ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Measurement and Analysis of the Productivity of Indian Banks

The paper reveals that cash holdings, the “growth rate of assets,” the “incremental gross non-performing assets,” and the “incremental cost of funds” negatively impact the productivity of banks, whereas the net interest margin has a positive impact. The paper also benchmarks major banks in India that can be used as an input in strategic decision-making.

 

In recent years, the Indian banking industry has shown a decline in profitability and asset quality. In 2017–18, the scheduled commercial banks incurred losses of `324 billion with gross non-performing assets (GNPAs) rising to 11.6% of gross advances. The losses and GNPs for public sector banks (PSBs) were higher, amounting to `854 billion and 15.6% of gross advances, respectively (RBI 2018b). The Reserve Bank of India (RBI) has cautioned that growing GNPAs and losses of banks may endanger the stability of the banking sector (RBI 2018a). Moreover, the gross domestic product (GDP) growth rate of India has declined from 8.17% in 2016 to 6.98% in 2018 (World Bank Data 2018), causing serious concern for all the stakeholders.

The measurement and analysis of the productivity of banks is important as it affects the financial stability (Rossi et al 2005). It will provide insights for taking corrective actions and stimulating economic development (Athanasoglou et al 2008). Economic growth is augmented by several factors, such as efficiency of financial intermediaries, increased credit (King and Levine 1993), and reduction in the interest margins (Koivu 2002). Thus, financial sector development leads to economic growth. It is possible that there exists a two-way relationship between economic growth and financial development (Khan and Senhadji 2000). But whatever be the direction of relationship, the efficiency of the banking sector is important (Singh 2016).

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Updated On : 25th Apr, 2022
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