Productivity growth of Indian banking sector: A comparative analysis of pre‐ and post‐global financial crisis

• Published date: 01 February 2022
• Author: Seenaiah Kale
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2282

ACADEMIC PAPER

Productivity growth of Indian banking sector: A comparative

analysis of pre- and post-global financial crisis

Seenaiah Kale

Faculty of Economics, Institute for Studies in

Industrial Development, New Delhi, India

Correspondence

Seenaiah Kale, Faculty of Economics, Institute

for Studies in Industrial Development,

4, Institutional Area, Phase II, Vasant Kunj,

New Delhi 110070, India.

Email: seenueconomiks@gmail.com

This article evaluates the productivity growth of Indian banks during the pre- and

post-global financial crisis of 2008. Productivity is calculated across banking groups,

such as public, private, and foreign peers, using Malmquist Productivity Index through

data envelopment analysis. Empirical findings indicate that the efficiency and produc-

tivity growth of Indian banks have declined in the post-global financial crisis as com-

pared with the pre-financial crisis. We observe efficiency differences across

ownership groups; further results clarify that the total factor productivity growth of

public banks is lower than that of private and foreign players, mostly due to the

change in technical progress though not driven by technical efficiency. The study

suggests that having a base in technological advances might help perform better

when encountering a crisis.

1|INTRODUCTION

The role of healthy financial system is eminent in stimulating the pro-

cess of economic growth (Demetriades & Hussein, 1996;

Levine, 1997; Schumpeter, 1934; Shaw, 1973). Within the financial

system, in developing countries like India, the banking sector plays

not only an accommodative but dominant role in navigating the pro-

ductive resources through proper allocative function to distribute

funds between savers (supply of credit) and investors (demand for

credit) to boost the economic activity through numerous channels by

reducing information asymmetry and so on. Therefore, the health of

financial system, particularly the efficiency of the banking sector, is

vital to drive real growth (Burgess, Pande, & Wong, 2005;

Greenwood, Sanchez, & Wang, 2010). In India, financial intermedia-

tion, in the form of commercial banks, is the reflection of financial

well-being due to its large financial base, that is, around 60–70% of

the financial services are covered by the banking sector. Thus, an

efficient, well-functioning banking sector is critical for economic

development and entrepreneurial success (see Pradhan, Arvin, Hall, &

Bahmani, 2014; Raj, Sen, & Kathuria, 2014).

Financial fluctuations seldom occur; the most recent one, the

global financial crisis of 2008, started as a result of the United States

sub-prime crisis and gradually spread all over the world, and devas-

tated the economic activities and financial systems all over the world

(Quiggin, 2011). The United States sub-prime mortgage collapse—the

worst crisis ever since the Great Depression of the 1930s—severely

impacted the major economies all over the world including India. As a

result, growth rates were slowed down along with the fall in savings

and investment rates, more particularly the banking sector, which con-

stitutes the major part of the financial system, was severely affected.

Initially, the crisis had a marginal impact on the Indian economy, but

subsequently in 2008 the growth rates declined and internal and

external deficits worsened gradually. In the second half of

2008–2009, the net capital flows turned out to be negative as there

were huge outflows of portfolio investment, short-term trade finance,

and banking capital. Capital flows under foreign direct investment and

external commercial borrowings during 2007 and 2008 recorded

sharp decline of 66 and 56%, respectively. Consequently, the effi-

ciency of financial, trade, and various productive sectors severely

deteriorated due to the contagion effect of the global financial melt-

down. This economic slowdown had severely impacted Asian econo-

mies due to closer economic integration with the United States in

terms of trade and financial inter-dependency. In this regard, the pre-

sent study made an attempt to explore the performance of Indian

banks, in other words, total productivity growth (hereafter TFP) of

Indian banks as group-wise during the pre- and post-global financial

crisis. As mentioned, previous studies have not focused on the perfor-

mance of Indian banks by ownership classification, which is more

appropriate than investigating various groups together as a whole

banking system.

1

At the time of the crisis, Indian financial system was

Received: 12 March 2020 Revised: 30 March 2020 Accepted: 11 July 2020

DOI: 10.1002/pa.2282

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https://doi.org/10.1002/pa.2282