A Stochastic Approach to Indian Banking Sector : Technical Analysis of Private Sector Banks
Dr. Rahul Rajan
The objective of this paper is to present a method for estimating the cost efficiency of Indian banks in order to study the degree of technical and cost performance of the Indian banking sector and to analyze how the banking sector has been affected by technical efficiency and cost efficiency. Initially, the evolution in the technical front in the banks between 2005 to 2012 is measured. For this analysis purpose a sample of 101 Indian banks including 28 public ,29 private and 44 foreign banks operating in India is taken for the period 2005-2012. For ...view middle of the document...
These features are reflected in the structure, size, and diversity of the country’s banking and financial sector.
The banking sector in India had another good year during 2011, with growth being propelled by factors such as good economic growth, favourable demographics and low penetration, according to a report titled ‘Indian banks are likely to ride an economic growth wave’, by research firm Standard & Poor’s.
* The country’s economy grew by 8.5 per cent in the last fiscal and the government expects the growth impetus to continue this year as well
* More than 50 per cent of India’s population is under the age of 30 years, which is a major target group for banks
* Penetration of banking services in the country remains low. The government has set targets to provide banking facilities to all areas with a population of over 2,000.
The banking sector in India is well capitalised, with capital ratios being above the global average. The average tier-1 Capital Adequacy Ratio (CAR) of the Indian banking industry is above 10 per cent compared to the Basel III norm of 8.5 per cent including the contingency buffer. Moreover, the Reserve Bank of India, in its Financial Stability Report (FSR) has also asserted that the sector remains well capitalised with both core capital adequacy and leverage ratios at comfortable level.
Efficient internal capital generation, fairly active capital markets, and strong support from the government ensured good capitalisation for most banks. The overall CAR reached 14 per cent as on March 31, 2011. High levels of public deposits also ensured a comfortable liquidity profile
The total assets size of the banking industry rose by more than five times between March 2000 and March 2010 - from US$ 250 billion to more than US$ 1.3 trillion - a Compound Annual Growth Rate (CAGR) of 18 per cent compared to the average GDP growth of 7.2 per cent during the same period.
During the last five years, while the annual rate of credit growth was 23 per cent, profitability was maintained at around 15 per cent. While the Indian banking sector is characterised by the presence of a large number of players, top 10 banks accounted for a significant 57 per cent share of the total credit as on March 31, 2011.
Nationalised banks accounted for 52.2 per cent of the aggregate deposits, with State Bank of India (SBI) and its Associates accounting for 22.1 per cent. The share of new private sector banks, foreign banks, old private sector banks, and regional rural banks in aggregate deposits was 13.3 per cent, 4.8 per cent, 4.6 per cent and 3.0 per cent, respectively, according to RBI’s Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, December 2010.
The seminal work comes from Ferrier and Lovell (1990). They apply parametric SFA and
non-parametric DEA on a sample of 575 US banks to estimate cost efficiency. Their results suggest both similarities and differences between the approaches....