Influence of Turbulent Macroeconomic Environment on Productivity Change of Banking Sector: Empirical Evidence from India

Abstract

This study aims to assess the direct impact of US subprime crisis and turbulent macroeconomic conditions on the productivity gains of Indian banking sector using non-parametric data envelopment analysis (DEA) based Malmquist productivity index (MPI) and panel data regression model for the period 2000–2010. This study evaluates the trend of productivity change and assesses the influence of turbulent macroeconomic environment and financial crisis along with regulatory/microeconomic factors on the productivity of the Indian banking sector. The results reveal overall productivity increase during the period under study with the technological improvement across the sector. Financial crisis 2008–2009 exhibits positive and significant impact on the productivity Indian banking sector. Empirical findings suggest that the Indian banking industry sustained their productivity growth even during the global crisis. GDP and inflation exhibits negative and significant association with the productivity gains of Indian banking sector. Productivity growth exhibits significant and positive association with the listing in the stock exchange and therefore this study supports the ‘market discipline’ hypothesis in Indian banking sector. Bank size in terms of total assets, bank’s diversification strategy and profitability exhibit insignificant relationship whereas bank’s expense preference behaviour reveals negative relationship. Bank origin exhibits insignificant association and ownership reveal positive association. Therefore, results of the study do not support global advantage hypothesis in Indian banking sector.