Competition in the Indian Banking Sector: A Panel Data Approach (original) (raw)
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Competition in Banking: The Indian Experience
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Competition in banking is important, primarily for productivity, efficiency, consumers' welfare and overall economic growth of a country. Since 1991, Indian government and the financial system regulator have initiated many policy measures so as to enhance the efficiency and stability of the Indian Banking Sector. The policy measures have reduced the assets concentration of public sector banks, improved customer services and customer profitability. The article has used PRH statistic and assessed the degree of competition of the Indian Banking Sector after the penetration of private and foreign banks in India. It has used a dynamic panel data involving 75 domestic and foreign banks and found that the Indian Banking Sector is monopolistically competitive having a few bigger size banks, both in Public Sector and Private Sector, influencing the market conditions and pricing system. Keywords-Competition; Indian Banking System; Panel Data Regression; Panzar-Rosse Statistic
Assessment of Competition in Indian Banking
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This paper measures the degree of bank competition in India using a sample of 70 commercial banks over the period 1996-2016. To assess the degree of competition, we estimate the market power of each bank in our sample employing three nonstructural measures: the Lerner index, the adjusted Lerner index, and the Boone indicator. Bank-wise and year-wise estimates of the marginal cost required in all these measures are obtained using the semi-parametric method. The paper further attempts to undertake a comprehensive assessment of competition in Indian banking and identifies various bank-specific, macroeconomic, structural, and contestability indicators, which are supposed to explain level and variation of the degree of competition over time. Empirical findings reveal that public-sector banks in India exercise a relatively higher degree of bank competition compared to private and foreign-sector banks. However, aggregate results support that the Indian banking system is competitive in general. Unlike the structure-conduct-performance paradigm, which advocates that a concentrated banking system impairs competitiveness, our findings reveal that concentration measures hardly exert any effect on bank competition. Rather, contestability measures play a significant role in the determination of bank competition.
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Competition has been regarded as a positive phenomenon for banks; it is perceived that competition makes banks more efficient, stimulates financial innovation and open up new markets For empirical assessment of the nature of competitive conditions amongst scheduled Indian commercial banks over a period of 15 years, we use the ‘Panzar-Rosser educed form revenue model’ to compute the so-called H statistic by estimating the factor price elasticities. In this study alternative estimation techniques have been used for comparing the dynamic H-statistic with static H-statistic. The static H-statistic was found to have a downward bias. However, dynamic as well as static H-statistic, both pointed to the presence of monopolistic competition. The hypotheses of perfect collusion as well as of perfect competition can be rejected using dynamic as well as fixed panel-econometric model estimations using micro data of banks’ balance sheets and profit & loss accounts for the years 2000-2014. The divi...
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Since, the global financial crisis, the link between Bank competition and Financial Stability is widely discussed and debated among policy makers all over the world. It is quite understanding that the degree of competition among credit institutions will increase the risk taking activities to acquire new market and improve profitability. In this backdrop, now the question arises, what is present state of competition in the Indian banking industry? & whether the financial stability of the banks deteriorate due to competition? Further, with the recent consolidation, what will happen the level of competition in the industry? In this study, we made an attempt to answer the above questions in the post financial crisis period (2007-08 to 2016-17). The post crisis period has chosen as the Indian banks’ balance sheet has increased in a robust manner. To do the analysis, a sample of 55 major nationalised and private sector banks has been selected, based on their balance sheet figures as publi...
Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking
Journal of Central Banking Theory and Practice, 2020
The primary purpose of this paper is to empirically investigate the impact of bank competition on financial stability in India. We use a dynamic panel model to examine whether an increase in bank competition hindrances financial stability of commercial banks in India over the period 1996 to 2016. Findings reveal that in India, a higher degree of bank competition is positively associated with the prevalence of non-performing loans. Additionally, the positive impact of the Lerner index on Z-score lends support to competition-fragility hypothesis. However, we argue that both the views of competition-stability and competition-fragility can coexist in a single banking system like India.
Competition in Indian commercial banking sector in the liberalized regime: An empirical evaluation
igidr.ac.in
The purpose of this study is to analyze the degree of competition in Indian commercial banking sector for the period 1996-97 to 2004-05. In this study, we have estimated a model containing first order condition for profit maximization, coupled with cost function and inverse demand function. Our findings supports that the competitive environment of Indian banking sector has improved during the regime of on going liberalization and competition has become more severe in the latter two years. JEL classification: G21; L13
The relationship between competition and risk-taking behaviour of Indian banks
Journal of Financial Economic Policy, 2016
Purpose Under the traditional franchise value paradigm, competition in banking markets is considered to be risk enhancing because of its tendency to raise interest rates on deposits. Taking a contrarian view, Boyd and De Nicolo (2005) have argued that competition in the loan market can lead to lower interest rates and hence reduce bank risk-taking. Following these contradictory theoretical results, the empirical evidence on the relationship between risk and competition in banking has also been mixed. This paper analyses the competition–stability relationship for the Indian banking sector for the period 1999-2000 to 2012-2013. Design/methodology/approach Banking competition is measured using structural measures of concentration, namely, five-bank concentration ratios and the Herfindahl-Hirschman Index as well as a non-structural measure of competition – the Panzar-Rosse H-Statistic. Panel regression methods are used to estimate the relationships. Findings Our results show that while ...