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Reforms, Productivity, and Efficiency in Banking: The Indian Experience [with Comments] Author(s): Rakesh Mohan, Mohsin S. Khan and M. Ashraf Janjua Reviewed work(s): Source: The Pakistan Development Review, Vol. 44, No. 4, Papers and Proceedings PART I Twenty-first Annual General Meeting and Conference of the Pakistan Society of Development Economists Islamabad, December 19-21, 2005 (Winter 2005), pp. 505-538 Published by: Pakistan Institute of Development Economics, Islamabad Stable URL: http://www.jstor.org/stable/41260730 . Accessed: 28/12/2012 00:17
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Review ThePakistan Development 44 : 4 PartI (Winter 2005) pp. 505-538
in and Reforms, Productivity, Efficiency Banking:The Indian Experience
in of India embarkedon a strategy economicreforms the wake of a seriousbalance-ofin sector was crisisin 1991. A central and,with plankof thereforms reform thefinancial payments The objective thebanking of the sector. of banksbeingthemainstay financial intermediation, banking financial a efficient competitive and was to promote diversified, sectorreforms systemwiththe the of ultimate through flexibility, efficiency resources operational objectiveof improving allocative from and financial 1992,Indianbankswere Beginning viability institutional strengthening. improved India's approachto banking domesticand international competition. gradually exposed to greater frommanyothercountries. Whereastherehas not been has been somewhatdifferent reforms a a disinvestmentnumber public of of privatisation publicsectorbanks,through processof partial and have becomesubjectto market and bankshave been listedin StockExchanges sector discipline the sectorand entry in Besides,newlyopenedbanksfrom private transparency thismanner. greater in to andexpansion several of banks resulted greater competition. Consequent these developments, foreign banksin totalassetsof commercial declinein theshareof publicsector there been a consistent has in of of concentration index.Improvements efficiency the banksand a declining trend Herfindahl's in in of such as, a gradualreduction cost of were reflected a number indicators, banking system intermediation as (defined theratioof operating expenseto totalassets) in thepostreform period loans. across variousbank groups(barring banks),and declinein thenon-performing As a foreign in result thesechanges, there been an all-around has of productivity improvement theIndianbanking Whilethecost income-ratio theratioof operating sector. (i.e., expensesto totalincomeless interest income overinterest scaled (i.e., theexcessofinterest expense)as wellas netinterest margin expense, trend the by totalbank assets) of Indianbanks showeda declining during post-reform period,the in overthree-fold real terms an businessper employeeof Indianbanksincreased exhibiting annual At rate 9 the increased more per compound growth of nearly percent. thesame time, profit employee of than a Branch also five-fold, implying compound growth around17 percent. productivity recorded in Such couldbe driven concomitant sector improvements thebanking improvements. productivity by two factors: whichexpandstherangeof production and technological improvements, possibilities a bankscompelsthem raiseproductivity to levels.As far as as amongst catching effect, peerpressure up thefuture Indianbanking concerned, number issues,suchas thecredit smalland medium of is a of to customers' interests financial and of inclusion, formalities, reducing enterprises, procedural listing the banksin thestock and market are publicsector exchange related discipline ofparamount importance.
Let me at the outset congratulate PakistanSociety of Development the Economists organising Issues of productivity efficiency for this Conference. and have been at thecentre-stage discussions recent in of Nowhereis thistruer years. than financial the which perceived be the'brain'oftheeconomy is to sector, [Stiglitz (1998)]. Even withinthe financialsector,given the dominanceof bank-based financialsystemsin most emergingmarketsincludingours and the systemic of the sector continues be the to importance banksin thefinancial system, banking
RakeshMohanis Deputy Governor theReserve of Bankof India,Bombay, India. Author's Note: The assistance Abhiman of Das, Saibal Ghoshand Partha Ray in thepreparation ofthepaperis gratefully acknowledged.
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centre attention academiaand policy-makers of for alike.Not surprisingly therefore, of thebanking sector repercussions has acrossthelength breadth and of performance theeconomy. thetheme theConference of to me thus, Judged immediately appealed in viewof itstopicality timeliness. a central and As the banker, obvioustopicforme to speakon relates productivity efficiency Indian to and in banking. The objective reforms general to accelerate growth of in the is momentum of theeconomy, defined terms percapitaincome. in of in the Typically, improvements rate can be effected exclusive three,not necessarily growth through mutually channels: in of investments humancapital improving productivity capital,through andraising total factor (TFP). productivity The quality functioning thefinancial of of sector be expected affect can to the and productivity all sectorsof the economy.Efficient of financial functioning intermediation shouldhelp in improving resource allocation economy-wide thereby all on promoting productivity growth round. Thus discussion economicefficiency and productivity should involveanalysisof developments the financial in sector. in the financing physicaland humancapital,both in termsof of Improvements and of shouldraiseefficiency increasing magnitudes, in terms allocative efficiency, andproductivity acrosstheeconomy.This approach the justifies choiceof mytopic today. Financialintermediationessential thepromotion bothextensive is to of and intensive The efficient intermediationfunds of from saversto usersenables growth. the application available resourcesto theirmost productive of uses. The more efficient financial a is in suchresource and in its allocation, the system generation is to and greater its contribution productivity economic growth. As resource allocation and wouldpresumably and increase, improves realreturns savings respond resource shouldresult.Thus,development thefinancial of higher generation system is essential thegeneration higher to of and productivity economic growth. I shallstructure address I lines.First, shallexplorein my alongthefollowing brief impact banking the of sectorproductivity therestof theeconomy. on This is relevant viewof thefactthat discussion productivity efficiency in on and issues any in bankingwould need to be judged in conjunction withthe level of financial and This will be followed a brief features. development othercountry-specific by reviewof banking in in sector reforms India.The subsequent will examine, section some detail, the trendsin productivity efficiency Indian banking.My and in will remarks be in thenature thewayahead on areasgermane this of to concluding at sector thepresent juncture. 2. HOW DOES PRODUCTIVITY IN BANKING INFLUENCE THE REST OF THE ECONOMY? Economichistory for providessupport the factthatfinancial development makesa fundamental contribution growth. to Financialdevelopment helpedin the
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at the firmlevel. Efficiency Banking 507 in countries facilitating mobilisation the of promotion industrialisationdeveloped by of capital for large investments.domesticcreditto private measuresof financial (including are to related to sectors and stockmarket capitalisation) found be positively economic growth. Table 1 in and ShareofReal GDP Originating Banking Insurance Period 1970-71to 1974-75 1975-76to 1979-80 1980-81to 1984-85 1985-86to 1992-93 1993-94to 1998-99 1999-2000 2003-04 to ShareofBanking and in Insurance GDP 1.5 11.9 8.8 2. percent during 1990s and further 7 percent 5 to the rosefrom than percent more less Within services the sector. shareof finance than12 percent overthesameperiod (Table 1). various measuresof financialdevelopment sectorassets. • At the cross-country level. • Similarly.8 12. firmsin countrieswith deeper financial enabledto are funds and thereby development able to obtainmoreexternal faster andMaksimovic (1998)]. grow [Demirgúc-Kunt A basic indicator financial of is of development the contribution financefrom finance-related relatedactivities GDP.3 Source:Computed from National Accounts Central Statistical Statistics.8 6.5 3.and in Productivity.2 2. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .6 5.4 5. The shareof real GDP originating to in from the activities India tripled just around2 percent during 1970s to around6 half the to the during first of thisdecade. This content downloaded on Fri. the Recent researchhas providedrobustevidence supporting view that financial contributes economic to development growth. • Other financial a between studies establish positive development relationship andgrowth theindustry at level [RajanandZingales(1998)]. Organisation.7 (Percent) ShareofBanking and in Insurance Services 4.9 5. banks or other financial Well-functioning intermediaries as venture such innovation by capitalfundsalso spurtechnological and funding whoareperceived havethebestchancesof to identifying entrepreneurs new products and innovative successfully forimplementing production developing processes.
improvement this period.6 1994-95 0.whilemoderate fluctuations theseratioswereobserved in during the 1990s (Table 2). Secondaryissues referto issues by financialintermediaries banks and otherfinancial (i.7 0.508 Rakesh Mohan The broad-based indicators financial of as the development. IR = Inter-relations = secondary ratio issues (i.9 1. issuesby banksand other financial institutions)/ issues.e. The relationship betweenfinancialdevelopment and the growth physicalinvestment of is Inter-relations (FIR) Ratio captured theFinancial by The New Issue Ratio (NIR) reflects proportion primary the of claims issued by non-financial institutions.4 0.3 1.4 1985-86to 1989-90 0. during 1970s and 1980s. FR = Finance ratio =Totalissues/National income at (netnational product current prices). FIR = Financial inter-relations =Totalissues/net ratio domestic capitalformation.4 2. ratioof aggregate to thefirst halfof the deposits GDP exceeded50 percent during current since the 1990s. a proxyfor is financial witnessed remarkable over deepening.4 1991-92 0. M3/GDP has averagedaround50 percent moredisaggregated whilebankcredit government witnessed to has level. Table 2 Flow ofFunds-based Indicators FinancialDevelopment of Period FR FIR NIR 1970-71to 1974-75 0.2 1995-96 05 23 L3 IR 0. Inter-relations Ratio (IR) captures relative the of in institutions financial importance financial transactions and [Source:Rangarajan Jadhav (1992)].3 2.1 primary When we move away fromthesebroad-based indicators more specific to and a the indicators. Illustratively. slightly some tapering in thesecondhalfof the 1990s.7 0. At a decade.9 0.8 1.5 2.5 2. This content downloaded on Fri.credit thecommercial off to sector or of 'By issueswe mean'sourcesoffunds' 'financial liability' thesectors. issues = sourcesof fundsof banking sector+ sourcesof fundsof other Therefore.8 1975-76to 1979-80 0.4 1.0 1980-81to 1984-85 0. issuesrefer issuesbyall sectors to other than financial intermediaries.2 1.credit-based picture emerges.e.8 0.7 0.8 0. Mostof thecommonly tracked an ratios exhibited upward trend the economy. Primary Finance Ratio (FR) capturesthe relationship between financialdevelopment and overall economic growth. institutions). What is of interest thatthe Finance Ratio.4 1. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . secondary financial sector.4 1. = NIR = New issueratio Primary issues/ domestic net capitalformation.. culledfrom flowof-funds are also testimony gradualwidening to and deepening the of accounts. similar liquidity.7 Source:Reserve BankofIndia.
