Assessing the effects of cost, revenue and profit efficiency on bank performance: empirical evidence from Indian banking

Abstract

Purpose This paper aims to investigate the effects of cost, revenue and profit efficiency on bank profitability in an emerging economy such as India over the period 1997 to 2017. Additionally, this study examines the effect of efficiency on profitability across different ownership groups for a panel of 70 Indian commercial banks. Design/methodology/approach In the first stage, using stochastic frontier analysis, we estimate the efficiency scores of cost, revenue and profit over the examined period. In the second stage, this study uses the two-step system generalized-method of moments dynamic panel approach to investigate the impact of several efficiency measures on bank profitability. Findings Results estimated through and system generalized-method of moments indicate that a higher level of cost, revenue and efficiency significantly improves India's bank profitability. Regarding ownership groups, this study finds that the public sector banks are most cost-efficient compared to private and foreign banks. Other bank-specific, macroeconomic and institutional variables have played a significant role in determining bank profitability. Practical implications The findings of the study extend some important policy implications. In light of the rapid decline in bank profitability, banks should focus on increasing the efficiency of their operations. Improvement in profit, cost and revenue efficiency can ameliorate bank performance significantly. Profit efficiency that takes into account both cost and revenue efficiency should be maintained reasonably to prevent the declining pattern of bank profitability that the industry has witnessed over the years. Originality/value To the best of the author's knowledge, this study is a fresh piece of research that fulfils an urgent need of investigating the dynamics between bank efficiency and bank profitability in India. In an emerging economy like India, where the banking sector has witnessed substantial structural transformations over the past two decades, such study demands an immediate empirical investigation.

An Enquiry into Technical, Pure Technical, and Scale Efficiencies of Indian Public and Private Banks in Post Global Financial Crisis Period

“…The efficiency scores for the period running from 2009-10 to 2018-19 have revealed that of the three ownership groups of banks, the banks under foreign ownership are the most efficient ones (92.53%) in comparison to the private banks (90.20%) and public banks (86.04%). Bijoy (2022) has attempted to measure the impact of cost efficiency, revenue efficiency and profit efficiency on the profitability of Indian banks. Using Stochastic Frontier Analysis (SFA) and generalized methods of moments on the panel dataset of 70 Indian banks for the period spanning 1997-2017, the study has concluded that higher levels of cost, revenue and profit efficiency improve the profitability of Indian banks.…”

The Effect of Liquidity, Efficiency, and Overhead on Bank Profitability

“…Bank overhead costs are simply incurred by banks indirectly related to efforts to get customers [2]. The use of technology can reduce certain overhead costs to increase profitability [4,13].…”

“…Bank overhead costs are costs incurred indirectly in getting customers, namely the cost of labor and information technology used [5]. The use of information technology enables banks to reduce certain overhead costs as a form of cost efficiency [13]. Information technology contributes to the development of mobile telecommunication operators, internet service providers, computer hardware manufacturers, software developers, mobile device manufacturers, and software manufacturers, which help the banking sector to accelerate services [4].…”

“…In addition, bank efficiency has a significant effect on bank profitability, and more efficient bank operations will encourage a decrease in bank operating costs, increasing bank profitability [3]. Banks carry out cost efficiency by maximizing output and minimizing waste in Indian banking [13]. Internet finance on commercial banks in China can positively impact profitability and efficiency, and vice versa, negatively impacting bank liquidity [15].…”

The moderation role of board independence change in the relationship between board characteristics, related party transactions, and financial performance

“…Along with increased competitiveness, the banking sector in India has seen a process of bank consolidation, followed by mergers and acquisitions, resulting in a reduction in the number of competitors and an increase in bank concentration [ 38 ]. The major stream of commercial banking has dominated the Indian financial system.…”