INTRODUCTION
From the early 1970s
through the late 1980s, the role of market forces in Indian banking system was
almost missing, and excess regulation in terms of high liquidity requirements
and state interventions in allocating credit and determining the prices of
financial products has resulted in serious financial repression. The main
consequence of this financial repression was an ascent in the volume of bad
loans due to ineffective credit evaluation system and poorer risk assessment
policies. Further, poor disclosure standards abetted corruption by window-dressing the true picture of banks. The over staffing and over-branching
and undue interference by labour unions resulted in huge operating losses. This
led to a gradual decline in the profitability and efficiency of Indian banks,
especially of public sector banks (PSBs). In fact, in late 1990s, Indian banking
system was on the verge of a crisis and lacking viability even in its basic function
of financial intermediation.
Realizing the presence
of the signs of financial repression and to get an escape from any potential
crisis in the banking sector, Government of India (GOI) embarked on a
comprehensive banking reforms plan in 1992 with the objective to create a more
diversified, profitable, efficientand resilient banking system. The broad
contour of this plan was sketched by the Committee onthe Financial System
(Chairperson: M. Narasimham, 1991), while the definite shape to the plan was provided
by the Committee on the Banking Sector Reforms (Chairperson: M.
Narasimham,1998. The main agenda of reforms process was to focus on key areas:
i)
Restructuring of PSBs
by imparting more autonomy in decision making, and by infusing fresh capital
through recapitalization and partial privatization.
ii)
Creating contestable
markets by removing entry barriers for de
novo domestic
private and foreign banks.
iii)
Improving the
regulatory and supervisory framework.
iv)
Strengthening the banking system through
consolidation. To meet this agenda, the policy makers heralded an episode of
interest-rates deregulation,standardized minimum capital requirements as per
Basle norms, prudential norms relating to income recognition, assets
classification and provisioning for bad loans, and changes in regulatory and
supervisory environment.
DISCUSSION
Noulas and Ketkar (1996) measured
the efficiency of public sector banks of India by using the Data Envelopment
Analysis. The study considered 18 public sector banks and the necessary
information for analysis have been collected from the RBI publications for the
year 1993. The study identified that pure technical efficiency was 1.5 percent
and scale inefficiency was 2.25 percent and none of the banks were operating
under decreasing returns to scale.
Milind Sathye (2003) compared the
efficiency of Indian commercial banks with the efficiency of foreign banks by
employing a nonparametric approach of Data Envelopment Analysis. Annual data
consists of 27 public sector commercial banks, 33 private sector commercial
banks and 34 foreign banks were considered for the analysis have been obtained from the Indian Banks’
Association for the year 1997-1998. The
analysis revealed that public sector banks such as State Bank of India, and
Bank of Baroda and Indus Ind private
bank have been recorded with higher mean efficiency. But most of the Indian banks had lower mean
efficiency as compared to the foreign banks. The study recommended that the
bringing down non-performing assets and curtailing the establishment
expenditure and rationalization of rural branches could help Indian banks to
improve their efficiency.
Shanmugam and Das (2004) analyzed
the technical efficiency of banks in four different ownership groups in India
by using stochastic frontier approach with specification of Cobb-Douglas
production function. The analytical
results in general indicated that due to technical inefficiency actual output
of Indian banks was less than potential output and the State Bank of India
group and private foreign group performed better than their counterparts.
CONCLUSION
The recent deregulation has led
to increase the efficiency of commercial banks and perhaps deregulation also
brings significant changes in technology and practices all of which shift the
production frontier outwards. Therefore, the objectives of liberalization seem
to be realized. However, there is some
evidence of improvement in efficiency but still there is a wider gap between
actual and potential performance of banks. Indian banks are, on an average,
utilizing only below 60 per cent of their potentialities. This inefficiency has
to be reduced in order to provide better services to the people and in order to
supply adequate financial resources to needs of growing economy.
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