. The continuous deregulation and entry of newer players call for the banks to improve efficiencies and access low cost funds, and to address their competency gaps. The industry may also be beginning to look at a second phase of consolidation after the early 1990s as a counterweight to address these challenges.