Indian Banking Industry Competitiveness and Market Structure

Indian swearing Industry scrap and securities industry StructureIntroductionAfter 1991 crisis, Indias liberalisation journey was multi-faceted. One of the major areas of liberalization was the argoting welkin which was highly regulated and controlled by government. Most importantly for banking industry, as per the M. Narasimhan committee recommendations, the liberalization came in the even out areas namely interest rate, reduction of reserve requirements, ledger entry deregulation, credit policies and prudential supervision.Incase of interest rates, they could promptly be adjustd by the banks based on their cost of funds rather then government fixing them for banks. The administered regime for interest rate came to an end except for interest rate on savings account. The reduction of reserve requirement for banks made huge capital available for banks which could be deployed in the business. The entry of parvenu players was de-regulated. The government empowered the Reserve Bank of India to issue licenses to the new players, if they met the execute criteria jointly set by RBI and Finance Ministry. The credit proportionning was completely done away with. Although there is hitherto credit proportionning for priority sector, the banks are free to deploy their capital on the sectors which they feel profitable. ebullient supervision regime came to an end. The Reserve Bank of India made several changes in prudential supervision and gave impropriety to banks in their day-to-day operation.The unblemishedness asset size of Indian Banking industry is over US$ 270 billion. The hail deposit amount is US$ 200 billion. Its branch network is one of the largest in the world with much than than 66,000 branches and over 17,000 ATM spread across the country. The bank assets are expected to bugger off at 13.4% CAGR and it is predicted that India could ferment the 3rd largest banking hub in the world by 2040.Currently India has 80 Scheduled commercial banks ou t of which 28 are public sector banks, 24 private banks and 28 inappropriate banks (Annual Report, RBI). As Indian parsimony is growing at an average rate of over 7% since a decade, more and more foreign banks are thinking to foray into the Indian grocery. As per McKinseys report on Indian Banking (2010), total loans-to-percentage of GDP, could grow from its current level of around 30% to 45% in years to come. Such huge opportunities excessivelyprompts several questions Who is/ are the dominant players in the market place? What is/are their share in the banking industry? What is the market structure of Indian banking industry is it a monopoly or a unblemished argument?Objectives and MotivationThe neutral of this dissertation is to understand the Indian banking industry, its composition (nationalised banks, private bank and foreign banks) and knowing the players of the industry.Further the cultivation will find out how much concentrated the Indian banking industry is and provide knowledge regarding jacket 3 as well as top 5 major banks. Such a slow-wittedness ratio would give a fair idea of how decision of the top players as an implication on the other industry players.The study will include the determination of the market structure of Indian banking industry. Its instant to know whether the industry is a perfect competition, a monopoly or a monopolistic competition. This would lead to understand of the cohesive behaviour of the market players.My motivation for choosing this topic came from the complexity of the Indian banking industry. The number of players, entry of new players, consolidation among the brisk players, ever-changing economic scenario of India etc and its impact on the banking industry always fascinated me to do a study on the Indian Banking industry. I also feel that such study would be useful not only for the policymakers within the central bank and the government but also for the existing players, the potential entrants and f or other stakeholders of the banking industry.Literature ReviewAs per the neoclassical theory, the spectrum of market structure can be defined by the number of firms and size of those firms in the market Goddard, Molyneux Wilson (2001). Various numerical preventions of concentration return been use by empirical researchers in order to find the concentration of industry players. scarce at the same time, there is no single perfect measure for concentration Goddard, Molyneux Wilson (2001). Nevertheless all these measure are subject to the idiosyncracies and limitation they usually tend to correlate highly with each other Curry and George (1983) Scherer and Ross (1990). student residence and Tideman (1967) have provided the desirable properties which are required for these measures of concentration to be acceptable.Concentration measures like k-bank concentration ratio, Herfindahl-Hirschman might (HHI) are extensively used to measure the banking sector performance as a function of market structure Barth et al., 2004, Beck at el, 2006).k-bank concentration ratioFor measuring the concentration of firms, the most frequently used ratio is k-bank concentration ratio (Bikker 2004). The reason this ratio is so frequently used is because of its simplicity and limited info requirement. The index gives equal emphasis to the k leading banks, but neglects the many small banks in the market. It is a one dimensional measure ranging surrounded by zero and unity Al-Muharrami S.,Matthews k., Khabari Y (2006). In a limited review of 73 US Structure-Conduct-Performance studies in banking from 1961 to 1991, in 37 studies the k-bank deposit concentration measure was used (Molyneux et al. 1996)Herfindahl Hirschman advocate (HHI)HHI is another benchmark measure for measuring the bank concentration and gives more weight to larger banks. It was positive by A.O.Hirschman. It expands to all the banks in the system, thereby avoiding the arbitrary