Structure, Conduct and Performance of Indian Banking Sector
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.
BAIN J. S. (1951). Relation of Profit Rate to Industry Concentration: American Manufacturing 1936-1940. Quarterly Journal of Economics. 65(3), pp. 293-325.
BAIN, J. S. (1959), Industrial Organization. New York: Wiley
BAKER, J. B., WOODWARD, P. A. (1998). Market Power and the Cross-industry Behaviour of Price around a Business Cycle Trough. Working Paper No. 221. Bureau of Economics. Federal Trade Commission.
BASANT, R., MORRIS, S. (2000). Competition Policy in India: Issues for a Globalising Economy. Project Report Submitted to the Ministry of Industry, Government of India, New Delhi.
BERGER, A. N., HANNAN, T. H. (1992). The Price Concentration Relationship in Banking: A Reply. Review of Economics and Statistics. 74(2), pp.376–389.
BERGER, A. N. (1995). The Profit-Structure Relationship in Banking: Tests of Market-Power and Efficient-Structure Hypotheses. Journal of Money, Credit and Banking. 27(2), pp. 404-431.
BHATTACHARYA, K., DAS, A. (2003). Dynamics of Market Structure and Competitiveness of the Banking Sector in India and its Impact on Output and Prices of Banking Services. Reserve Bank of India Occasional Papers. 24(3), pp. 124-159.
BRESNAHAN, T. F. (1989). Empirical Studies of Industries with Market Power. Handbook of Industrial Organization. Vol. 2, pp. 1011-57.
BRUCKER, E. (1970). A Microeconomic Approach to Banking Competition. Journal of Finance. 25(5), pp. 1133-1141.
CHO, Y.J. (1986). Inefficiencies from Financial Liberalization in the Absence of Well-Functioning Equity Markets. Journal of Money, Credit and Banking. 18(2), pp.191-199.
CHIAPPORI, P.A., PÉREZ-CASTRILLO, D., VERDIER, F. (1995). Spatial competition in the banking system, localization, cross-subsidies and the regulation of interest rates. European Economic Review. 39(5), pp. 889-919.
DELOMER, C. D., KLEIN, P. G., KAMERSCHEN, D. R., VOEKS, L. F. (2002). Structure Conduct and Performance: A Simultaneous Equations Approach. Applied Economics. 34(17), pp.13-20.
DEMSETZ, H. (1973). Industry Structure, Market Rivalry, and Public Policy. Journal of Law and Economics. 16(1), pp. 1-9.
DEMSETZ, H. (1974). Two Systems of Belief about Monopoly. In H. Goldschmid, H. Michael Mann and J. Fred Weston, eds. Industrial Concentration: The New Learning. Boston: Little, Brown and Co., pp. 164-84.
EDWARD, F. R. (1964). Concentration in Banking and Its Effect on Business Loan Rates. Review of Economic and Statistics. 46(3), pp. 294–300.
EVANOFF, D., FORTIER, L. (1988). Re-evaluation of the Structure-Conduct-Performance Paradigm in Banking. Journal of Financial Services Research. 1(3), pp. 277-294.
FRAME, W. S., D. R. KAMERSCHEN (1997). The Profit-Structure Relationship in Legally Protected Banking Markets Using Efficiency Measures. Review of Industrial Organization. 12, pp. 9-22.
GILBERT, A. (1984). Studies of Bank Market Structure and Competition: A Review and Evaluation. Journal of Money, Credit and Banking. 16, pp. 617-644.
GOLDBERGER, A. S. (1991). A course in Econometrics. Cambridge: Harvard University Press.
GRABEL, I. (1995). Assessing the Impact of Financial Liberalization on Stock Market Volatility in Selected Developing Countries. Journal of Development Studies. 31, pp. 903 – 917.
GUJARATI, D. N., SANGEETHA. (2007). Basic Econometrics (4th ed.). New Delhi: McGraw-Hill, Inc.