of Subsequent in around theviewthat to between finance growth Indiahas veered and inter-linkage the Indian growth been 'finance-led': expansionin the process has essentially financial in sector rolein promoting which. and Rousseau (2001)].9 28.8 65. [Bell engendered highergrowth of studies thisgenre tendto be susceptible thetime to periodandchoiceof variables.7 22. model is However. process. Typicallyhowever.0 39. Efficiency Banking 509 over 30 percent GDP during first of the halfof thecurrent decade (Table averaged These observations particularly are relevant from standpoint therole of the of 3). evolve and financial systems This content downloaded on Fri.6 33. and provided has manifested in in has itself theuptrend these ratios.6 21. Table 3 Indicators FinancialDevelopment Liquidity and Credit-based of of Market Prices) (as Percent GDP at Current Period 1970-71to 1974-75 1975-76to 1979-80 1980-81to 1984-85 1985-86to 1989-90 1990-91to 1994-95 1995-96to 1999-00 2000-01to 2004-05 Source:Reserve BankofIndia.8 26.1 30.1 45. althoughsuch observations related to financial havelittle say aboutefficiency productivity to and deepening growth.Juxtaposed thissuggests theenhanced that freedom bankssincetheliberalisation of processhas which themwiththeflexibility resource in mobilisation deployment. so that different a lead to different another of variables set couldpossibly periodwith conclusions. system market-based oftentendsto be static. turn.9 18.3 53. did is finance playa rolein influencing accepted that the growthprocess in India.0 21.3 29. The aforesaid the of observations nottakeintoaccount changing do dynamics thefinancial The traditional of as bank-or classification thefinancial system. Aggregate Deposits 164 .8 54.0 23.and in Productivity.9 30.in the absence of any structural in suchrelationships. these'causality'estimates onlybe interpreted can underlying on terms thepredictive of research the content each of thevariables.in contrast. playedan enabling capitalaccumulation.24. banksin the intermediation withthe financial sectorreforms.1 39.6 43.7 M3 25Í9 33. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . however.0 36. Thusfinancial deepening been in taking place continuously Indiaandis stillin progress.5 24^9 between finance Studies theReserveBank [RBI (2000)] on theassociation by and growth an extended for timespan from1971-72 to 1999-2000findthatthe and between finance by causality by (proxied real (proxied realM3 growth) growth GDP growth) bi-directional.4 49. Whatis.3 to BankCredit BankCredit Commercial to Sector Government ш5 133 14.
2 28. This is not surprising. has beenthecase in Indiaas well. Whereas financial is and deepening easierto measure. following rapidgrowth stockmarkets the 1990s.510 Rake Mohan sh to environment. came down gradually over a periodof timeand has hovered around two-thirds sincethe1990s[RayandSenGupta the mark (2004)].5 54/7 Financial System Orientation (4)=(3)/(2)xl00 21.8 72Л Source:Computed from Handbook Statistics theIndian of RBI.2 43.5 79. Mumbai.0 9. set developovertimein response changesin theinstitutional legal andother features.8 7. since typically bankshave traditionally thedominant been financial intermediaries. the However. magnitude of market is on of capitalisation obviously dependent thevagaries thestockmarket: it is notexpectedto exhibit consistent a increaseas a ratioof GDP.8 56.8 2.Many This up country-specific of you wouldbe awarethat. in the early 1980s.6 59.8 23. This suggests capitalisation bankassets supports observation notonlyhave financial institutions in terms financial of butthere is assets. whereasthe inbankassets/GDP ratio much is more growth regular.3 51. Moreimportantly the of since however.However. on Economy. the role of 'market-based' financehas been on the rise. Table 4 FinancialSystem Orientation Assets of Scheduled Commercial Banks (2) 17.6 75^ of Market (as Percent GDP at Current Prices) As atEnd ~O) December1970December1975 December1980 December1985 March1991 March1995 March2000 March2003 March2004 March2005 Market at Capitalisation BSE (3) 3.4 16. BSE: The National StockExchange.? 11. analysing productivity is and to efficiency changesin banking morecomplex needsto be viewedin relation thechanging contours thebanking of in industry India. This content downloaded on Fri.0 40. gained also considerable for to the potential market financing develop.6 3. shareofbanksin totalfinancial relative sector which was nearly threefourths assets.7 60.0 43.0 46. classifications financial of have cross-country system classifiedIndia as a Ъапк-baseď system.3 15. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .1 46.1 69.0 71.4 83.9 21. The most measure financial of orientationtheratioof market commonly employed system to this that (Table 4).3 33.
is in summary profile industry Table 5 1990-91to 2004-05 Summary Profile theBanking of Industry: Year/Bank Group 1.9) 16.0 3.7 4. own increasingexposure to international competition in corporate behaviour suchas growing disintermediation equallyimportant.a central plankof thereforms reform thefinancial was in sector of banksbeingthemainstay and.5 55.3 3. changes and increasing on value.8 75.2 563 804 504 (Percent) Source:Reserve Bankof India.5) 78.with financial the bankingsector. CONTOURS OF INDIAN BANKING SECTOR REFORMS2 The transformationthebanking of sector Indianeedsto be viewedin light in oftheoveralleconomic reforms with rapidchanges the that havfe been processalong in theglobalenvironment within which banksoperate. This content downloaded on Fri. reforms to promote diversified.7 6.0 3.2(12. No.9) 76.3 6. Memo BankAsset/GDP 91.0 7.0 93.9 4.9 9.0(13. in under Private to banks. Efficiency Banking 511 3.0 68.2 20.6(1. ofthebanking overthelast15 years presented Table5.3 4.8 6. PSB: public sector banks.0 89.and in Productivity.7 8.6 7.The objectiveof the bankingsector intermediation. internationally.9 16.5 84.9 6.9 16.3) 6.4 77. ofBanks (a) Listed (b) Non-listed 2. Share of (in Percent) (a) Assets (b) Deposits (c) Credit (d) Income (e) Expenses (f) Profit 3.8(1.5 85. Figures bracket pertain de novoprivate 2Ihavediscussed details financial the of in see sector reforms Indiaelsewhere.2 7. As manyof you wouldbe aware.3 6.5) 6.4 92.9) 8.4 82.4 PSB 28 None 1990-91 Private Foreign PSB 25 None 23 NA 27 2 25 1995-96 Private Foreign PSB 35(8) 9(3) 26(5) 29 NA NA 28 20 8 2004-05 Private Foreign 31 29(9) 18(7) 11(2) NA NA 76. improved viability institutional strengthening.7 74.0 17.4 73.4 8.7 6.5 3.4 82.India embarked a strategy economic on of in reforms thewakeofa serious crisis balance-of-payments in 1991. globalforces The taking place of changeincludetechnological the of services innovation.4 9.4 84.8 27.3 18.4 6. Mohan(2005). was a efficient competitive and with financial system the ultimate the of objectiveof improving allocativeefficiency resources through financial A and operational flexibility.1 -33.5(1. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . NA: Not applicable. Latin emphasis shareholder America elsewhere and haveaccentuated these pressures.0 4.3(10.Recentbanking crisesin Asia. deregulation financial our and.1 4. Listed: Banks listed on recognisedstock exchanges.4 90.5 4.
• Riskbased supervision introduced. • Ownership publicsector of bankshas beenbroadened disinvestment through to49 percent. rights 3Adetailed discussion this on in et aspectis contained Bhide. rates. of interest rates. bankshavebeenlisted and (Table 6). • Microprudential measures instituted. Thus. • Processof structured discretionary and for intervention introduced problem a banksthrough prompt action corrective mechanism. cd. therewas little and continuously. pricediscovery and productivity enhancing functionof the financial system was severely has been handicapped. • Bank regulation and supervision best towardsinternational strengthened practice. Hence. The efficiency i. lending • Restoration thehealth thebanking of of has system involved. althougha great degree of financial deepening had indeed taken place and financial savings had increased financialmarkets were notreallyfunctioning.512 Mohan Rakesh As you are aware. in terms thecost of money. • Measures taken strengthen to creditor (stillinprocess). a widespreadfinancialsector reformeffort since 199 1. one recapitalisation • Competition increased of sector banksandforeign through entry newprivate banks..e. stepping prudential up regulations • Interest rateshave been progressively on deregulated boththedepositand sides(Box I).and widespreaduse of administered financialrepressionthrough forcedfinancing government fiscal deficitsby of banks and through monétisation. This content downloaded on Fri. up • Mechanism greater for for and coordination instituted regulation regulatory offinancial supervision conglomerates.(2001). • Supervision of withcombination on-siteand off-site process streamlined surveillance with external along auditing. the financialsystemin India by the late 1980s was characterisedby dominant government ownership of banks and financial and variegatedinterest institutions. at thesametime. underway Let mebriefly up themajorareasofbanking sum sector reforms:3 • Financial while has through repression statutory pre-emptions beenreduced. • Higher levels and standards disclosureachieved to enhance market of transparency. • Restorationof public sector banks' net worth achieved through where needed(total of costless than percent GDP). 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .
