Using an appropriate theoretical framework and econometric methodology, the study seeks to measure and model competition in private banking industry in India in an attempt to analyze the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation is the motivation behind the study. It uses the concept of competition proposed by Stigler (1961) and measures it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure- Conduct-Performance (S-C-P) paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price-cost margin. One basic contention of the study is that competition goes beyond ‘conduct’ and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three-equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.

The banking reform initiative of Narasimham Committee (1991) has freed banking industry in terms of allowing entry, which has led to growth of private banking industry in India. Alongside deregulation of interest rates, it provides conditions for private banks to manage themselves more efficiently. With the removal of restrictions, it is expected that banking industry would become more competitive. Although private banking is not a major component of the banking sector, its importance has progressively been increasing. Today, it would be no exaggeration to treat this segment of banking industry as the most dynamic segment. It no longer plays a residual role in the banking industry. Of the three components, private banks operate in the most open environment. Therefore, they are likely to be closest to competitive markets. It is also the segment that has seen the greatest growth and entry of new banks making it prone to competition.

We begin by rationalization of our study of competition in banking in India. Firstly, there is not adequate discussion about private sector banks in the Narasimham Committee report, even when they have been visualized as dynamic agents, which would improve the functioning of the banking industry through competition. Secondly, there are very few studies of competition in Indian industry, save one in Indian banking industry.1 Finally, the need to study competition in banking industry has been stressed in the literature.2 This study chooses to use the Structure-Conduct-Performance (S-C-P) approach to analyze competition in private banking industry in India.

Applied Finance Journal, Measurement, Determinants of Competition, Private Banking Industry, Structure- Conduct-Performance (S-C-P), Narasimham Committee, S-C-P hypothesis.