DOES BANK EFFICIENCY ENHANCE BANK PERFORMANCE? EMPIRICAL EVIDENCE FROM INDIAN BANKING
This paper examines the effects of cost, revenue, profit efficiency, and stability inefficiency on bank profitability in India over the period 1997 to 2017. Additionally, this study examines the effect of efficiency on profitability for banks according to their ownership and for periods with (and without) the global financial crisis. The cost, revenue, and profit efficiency scores for 70 banks in India are estimated using stochastic frontier analysis. Our key findings are as follows. First, we find that cost, revenue and profit efficiencies positively influence the profitability conditions of Indian banks. Second, banks that are inefficient adversely influence bank performance, although the global financial crisis did not seem to impact the efficiency-profitability relationship. Finally, we find that bank ownership matters for the association between its efficiency and performance.
Ahamed, M. M. (2017). Asset Quality, Non-interest Income, and Bank Profitability: Evidence from Indian Banks. Economic Modelling, 63, 1-14.
Aigner, D., Lovell, C. K., & Schmidt, P. (1977). Formulation and Estimation of Stochastic Frontier Production Function Models. Journal of econometrics, 6, 21-37.
Alhassan, A. L., Tetteh, M. L., & Brobbey, F. O. (2016). Market Power, Efficiency and Bank Profitability: Evidence from Ghana. Economic Change and Restructuring, 49, 71-93.
Almaqtari, F. A., Al‐Homaidi, E. A., Tabash, M. I., & Farhan, N. H. (2019). The Determinants of Profitability of Indian Commercial Banks: A Panel Data Approach. International Journal of Finance & Economics, 24, 168-185.
Al-Muharrami, S., & Matthews, K. (2009). Market Power Versus Efficient-structure in Arab GCC Banking. Applied Financial Economics, 19, 1487-1496
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, Industryspecific and Macroeconomic Determinants of Bank Profitability. Journal of International Financial Markets, Institutions and Money, 18, 121-136.
Bardhan, S. (2013). Profit Efficiency of Indian Commercial Banks in the Postliberalization Period: A Stochastic Frontier Approach. Margin: The Journal of Applied Economic Research, 7, 391-415.
Berger, A. N., & Mester, L. J. (2003). Explaining the Dramatic Changes in Performance of US Banks: Technological Change, Deregulation, and Dynamic Changes in Competition. Journal of Financial Intermediation, 12, 57-95.
Chen, G., Firth, M., & Rui, O. (2006). Have China’s Enterprise Reforms Led to Improved Efficiency and Profitability? Emerging Markets Review, 7, pp.82-109.
Čihák, M., & Hesse, H. (2010). Islamic Banks and Financial Stability: An Empirical Analysis. Journal of Financial Services Research, 38, 95-113.
Claessens, S., Coleman, N., & Donnelly, M. (2018). “Low-for-long” Interest Rates and Banks’ Interest Margins and Profitability: Cross-country Evidence. Journal of Financial Intermediation, 35, 1-16.
Das, A., & Ghosh, S. (2009). Financial Deregulation and Profit Efficiency: A Nonparametric Analysis of Indian Banks. Journal of Economics and Business, 61, 509-528.
Fang, J., Lau, C. K. M., Lu, Z., Tan, Y., & Zhang, H. (2019). Bank Performance in China: A Perspective from Bank Efficiency, Risk-taking and Market Competition. Pacific-Basin Finance Journal, 56, 290-309.
Goddard, J., Molyneux, P., & Wilson, J. O. (2004). The Profitability of European Banks: A Cross‐sectional and Dynamic Panel Analysis. The Manchester School, 72, 363-381.
Jiang, G., Tang, N., Law, E., & Sze, A. (2003). The Profitability of the Banking Sector in Hong Kong. Hong Kong Monetary Authority Quarterly Bulletin, 3, 5-14.
Kumar, S. (2013). Banking Reforms and the Evolution of Cost Efficiency in Indian Public Sector Banks. Economic Change and Restructuring, 46, 143-182.
Kumbhakar, S.C., & Lovell, C.K. (2003). Stochastic Frontier Analysis. Cambridge University Press.