2004-05. 46 but ceilingprescribed. Ratepermitted. Rs 2 lakh % ■2002-03:BankwisePLRs madetransparent RBI website on ■2003-04: Computation Benchmark of PLR rationalised tenorlinked PLRs abolished Table 6 Private in Shareholding PublicSectorBanks on March31. 2005) (as Number Banks* of (in Shareholding Percent) 4 Up to 10 Morethan10 andup to 20 Morethan andup to 30 20 5 Morethan andup to40 30 6 Morethan andup to 49 40 6 Source:Trend and Progress Banking India. Efficiency Banking __ 513 Interest Rate Deregulation DepositRateDeregulation ■ April1992: (a) interest ratesfreed between daysand 3 yearsand over. October1995: Ceilingremovedfordeposits (b) over2 years ■July 1996: Ceilingremoved deposits for over1 year ■October1997: Interest Rateson TermDepositsCompletely Deregulated ■2004: Minimum for to reduced 7 days maturity term deposits RateDeregulation Lending ■ 1992-93:Six categories lending of rates о 5 slabsfor belowRs 2 lakh о Minimum rate lending aboveRs 2 lakh ■ October 1994: LendingRate freedfor Loans above Rs 2 lakh and Minimum RateAbolished ■ October1996:Banksto specify maximum overPLR spread ■ 1997-98:Separate PLRs permitted cashcredit/demand andterm for loans loansabove 3 years. of in * 19 StateBankof Indiaand ЮВ1 Ltd.RBI.and in Productivity. banks. Comprising nationalised This content downloaded on Fri. Floating ■ 1998-99:PLR madeceilingforloansuptoRs 2 lakh ■ 1999-00:Tenorlinked PLR Introduced ■2001-02:PLR madebenchmark sub PLR permitted loansabove for rate. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .
5@ Argentina: 1999 15.4 10.9 3.7 2.1 6.whichwas at a highof 15.8 4.2 2002 11.6 Brazil:3.RBI (various to years). and management.8 NC NC NC 1995 19. of policy has also been tailoredto take into accountthe realities the changing from environment direct indirect to (switch instruments).9 5. to Another in driven thetwin heartening development banks'balancesheets.8 percent end-March at levelof9 percent.7 percent scheduled for commercial (NPL) banks (SCBs) at end-March1997.0 10.6 4.6 1994 24.0 NC NC NC Korea: 1.9 2000 14.9 Japan: 2003 9.9 13. has declinedby morethantwo thirds 5.2 7.4 17. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . This content downloaded on Fri.3 Malaysia:11.1 7.7 5.9 6.5 6. percent end-March drivenby the improvements loan loss provisioning in and improved recovery whichcomprises overhalfof thetotalprovisions contingencies.6@ 1998 16. Table 7 Loans Bank Non-performing ofDifferent Groups:1994-2005 to (Percent TotalAdvances) Year Old Private New Private Foreign Memo:NPL /TotalLoans PSB Banks Banks Banks (end-March) (Percent)-2004 • China: 15. dynamics as to balancegrowth stability thegradual of prudential theratioof non-performing loans norms. This macroapproachto financial has to monitoring enabledpolicy-makers fine-tune theirregulatory stance in consonancewith the changingmarket and institutional so and For concerns.1 11. part their Report.8 10.8 7.0 8.1 6. NC: Notcompiled.0 4. 2005.7 1997 17. by forcesof international and initiatives been has accounting irregularities regulatory theincreasing focuson corporate As of Annual banks governance.2 to at 2005 (Table 7).8 Global range:[0.9 5. NetNPLs also witnessed significant a decline.4 2.8 2001 12.4 1996 18.3 2004 7.3 to30.8 UK: 2.6 5. despite tightening to totalloans. sectoralso recorded marked a and Capitaladequacyof the banking improvement reached 12.0 US: 0. wellabovethestipulated Banks have also been sensitised developrobust to riskmanagement for systems creditand operational risksand focus on theirasset-liability maturity profileto withstand in adversemovements market parameters risk such as interest ratesand takecorrective measures. @: relates 2005.4 8.6 2005 2.5 NC NC NC Indonesia: 13. instance.514 Rake Mohan sh As thebanking has and marketsystem been liberalised becomeincreasingly oriented financial and markets havedeveloped theconduct monetary of concurrently.0] 5^ 6£ 3£ Source:Computed from Statistical Tablesrelating Banksin India.0 10.
which would. had some timeback issued guidelineslayingdown transparent in of and directors private the criteria determining 'fitand proper'status owners for the banks. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . presently attended members. Efficiency Banking 515 detailsof their the on disclose. Second. borrowing by This content downloaded on Fri.under head 'Report corporate governance'. The whole policy reform processhas been designedto make the banking and oriented enableefficient to moremarket pricediscovery to inducegreater system in the in theresource allocation internal Thus. firms which contribute their to undertaken banking by forces. EFFICIENCY AND PRODUCTIVITY ANALYSIS IN BANKING the has a In recent times. number boardmeetings by information the of various sub-committees theboardsand provided banksare listed. in and soundness the of this entities. such listingis an important the whichcomplements regulatory of discipline'. component theprocessof 'market To undertaken theauthorities. standpoint.in turn. to increases therateof economicgrowth. in thefinancial efficiency productivity thebanking as sector a whole. Given our focus on a consultative approachto policy formulation. This is complemented thebanks' philosophy on their stockprice mechanisms undertaken thebanksto and on corporate by governance theenabling As achieve theirphilosophy. you would be aware. in focus of reforms the past decade and a half has been engendering greater in and in and system particular. strategies highlight successes. draft beingreviewed can be issuedtobanks. liberalentry de novo and banksas a partof thederegulation processis expectedto raise private foreign becausede novoprivate/foreign bankefficiency.whereas efforts process. detailsof the of boardsof directors. efficiency the devotedto financial the 1960s. and technology levels. before finalguidelines the is Based on thefeedback received. Such A priori. financial system the to More importantly. a document was postedon theRBI websiteforencouraging debateon thisissue. input competition increasein output that withtechnological facilitates whencombined developments of and raises overallbank productivity efficiency. analysisis usefulin enabling such policy-makers identify different successor failure policyinitiatives alternatively. How wellhavewe succeeded? 4. deregulation expected to unleash competitive is and output enablebanksto altertheir mix. takethegovernance initiatives processin banksa by we step further. 1970s and 1980s were essentially deepening.A third strand thinking. with movements. significant of literature evolvedwhich explores body These in liberalisation. institutions the wake of financial of performance financial in and seek to analysetheefficiency micro-economic nature are studies essentially from policy the Such analysisis of relevance and productivity banking of systems.in and Productivity. is expectedto be reflected safety functioning in lead and ultimately. of be fruitfully imbibed thosewhichare not. productivity which can and banksare associatedwith superior management practices technology. ifbanksbecomebetterliterature becauseas thefinance-growth suggests. of or.
to thesedevelopments.516 sh Rake Mohan structures contends different that from publicchoiceframework. public sectorbanks still remainthe mainstay.4 Notwithstanding such trend of Herfindahl'sconcentration for the transformation. accompanied by deregulation due to over-expansion banking of inducefinancial andcould Thus. generally This content downloaded on Fri. the may ownership is straightforward: levels. in in banksresulted greater and entry expansion severalforeign and of competition there and markets.It is also important notethatpublic of nearly in of as bankshaveresponded thenewchallenges competition. efficiency productivity of and inbanking constrained theabsenceofprecise definitions inputs outputs of are by of exist and the appropriateness each of banks. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . public sectorbanks are competing the listing most of and foreign banks.with operational profitability withprivate relatively effectively flexibility. has beena bothdeposit credit Consequent banksin totalassetsof commercial consistent declinein theshareof publicsector is from declining the banks.Decreasesin theindex as sharesof individual 4Defined thesumof squaresof themarket in indicate loss ofpricing a powerandan increase competition. is not deregulation the and studies Besidesvarious methods estimation. cost an increasein banks' operational in general. andefficiency/productivity conclusive.This suggeststhat. to (Box approach and of Competition Profitability Indian Banks of from 1992. As a result. public sectorbanks has also probably to are more attuned the market Public sectorbank managements now probably of activities [Mohan(2005)]. reflected the to sector sector. From in of increase theshareof thesebanksin theoverallprofit thebanking in of theposition netloss in themid-1990s. indicating broad convergence across various bank groups. relationship is and technological progress on the contrary. for fewer incentives and the to own interests. banking thecurrent bank the between itself scale augmenting. accounting to three-fourths assets and income.The evidenceof competitive pressure well supported index (Table 8). The theoretical different argument efficiency engender lack of capital marketdisciplineweakens owners' controlover management. Finally. is. consequences their banks. activity.Indianbanksweregradually exposedto therigours Beginning the sector and domestic international Newlyopenedbanksfrom private competition. recent yearstheshareof publicsector banks in the profitof the commercialbankingsystemhas become broadly of a commensurate with their share in assets. becomes important.The 'market sector discipline'imposedby to contributed thisimproved performance. fragility in and could be temporary notsustainable the deregulation productivity gainsafter between evidencein support a unidirectional of relationship longrun.severalapproaches variesaccording thecircumstances II). provides enabling latter pursuetheir in worldis technology driven as to them be efficient. size and efficiency argue that Skeptics.As a result.
