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Perfect
competition among the market participants is the most cherished
phenomena, for it facilitates minimum prices to the consumers
besides maximizing allocative efficiency. However, when it
comes to banks it is felt that certain degree of market power
is necessary for maintaining stability and growth in the banking
sector that mostly thrives on public deposits. However, this
opinion has recently changed: perfect competition is considered
equally important for banking industry. An increased competition
is believed to promote efficiency in the delivery and quality
of financial services through various innovative efforts.
A high degree of competition among the participants of the
financial market is supposed to increase stability as also
result in higher growth rate of economy. Taking a cue from
these research findings, many developing countries have started
liberalizing their banking sector. India is no exception to
these developments: it launched financial sector reforms in
the early 1990s to promote efficiency in the intermediation
process of banks and improvement in the overall allocative
efficiency of capital. As a part of this exercise, many private
banks have made entry into the market. The regulator has also
introduced a liberal branch expansion policy for foreign banks.
The cumulative result of all these measures is: the share
of public sector banks dropped from 92% in 1991 to 72% by
2006. There is thus a significant change in the market structure
of Indian banks.
It
was against this background that the authors, Satish Verma
and Rohit Saini undertook a study to assess the overall market
power of the banks in the post-reform period; the differences
in the behavior of banks of different ownership, in their
conduct under competition and exercise of market power; and
the overall impact of reforms in promoting competition among
the banks and presented their findings in the article, "Competition
and Market Power in the Indian Banking Industry in the Post-Reform
Scenario". The authors have used an unbalanced panel
for a period of 15 years from 1991-92 to 2005-06 and found
that Indian banking industry is characterized by a relatively
high degree of competition. The study found that the average
level of mark-up in post-reform period was 10%. It is also
found that the foreign banks charged nearly double the mark-up
vis-à-vis what the public sector banks and the domestic
private banks charged. The study also reveals that the mark-up
declined sharply during the period 1995-99 and ultimately
reached 5% by 2006. The authors have thus concluded that the
overall efficiency of the intermediation process of banks
has increased. The findings of the present study, as the authors
opined, throw open a new area of research: study of interrelationship
between the level of mark-up and operating efficiency of Indian
banks.
In
the next article of the issue, "Macroeconomic Determinants
of Asset Quality of Indian Public Sector Banks: A Recursive
VAR Approach", the authors, Basabi Bhattacharya and Tanima
Niyogi Sinha Roy have carried out a study to evaluate the
impact of changing macroeconomic fundamentals and policy framework
on the financial health of banks. The authors have employed
a recursive Vector Auto-Regression approach to examine the
dynamic interactions between the default rate among the Indian
Public Sector Banks and a few selected macroeconomic variables.
They have simultaneously examined the impact of new monitory
resume on the quality of loans of various banks. The authors
could not find any evidence of cyclicality and pro-cyclicality
and one month lag, but the Impulse Response Functions revealed
the existence of cyclical and pro-cyclical patterns over two
months. The study also revealed that the shocks to exchange
rate and monitory policy have significantly impacted bank's
asset quality. In view of these findings, the authors opined
that monitory policy instruments must be so adjusted by the
central bank that they ensure optimization of banking and
price stability rather than focusing on price stability alone.
The
authors, V K Shobhana and G Shanthi of the next article, "Operational
Efficiency of Foreign Banks Operating in India: A Non-Parametric
Model", have assessed the operational efficiency of foreign
banks using the data for the period from 1996-97 to 2004-05
using ANOVA and found that there is no significant relationship
between operational efficiency and variables such as size
of assets, branch network and staff strength.
The
next article of the issue, "Financial Performance of
Banks in India" by Harish Kumar Singla examines the profitability
position of the select 16 banks with a view to identify the
factors determining the profitability. The study reveals that
interest coverage ratio has a strong negative correlation
with net profit ratio, debt equity ratio, interest income
to working funds ratio, ROI and net NPA to net advances ratio,
while it has a positive relation with the operating profit
to working funds. It is also found that the net profit ratio
has a strong negative relation with capital adequacy, while
strong positive relation with debt equity, interest income
to working funds, net NPA to net advances and ROI.
The
last article of the issue, "Customer Perception of E-Banking
Services of Indian Banks: Some Survey Evidence" by R
K Uppal analyzes the quality of e-banking services using a
five-point likert-type scale. The collected data was used
to generate weighted average scores and ranking. The study
found that most of the customers of e-banking are satisfied
with the different e-channels offered by banks and the services
thereof. The author has also suggested certain measures for
improving the efficiency of e-banking services.
-
GRK Murty
Consulting Editor
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