Structure, Conduct and Performance of Indian Banking Sector

Abstract

Abstract In the context of initiation of economic reforms in general and changes in policies and regulations of the banking sector in particular, the present paper attempts to examine the structure-conduct-performance relationships in Indian banking sector. It is observed that there have been changes in the market structure of Indian banking sector, conducts of the banks and their performance in the post-reform era, especially during the last decade, though the changes have not been significant in every aspect. Using a panel dataset of 59 banks operating in India during 1999-2000 to 2008-2009 and applying the two-stage least squares (2SLS) method of estimation, the paper finds that there exist strong inter-linkages amongst structure of the market, banks’ conduct and their financial performance. While market share of a bank depends directly on its market size, asset base, selling efforts, and past financial performance, its selling efforts vary directly with market share, asset base, and past financial performance. On the other hand, returns on assets of a bank vary directly with its market share, but inversely with its asset base and selling efforts. The regression results essentially suggest for multidirectional and dynamic SCP relationships in Indian banking sector. It is also found that the nature of ownership has significant influence on market share, selling efforts and financial performance of the banks. As compared to the nationalised banks, market share of the private banks (both domestic and foreign) is found to be lower. But private banks make greater selling efforts and have better financial performance vis-à-vis their public sector counterparts