physical and the outputs the labour.. The inputs.securities other and investments. theliterature banking on the output: production approach.Depositsand other withreal resources as liabilities.the intermediation approach. The operating units approachforincome-based approach)viewsbanksas business withthefinalobjective generating of revenue from totalcost incurred running the for the business. Banksproduce intermediation services intermediating the collectionof depositsand otherliabilities and theirapplication interestin through suchas loans. a result. input under to The set thisapproach includes variables(e. thisapproach.g. Earningsand Liquidity. individual In of the of components CAMEL5 are derivedfromthe financialtables of the banks and are used as variablesin the performance analysis. This content downloaded on Fri. theyare considered outputs. Asset quality. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . respect thetypes outputs In viewof thesecomplexities. by Under the intermediation are viewed as approach.Management. Efficiency Banking 517 Box II Inputsand OutputsofCommercialBanks Banks are typically and firms. majorcategories produceddepositsand loansas outputs form significant a becausethey of proportion valueadded. outputs. Under the production of viewed as providers approach.The asset approach is a reduced form of on modelling thebanking activity.the user cost approachand value-addedapproach. theyare considered The value-addedapproachidentifies of inputs.thefinancial the opportunity as as cost. the asset approach. approach This includes both assets.. modern approach.and in Productivity. theoperating the (income -based)approachandmore recently. approach. thefinancial to If returns an assetexceedthe on if cost or costsof a liability less than are opportunity of thefunds alternately. systems) represent services space or information to and of and provided customers arebestmeasured thenumber deposit loan accounts. what As multi-input multi-output defining constitutes withdifficulties. Berger Humphrey 5CAMEL is the acronymfor Capital adequacy.Accordingly. financial institutions funds between saversand investors. approaches four have come to dominate actually produced. banks are primarily services customers. some measureforrisk. focusing exclusively theroleof banks as financial and intermediaries between depositors finaluses of bankassets. definesbanks' outputas the totalrevenue(interest it and nonand as and interest) inputs thetotal (interest operating expenses expenses). (labourand physical together capital)are defined whereas output includes the set assetssuchas loans and investments. since manyof the financial 'input' and 'output'is fraught servicesare jointlyproducedand pricesare typically assignedto a bundleof financial services. banksmaynotbe homogeneous with to of Additionally. In of thereare threevariant intermediation viz. otherwise. principle. Source:Adapted and from andRochet (1992) andFrexias (1997). earning usercostapproachdetermines whether financial a is or on product an input an output the basis of itsnetcontribution bankrevenue.material.the modern approach seeks to integrate costsandquality bankservices.agency Finally. earning and whereas loans and other operating interest majorassetscountas expensesas inputs.
intermediation cost. beenincreasing consistentlythepost-reform period.6 7. rate bothinterest 1990s.518 Mohan Rakesh Table 8 IndexofConcentration Depositsand Credit on of HerfindahVs Banks:1992-2004 Scheduled Commercial Year (end-March) Credit Deposit 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 8Л 7. intermediation ofbanksin Indiastilltend costs Admittedly. witnesseda gradual expense reduction thepostreform in bankgroups banks periodacrossvarious barring foreign This declinein intermediation needsto be weighed cost thelarge (Table 10). to be higher than thosein developed markets.9 63 Ш 10.6 7.Illustratively. of Efficiency Indian Banks in of Improvements efficiency the bankingsystemare expected to be inter in a reduction operating in interest reflected.in line withthebenign income and interest of banksas proportions totalassetshavedeclined. In this in it to that in the sector context. particular public are to banks.7 6.4 7. spreadand cost of intermediationgeneral. non-interest which emanates However. non-interest incomeas a proportion totalassetsof the banking of sector example. banking production definedas the ratio of operating to total assets. mostly from fee-based has in For activities.0 6. against incurred upgradation information in of and of expenditures technology institution 'corebanking' solutions. expenditure. alia.9 6. in Severalindicators havebeenemployed theliterature in to compare costsacrosstime.8 7.1 6. increased 1.1 6.3 7.3 7. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .2 6.9 6.9 7. Since thelate interest regime. is also appropriate mention Indian banks. income.4 7. of expenditure interest declinedfaster thaninterest in However.9 7.0 6.0 5Я Source:Author's calculations.7 6. banking This content downloaded on Fri.1 8. income. yet catch-up with fully their foreign counterparts.2 in from percent 1993 to morethan2 percent 2004 (Table 9). expenditure resulting an in increase netinterest income.6 7.
35 2.85 1.24 2.79 2.RBI (various to years).99 2.20 2.20 Source:Computed from Statistical Tablesrelating Banksin India.67 1.49 1.88 2.94 2.RBI (various to years).64 ^98 to (as Percentage TotalAsset) All Scheduled Commercial Banks L38 1.57 1.29 2.01 Source:Computed from Statistical Tablesrelating Banksin India.96 2.64 2.65 2.19 2.05 3.83 2.45 1.54 2.34 1.45 1.91 2.49 2.48 2.47 2.39 1.28 1.33 1.22 1.33 1.99 3.78 3.12 3.65 2.99 2.14 2.64 2.65 2.66 L9] IndianPrivate Banks LÕ3 1.76 All Scheduled Commercial Banks IŠ9 2.60 2.87 1.40 3.32 1.70 2.46 2.04 2. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .66 2.04 1.19 1. * Intermediation = cost operating expenses.22 2.85 2.45 2M Foreign Banks 340 0.73 2.32 1.65 2.43 1.47 2. Efficiency Banking 519 Table 9 Non-interest IncomeofScheduled Commercial Banks:1992-2004 Year (end-March) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Public Sector Banks L22 1.22 1.17 1.34 1. This content downloaded on Fri.36 1.26 1.86 2.46 2.52 2.99 2.43 1.63 2. Table 10 Intermediation ofScheduled Cost Banks:1992-2004 Commercial Year PublicSector Banks (end-March) 1992 2~6Õ Indian Private Banks I97 Foreign Banks 226 to (as Percentage TotalAsset) 2004 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2.72 2.68 1.59 2.13 1.and in Productivity.26 1.25 2.71 2.94 1.52 1.03 2.36 2.28 1.35 2.36 1.64 2.79 2.01 2.64 1.65 2.43 1.
reflecting factthat Indian banks maintained steadyflow of investments a towardsphysicalcapital on and formation. operating perunit totalvolume business to the of percent 2.64 2.69 2.81 1.78 3. Earning * Totalbusiness = deposit credit.16 1.Amongthecomponents operating a declinein the expenses.thechange in physical has the capitalcost perunitof output been marginal.68 3.47 0.70 3.73 1. by banking outputs. of thechoice of outputs The operating (Table 11).60 0.80 1.01 2.22 1997 2.21 1.96 2003 1.6 percent during sameperiod. especially and post-reform period.03 This content downloaded on Fri. irrespective cost per unitof earning 2.18 0.14 2.48 1.77 0.1 in in assetsdeclinedfrom percent 1992 to 1.48 1. for public sector banks in the post 2001 period consequentto the voluntary retirement schemeacrossseveralnationalised banks. especially automation information technology.75 4.22 2.31 1.78 3. + 'Total operating can be broken cost downintolabourcostand costof physical capital.26 1996 2.56 2.51 1.51 2.08 L4Õ 068 342 ХЛ2 230 1993 2.15 1.28 1.520 Rakesh Mohan At a moredisaggregated that6 Indianbankshave improved level.22 1.60 1.24 1998 2.65 1. of whichcan be justified the value-added by approachin measuring banking outputs.05 1. similarly.it is evident their in in as from declining the trend per efficiency thepostreform period evidenced unitcost of output.35 1.06 2001 2.82 1.37 0.36 1.46 0.32 1.07 2002 1. 9 + assets= credit investment.72 3. employeecost per unitof outputwitnessed noticeable Thisdeclineis discernible acrossall bankgroups.69 3.43 0.44 0.34 1.65 1.On theother hand.14 1.20 2000 2. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . deflate operating and itstwocomponents either thetotalearning (i) by assets(deposits whichis justified theassetapproach measuring in plus investments).4 2004.74 2. 1£8 O71 2£l 1£8 1.16 1.17 1994 2.36 2. or (ii) the aggregate advancesand deposits.84 2.13 0. Table 11 and Its Components Scheduled Operating Expense of Commercial Banks:1992-2004 (Percent) Non-labour Operating Operating Cost/ Cost/ Cost/ Non-labour Expense/ Labour Expense/ Labour Year Total Total Cost/Ttotal Earning Earning Earning Assets® Business* Business* Business* Assets® (end-March) Assets® 1992 2.8 percent cost of declined from of 3.37 1999 2.76 3.RBI (various to years).47 0.73 0.55 2.To create we the cost perunitcostmeasure.25 1995 2.00 2004 L78 Source:Computed from Statistical Tablesrelating Banksin India.54 0.74 3.
45 1994 1.22 to (as Percentage TotalAsset) All Scheduled Commercial Banks L21 1.50 0.86 2003 0.2 percent 2004.44 1.Till 2001.11 1.27 0. expenses recovered through The cost income-ratio (definedas*the ratioof operating expensesto total incomeless interest of Indianbanksshoweda declining trend the expense) during Indianbankspaid roughly percent their 45 of net postreform period. In other of nearly percent their income 27 of net the to during postreform period.05 1.43 0. banks has been remarkable. Efficiency Banking 521 Fromtheefficiency the cost standpoint.33 1. incometowards labourand physical 72 managing capitalin 2004 as againstnearly in Indianbanksrecorded netcost saving a words. in in there been a lowering has of theburden acrossbankgroups recent in in The improvement respect Indian of years.32 1.16 0.According thedatareported TheBanker in thecost-income of world'slargestbanks ratio 2004.24 2001 1.94 0.42 0.56 1998 1.44 1999 2000 1.RBI (variousyears). intermediation needsto be viewedin withnon-interest income.19 0.60 1997 1.69 0.53 0.18 0.57 1.For example.92 0.19 Source:Computed from Statistical Tablesrelating Banksin India.39 1995 1.32 0.72 0.and in Productivity.14 -0.59 2004 029 Indian Private Banks L94 1.12 0.07 Foreign Banks -1.59 -0.46 -0.5 percent (Table 12).48 1.78 0. to *Burden=non-interest income.63 0. percent 1993 (Table 13).15 -0.43 1.03 0.It reflects extent whichnon-interest the to expenseless non-interest are non-interest income.40 1. burden Indiancommercial 1. This content downloaded on Fri.70 0.14 1.57 1996 1.59 0. Moreover. surpassed Table 12 Burden* Scheduled Commercial Banks:1992-2004 of Year PublicSector Banks (end-March) 1992 L37 1993 1. the burden(the excess of nonconjunction interest over non-interest incomeas a percentage total assets) of to expenditure commercial banks hoveredaround1 to 1.For example. theirnon-interest incomein recentyearshas private their in intermediation andhas resulted a negative cost burden.2 percent 1992 to 0.30 1. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . This gap between intermediation and incomefrom cost fee-based activities narrowed has considerably in recent the of banksdeclinedfrom years.51 2002 0.38 0.
