Competitive Dynamics in the Indian Banking Sector: A Comparative Analysis Using Structural and NEIO Approaches

Abstract

Purpose: The study examines competition in the Indian banking sector by analysing public, private, and foreign-owned banks from 2005 to 2023. It also explores the market structure of the Indian banking industry. Design/methodology/approach: The study employs both structural approaches – specifically, the concentration ratio (CR) and the Herfindahl-Hirschman Index (HHI) – and the New Empirical Industrial Organization (NEIO) framework, which includes the Lerner index (LI) and the Panzar-Rosse H statistic, to estimate bank competition. Findings: The findings indicate that competition levels vary based on ownership segments and the metrics employed. The HHI reveals that the differences in HHI values based on ownership are negligible, reflecting that the banking sector in India has remained highly competitive throughout the study period. In contrast, the LI, which utilises marginal cost, shows varying levels of market power. When examining total revenue, public sector banks are marginally more competitive than private sector banks, although the difference is minimal. Originality/Value: This paper offers new insights into the competitive dynamics of the Indian banking sector, contributing to the existing literature on banking efficiency. The application of structural and non-structural approaches, and a comparative analysis of the results obtained, provides a new perspective on bank competition in India. Policymakers can use the study’s findings to enhance competition in the Indian banking industry and implement measures accordingly.

Keywords: Public Sector Banks, Banking Policy, Bank Competition, Lerner Index, Panzar-Rosse H Statistic, Financial Intermediation, Financial Markets

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