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Banks play an important role in capital allocation, risk sharing and economic growth. Banks’ reserves work as a buffer against macroeconomic shocks and allow for better intertemporal risk sharing. In India, the role of banks in accelerating the economic development of the country has been increasingly recognized since the nationalization of major commercial banks, which facilitated rapid expansion of banking in terms of its geographical reach, covering rural India by encouraging significant growth in deposits and advances. In India, banking industry acts as the backbone of economic development. Starting in the 1990s, India has undertaken a massive liberalization of the banking sector to make it more productive and efficient. After banking sector reforms, three categories of banks are now operating in India: Public Sector Banks (PSBs), private sector banks and foreign banks. Due to the banking sector reforms, the Reserve Bank of India (RBI) has given freedom to all banks for issuing new policies by themselves for improving their productivity and efficiency.
In the last two decades, the competition among public sector, private sector and foreign banks in India has been increasing to meet the customers’ requirement more efficiently. However, the PSBs are still dominating the banking sector in India by holding approximately 75% of deposits and 71% of advances. Thus, the overall success of banking sector in India largely depends on PSBs. Hence, the appraisal of productivity and efficiency of PSBs in India is vital in the context of an efficient and competitive financial system. Therefore, in this paper, we try to analyze the sources of productivity and efficiency of PSBs in India which has become a major concern to planners and policy makers in India.
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