3 62. becausecomparisons besetwith are severaldifficulties.7 73. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . Cost-income ratio= ratioof operating to expenses totalincomeless interest expense.6 45.1 553 71.4 53.1 47.1 67.g.3 52.1 63.3 48.6 45.6 42.Early studies[Sarkar. to others on [Keova (2003)] suggest ownership havesomeeffect bankperformance. publicsector higher income ratio against as banksandforeign banks.0 49. More importantly.5 51.3 59.RBI (various to years). evidence is notconclusive.2 41.8 5ÏÏ!9 66.9 68.5 58. costbankshave tended have relatively to ownership patterns.9 63.9 48.9 47.522 Rakesh Mohan Table 13 RatioofScheduled Banks:1992-2004 Cost-income Commercial Year PublicSector Banks (end-March) Indian Private Banks Foreign Banks (Percent) All Scheduled Commercial Banks 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 45.9 48.2 Source:Computed from Statistical Tablesrelating Banksin India.It measures theextent which to non-interest devours total net income. expense variedmarkedly from low of 48 percent a highof 116 percent a to and theratio around percent an indicative 60 is In that benchmark the [RBI (2005)].6 51.8 309 59.1 46.3 61.6 66.2 51.0 58.1 46.8 45.9 63.5 45.5 50.6 43. Bhaumik and Dimova (2004)] veeraround view that the induced [e.7 64.6 45.1 584 73. respect. competition banksto eliminate performance that the and existed between them publicsector gap bothdomestic and foreign private and research sector banks.7 65..More recent reported in differences theefficiency Indiancommercial of bankswithdifferent ownership levelof non-performing size and assetquality status. loans.2 67. (1998)] foundsomewhat et ownership profile weak evidence to suggest that ownershipwas an important of determinant More recentstudiesexhibitmixed evidence: while certainstudies performance.8 57.2 40.1 56. al. private This explanation needs to be viewed in conjunction withthe differential of banks.5 63.9 64. study their uncovered evidencethatpublicsectorbanks(PSBs) recorded here the higher efficiency gainsin thepost-reform period. [Das andGhosh(2006)]. costincomeratioof Indianbanks is now comparable Amongvarious internationally. Clearly.0 54. Giventhe This content downloaded on Fri.
95 2.57 2. enabling performance private as compared withan alternative for of and policythatprovides transfer ownership control from public to the private the sector.91 1999 2.46 2.3 percent (Table 14).92 3.11 2.and in Productivity.92 1996 3.RBI (various in of years).64 3. with.96 ^24 Foreign Banks 3Í9Õ 3. the NIM ofIndian reform bankswas about3.87 Source:Report Trend on and Progress Banking India. of however.33 1.01 3.36 3£7 to (as Percentage TotalAsset) All Scheduled Commercial Banks 330 2.51 2.85 3.73 2003 2.57 4.39 1994 2. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .84 2002 2. In addition.20 4.58 1. This content downloaded on Fri. is quite to reasonable believe thatthe declinein depositratesushered thederegulation by in behaviour banks.54 3.36 1995 2. itis possibleto find of banksthat couldequal thegood private sectorbanksas well as bad ones.10 1997 3.51 3.15 3. PSBs have to reckonwith'legacy' such as manyof thenon-performing thattheyhave been saddled assets problems. Some PSBs operate relatively in backward areaswith limited discretion pull to out from such areas.97 3.72 2. defined theexcessof interest expense.10 2.07 3. processwill be manifested thelending rateshave tended be sticky to downwards seemto operatewitha time and lending the lag.Will greater and formergers scope within between and andprivate sector to greater add acquisitions public efficiency? Another indicator efficiency banks is net interest of of important margin as income overinterest scaledbytotal (NIM).52 2004 ^97 Indian Private Banks 4Ш 2.84 2.22 2.16 1998 2. lower ratio being indicativeof higherefficiency. Historically NIM of Indianbanksis rather high. The question stillremains: whether in there a better is payoff PSBs to improve their whilepromoting sectorbanks.Aroundtheonsetof the in 1992.03 3.95 2.In practice. = earned interest @Spread interest paid.70 2001 2. bankassets.13 3.13 2.79 2.48 2.25 3. ratio efficiency financial a It intermediation. Efficiency Banking 523 size andvariety PSBs.Broadly this reflects allocative the of speaking.27 3. process Table 14 Banks:1992-2004 Commercial Spread® Scheduled of Year PublicSector Banks (end-March) 1992 I22 1993 2.81 2000 2.76 4.
Contextually. maybe mentioned banksin most countries severalemerging and economies have NIM (as a percentage to developed totalassets)of around percent.Branch productivity distinctive Overall.medium big banksareas follows: of and smallbanksarethosewith assetupto Rs 50 billion.000over thesame period. At the same time. business branch also used to is employee per The business per employee of Indian banks judge branch-level productivity. but there was little evidence of of differentials across ownershipcategoriesfollowing narrowing productivity deregulation[Kumbhakarand Sarkar (2003)].severalfactors could have been at work:a significant of thebest-practice shift driven frontier.524 Rakesh Mohan in it a modestdeclineto around3 percent recent Thereafter. per per are mostcommonly used. financialinnovationand different and risk-return strategies pursuedby banks suitedto theirbusinessphilosophy of banks' input-output. bottom-line clear:Indian bankswitnessed significant productivity improvements. increasedover three-fold real terms in fromRs 5. ability mobilise low-cost have thehighest whereas thoseforprivate banks NIMs.7Thereafter.implying compound Rs a of also recordedconcomitant growth around 17 percent.theprofit employeeincreasedmorethanfiveper fold:from 20.3 millionin 2004.medium banksare thosewithassetexceeding 50 billion and uptoRs 100 billion. These comparisons are not watertight: smalland medium bankshad highNIM until1997. a it that big banksrecorded rise. changing composition due to improvements overall efficiency. by a combinationof technologicaladvances. A recentstudyfoundthattotal factorproductivity has improved growth in the post deregulation marginally period.000 to Rs 150.whichby virtue their years. post-reforms. and largebanksare those with assetexceeding 200 billion. peer pressureamongstbanks compels themto raise productivity levels. have been the lowest in recentyears. In the context gradualderegulation financial of of sector. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . In addition.thebalance of evidencesuggests improvements. recorded relatively And traditionally. in While it is difficult pinpoint to the mixof thesefactors raising relative in the is productivity.4 millionin 1992 to Rs 16. Among various productivity labourproductivity indicators business employee like and profit indicators. deposits. thatsuch improvements could be drivenby two factors: suggests technological whichexpandstherangeof production and improvement. reduction totalcost and in profile. Rs This content downloaded on Fri. productivity in sectorover thereform The extant literature improvements thebanking period. for NIM typically.big Rs banksarethosewith assetexceeding RslOObillionbutand uptoRs 200 billion. 7Definitions small. possibilities a catching as up effect. 2 This provides in some indication competition that stillhas somewayto go inIndia.is theforeign it of to banks. banking Productivity Studieson productivity Indianbanking in have only begunto emanateof late. exhibiting annualcompound an rateof nearly percent 9 growth (Table 15).
recent study theAsian context analysedvarious measures South-East of Asian (Indonesia. to In a widerframework. justification Let me encapsulate thissectionby makingsome generalcomments the on and of efficiency productivity growth Indianbanksvis-à-vis leadingAsian nations like China and Korea.7 15.12 015 110. empirical (2005)].and in Productivity.5 13.2 214. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .Korea.4 5.9 5.4 9.5 Source:Statistical Tablesrelating Banksin India. Typically. Efficiency Banking 525 Table 15 Indicators Scheduled Banks SelectProductivity Commercial of Year Business per Employee Profit perEmployee (Rs Millionat 1993-94Prices) I992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Ja от Businessper Branch io9. The results and uncovered evidence the sincethestart of that.4 196. of and studies deregulation productivity cross-country are of views.09 0.7 11. sourceof were efficiency gainsthus beinga very important in A in improvement profitability.04 0. Although found economic forthepolicyofbankprivatisation.05 0.05 -0.0 6.0 119.6 6.02 0. also owingto thedifferential regimes by of services Maudos associatedwith and loansin different countries. (2001) analysed costandprofit efficiency wellas Japan theUSA.03 0.4 5.7 179.0 163 -0. quality deposits andPastor the as across14 EU economies. As far as real growth and (adjustedforprice movement rate fluctuations) bankingbusinessis concerned.5 8.Philippines efficiency and Thailand)banksin thecontext corporate of and Nguyen [Williams governance themotivation thestudy of their results was different.4 109. variancein of profitability betweencountries would be considerably reducedif inefficiencies eliminated.0 144. growth banksreport cross-country comparisons divergent and oftenfraught withdifficulties.9 234. Malaysia.2 113.04 0. the1990sincreasing in has efficiency theUSA and competition led to gainsin profit butnotso in theJapanese Theirresults also show thatthe Europe banking system.01 0. only because of the different not regulatory economic encountered financial but entities.05 0.8 254.6 7.9 158. in Indian banks are exchange This content downloaded on Fri.05 0.6 129.
