No abstract

PurposeThe purpose of this study is to explore and evaluate potential nonmonotonicity in the determinants of profit efficiency, specifically IT and R&D investments in the Indian commercial banking sector.Design/methodology/approachThe study employs an alternative stochastic profit efficiency framework and introduces nonmonotonic effects by parameterizing the location and scale parameters of the inefficiency component on an unbalanced panel data set of 72 commercial banks in the 2008–2019 period. Marginal effects across quartiles are calculated using a bias-corrected and accelerated bootstrap procedure of 500 simulations. The study disaggregates across ownership and size for gauging the impact of structure on the associations between determinants of profit efficiency.FindingsThe study partially rejects the productivity paradox as it discovers a negative association of IT and R&D with profit inefficiency. However, the observed nonmonotonicity of IT is of significance for bank managers, as the study concludes that overinvestment in IT is detrimental to a bank’s profit-maximizing interests. Further, bank size, loan default and credit risk depict a nonmonotonic relationship across the sample with large banks, high NPAs and high credit risk associated with reducing profit efficiency. In addition, higher margins and greater diversification are related positively to efficiency, and banks with cost-heavy structures or having high liquidity risk associated negatively with efficiency.Originality/valueTo the best knowledge of the authors, the study is perhaps the first to acknowledge and incorporate nonmonotonic associations of IT investments amidst other exogenous determinants under a stochastic profit efficiency framework.

PurposeAgainst the backdrop of an Indian banking sector that finds itself entangled in the triple deadlock of increasing competition, technological changes and strict regulatory compliance, the study aims to examine the need for reinforcing stringent corporate and risk governance mechanisms as an instrument for improving efficiency and productivity levels.Design/methodology/approachThe authors construct three separate indices, namely, supervisory board index, audit index and risk governance index to measure the governance practices of commercial banks. A slacks-based data envelopment analysis technical efficiency (TE) measure, a variable returns to scale cost efficiency model and Malmquist productivity index are employed to determine TE, cost efficiency and productivity change, respectively. A two-step system-generalized method of moments estimation accounts for the dynamic relationship between governance and efficiency.FindingsThe authors show that strict audit and risk governance mechanisms are associated with better efficiency and productivity levels. However, consistent with the free-rider hypothesis, large, independent and diverse boards lead to cost inefficiencies. Strict risk governance structures circumvent the negative effects of high regulatory capital and improve efficiency and total factor productivity. However, friendly boards do not perform efficiently in the presence of regulatory capital, implying that incentives arising from maintaining high levels of equity capital make them more susceptible to risk-taking, and board composition is unable to sidestep this behaviour.Originality/valueThe paper contributes to the literature that explores the linkages between governance, efficiency and productivity. The inferences hold relevance in the post-COVID world, as regulators try to circumvent the additional stress on the banking system by adopting sound corporate and risk governance mechanisms.

PurposeThis paper empirically examines the short-term and long-term associations between risk, capital and efficiency (R-C-E) in the Indian banking sector across 2008–2019 to answer the presence of causation or contemporaneousness in the R-C-E nexus.Design/methodology/approachThe paper focuses on three objectives. First, the authors determine short-term causality in the risk–efficiency relationship by studying the simultaneous influence of a wide array of banking risks on DEA-based technical and cost efficiency in static and dynamic situations. Second, the authors introduce bank capital and contemporaneously determine the interplay between R-C-E using seemingly unrelated regression equation (SURE) and three-staged least squares (3SLS). Last, the authors assess stability in inter-temporal associations using Granger causality in an autoregressive distributed lag (ARDL) generalized method of moments (GMM) framework.FindingsThe authors contend that high capital buffers reduce insolvency risk and increase bank stability. Technically efficient banks carry lesser equity buffers, suggesting a trade-off between capital and efficiency. However, capitalization makes banks more technically efficient but not cost-efficient, implying that over-capitalization creates cost inefficiencies, which, in line with the cost skimping hypothesis, forces banks to undertake risk. Concerning causal relationships, the authors conclude that inefficiency Granger-causes insolvency and increases bank risk. Further, steady increases in capital precede technical and cost efficiency improvements. The converse also holds as more efficient banks depict temporal increases in capitalization levels.Originality/valueThe paper is perhaps the first that acknowledges the influence of the “time” perspective on the R-C-E nexus in an emerging economy and advocates that prudential regulations must focus on short-term and long-term intricacies among the triumvirate to foster a stable banking environment.

No abstract