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The Performance of the Banking Sector in the New Economy

In: India’s New Economy

Author

Listed:
  • Jati Sengupta

    (University of California)

  • Chiranjib Neogi

    (Indian Statistical Institute)

Abstract

The primary aim of liberalization is to strengthen the market mechanism by eliminating relative price distortion to achieve efficiency and growth, and to improve the performance of deregulated industry by encouraging competition. The presence of fixed transaction costs associated with every transaction will encourage borrowers and depositors to form a coalition to share the burden of transaction costs. A coalition of large number of investors will be able to invest in less liquid but more profitable securities to fulfill the individual investor’s liquidity-intact demands for the appropriate size of the coalition. The banking sector of an economy plays a significant role in the financial life of the economy by functioning, particularly, as a financial intermediary, offering access to a payment system, transforming assets, managing risks, processing information and monitoring borrowers. As the banking sector performs the task of intermediation efficiently, the cost of loanable funds reduces and that encourages investment expenditure, resulting in a potential increase in the rate of economic growth. Improvements in competition and proficiency allocate resources efficiently for the benefit of the economy by reducing the prices of services extended to its customers.

Suggested Citation

  • Jati Sengupta & Chiranjib Neogi, 2009. "The Performance of the Banking Sector in the New Economy," Palgrave Macmillan Books, in: India’s New Economy, chapter 6, pages 193-241, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-22824-5_6
    DOI: 10.1057/9780230228245_6
    as

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