The process of globalization and liberalization has strongly influenced the Indian banking sector. The ongoing reforms in the banking sector, with their thrust on transparency, efficiency and profitability, have forced the Indian banking sector to adopt suitable strategies with focus on productivity, profitability, competitiveness, and sustainability. Keeping a decade of reforms in the financial sector in the background, this study empirically investigates the productivity and profitability of five large Indian public sector banks and five large Indian private sector banks during the period 1996-97 to 2003-04.
Sound
banking system is an important indicator of an economically strong nation. The
Indian banking system has played a vital role in the growth and development of
the economy (Satish, Jutur and Surendar, 2005). Banking sector in India, being
the lifeline of the country's economy, has undergone metamorphosis over the years.
The post-nationalization era witnessed a cataclysmic change in the face of the
public sector banks, giving thrust to social and mass banking and expanding the
network of branches (Chakraborty, 2005). The process of globalization and liberalization
has also influenced the Indian banking industry. In the post-liberalization period,
there has been an ardent need to bring about structural changes in the Indian
banking system so as to make it economically viable and competitively strong.
In the changed environment, a series of reformative steps has been undertaken
by the Government of India and the Reserve Bank of India on the basis of the recommendations
of the Narasimham Committee to improve the working of banks in line with the international
banking practices. The changes that have come about are greater degree of operational
autonomy, deregulation of interest rate system and free pricing of products, consolidation
and restructuring of weak public sector banks, freedom to open new branches, improved
credit delivery mechanism, legal reforms to expedite recovery of bank dues, etc.
The emergence of new private sector banks as well as the entry of new foreign
banks in this era has thrown tremendous challenges in the form of tough competition
among the Indian banks. The Committee also recommended that there should not be
any difference in treatment between public sector banks and private sector banks.
As a result, cost consciousness, credit management, efficient utilization of all
resources, profitability and overall efficiency have got paramount importance
for the survival and growth of the banking business. The spirit of competition
and the emphasis on profitability are also forcing the public sector banks towards
greater profit orientation in a departure from the socialistic approach followed
for decades (Chakraborty and Chawla, 2005). |
