Competition,Concentration and the Relevance of New Banks’ Entry in the Indian Banking System

Abstract

This article analyzes the evolution of competition in the Indian banking system for the period 1994– 2011. The reform process for the Indian banking sector started in 1992, led by the Narasimhan committee report and thus the period of study is divided into three phases: deregulation and liberalization, consolidation and post-consolidation period. To evaluate competition, we apply two indicators of competition from the theory of industrial organization: concentration indices and Panzar and Rosse’s H-statistic (PRH statistic). The empirical evidence from the PRH statistic does not permit us to reject the existence of monopolistic competition. There is a steady fall in concentration ratios suggesting an improvement in competitive conditions. The PRH statistic suggests a fall in competitive condition during the consolidation phase followed by a revival in competitive conditions during the post consolidation period. This study also helps in understanding the effect of new banks’ entry in the Indian banking sector on the competitive conditions. The results obtained support the decision by Reserve Bank of India to allow entry of new private banks which will help in further infusing competition in the Indian banking sector.