cut offs Alegria, C and Schaeck K (2006). Bikker (2004) highlights the importance of HHI in the theoretical research. In practice, the HHI plays a pivotal role in the US for the approval of bank mergers where the blank space mergers market HHI cannot exceed 0.18 and that the change in the index should be less than 0.02 (Cetorelli, 1999).This index is also used to measure the bank concentration in Arab GCC banking system Al-Muharrami S.,Matthews k., Khabari Y (2006) and in measuring the competition and market structure in the Saudi Arabia Al-Muharrami (2009)Panzer and Rosse H statisticsThe measure of market structure helps in determining whether the market enjoys perfect competition, monopoly or monopolistic competition. This is also known measuring the monopoly power hypothesis. It means that in more concentrated markets the bigger players tend to be collusive and try to dominate the market. Also their actions have right smart impact on the other market players.There are several models for determining the market s tructure. The models are divided into two parts 1) Structural Models and 2) Non Structural Models.This study will employ the non-structural model salute suggested by Rosse and Panzer (1977) and Panzer and Rosse (1982, 1987), popularly known as the H-statistics. It is spaciously used in determining the competitive structure of the banking industry in various countries.In the banking industry, there is extensive use of Rosse and Panzer method and has got a wide practical applicability. In his study on New York banks, Shaffer (1982) had observed that banks had monopolistic competition. Similar study for Canadian banks by Nathan and Neave (1989) found a perfect competition for 1982 but monopolistic competition for 1983-84. Japan revealed perfect competition Molyneux et al (1996).Molyneux et al. (1994) also tested the P-R statistics for French, German, Italian, Spanish and British banks for the period of 1986-1989 in order to determine the competitive conditions of major European count ries.MethodologyThe study involves the use of k-bank concentration ratio and HHI ratio for gauging the competition and Panzer and Rosse for determining the monopoly power of the players of Indian Banking industry. These ratios have been extensively used in the different studies mentioned above.K-bank concentration ratio measures the market share of the top k-firms in the industry. The equation isnCRn = Sii=1Where Si is the market share of the i-th firm when firms are ranked in descending order of the market share.Market share is deliberate in terms of sales, assets or number of employees. Commonly used values of n include 3, 4, 5 or 8. The researchers have also found that there is high correlation between concentration ratios defined using alternative values of n Bailey and Boyle (1971). The advantage of k-bank concentration ratio is that it is tardily measurable one needs to know only the total size of the industry and the individual sizes of firms. But it lacks in taking the siz e distribution of remaining firms.In this study, the market share would be measured on the basis of the loan size (assets) and the deposit size (liability) of the banks. The value of n would be 3 and 5 i.e. CR3 and CR5.HHI uses information about all points in the firm size distribution. It is defined as the entirety of the squares of the markets share of all firmsNHHI = Si2i=1Where Si is the market shares of the firm i and N is the total number of firms in the industry. In the calculation of HHI, the larger firms get a heavier weightage than their smaller counterparts which reflects their sexual relation importance in the market.This study uses P-R h-statistics, a non-structural model, measuring competition and emphasizes the analysis of the competitive conduct of banks without obvious information about the structure of the market. The P-R determines the competitive behaviour of banks on the basis of the comparative static properties of reduced-form gross equation based on cross-s ection information Panzer and Rosse (1987).The equation isLn(TREV) = 0 + 1 ln PL + 2 ln PK + 3 ln PF + 4 ln RISKASS + 5 ln ASSET + 6 ln BRThe variables are defined as followsTREV the ratio of total revenue to total assetsPL ratio of personnel expense to employeesPK ratio of capital expense to fixed assetsPF ratio of annual interest expense to total loanable fundsRISKASS ratio of provisions to total assetsASSET bank total assetsBR ratio of number of branches to total number of branches in thecountry.The H-statistic value is the sum of cipher price elasticity PL, PK and PF. The value H 0 implies monopoly equilibrium. A value of 0 DataThe data for all the calculations of k-bank concentration ratio, HHI and P-R H-statistics will be obtained from Orbis database. Further, the data would also be taken from the Reserve Bank of India(RBI)s profile of banks 2004-2005 2008-2009. Incase any data is not available from the two main sources (Orbis and RBI), the data would be extracted f rom financial statements of banks, from their websites and from reports published on the Indian monetary fund exchanges namely Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).The sample period covers 2002-2008.ConclusionThe conclusion would include the interpretation of the results obtained by usage of E-view and MS- stand out software. In summation, the study would help in knowing the concentration ratio through k-bank ratio as well as HHI and help in understanding the monopoly power of large banks in India. Such a study would be helpful to determine the cohesive behaviour of the players of industry and how their decision would affect the entire industry as well as the Indian economy. With a lots consolidation happening in the industry, such a study would help in understanding the shifts in the concentration and market powers if any. sound but not the least an attempt would be made to give some recommendations based on the results.