Regulatory Changes and Productivity of the Banking Sector in the Indian Sub-Continent

Abstract

This study seeks to measure changes in technical efficiency levels within the banking sectors of the Indian sub-continent: specifically India, Pakistan, and Bangladesh, over the period 1993–2002. This study is done in the context of a number of sweeping deregulations across the sub-continent in the early 1990s, and the possible effect these may have had upon efficiency levels. A Malmquist Index of TFP change over the time-period in question is employed, along with a Tobit regression, in order to determine whether these significant measures of deregulation and financial modernisation have had the desired effect upon the Indian sub-continent in terms of technical efficiency levels. It is found that technical efficiency both increases and converges across the Indian sub-continent in response to deregulation. India and Bangladesh experienced immediate and sustained growth in technical efficiency, whereas Pakistan endured a reduction in efficiency during the middle years of the study, before rebounding to levels comparable to the rest of the sub-continent in the latter years of the study. These results indicate that the measures employed to modernise the financial sectors of these respective countries have had the desired effects upon levels of technical efficiency.