The present study examines the changes in the Total Factor Productivity (TFP) of Indian commercial banks for the period 1985-2004, when TFP indices are estimated using Malmquist productivity index approach. Further, the TFP indices are decomposed into efficiency change and technical change to see what drives the TFP change. The results show that TFP has improved significantly after liberalization across bank groups. Foreign banks have experienced the highest TFP growth for the total study period. The results also suggest that, on an average, the TFP growth is more due to technological change than efficiency change. However, this does not apply to all years. For TFP, growth is due to efficiency change during some years, due to technical change during some years and due to both during some years. This shows that Indian banking sector has experienced efficiency change as well as technical change.
Recognizing the importance of the financial sector for the development of an economy, various reforms were introduced in the Indian financial sector in order to enhance its efficiency and productivity. Banking sector being the dominant part of the financial system, most of these reforms were related to the banking sector. As the major objectives of the financial sector reforms were to increase the efficiency and productivity of the banking sector, it is essential to study whether the financial sector reforms have been successful in achieving their goal. Thus, the present study attempts to compare the productivity of Indian commercial banks in the pre- and post-liberalization periods. For this purpose the Total Factor Productivity (TFP) indices of Indian commercial banks are estimated using the Malmquist Productivity index for the period 1985-2004, and further they are decomposed into efficiency change and technical change.
Internationally there are a number of studies, which have examined the efficiency and productivity of the banking sector; and many of them measure the productivity in the face of changing policy reforms. These studies show that the impact of deregulation on efficiency of different banking sectors has been found to be mixed across the globe. While in countries such as Australia (Sturm and Williams, 2004), Spain (Vivas, 1997), Turkey (Isik and Hassan, 2003) and Norway (Berg et al., 1992) financial liberalization has positively affected the efficiency and productivity of commercial banks; in Italy (Boscia, 1999), US (Bauer et al., 1993) and others, banking efficiency was relatively unchanged after deregulation. Surprisingly, in Korea, after deregulation productivity of the banking sector has declined (Mahadevan, 2004). A survey of 130 studies of financial institutions in 21 countries by Berger and Humphrey (2000) shows that the impact of deregulation on the efficiency of banks is mixed. |