GUPTA, V. K. (1983). A Simultaneous Determination of Structure, Conduct and Performance in Canadian Manufacturing. Oxford Economic Papers. 35, pp. 281-301.
HANNAN, T. H., BERGER, A. N. (1989). Price rigidity and market structure: theory and evidence from the banking industry. Finance and Economics Discussion Series 59. Board of Governors of the Federal Reserve System (U.S.).
HANNAN, T. H. (1991).The Functional Relationship between Prices and Market Concentration: The Case of the Banking Industry. Finance and Economics Discussion Series 169. Board of Governors of the Federal Reserve System (U.S).
JOSHI, V., LITTLE, I.M.D. (1996). India's Economic Reforms 1991-2000. Oxford: Clarendon Press.
KATIB, N. M. (2004). Market Structure and Performance in the Malaysian Banking Industry: A Robust Estimation. 8th Capital Market Conference. Indian Institute of Capital Market Paper.
KHAMBAMPATI, U. S. (1996). Industrial concentration and performance: a study of the structure, conduct, and performance of Indian industry. New Delhi: Oxford University Press.
KIRZNER, I. M. (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press.
LEVIN, A., LIN, C. F., CHU, C. (2002). Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties. Journal of Econometrics. 108, pp. 1–24.
LLOYAD-WILLIAMS, D. M., MOLYNEUX, P., THORNTON, J. (1994). Market structure and performance in Spanish banking. Journal of Banking and Finance. 18(3), pp. 433–443.
MARQUARDT, D. W. (1970). Generalized Inverses, Ridge Regression, Biased Linear Estimation and Nonlinear Estimation. Technometrics. 12(3), pp. 591–612.
MARTIN, S. (1979a). Advertising, Concentration and Profitability: The Simultaneity Problem. Bell Journal of Economics. 10, pp. 639-47.
MARTIN, S. (1979b). Entry Barriers, Concentration and Profits. Southern Economic Journal, 46, pp. 471-88.
MASON, E. (1939). Price and Production Policies of Large-Scale Enterprise. American Economic Review. 29, pp. 61-74.
MASON, R. L., GUNST, R. F., HESS, J. L. (1989). Statistical Design and Analysis of Experiments: Applications to Engineering and Science. New York: John Wiley and Sons, Inc.
MILLER, R. L., VANHOOSE, D. D. (1993). Modern Money and Banking. (3rd ed.). New York: McGraw-Hill.
MISHRA, P., BEHERA, B. (2007). Instabilities in Market Concentration: An Empirical Investigation in Indian Manufacturing Sector. Journal of Indian School of Political Economy. 19(3), pp.119-149.
MISHRA, P. (2005). Mergers and Acquisitions in the Indian Corporate Sector in the Post- Liberalisation Era: An Analysis. Unpublished Doctoral Thesis. Vidyasagar University, West Bengal.
MISHRA, P. (2008). Concentration-Markup Relationship in Indian Manufacturing Sector. Economic and Political Weekly. 43(39), pp.76-81.
MISHRA, P., VIKAS. (2010). Structure, Conduct and Performance in Indian Pharmaceutical Industry: A Simultaneous Equations Investigation. Review of Development and Change, 15(1), pp. 69-99.
MOLYNEUX, P., THORNTON, J. (1992). Determinants of European Bank Profitability: A Note. Journal of Banking and Finance 16(6), pp.1173–1178.
MOLYNEUX, P., FORBES W. (1995). Market Structure and Performance in European Banking. Applied Economics. 27(2), pp.155–159.
MUELLER, D. C. (1990) (ed.). The Dynamics of Company Profits, An International Comparison. New York: Cambridge University Press.
MULLINEUX, A., SINCLAIR, P. (2000). Oligopolistic Banks: Theory and Policy Implications Unpublished .
NEUBERGER, D. (1997). Structure, Conduct and Performance in Banking Markets. Thuenen-Series of Applied Economic Theory 12. University of Rostock, Institute of Economics, Germany.
