Concentration and Competition in the Indian Banking Sector A Bank-group wise Study

The Indian Banking Sector is in an evolutionary phase, particularly in the post reforms period, exhibiting several changes over time. The impact of reforms in the form of easing of entry norms and deregulation of interest rates has led to greater privatization of the Indian banking sector. The infusion of technology has added a new dimension to the way banking services are provided and the way banking is done by customers, and private banks, both, domestic and foreign, have played a leading role in the adoption of the same. Private banks are found to adopt aggressive product and price policies in the race for a bigger pie of the Indian banking sector. The increased level of competition seems to have induced consolidation of the sector with mergers, amalgamations and rationalization witnessed both among private sector and public sector banks. Most studies on the level of competition in the banking sector undertake the
examination of the level of concentration in the sector as a whole. The present study augments this approach by examining bank group-wise levels of concentration. The premise of such an examination is that while individual banks chart their ways of responding to the changing environment and influence the structure of the sector, there may be fundamental difference in the nature of the competitive changes within different bank groups. Interestingly, the analysis reveals apparently conflicting trends in the Indian Banking Sector. On the one hand, entry of private banks has led to increase in the level of competition as revealed by secular decline in the Net Interest Margin; on the other hand, it has evoked consolidation within all bank -groups, leading to increase in the level of concentration. The study shows that increased levels of concentration are consistent with increased levels of competition. The nature and dimensions of the intra -bank group structural changes and their performance implications may throw light on the structure of the Indian
Banking Sector that might emerge in the years to come and may reflect preliminary but vital indicators for an inquiry into what constitutes an appropriate and effective banking structure for the Indian economy.

Keywords – Indian Banking Sector; Banking Reforms; Banking Structure; Bank Groups; Level of Concentration