1. Performance and Profitability of Indian Banks in the Post Liberalization Period
Kusum W. Ketkar
2008 World Congress on National Accounts and Economic Perfromance Measures for Nations

2. Motivation and Objectives
Financial Sector Reforms and the banking sector
Estimating bank level efficiency using Data Envelopment Analysis technique from to
Input-output debate in banking
Explain efficiency differentials among banks using fixed and random effect regressions due to regulatory mandates, management structures and external macro environment
Explain profit differentials among banks using fixed and random effect regressions due to NPAs, priority sector lending, wage bill and market power

3. Banking Sector Reforms
Narasimham Committee Reports of and 1997
Reforms:
Increase in competition via more liberal rules for the entry of new domestic and foreign banks
Infusion of Government capital in PSBs followed by Injection of private equity

4. Reforms (contd)
Deregulation on interest rates except for certain specific classes
Cuts in Statutory Liquidity Requirements (SLR) and Cash Reserve Requirements (CRR)
Reduction in credit controls to 40% from 80% of total credit
Introduction of a broader definition of priority sector lending

5. Reforms (contd) Incentives to increase consumer loans
Implementation of micro-prudential measures
Emphasis on performance, transparency and accountability

6. Table 1: Characteristics of Banks in India

7. Table 2: Trend in Bank spreads and Profits (% Total Assets)
S1 = Net interest, P1 = Net Profits, P2 = Gross Profits

8. DEA Model Estimation Specification 1: Specification 2:
Outputs: Loans, Non-interest Income, Deposits
Inputs: No. of Bank Branches, Equity, Total operating expenses
Specification 2:
Outputs: Loans, Non-interest Income
Inputs: No. of Bank Branches, Equity, Total operating expenses, Deposits

9. Table 3: Efficiency Under Alternative
Specifications

10. Regression Model Specifications: Determinants of Efficiency and Profit Differentials
Efficiency equation:
ES(i) = a1 + a2 RSB(i) + a3 OS(i)+ a4 FA(i) + a5 MSI(i) + a6 CV (i)
Profit equation:
ROA(i) = b1+ b2ES(i)+ b3IS+ b4NPA (i) +b5PSL(i)+b6WS (i)+ b7HHI(i)

11. Determinants of Efficiency Score Differences
Specification 1
Specification 2
Independent Variables
Random Effects
Fixed Effects
Ownership Time
Ownership Time
Intercept
0.646
0.471
0.593
0.66
0.559
0.619
RSB
(1.87)
0.002
(3.28)
(2.10)
0.0002
(2.71)
(2.81)
(0.34) OS
0.0021
(5.44)
0.001
(1.66)
0.0018
(4.69)
0.0017
(3.78)
0.0025
(3.55)
0.0013
(3.02) FA
-0.017
(3.46)
-0.021
(4.11)
0.009
(1.86)
-0.15
-0.01
(1.78)
-0.006
(1.12)
MSI
(4.55)
-0.008
(1.70)
-0.02
(4.67)
-0.016
(3.22))
-0.005
(0.96)
-0.015
(3.29)
Adj.R2
0.23
0.32
0.29
0.08
0.17
0.15
F- Statistic
38.00
30.90
19.56
11.11
13.75
9.3

12. Determinants of Bank Profits (ROA)
Specification 1
Specification 2
Independent Variables
Random Effects
Fixed Effects
Ownership Time
Ownership Time
Intercept
1.32
-1.30
-1.03
-0.97
-0.87 ES
2.79
(8.20)
(7.67)
2.51
(7.28)
2.46
(7.69)
2.37
(7.05)
2.14
(6.52) IS
0.77
(16.03)
0.76
(14.72)
(16.09)
(15.74)
0.75
(14.51)
(15.80)
NPA
-0.036
(4.28)
-0.038
-0.032
(3.86)
-0.-39
(4.65)
-0.035
(3.84)
-0.04
(4.24)
PSL
0.008
(1.45)
-0.013
(2.02)
-0.011
(1.95)
(2.37)
-0.01
(1.59)
-0.02
(2.83) WS
1.41
(0.84)
1.90
(0.98)
1.11
(0.64)
2.034
(1.20)
0.96
(0.49)
1.66
(0.97)
HHI
(0.32)
(0.28)
0.0002
(0.25)
(0.33)
(0.26)
(0.40)
Adj. R2
0.48
0.47
0.49
F - Statistic
76.16
46.01)
38.47
73.86
44.42
37.01

13. Conclusions
DEA results show that the relative efficiency of banks by ownership does not critically depend upon whether deposits are treated as an input or output. In general, we find foreign banks to be the most efficient followed by new private banks.
The regression analysis undertaken to explain efficiency differences among banks shows that the mandates on priority sector lending and the macro environment facing each bank is found to be quite relevant in explaining lower efficiency scores of state-owned and nationalized banks.
Finally, banks profitability is found to be positively affected by efficiency scores and net interest spreads and negatively by NPAs.