Ownership Effects on Performance of Indian Banks

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Source 1: Competitiveness of the Indian Banking Sector- Public Sector Banks -by SBI/ ISB Hyderabad

LITERATURE SURVEY

- De Bikram (January 2003) used Panel Regression techniques to analyze the effects of ownership on the bank performance in India by taking a sample of 58 banks over 5 years, 27 of which belong to the Public Sector (includes SBI and its 7 associates), 23 old private sector and 8 new private sector banks and concluded that ownership does not seem to have any effect on the Return On Assets but public sector banks do seem to have higher Net Interest Margin and Operating Cost Ratio. However when SBI and its 7 associates are dropped from the sample, it was found that new private sector banks start showing a higher Return On Assets.

- Umakrishnan, K U and Bandhopadhyay (2005) investigate the relationship between the changing patterns of bank’s source of income and risk adjusted performance by using a sample of 77 banks over a period of 5 years including 27 public sector banks, 22 private banks, 25 foreign banks and 3 cooperative banks to ompare their change in income composition by measuring the risk adjusted return on BIS risk allocated capital (RARORAC) and conclude that in order to change the profitability drivers in banking, Indian banks need to improve their non-interest income and also augment risk adjusted interest income through better risk based pricing.

- Chaudhary Kajal & Sharma Monika (June 2011) said that the economic reforms in India in the early 90’s brought about major changes in the functioning of Banks in India after liberalization, globalization and privatization which increased competition, new information technologies and thereby declining processing costs, the erosion of geographic boundaries and less restrictive governmental regulation have played a major role for Public Sector Banks in India to forcefully compete with Private and Foreign Banks. The paper covers a sample of 300 banks also attempts to analyze how efficiently the Public and Private Sector banks have been managing NPA and concludes that it is the right time to take suitable measures to get rid of NPA problem. An efficient MIS should be developed and public banks must pay attention on their functioning to compete with private banks.

- Sathye Milind (2005) examines the effect of bank privatization on bank performance and efficiency by using relevant banking data published by the Indian Banks’ Association for 5 years (1998-2002) in order to achieve the desired objectives and analyzes it using the difference of means test and concludes that the financial performance of banks already in the private sector is not significantly different from those that are partially privatized.

- Khatri Deepak & Kumar Nitin (2003) examine if ownership of bank effects the performance by taking a sample of 27 public banks, 31 private out of which 8 are new private banks and 42 foreign banks and said that it has been argued since a long time that private ownership of firm leads to better firm performance since private ownership leads to better intra-firm allocation of resources, but it does not guarantee that the privately owned firms would always perform better than the public sector firms and concluded that initially Private sector and Foreign banks were performing better but as the performance increased the Public sector has reduced the performance gap, thus suggesting that after 1999 neither competition nor ownership had any influence on bank performance and also suggests that Private and Foreign banks have increased competition in the Indian banking sector.

- Wanniarchchige Manjula Kumara (2011) examines the effect of ownership on performance of Commercial banks in by taking a sample of 50 Indian commercial banks during 2002-2009 using data envelopment analysis with 3 supplementary measures of performance and concluded that the performance of domestic banks had not yet reached the level of foreign banks in terms of both the cost and revenue efficiencies and further concluded that domestic private banks are the least efficient in the market.

- Sensarma Rudra (2005)studies the effects of deregulation on the banking industry in an emerging economy using profit-based measures of performance using panel data of 83 Indian banks, belonging to different ownership groups ranging from 1986-2005 and found that profit efficiency and productivity declined following deregulation. While public sector banks performed better than private banks in the pre-deregulation period, there was no difference in their performance post deregulation. The results found are in contrast with the findings of the previous studies that have found significant improvements, in efficiency, and productivity of Indian banks using cost-based measures of performan ce.

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SCOPE and METHODOLOGY

Scope of work- The research would involve:

- Number of banks to be studied (Public and Private) - 30

- Time period to be studied - 5 years (2007-2011)

- Main sources of data- RBI, MPRA, Capital Line, IGIDR Paper 2003, Vikalpa, SSRN, International Journal of Innovation Management & Technology, RBI publications, etc.

Methodology -

The research involves usage of T-test, Correlation and Multiple Regression Model analysis to test the following hypothesis:

Hypothesis 1: Ownership has an effect on the performance of banks.

Hypothesis 2: Deposits and Advances can measure the performance of banks

T-Test Model

The t-test assesses whether the means of two groups are statistically different from each other. The test statistic in the t-test is known as the t-statistic. The t-test looks at the t-statistic, t-distribution and degrees of freedom to determine a p value (probability) that can be used to determine whether the population means differ.

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Correlation Model

Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security