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Are more productive banks always better?

Author

Listed:
  • Rajeswari Sengupta

    (Indira Gandhi Institute of Development Research)

  • Harsh Vardhan

    (SP Jain Institute of Management & Research)

Abstract

In this paper, we connect productivity growth in the banking sector with the subsequent build up ofstressed assets on the banks balance sheets. In doing so, we highlight the problems of a methodology that measures productivity based on quantity of loans but does not take into account the quality of credit extended by the banks. We quantify the magnitude of efficiency gains in the banking sector in Indiausing the Malmquist Index techniques for a sample of 33 commercial banks during the period 2002-2018. We find that the Indian banking sector experienced steady productivity growth till about 2011-12, and after that efficiency gains stagnated and even got reversed in the more recent years. We show that the phase of productivity growth is followed by high levels of non-performing assets on the banks balance sheets. We conclude that conventional methods of measuring efficiency gains in the banking sector may convey a misleading picture if they do not take into account the risks associated with the business of banking.

Suggested Citation

  • Rajeswari Sengupta & Harsh Vardhan, 2020. "Are more productive banks always better?," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-027, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2020-027
    as

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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2020-027.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Banking; Bank productivity; Malmquist Index; Indian commercial banks; Technical efficiency; Non-performing asset;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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