Market structure is an important determinant of both competitiveness and consumer welfare. This paper examines the market structure of the Indian banking industry over the last three years. Liberalization, deregulation and globalization could result in a more competitive structure or a more monopolistic one, depending on the ability of the Indian banks to compete with each other and with foreign banks. The standard methods of Concentration Index and Herfindahl Index indicate that the market structure is competitive and has remained so in the recent times. Surprisingly, the econometric estimates based on the Panzer-Ross methodology indicate that the market is monopolistic competitive and has become more monopolistic in the last three years. This trend appears to be slow but one cannot rule out its efficiency in the future. Only when full competitive forces are allowed in the nature of wholesome foreign competition that the market structure stabilizes.

The Financial Sector Reforms, set in motion in 1991, have greatly changed the face of the Indian financial services industry, including the Indian banking sector. It has moved gradually from a regulated to a deregulated environment. Earlier, the banking industry was largely a nationalized industry (since 1969). The larger developments in the economies across the globe, the economic crisis in 1991 and the changing attitude of the policy makers in India have forced the pace of change of the banking industry. The market structure of banks has changed with time. The change may be attributed to several forces acting together—market forces and competition, policy changes and regulatory framework, globalization, technological changes (e.g., role of information technology), and the changing role of banking industry (product mix). In turn, structural changes have resulted in changes in profitability, product-mix, geographical reach, and hence, consumer welfare.

The changing nature of the banking sector and the resultant uncertainties have raised several questions. (G-10, 2001, & IMF, 2001)Normative issues include, for example, in a developing country like India whether a market-driven, profit-driven sector without the social safety net is a right model for the banking industry. Positive questions are, for example, what is the emerging structure, what are its characteristics in terms of ownership, market share, profitability, etc.