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

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The Effect of Information Technology on Banking Efficiency

The effect of information technology in the Indian banking sector is analysed using the stochastic frontier production model to estimate technical efficiency during 2002–18. The evidence suggests that the adoption of IT has a positive and significant impact on the performance of banks. On average, nationalised and new private sector banks are more efficient than foreign ones, while old private sector banks have fallen back in efficiency. While a higher number of bank employees adversely impacts efficiency, greater capital positively impacts banking performance. It is also found that IT-led performance is a promising strategy for a multiplier effect on banking performance. 

Information technology (IT) has proven to be a valuable and powerful tool for fostering development, growth, innovation, and competitiveness. In an increasingly global environment where time and distance are no longer constraints, developing nations worldwide need to get connected and join the globally networked community. Contrarily, they may fall further behind the developed world. There is mounting evidence that IT is an efficient tool when used as part of an overall development strategy coupled with partnerships between businesses, governments, and civil society (World Bank 2003). The global economy has undergone a significant technological transition in recent years due to the IT saga. Technological advancements augment per capita income rises by reducing the quantum of inputs per unit of output for a given amount of output. Technological change in an economy, thus, refers to changes in the input–output relations of production activities (Mathur 1963). As an economy progresses from lower to higher development junctures, there is a shift from simpler to more modern and sophisticated production techniques.

Entire segments in the modern economy have made massive investments in IT over the last two decades. The financial sector is one of the main areas to gain renewed attention, within which the banking sector has become the cynosure of policymakers and academics alike. IT in banking infrastructures has had implications on several nations’ economic development in the developing world. It was one of the first sectors to adopt IT back in the 1960s, thereafter evolving from a highly protected government agency that only lends and borrows to an autonomous sector with a wide range of services, resulting in significant improvements in services, support, and competencies. It is one of the industries whose products have a high level of information content and whose processes have a high level of information intensity (Bilderbeek and Buitelaar 1992).

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Updated On : 18th Sep, 2023
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