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An empirical analysis of competition in the Indian Banking Sector in dynamic panel framework

Sinha, Pankaj and Sharma, Sakshi and Ghosh, Sayan (2015): An empirical analysis of competition in the Indian Banking Sector in dynamic panel framework.

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Abstract

Competition has been regarded as a positive phenomenon for banks; it is perceived that competition makes banks more efficient, stimulates financial innovation and open up new markets For empirical assessment of the nature of competitive conditions amongst scheduled Indian commercial banks over a period of 15 years, we use the ‘Panzar-Rosser educed form revenue model’ to compute the so-called H statistic by estimating the factor price elasticities. In this study alternative estimation techniques have been used for comparing the dynamic H-statistic with static H-statistic. The static H-statistic was found to have a downward bias. However, dynamic as well as static H-statistic, both pointed to the presence of monopolistic competition. The hypotheses of perfect collusion as well as of perfect competition can be rejected using dynamic as well as fixed panel-econometric model estimations using micro data of banks’ balance sheets and profit & loss accounts for the years 2000-2014. The division of the entire period into two sub-samples, i.e. before and after 2007 revealed a decrease in competition levels across the two periods. Although, empirical analysis supported the assertion that the nature of competition among the Indian Banks is monopolistic.But it showed a decrease in the level of competitionmay be due to consolidation exercises of top few large banks with smaller banks and also because of the shift from traditional financial business to off-balance sheet activities, which might have lead to the convergence of competitive levels in the second sub-sample period, i.e. after 2007.The second sub-period also corresponds to the global financial crisis of 2008, a possible reason for the lower H-statistic values. The low persistence of profit values (in the sub-periods) should be associated with higher competition, It is also found that the values of competitive conduct (H-statistic), does not coincide with the classical concentration approach (CR5, CR10), for the Indian Banking Industry. The unit cost of funds, capital, and labour were found to be positive and statistically significant. The unit cost of funds was the highest contributor to the overall H statistic. The control variables, such as size and risk were found to be positively affecting the revenue. The findings arrived in this study; highlight the possible links between Indian banking sector competitiveness, profitability, intermediation and regulatory scenario.

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