NEUMARK, D., SHARPE, S. A. (1992). Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits. The Quarterly Journal of Economics. 107(2), pp. 657-80.
OKEAHALAM, C.C. (1998). Concentration in the Banking Sector of the Common Monetary Area of Southern Africa. Paper was presented at the Development Issues in the New Economy Conference. University of Cape Town, South Africa. March 24-26 2002.
OSBORNE, D. K., WENDEL, J. (1983). Research in Structure, Conduct and Performance in Banking 1964–1979. Research paper 83-003. College of Business Administration, Oklahoma State University.
PRAGER, R., HANNAN. T. H. (1998). Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry. Journal of Industrial Economics. 46(4), pp. 433-452.
PHILLIPS, A. (1967). Evidence of Concentration in Banking Markets and Interest Rates. Federal Reserve Bulletin. 53(6), pp. 916–926.
PODENDA, R. J. (1986). Structure and performance: Some evidence from California banking, Economic Review. Federal Reserve Bank of Sanfrancisco (winter), 5–17.
PUSHPANGADAN, K., SHANTA, N. (2008). Competition and Profitability in Indian Manufacturing Sector. Indian Economic Review. 43(1), pp. 103-123.
RAM MOHAN, T.T. (2001). Long run performance of public and private sector bank stocks Economic And Political Weekly. 36(52), pp. 4865-4871.
RAMASWAMY, K. V. (2006). State of Competition in Indian Manufacturing Industry. In Mehta, P. S. (Ed). A Functional Competition Policy for India. New Delhi: Academic Foundation.
RHOADES, S. A. (1985). Market Share as a Source of Market Power: Implications and Some Evidence. Journal of Economics and Business. 37(4), pp. 343–365.
SCHERER, F.M., ROSS, D. (1990). Industrial Market Structure and Economic Performance. Boston: Houghton Mifflin.
SCHMALENSEE, R. (1989). Inter-industry Studies of Structure and Performance. In R. Schmalensee and R. Willig (ed.) Handbook of Industrial Organization. Vol. 2, New York: North Holland. pp. 952-1009.
SHACKLE, G. L. S. (1971). Economics for Pleasure. Cambridge: Cambridge University Press.
SHAFFER, S. (1989). Competition in the U.S. banking industry. Economics Letters. 29(4), pp. 321-323.
SINGH, A. (1993). Stock Markets, Financial Liberalization, and Economic Development. Economic Journal. 107(442), pp. 771-782.
SMIRLOCK, M. (1985). Evidence on the (non) Relationship between Concentration and Profitability in Banking. Journal of Money, Credit and Banking. 17(1), pp.69-83.
STRICKLAND, A. D., WEISS, L. W. (1976). Advertising, Concentration and Price-Cost Margins Journal of Political Economy. 84(5), pp. 1109-1121.
SWANK, J. (1996). Theories of the Banking Firm: A Review of the Literature. Bulletin of Economic Research. 48(3), pp.173-207.
THAKOR, A.V. (1995). Financial Intermediation and the Market for Credit. edited by Jarrow, Handbooks in Operations Research and Management Science. Elsevier Science. Vol. 9, pp. 1073-1103.
VERNON, J. R. (1971). Separation of ownership and control and profits rates, the evidence from banking: Comment. Journal of Financial and Quantitative Analysis. 6(1), pp. 615–625.
VERMA, S., SAINIR, R. (2010). Structure Conduct and Performance of commercial bank in India. Prajnan. 39(2), pp. 39-45.
VICKERS, J. (1995). Concepts of Competition. Oxford Economic Papers. 47(1), pp. 1-23.
WEISS, L. (1974). The Concentration-Profits Relationship and Antitrust. In Audretsch, D., Yamawaki, H., (eds), Industrial Concentration: The New Learning Boston: Little Brown and Company.