Efficiency of Shadow Banks in India and Its Drivers

Abstract

With the growth of shadow banking (SB) across the globe, their importance as an inevitable segment of the financial system is already established. Therefore, along with banking institutions, the assessment of the efficiency of this segment has become imperative. This article tries to look into the aspects of their efficiency in the Indian context. With the data set of all the listed companies in the SB category for the past 10 years, the efficiency score is ascertained and the drivers of efficiency are identified. Data envelopment analysis and Malmquist Index are employed to ascertain the efficiency score and analyse the efficiency change, respectively. Tobit regression is employed to identify the drivers of efficiency. The findings reveal that many of the firms are operating at the efficiency frontier with the maximum score of 1, and few others are yet to achieve the same. The size of the institution, earning capacity and liquidity drive the efficiency further, whereas the quality of the assets drags it down. There is a need to improve the managerial efficiency for inefficient firms to achieve economies of scale and optimum efficiency. As size has emerged as an important driver, small SBs need to scale up their operation. Furthermore, there is a need to improve the quality of loan assets.