Business Study

Deregulation and productivity growth: a study of Indian commercial banking

Tianshu Zhaoa,b∗, Barbara Casub, Alessandra Ferraria

a

The University of Reading and b The University of Wales, Bangor

Abstract: This paper examines the impact of regulatory reform on the performance of Indian commercial banks. Using a balanced panel data set covering from the beginning of the deregulation period (1992) to the most recent years (2004) and employing a DEA-based Malmquist index of total factor productivity change, this paper attempts to quantify the magnitude of total factor productivity change and identify its main sources. We also explore whether deregulation has had a different impact on the performance of public, private and foreign banks and whether it affected the risk-taking behaviour of market participants. The empirical results seem to indicate that, after an initial adjustment phase, the Indian banking industry experienced sustained productivity growth, driven mainly by technological progress. Banks’ ownership structure seems to have an impact on bank efficiency but does not appear to have an influence on total factor productivity change. Although ownership per se does not seem to matter as much as increased competition, during the deregulation process foreign banks appear to have acted as technological innovators, thereby increasing even further the competitive pressure in the Indian banking market. Finally, our results also indicate an increase in risk-taking behaviour along with the whole deregulation process.

Keywords: Deregulation; Indian banking; Productivity Change; Malmquist Index.

JEL classification: G21; D24

∗Please address correspondence to Tianshu Zhao, University of Reading Email: tianshu.zhao@reading.ac.uk

1. Introduction

A large number of economies, both in developed and developing countries have deregulated their banking systems over the past two decades. The primary objective of such reforms is to improve productivity, efficiency...