Author: Rajeswari Sengupta and Harsh Vardhan
Title: Are more productive banks always better?
Abstract: In this paper, we connect productivity growth in the banking sector with the subsequent build up of stressed 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 India using 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.
Keywords: Banking, Bank productivity, Malmquist Index, Indian commercial banks, Technical efficiency, Non-performing asset
JEL Code: G21, G28, D24, D61