This paper examines the effect of ownership on performance and risk of commercial banks in India during the period 1995-2007. The study, using t-test, fixed effects and random effects models, examines whether there exists any significant difference in the performance and risk among State-Owned Banks (SOBs), Domestic Private Banks (DPBs) and Foreign Banks (FBs), controlling other factors. The empirical results show significant differences in the performance and risk, and FBs seem to be more profitable and more risk-taking than both DPBs and SOBs. Bank capital and demand deposits are positively associated and loans are negatively associated with bank profitability, whereas size of banks and growth rate of economy are negatively associated with bank risk.

Ownership structure of an economic unit is explained through two main dimensions. First, the degree of ownership concentration: units may differ because their ownership is more or less dispersed. Second, the kind of owners: given the same degree of concentration, two units may differ if the government holds a majority stake in one unit; similarly a stock firm with dispersed ownership is different from a mutual firm (Iannotta et al., 2007). Indian banking industry consists of different ownership structures: State-Owned Banks (SOBs), Domestic Private Banks (DPBs) and Foreign-Owned or Foreign Banks (FBs). Although their ownership is different, they are not apparently different in terms of the kind of services they provide. They provide full-fledged banking services, thereby competing in the same markets under the same regulatory conditions.

Over the years, a considerable number of studies have debated the relationship between firm ownership and performance. The conclusion relies on various theoretical explanations starting from property rights and agency theory to managerial rewards and public choice theory. According to property rights hypothesis, private enterprises perform better than public enterprises (Alchian, 1965 and De Alessi, 1980) because of principal agent problems, which imply that management in private enterprises are supposed to be more restrained by capital market discipline (William, 2004). Public choice theorists (Niskanen, 1975; Aharoni 1986 and Levy, 1987), while complementing the property rights perspective, point out that government ownership usually yields specific inefficiency factors irrespective of market conditions. The argument is straightforward: a lack of capital market discipline weakens the owners' control over management, making the management free to pursue their own interests rather than the interests of the public at large. Common reasons for different ownership forms leading to different performance levels are often extensively discussed in the literature, which include: (1) pay differentials between state-owned enterprises and private enterprises, (2) poor accountability, (3) ownership dispersion and constraints on transfer of property rights, (4) inadequate monitoring by state, and (5) protection and subsidization of poorly performing state-owned enterprises using public funds (Ramaswamy, 2001).

Applied Finance Journal, Ownership Structure, State-Owned Banks, SOBs, Domestic Private Banks, DPBs, Gross Domestic Product, GDP, Center for Monitoring Indian Economy, CMIE, Macroeconomic Factors, Monitoring Costs, Competitive Intensity, Random Variables.