Relative efficiency of foreign and domestic Banks

Abstract

This paper seeks to examine empirically whether foreign banks on an average operate with greater efficiency and so attain higher levels of productivity and profitability. For this purpose, first, a stochastic frontier production function for the banking industry is estimated and bank-wise technical efficiency is computed. In the second stage, the authors compare the mean efficiency level of foreign banks with that of domestic banks. In addition, foreign and domestic banks are also compared with respect to the other measures of performance, namely, productivity and profitability. The result shows that the efficiency levels of group of foreign banks and domestic banks are not significantly different. The comparison of labour (or branch) productivity and profitability between domestic and foreign banks revealed that the same are respectively higher for the latter group. In wake of these findings, authors feel that the higher productivity and profitability of foreign banks are the consequences of their particular operational characteristics and strategies and preferential treatment rendered to them by the government of India