05 3. as compared to other Asian countries.78 1. Finally.38 to Asset) (as PercentageTotal Malaysia PhilippinesThailand India 2Л7 1.69 3.66 2.71 3.21 3.84 Z6Ì 2003 2¡30 1£7 ^22 ^50 Source: BankScope.54 1.21 2. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .54 1.20 1.50 4.profitability Indian banks.42 1.55 2. Table 17 Intermediation (Operating Cost Expense)ofBanksofMajorAsianCountries Year China "Ï996 L23 1997 1.70 2. as determined thereturn by cost of is also much higher(Tables 16.83 -3.49 2. differentials difficult ascertainthe degree of labour productivity to Table 16 Spread (Net Interest Margin) of Banks ofMajor Asian Countries* to Asset) (as PercentageTotal Year China Indonesia Korea Malaysia PhilippinesThailand India ЗХУ7 2.11 2.the real growthof deposits and of loans of Indian banks were noticeablyhigherthanthose of otherAsian countriessuch as China and on of Korea. However.73 2.53 1.18 1.01 Source: BankScope.39 1.38 2.84 1.86 4.16 -9. in the absence of data on employmentfor banks in othercountries.42 L50 152 2.32 1998 0.higheroperatingcost in India is well compensated by the highernoninterest income. The intermediation assets.27 1.50 2.46 1.58 2.76 4.03 2.67 2. Nonetheless. 18 and 19).16 2.74 2.33 2002 L99 2. At the same time.57 3.10 2002 1.92 1/70 191 4Я7 251 1996 1.67 3.02 2000 2.00 1.56 2.94 1997 2.06 3.98 1.78 3.12 2000 2001 1. Indian banks seems to be relatively higher than that of Korea and China. the labour of productivity the top 4 banks in India (which includes one de novo privatebank) and the four state-ownedChinese banks indicates thatexcept the private bank. In recentyears.16 1999 1.60 1.69 2.it is across countries.36 2.61 2.94 Korea Ü24 2.80 3.05 2003 1.74 2. the top threepublic sector banks in India recorded much lower employee productivity.40 1999 1. 17.38 1.69 2.52 0.83 2.29 1.72 2.00 2.04 2.61 with tables in for *Tht figures comparable earlier reported Tables16-19 Indiaarenotstrictly of because different sources.12 2.68 3.70 2. Indonesia 239 4.54 2.526 Rakesh Mohan favourably placed.32 1.22 1.78 3.30 2.24 1998 1.19 1.53 1.83 2001 1.28 2.21 2.74 2.83 2.01 1.41 3.73 3.60 1.80 2.76 2. data This content downloaded on Fri.43 1.16 2.
20 2001 2002 0.96 1.11 0. in and banks.48 0.88 -0.37 0.03 0.73 0.99 0.83 1. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .11 2.73 2.10 -1.Therefore.20 1998 0.29 1997 0. has become thekey to on future forthebanking opportunities to convenience retail all customer.03 0.However.30 1. 1.40 -0.93 0.46 0.76 0.17 2000 0. and efficiency improvements.87 1. per Development This content downloaded on Fri.49 1.38 1.33 1.21 0.60 0.28 0.31 1. keydriver efficiency productivity thebanking a of industry for This is use pre-requisite capitalising today theeffective oftechnology.62 0.97 1.08 -0. is a crucial it sector.39 -46. critical for use makestheeffective of technology and products servicing offerings business.71 0.10 -0.15 1. is crucialforthedesign.96 1.24 1997 0.94 1.03 0. The increasing flexibility complexity sophistication.17 -5.91 0. execution service delivery organisation.22 0.90 0.25 0.30 0.46 0.03 1.16 1.85 0.15 Malaysia PhilippinesThailand India 1.49 1.00 1.69 0.the 'technological the managing risksassociatedwithbanking in to in According datareported theWorld penetration' Indiahas beenquitemodest. the number computers 1000 database.57 -5.80 Malaysia PhilippinesThailand 2Л2 068 098 1.17 1999 2000 0.92 -9.68 1.25 2003 Source: BankScope.97 Table 19 NetProfit BanksofMajorAsianCountries of Year China Indonesia Korea to (as Percentage TotalAsset) 1996 0.29 0.10 1.in and Productivity.47 1.00 1.51 1.08 1.56 -1.20 0.40 1.97 0.01 -0.22 2001 2002 0.84 -3.95 India L44 1. corporates servicing customer segments offering of and and government clients.63 0. driving productivity is technology consideredas the basic tool of the "process engineers"of the in of and It control.74 1.59 1.46 0.13 1998 1999 0.61 0.08 2.30 1.97 1.63 0.17 -0.48 0.21 0.96 1.04 0.In effect.01 1.16 1.15 1.60 1.54 0.20 0.73 1.20 0.14 in is from thesefindings therole of technology A clear messageemanating In today's worldof banking.95 1.12 2003 Source: BankScope.93 0. 2.70 0. of Indicators as of 2002.06 1. Efficiency Banking 527 Table 18 Income BanksofMajorAsianCountries Non-interest of Year 7996 China Õ26 Indonesia O99 Korea LÕ6 to (as Percentage TotalAsset) 0.
In so delivering 'managing' technology as toreapthemaximum benefits remains keychallenge theIndian a for banks. ours. respectively [Huang(2005)]. and instead. THE WAY AHEAD How do we see the future? thiscontext.theseissues remainrelevant. noteworthy development thiscontext beenthepassage of theCredit Information The Act. it optimally remaining and cost-effective whilst deploying sustainable to returns shareholders. economies sharesimilar of smallandmedium First. The challenge. to In standards. Companies (Regulation) Actis expected encourage to ofcredit information andthereby. many youwouldbe awarethat (SMEs) enterprises constitute important an oftheindustrial services and in sectors Indiain view segment of their contributions employment to as Withthe significant generation also exports. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .2005 in theParliament. of new activities the ruralsegment in such as agri-clinics.expanding outreach of the targets of formal and formulation comprehensive moreliberalpolicies for of and credit. Salientamongtheseincludefixing of delivery self-set forfinancing.9 in Wide disparities emerging existwithin banking the sector faras technological as are the capabilities concerned: of literate' as in of percentage 'computer employees percentage totalstaff 2000 was around percent publicsector 20 in bankscompared with100 percent newprivate in and around90 percentin foreign banks [ReserveBank of India (2002)].computerisation mere'arithmetical'. rationalisation costof loans.The ReserveBank has also initiated severalmeasures streamline flowof credit address to the and structural in bottlenecks credit to thissegment. fact. would like to sharewithyou In I some of theissues thatneed to be keptin view whilediscussing and productivity in banks. remains three fold:acquiring therefore. 5. Publicsector bankshavealso beenadvisedto constitute specialised SME branchesin identified clusters/centres preponderance small and with of medium A in has enterprises. Needless to state.21 in 2001. borrow term to a from Report theCommittee Banking the of on SectorReforms of needs to be leveraged [Government India (1998)]. lending SMEs has become a viable revenue for proposition banks. the 'right'technology. This content downloaded on Fri. effect. degrees. contract emergence and with forward backward and to to farming rural housing linkages SMEs. optimally achieve and maintain highserviceand efficiency recent on research therole of technology driving in in productivity improvements demonstrates that computer and IT capital exhibithigher banking employees than productivities theirrespective non-computer employeesand non-IT capital. setting up companies 'The reported for was figure Pakistan 4.528 Rakesh Mohan between70-500 in most personswas about 7 in India comparedto anywhere and markets even higher mostdevelopedeconomies. Data thatnearly percent branches publicsector 71 of of reported the RBI suggests by banksare fullycomputerised. needs to go beyondthe However. credit extension. varying in efficiency in that in features thebanking as sector.
28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . also to improve but theagriculture-industry The secondissue of import thesimplification is of linkage. Reserve of the Bankhas recently advisedall banksto privileged. Coupled with risk assessment models and mechanisms. third theissue of finances.Looking accounting capital-output action on several fronts needs to be beyondthe aspect of fiscal consolidation. ReserveBank has announced intention implement policies to incentivise banksto provide extensive services to responsive theneedsof theunderAs part theprocess. to inadequate and transport facilities and paucity adequatefood of owing storage on processing capacities. and savings by The fourth is in aspect of steppingup investment to address the deficiencies This content downloaded on Fri.and in Productivity.The current levels of investment mightnot be adequate to achieve such growthrates. make available a basic banking'no frills'accounteitherwith 'nil' or verylow minimum balancesas well as charges thatwouldmakesuchaccounts accessibleto vastsections population. there д needto undertake 8 is efforts to per significant achieve higherrates of growthin a sustainedmanner.The overalleffect thisprocessis likely be reflected costs of to in a lowering theriskpremium of in embedded interest ratescharged SMEs with to for to positive spillovers banklending theSME sector.Firstis the issue of investment in pursuedvigorously step up growth and allied activities. sectorthatproduces21 percent GDP. nature number transactions suchaccounts of The and of in could be restricted.This necessitates greater public and privateinvestment thesepost-harvest facilities notonlyincrease to value addition. de-reservation items the of from exclusive significant output under units likely permit sector SSI is to the of production reapeconomies scale and The is The incipient scope and enhance competitiveness. made knownto the customer advance in a transparent but in manner. but a of agriculture 60 of Thereis often loss substantial of output supports nearly percent thepopulation. this of In bankingpractices the its to context. Efficiency Banking 529 on of improve exchangeof information credithistories borrowers. Bankshavebeenurged givewidepublicity thisfacility as to ensure to to so financial inclusion. This will at of sector processinformation to and dependon theability thefinancial properly to intermediate extant the intooptimal investment specific firms sectors. Cumbersome formalities introduce and resultsin procedures. procedural delays losses. this is expectedto lower appropriate transactions of banks. More importantly. Addedto these. investment boomin infrastructure.Yet.experienceshows that customers'interests are not always accordedpriority. even after forreductions theexisting in incremental ratios. and willyieldbestresults industry services onlyif enormous resourceflows are successfully intermediated a low cost. greater The growth of the performance the Indianeconomyduring last few years indicates possibleratcheting of thetrend of growth a rate from around percent 6 up to around percent year. to rates. liberalisation financial of servicesand competition improved has Although customerservices. concernshave been raised with regardto thattend to exclude vast segments the population.
