A Study on Testing the Operating Efficiency of Indian Banking Sector with Special Reference to the Select Financial Soundness Indicators — An Empirical Approach

Abstract

A decade of financial sector reforms has strengthened the fundamentals of Indian economy and paved the way for efficiency in operating performance of the banks. The most important achievement of the financial sector reforms is to bring a marked improvement in the financial health of commercial banks with respect to capital adequacy, profitability, asset quality and risk management. Now banks have to compete not only with the same business line but also with mutual fund, insurance, post office and NBFCs to attract the customers and they have to adopt the technology-oriented reforms to stay in their business. Further deregulation has opened up new opportunities for banks to enhance their revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing etc. A positive outcome of competition is the emergence of choice system in selecting the services by the customers and increased levels of sophistication and technology in banks have facilitated the customers to get the services at their door-step. the government also has adopted many initiatives, which changed the face of traditional banking sectors. In the light of the recent measures initiated by the government, the wings of the banks have spread across the country to improve their operating performance. This paper has made an attempt to analyze the operating performance of the Indian banking sector on the basis of the indicators like Capital adequacy ratio, Non-performing Assets (NPA), Cost of funds, Return on funds, Spread and Credit — Deposit ratio.