The Effect of Technology on Financial Performance of Indian Banks

This study empirically analyses the effect of technology on the financial performance of 50 Indian banks during 2011-12 to 2019-20. It considers three technology indicators – average amount of debit card transaction at ATM, average amount of debit card transaction at POS and average amount of NEFT transactions and three performance indicators – return on assets, return on equity and net interest margins of banks and uses them to construct the composite technology index and the composite performance index respectively. It regresses the performance indicators individually and also the composite performance index on technology indicators/technology index along with other explanatory variables and estimates these equations using the standard panel data methodology. As these regression results provide the average effect of technology indicators and technology index on banking performance, it also allows the technology index to interact with bank dummies to observe bank specific effects of technology in the alternative specification of equations. The estimation results indicate that the NEFT has a negative and significant effect on the performance index, but it has a positive and significant effect on both return on assets and return on equity. Surprisingly, both average amounts of debit card transactions at ATM and POS do not influence all performance indicators and the performance index. Thus, the technology impact is mixed based on the performance indicator and the NEFT is the dominant technology indicator in determining the profitability of banks. Results from the estimation of an alternative specification of the model indicate that the technology index has a significant negative effect on the performance index of 42 banks. However, it has a significant positive effect on both return on assets and return on equity in almost all banks, but it does not play a role in determining the net interest margin of banks. We hope that these results are useful to policymakers and other researchers to take appropriate strategies to improve the performance of the banking industry in India.