investment infrastructure. it is likelythattheywouldcontinue remain banking to in business. Such aspects of corporategovernance of in PSBs is important. the multiple of objectivesof the as needs to be government ownerand the complexprincipal-agent relationships taken on board. in all. thisis an excitingphase for PSBs to grow and prosper. the stockexchange. adequately compensated by possibly owing environment. has led to greater market disciplineand to in concomitantly. The issue of mixedownership as an institutional structure wheregovernment controlling has is interest a salient feature bank governancein India. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . not but also because. Such investment likelyto trigger is assist humancapital technology spillovers. of This content downloaded on Fri. Let me conclude: address havetraversed modest the has a on terrain. foreign primarily theform FDI. C. This has led to a broadbasing theownership PSBs. As deregulation commercial banks would need tò devise gathersmomentum. REFERENCES India: A Case of Finance-led Bell. To the extent thereis public ownership PSBs.which.530 Rakesh Mohan infrastructure. regulatory nurturing policyframework. improve efficiency resource Over thereform moreand morebankshave begunto get listedon period.and it is up to these banks to to respond thechallenges. an improvement theirgovernance aspectsas well. final in The accelerating aspectis theneedto complement domestic investment higher with in of investment. Rousseau (2001) Post Independence Industrialisation? Journal Development Economics 153-175. reaction evolving prospects.board representation of interests minority shareholders [Reddy(2002)]. patterns efficiency and technological in can changewitnessed Indianbanking be viewedas consistent with in in to of expectations an industry undergoing rapidchange response theforces In to market a fewpioneering banksmight deregulation. in since there is induction privateshareholding well as attendant of as issues of shareholder's and value. to whileothers adjustquickly seize theemerging opportunities. as reflectedby the marketcapitalisation. Given the increased technicalcomplexity most business of activitiesincludingbankingand the rapid pace of change in financialmarkets and practices. a conduciveenvironment public-private for remainsthe key to participation. Such diversification ownership of of of has also led to a qualitativedifference their functioning. formation moregenerally. 65. respond cautiously. focusing theefficiency productivity and in The of changes Indianbanking. theirincomesand more importantly theirfeeimaginative ways of augmenting incomes as to raiseefficiency productivity so and levels. PSBs would need to devise imaginative to waysof responding the the of All evolvingchallengeswithin context mixedownership. decline in public spendingon infrastructure not been The has theprivate in to difficulties the sector.in its wake. and the of use. an appropriate with Therefore. and P. only because PSBs dominatethe bankingindustry.
andN. and V.) Output Banking. 88. SenGupta(2004) SystemicRestructuring Banks: The Indian Association. Comparative Bhide. and S.Y. Demirguc-Kunt. of Sector. A.) TheIndianEconomy. A. Efficiency Banking 531 Issues in and A. Pastor(2001) Cost and Profit Efficiency Banking:An Letters andUSA. on SectorReforms. P. Journal Finance53. and D. and I. Zingales(1998) FinancialDependenceand Growth. Sarkar (2003) Deregulation. (IMF Working Paper Washington. Ghosh (2001) Emerging Challengesin Indian and Policy Reform. 24.Cambridge.. N. M. Delhi. Field? The Indian BankingSector Revisited. This content downloaded on Fri. Financial of Koeva.. Humphrey in Measurement theServices In Z. (2005) FinancialSectorReforms: Analysis. Special Issue on Money.Reviewof Financial the Analysisof IndianBanks during Post-Reform Economics (forthcoming). Finance and FirmGrowth. No. 1106-1121. and J. K.Bankingand Finance (March)40.R.. (2002) Public SectorBanks and the Governance Challenge:Indian Lecture Delivered at the World Bank. 150. of MA: Frexias. In SectorReforms. 103. Reddy. International Japan Comparison 383-387.) D.. (1992) Issuesin Financial Rangarajan. and L.C. Banking 403-414. andJ. CentreforResearchin EconomicDevelopment Banking. 32. Kumbhakar. P. Liberalisation.) Stanford (Working Paper University. of Ray.Journal Money.С Rochet(1997) Microeconomics Banking. M. Griliches Commercial (ed. IMF and Brookings Experience. and S. American Rajan. in is S. B.Creditand Evidencefrom of Changein IndianBanking: 35. Maksimovic(1998) Law. A. (1992) Measurement Efficiency Berger. J. S.R. Institutions Conference.. Economic Review 559-86. 8.. of Government India (1998) Report the Committee Banking of New ShriM Narasimham). Journal theIndianBankers of Experience. in Maudos. (Chairman: of HuangTai-Hsin(2005) A Studyon theProductivities IT Capitaland Computer Journal of Labour: Firm-levelEvidence fromTaiwan's Banking Industry. 2107-37. (ed.. G. and R. Dimova (2004) How Important Ownership a Market Bhaumik.. (2003) The Performance IndianBanksDuring No.. Jadhav Delhi:Penguin Books India. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . Productivity Analysis 241-257.245-279. V. of MIT Press. Ownershipand Efficiency India. Ghosh(2006) FinancialDeregulation Efficiency: Empirical Period. Applied Economics ofEurope. Prasad. Chicago:University ChicagoPress.Journalof withLevel-Playing Economics 165-180. and S. Economic Political Weekly. G.in and Productivity. An and Das. X. Jalan C. April.. Policies and Performance Mohan. B.
2119-2154. E. Nguyen (2005) Financial Liberalisation. ReserveBank of India (2005) Reporton Trendand Progressof Bankingin India 2004-2005. and of ReserveBank of India (2002) Expenditure Pattern IT Initiatives Banks. Bhaumik Sarkar. J. Bulletin. RBI: on Mumbai. J. WIDER Annual Helsinki.RBI December. Sarkar. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . (1998) More Instruments BroaderGoals: MovingTowardsthe Consensus. K. of 26.532 Rakesh Mohan and ReserveBank of India (2000) Report Currency Finance 1999-2000.262-281. and N. Lecture..RBI: Mumbai. J.. and S. and Stiglitz.Crisis. and of This content downloaded on Fri. Post-Washington Williams. S. and A of and Restructuring:Comparative Study BankPerformance BankGovernance in SouthEast Asia. Journal Banking Finance29. (1998) Does Ownership AlwaysMatter? Economics Evidencefrom IndianBanking the Journal Comparative Industry.
These measures have worked. The main objective was to promote financial withthe aim of improving developmentand make the systemmore market-oriented.and profitable. positive impact on the Indian economy.These include the of and intertemporal geographic transfer resourcesbetween deficitand surplus units. financial India and Pakistan. many othercountriesundertaking of have had to examine closely the factthatthe efficiency a financial sectorreforms system relates to the way it performsits intrinsicfunctions.followed by securitymarkets.and India's exchanges (although Good use of dynamic. Monetary This content downloaded on Fri. starting with money markets. bankingsystemtoday seems generallyhealthy. And technologyhas been one factorexplaining the banking system's improvements.prudentialregulationswere stepped up (promoting confidence and reducing systemic risk).e. Market-orientation was fosteredby exposing domestic state-ownedbanks gradually and listingstate-ownedbanks on the stock to domesticand international competition. of the allocative efficiency resources and ultimately generatehighergrowth.and their for Pakistan. I will limit myself to two main comments on this paper. in the aftermathof an external crisis. My firstcomment relates to the observationthatfinancial marketstend to evolve (i. Banking sector reforms in India were started in the early 1990s. and dealing withincentivesproblems. reforms and improvements banks are while Dr Mohan acknowledges thatfurther by needed to meet futurechallenges.To that intermediation was improved (financial repressionwas reduced and the interest end. mature) in sequence. it would have been useful if the paper had also covered the initiativesor limitations Author's Note:The viewsexpressed herearemysole responsibility do notreflect and thoseofthe International Fund. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . the Reserve Bank of India (RBI) can take much pride in its achievementsso far. and the banking system's health restored. I will then use Dr Mohan's paper to draw parallels with Pakistan. the management of risk.and then equity and derivatives markets. of course. the pooling of resources (subdivision of ownership). not privatising them). Deputy Governor Rakesh Mohan has given us an excellent overview of the impressive financial sector reformsundertakenby the Indian authorities.Comments /. and. of clearingand settlement payments. rates progressivelyderegulated). Given the initial dominance of banks in the Indian financial system. What he says is instructive where the State Bank of Pakistan (SBP) and the governmenthave pursued an ambitiousfinancialsectorreform programme.