Kundu, S., & Banerjee, A. (2021). Operational and Policy Efficiency: A Comparison between Public and Private Indian Banks. International Journal of Productivity and Performance Management.
Le, T. D., & Ngo, T. (2020). The Determinants of Bank Profitability: A Cross-country Analysis. Central Bank Review, 20, 65-73.
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank Income Structure and Risk: An Empirical Analysis of European Banks. Journal of Banking & Finance, 32, 1452-1467.
Li, Z., Liu, S., Meng, F., & Sathye, M. (2019). Competition in the Indian Banking Sector: A Panel Data Approach. Journal of Risk and Financial Management, 12, 136.
Naceur, S. B., & Omran, M. (2011). The Effects of Bank Regulations, Competition, and Financial Reforms on Banks’ Performance. Emerging Markets Review, 12, 1-20.
Olson, D. and Zoubi, T.A., 2011. Efficiency and Bank Profitability in MENA Countries. Emerging Markets Review, 12, 94-110.
Peng, J. L., Jeng, V., Wang, J. L., & Chen, Y. C. (2017). The Impact of Bancassurance on Efficiency and Profitability of Banks: Evidence from the Banking Industry in Taiwan. Journal of Banking & Finance, 80, 1-13.
Rahman, M. M., Hamid, M. K., & Khan, M. A. M. (2015). Determinants of Bank Profitability: Empirical Evidence from Bangladesh. International Journal of Business and Management, 10, 135.
Rakhe, P.B., (2012). Asset Liability Mismatches (ALMi) in the Indian Banking Sector—The Extent, Persistence and Reasons. WPS (DEPR), 17, 2012.
Rakshit, B. and Bardhan, S. (2020). Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking. Journal of Central Banking Theory and Practice, 9, 75-102.
Rakshit, B., & Bardhan, S. (2019). Bank Competition and its Determinants: Evidence from Indian Banking. International Journal of the Economics of Business, 26, 283-313.
Rakshit, B., & Bardhan, S. (2021). An Empirical Investigation of the Effects of Competition, Efficiency and Risk-taking on Profitability: An Application in Indian Banking. Journal of Economics and Business, 106022.
Ramlan, H., & Adnan, M. S. (2016). The Profitability of Islamic and Conventional Bank: Case Study in Malaysia. Procedia Economics and Finance, 35, 359-367.
Ray, S. C., & Das, A. (2010). Distribution of Cost and Profit Efficiency: Evidence from Indian Banking. European Journal of Operational Research, 201, 297-307.
Roy, D. (2014). Analysis of Technical Efficiency of Indian Banking Sector: An Application of Data Envelopment Analysis. International Journal of Finance & Banking Studies, 3, 150.
Sathye, M. (2003). Efficiency of Banks in a Developing Economy: The Case of India. European Journal of Operational Research, 148, 662-671.
Singh, P. K., & Thaker, K. (2020). Profit Efficiency and Determinants of Indian Banks; A Truncated Bootstrap and Data Envelopment Analysis. Cogent Economics & Finance, 8, 1724242.
Sufian, F. and Kamarudin, F., (2015). Determinants of Revenue Efficiency of Islamic Banks. International Journal of Islamic and Middle Eastern Finance and Management.
Tabak, B. M., Fazio, D. M., & Cajueiro, D. O. (2012). The Relationship between Banking Market Competition and Risk-taking: Do Size and Capitalization Matter? Journal of Banking & Finance, 36, 3366-3381.
Tan, Y. (2018). The Impacts of Competition and Risk on Profitability in Chinese Banking: Evidence from Boone Indicator and Stability Inefficiency. Annals of Economics & Finance, 19.
Tan, Y., Floros, C., & Anchor, J. (2017). The Profitability of Chinese Banks: Impacts of Risk, Competition and Efficiency. Review of Accounting and Finance, 16, 86-105. https://doi.org/10.1108/RAF-05-2015-0072.
Tanwar, J., Seth, H., Vaish, A. K., & Rao, N. V. M. (2020). Revisiting the Efficiency of Indian Banking Sector: An Analysis of Comparative Models Through Data Envelopment Analysis. Indian Journal of Finance and Banking, 4, 92-10.
Copyright (c) 2022 Buletin Ekonomi Moneter dan Perbankan
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.