Abstract
The chapter aims to analyze and compare the cost and profit efficiency of public sector banks (PSBs) in India after the post-banking sector reforms of 1991. The data was gathered and analyzed from 1995 to 2017, i.e., from the post-liberalization period until the significant State Bank of India merger in 2017. Average profit efficiency (PE) and cost efficiency (CE) scores were analyzed year-wise for each PSB in India. The distribution and median of efficiency scores in two sub-periods were also assessed using non-parametric Friedman's two-way ANOVA and Wilcoxon signed-rank test. The results revealed profit inefficiencies among PSBs in the selected period. Over the whole period, PE is less than the CE scores. The findings also revealed wide variations across public sector banks from 1995 to 2017. Moreover, the PE of PSBs has declined since the banking sector reform in 1991 in India.
TopIntroduction
A bank is an institution licensed by the government to lend money and accepts deposits from the citizens of the country. Banks are the life blood of an economy and being the life blood of the economy, banks make huge contributions towards GDP growth of the country, infrastructure spending and tap rural areas. The banking sector channelizes the savings of public into productive ventures. The ability of the banking sector to channel funds also impacts their efficiency and performance. The banking sector in India was needed to be strengthened after achieving freedom from Britishers in 1947. The partition of India during 1947 influenced the whole economy with drastic impact on banking sector. This had also ended the laissez faire of financial regime in the country. With the advent of various Industrial Policy Resolutions after independence, the government evolved in various other sectors of the economy including banking and finance. The Banking Regulation Act 1949 was also formed, which imparted the powers of control and supervision of all the banks to Reserve Bank of India (RBI) established in 1935.
In the modern era, responsibility of banks is paramount towards sustainable development because of their diverse financial services. It creates a multiplier effect on the whole economy with long-term sustainability in the culture of today. Banks are responsible for the smooth functioning of money and capital markets in an economy. The banks also possess the responsibility towards society which supports them by purchasing their products and services (Carroll, 2008; Gupta, 2021). To attain development, the country should have a sound financial system that supports the economy as well as society (Kumar and Gulati, 2009). Therefore, banks are crucial to the nation's social and economic well-being. The banking sector in India experienced a major transformation following Narshimham Committee recommendations in 1991 and 1998 respectively. The structure of banking in India comprises of cooperative banks and Scheduled Commercial Banks (SCBs). The SCBs are further divided into Public Sector Banks (PSBs), Private Sector Banks, Foreign Banks, and Regional Rural Banks. While the cooperative banks were established for the cooperation principle and controlled and owned by the members. The public ownership of banks was accomplished in three consecutive phases in 1955, 1969, and 1980 respectively and recognized as PSBs.
Public Sector Banks
The PSBs were emanated by the ruling Britishers in India from three Presidency Banks namely Bengal (1809), Bombay (1840) and Madras (1843). These banks were merged to form the Imperial Bank of India in the year 1921 during first World War. After gaining independence from the Britishers the Imperial Bank was named as State Bank of India (SBI). The SBI’s associates were formed with the rulers of different states namely Patiala, Bikaner, Jaipur, Indore, Saurashtra, Hyderabad, Mysore, and Travancore in the year 1957. The PSBs became Twenty-seven with the merger of New Bank with Punjab National Bank. The Reserve Bank of India and Ministry of Finance both regulates the functioning of PSBs in India. PSBs are the banks in which the majority of stake is held by the government of India. PSBs are listed in stock exchanges and leveraged by the government to fulfil he social obligations for an economy. PSBs were regulated from both the Reserve Bank of India (RBI) and the Ministry of Finance. PSBs in India had many branches with a considerable rural presence provides largest employment opportunities to the citizens of the country.
Key Terms in this Chapter
Wilcoxon's Tests: These tests show the differences in medians between the two periods.
Production Approach: This approach states that the deposits and loans (number of accounts) of banks were considered as an output and the physical capital and its cost as inputs of banks.
Cost Efficiency: This term states the closeness of banks’ costs to the best practice frontier with given outputs.
Public Sector Banks: These are the banks in which the majority of stake is held by the government of India.
Conventional Microeconomic Theory: A conventional premise of microeconomic theory reveals that demand and supply of commodities are adjusted through quantities.
Friedman's Tests: These tests show changes in the distribution between the two periods.
Data Envelopment Analysis: DEA states the non-parametric frontier method of linear programming.
Profit Efficiency: This term states the closeness of banks’ profit to the standard frontier (bank) under prevailing conditions.
Intermediation Approach: This approach specified DMU as a producer of assets which utilizes deposits of customers in producing assets of banks.