relatingto potentialand speed of growthin the otherfinancialmarkets. to indirect instruments). and liberalisingthe foreignexchange regime. This content downloaded on Fri. (beforetax) We know that financial sector reformsare not an end in itself.thoughboth comfortably minimumthresholds. the Indian banking sector has a capital adequacy ratio (capital to risk weighted assets) of 13. My second main commentrelates to the changes in the relativeimportanceof with the improvementin the functioning financial systems the of intermediaries other focus of central banking operations change (e. Market capitalisationand domestic crédit to GDP ratios. as the RBI seems to have managed quite well in this evolving context.forexample. Pakistan's banking sector still accepted internationally suffersmore from a legacy of high non-performing loans (NPLs) which while .some discussion of the other marketswould have providedusefulbackground. deregulatingand liberalisingcreditextension. Several studies have documented economy. of forcefully The reforms focused on: restructuring and privatisation of problem banks. However.thusraisingthe growth potentialof an and benefitingthe population at large. The Indian banking March 2005 reveals some interesting is dominatedby state-ownedbanks which have a 75 percentmarketshare in system assets. in while the benchmarksquoted show that efficiencyand profitability the Indian banking system compare favourably with that of many other developed and emergingmarketeconomies. In Pakistan. Enhancing financial intermediation reduces the spread between deposit and lending rates. strengtheningthe prudential regulations and the institutional infrastructure. the return assets in Pakistan is 2 percentwhile it is 1 percentin India. Now let me turnto comparisons of India and Pakistan. For example. financial sector reforms were initiated in 1997 and pursued after 1999 when the government PresidentMusharrafcame to power. the largely private banking systemin Pakistan outperforms largely on state-ownedbanking systemin India. state-ownedbanks account foronly 20 percentof assets (as result of the authorities' privatisationprogramme). indirectfinancingof investment. while in Pakistan.534 Mohsin Khan S. othersdon't. financial intermediariesbecome more importantin the provision of direct and and equity marketsget largerand more liquid. A snapshot of the Indian and Pakistani banking systems' financial soundness indicators(FSIs) at enddifferences(Table 1). and allows fora more efficient resourceallocation. As an indicationof this.Notwithstanding this. thispositive influenceof financialdevelopmenton economic growth. While it is on truethatthispaper concentrates the bankingsystem.are still twice the Indian gross having been reduced substantiallyin recent years NPL to gross loans ratio of 5 percent. are well below those of Malaysia and China. slightly exceed higherthan of 1 1 for the Pakistani banking sector.And.. Dr. when it comes to the the bottomline. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . Mohan is well placed to tell us about conductingmonetary policy duringstages of an financial landscape.g.
Under private sector management. and less followingthe reforms. Clearly.but remain shallow relative to regional and the domestic investorbase is narrow. showing an impressive growth performanceon the year.mutual funds have been to allowed to investoutside of Pakistan. This content downloaded on Fri. Credit allocation was far from efficient.banks' balance sheets have been cleaned up. privatisation. a high compliance with international good practices. "Efficiency in the Pakistani Banking Development " Reformin the Late 1990s. Today.In addition. Mention can be made here of a recent interesting paper in The Pakistan Review (by Atsushi limi. Replacing badia financingby a less riskycontinuous fundingfacilitythataddresses most of badia 's shortcomingsshould make the stock marketless prone to speculative exuberance. remittanceswithout any restrictions. profits. Capital marketshave grown rapidly. and has facilitatedinvestment the and deregulationhave invigorated bankingsystem.Pakistan's banking system was dominated by chronically loss-making public sector commercial banks weighed down by substantial loans (NPLs).As a result. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . The Karachi Stock Exchange was able to weathera substantialcorrectionearlierthisyear. which provides empirical evidence of technical efficiency in Pakistan's banking system following the reformsthat started in the late 1990s. of The gradual introduction more sophisticatedderivative and related instruments will further marketdevelopment.which is a welcome precedentin the region. allowing banks to concentratetheirenergies on acquiring new business.and credit nonperforming low. This study analysis to a panel of major banks during 1997-2001. building on theirremaining branch network and experience. Very recently. the core of the systemis made up of dynamic extension insufficiently and profitable local private banks.and has recovered since then. public-private ownershipdid not matterin termsof increases in technical efficiency. so forUBL and NDFC. restructuring.the across the board. is bank profitability high. improvingthe to nonperforming total loan ratio has been a crucial factorof the banking system's As turnaround.Capital marketregulationhas comparators.In particular. a result. The foreignexchange regime has been liberalised.which is closely trackedby deposit growth. It applied stochastic frontier finds evidence of an increase in the productivityof employees and branches The efficiency gains were highestin HBL and NBP. Setting up and regularisingforeignexchange companies has stabilised the market and contributed a unified exchange rate.dividends. and privatisation have allowed banks to rationalise their Restructuring branches of retrenchment staffand closing of unprofitable operations. In short. have laid the basis for banks' improved performance. banks have realised strongasset growth. Spring Industry: Empirical Evidence afterthe Structural 2003). Credit expansion has picked up substantially and consumerdemand. but introducing private sector management structures likelyplayed a role.Comments 535 Prior to reforms.Foreign investorscan bring in and take out capital.
28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .4 9. In conclusion.0 13.1 17. in Pakistanby those interested financial development.3 Foreign Banks Market Share(in Assets) Assets CapitaltoRiskWeighted Tier1 Capital RiskWeighted to Assets GrossNPLs toGrossLoan NetNPLs toCapital Return Assets(before on Tax) 100.3 17. in substantial financial sector reforms have been implemented India and Pakistan thatwill maketheir domestic financial sectors more respective In efficient. Table Indicators Pakistan India.pdf 3/Includes are otherwise this in table.7 10. I think bothcountries learn can Pakistan aboutdeveloping financial the from each other.2 3.1 11.2 12.7 1/ IV Source:2005 Article Consultation Report. India and Pakistan have recently agreedto allow each other's in banksto set up foreign branches theother This is notonlyan important country. trade financial in it services.org.4 10.4 5.1 2.9 0.4 14. MohsinS. is also another encouraging of sign stepforliberalising thestrengthening between ties and India.end-March in and 2005 KeyFinancialSoundness All Banks Market Share(in Assets) Assets CapitaltoRiskWeighted Tier1 apitai toRisk Assets Weighted GrossNPLs toGrossLoan NetNPLs toCapital Return Assets(before on Tax) 100.1 10.pk/publications/q_reviews/q__re view_June_05.536 Mohsin Khan S.4 12.8 8.5 0.0 2.8 8.5 20.6 4. SpecialisedBankswhich notlisted International Fund.9 All Banks3/ India 1/ StateBanks Domestic Private Banks 74.0 8.4 -0.8 14.7 0.6 23.0 10.2 16.2 7.8 18.2 8. 2/Source:http ://www. GlobalFinancial Staff and Stability Report.1 4.Dr Mohan'spapershould be system in read.8 13. addition.1 Ц.7 7.4 Banks Foreign 6. and I am sure will be read.0 12. С Washington.4 2.5 1.sbp.5 5. Monetary D.1 66.8 Pakistan2/ Public Sector Local Private Commercial Bank Banks 20.6 9. Khan This content downloaded on Fri.8 2.8 1.
year Productivity. a significant is The paper is helpfulnot only in process at the presentstage of developments. the On early whole of Section 2 the authorneither talks about the impactof bankingsector nor influence economy. to While mentioning objectiveof financialsectorreforms accelerate the momentum author the has rightly economicgrowth explainedthatqualityof the which growth rate can be financialsector can affectall the channelsthrough improved. and The authorhas given a detailed analysis of trendsin productivity in efficiency Indianbanking.. from boththe Hmpacť analysisand 'how discussionunderSection2 is different does'. review literature of as somerelevant (crosscountry well as alongwith Indianstudies).The author the productivity about how does productivity states at theendofSection2. contribution assess theimpact reform to of The IndianExperience".. authorshows his on first the of sectorproductivity the intention to 'explorein brief impact banking in restof economy'. influence restof theeconomy'is different that Interestingly. in Indiaduring the In thecontext financial sector reforms restructuring and of in and Efficiency Banking: last fifteen thispaperon "Reforms. just givesdescription thechangesin thefinancial it of sector during different spans:forsome measures time from 1970 to 2004 and forsome measures thenI from early1990s to 2004. of While discussingthe structure the paper on page 2. 28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions .. this If we read Section 3 carefully has verywell explainedthe process of it financial in the sector reforms Indiaduring last 15 yearalongwith somemeasures of But there contradictory are sector viewson page 7 (financial banking performance. By lookingat thetitleof thepaperone expectsthatthe focusof thepaper the has wouldremain banking on sectorbutin mostof thediscussion author used sectorinterchangeably. the the of assessing successand failures thepoliciestillnowbutalso provides future sector direction thefinancial for agenda. Rather. If before1990s it was era of financial repression think is better restrict it to discussion from 1990s to themostrecent.2.and financial by repression This content downloaded on Fri. in system India by thelate 1980s was characterised . can agreethattheIndian One financial sectorand banking and financial sectoris largely bank-based one can use theseterms interchangeably discussion stockmarket on on butthere comprehensive is developments page 6.The heading theSection2 'How does productivity banking of the the from intention.
28 Dec 2012 00:17:19 AM All use subject to JSTOR Terms and Conditions . Ashraf Janjua This content downloaded on Fri.1970s.and 1980s were to devoted thefinancial essentially deepening). banking CollegeofBusinessManagement. M. Karachi. in trends wide discusses 4 of Section is thebestmanaged part thepaperwhich In and sector related Indianbanking to productivity efficiency. rangeof indicators outlookof Indian theend author concludesthepaperin givingthe future rightly industry. Ashraf Janjua fiscal deficits bank and through of forcedfinancing the government by through in the and monétisation) page 11 (whereas efforts the1960s.538 M.