Partial privatization and bank performance: evidence from India

Purpose - The purpose of this paper is to examine the impact of partial privatization on performance of state‐owned banks using data from the Indian banking industry during the period 1986‐2003, and test the hypothesis that privatization leads to improvement in performance even when the government retains controlling stakes. Design/methodology/approach - Employing the technique of stochastic frontier analysis, bank‐specific estimates of total factor productivity were obtained, because they can be considered as a measure of performance, along with four accounting measures. Panel regression models were employed to assess the impact of partial privatization on these performance indicators. Findings - Partial privatization was found to result in significant improvement in performance of state‐owned banks. This finding is robust to alternative model specifications and different techniques for controlling potential selection bias. Research limitations/implications - The paper focuses on the impact of partial privatization on operational and financial performance of banks. Future work could consider the effects on other aspects such as wages and financial development. Practical implications - The results suggest that faced with political opposition to full privatization, even if the government does not relinquish control, the exposure to market discipline through partial privatization may be an effective way of improving performance of state‐owned banks. Originality/value - This is the first work to examine the effects of partial privatization in the context of Indian banks and one of the very few to study this issue for any banking industry.