The Increasing Economy Growth Of India Economics Essay

India is the considered one of fastest turning economic systems in the universe. In its planetary economic paper in 2003, the Goldman Sachs coined the word BRICs ( Brazil, Russia, India & A ; China ) and stated that in following 50 old ages BRICs economic systems could go a much larger force in the universe economic system.

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Specifically about India, the study predicted that India shows the potency of the fastest growing over following 30 and 50 old ages. The growing expected would be higher than 5 % over the following 30 old ages and near to 5 % boulder clay 2050. Besides, its US Dollar per capita would lift 35 times in 2050[ 1 ]. This study is one of the many studies and books written about India on rise.

The economic system is turning at a growing experienced seen ne’er earlier. The mean growing rate has been about 7 % from 2000-2009, with the highest recoded growing at 9.2 % in twelvemonth 2007. The diagram below will demo year-wise GDP growing rate from 2000 to 2009.

( Beginning: CIA Factbook )

But India ‘s economic narrative has two stages viz. Pre-1991 & A ; Post-1991 stage. The twelvemonth 1991 is a landmark twelvemonth in India ‘s economic system as it was, in this twelvemonth that India ran out of its foreign exchange ( FX ) modesty & A ; was left merely with FX of 11 yearss of imports. Pre 1991 period was considered as “ license Raj ”[ 2 ]where authorities regulated virtually all concerns. All the concern needed authorities permission and licenses which were about impossible to acquire. There was enormous red-tapism and the consequence was a sulky growing rate of merely 3 % which was popularly known as the “ Hindu growing rate ” . In 1990-91, although the direct trigger of crisis in India was addition of rough oil monetary values and Gulf war but the indirect factors were macro instabilities in the signifier of unwieldy current history and financial shortages. The external debt service as a proportion of current grosss increased from 10.2 per centum in 1980-81 to 35.3 per centum of current grosss in 1990-91. The consequence was a catastrophe: kerb of imports, pledging of gold militias with Bank of England and Bank of Japan, devaluation of Indian Rupee. And with this event the Licence Raj came to an terminal.

India adopted the liberalization policies which included major reforms in countries of: Fiscal Stabilisation, Trade and Exchange rate policy, Taxation, Public Sector and last but non the least the fiscal sector.

It is known that efficient fiscal sector is a sine qua non for the economic growing of a state. The fiscal sector is said to be efficient if it can apportion the resources optimally. Banks have a really of import function to play as they are the most of import fiscal mediators in a developing economic system like India. The reform in the Indian existent sector aimed at making a new set of inducement for reallocation of resources for their efficient usage. But those could be successful merely if there was a parallel procedure of fiscal sector reform to bolster the overall reform procedure. The fiscal sector reforms aimed at call uping nest eggs and apportioning them expeditiously. It besides aimed at taking many hindrances for free flow of capital within the economic system. The practical monopoly of the populace sector Bankss came to an terminal and the competition was created among Bankss. The Non Banking Financial Companies ( NBFC ) which were allowed to run, besides farther created efficient allotment of capital. Even the foreign Bankss, which were non welcomed before, were given licenses and were given a level-playing field to run and vie with the Indian populace sector and private sector Bankss. The most positive facet of liberalisation in fiscal sector was its debut of competition.

It has besides been seen theoretically and through empirical observation, that the grade of competition in the fiscal sector can count for the entree of houses and families to fiscal services and external funding and in bend impacting overall economic growing [ Claessens and Laeven, 2004 ] . Competition increases the efficiency which in bend has a direct influence on the profitableness, increased sum of financess being intermediated i.e. addition in the volumes, better monetary values for clients, improved degree of service for the clients and greater safety and soundness due to improved capital buffers that absorb the hazard [ Berger, A at EL, 1993 ] . But, the deregulating, liberalisation and consolidation in the fiscal services industry have progressively prompted concerns about greater market power enjoyed by Bankss and the subsequent impact upon the fiscal stableness [ Mishkin, 1999 ; Group of Ten, 2001 ; De Nicolo et Al, 2004 ] .

Therefore, the important alterations post liberalization in India, besides had a important impact on the Indian banking industry. There has been a re-allocation of resources with public sector, private sector and foreign Bankss viing with each other for the client base and market portion. Therefore, the important alterations in the Indian Banking industry raise really of import policy concerns that Bankss in the extremely concentrated markets gain market power. The higher market power consequences in Bankss being able to bear down higher than competitory monetary values thereby countervailing any benefit associated with the competition. Another really of import consideration is that a higher concentration ratio among the banking industry limits the effectivity of pecuniary and recognition policy, increases the chance of the systemic hazard and decrease in loaning to little and Average Corporation. In emerging economic systems like India, pecuniary policies are a major tool with the cardinal Bankss to maneuver the economic systems. Hence such concentration in the industry would procrastinate the stairss taken by the pecuniary governments.

This thesis is seeking to measure the fight and the market construction of the Indian banking industry which would give thought of how concentrated the Indian banking industry during the old ages 2002-2008. The double purpose of this thesis is to mensurate the concentration through the applied methods used to mensurate the concentration ratio viz. k-bank concentration ratio ( CRk ) and Herfindahl- Hirschman Index ( HHI ) . The 2nd purpose is mensurating the market construction of the industry through both the structured and non-structured methods. In structured methods, the competitory conditions would be measured by the most often used Structure-Conduct-Performance ( SCP ) method. In the non-structured methods, Panzar-Rosse ( PR ) H-statistics method would be used.

The thesis is organised as follows: Section 2 would include the background of the Indian banking industry since 1991. Section 3 presents the literature reappraisal for all the different steps of competition and market construction used in the thesis. Section 4 would depict the methodological analysis in inside informations and talk about the informations used to bring forth the consequences. Section 5 describes the reading and elaborate analysis of the consequence. Section 6 would sum up the survey by giving the concluding comments.

Section – Two

Indian Banking Industry – An overview since 1991

The liberalisation of economic system besides brought alterations in the banking industry. Pre-1991, the banking system was under authorities control. The authorities controlled the recognition regulations and restricted the usage of financess. It besides determined the monetary value of financess i.e. Interest on nest eggs and loans on behalf of the Bankss. The high statutory demand of hard currency modesty ratio ( CRR )[ 3 ]and statutory liquidness ratio ( SLR )[ 4 ]made Bankss unproductive and unprofitable as they had to park more than 40 % of their financess in authorities securities.

The authorities appointed a Committee on the fiscal system which was chaired by Mr. M. Narsimhan. The commission came out with several recommendations. The most of import recommendation which the commission came out was to increase the competition among the Indian banking industry by opening up the banking sector to the private every bit good as the foreign participants. The recommendations besides covered the countries of involvement rate deregulating, directed recognition regulations and statutory preemptions. The basic aim of the banking sector reform was to line up with the overall ends of the 1991 economic reforms of opening the economic system, giving a greater function to markets in puting monetary values and apportioning resources, and increasing the function of private sector [ Arun and Turner ( 2002 ) ; Bhide, Prasad and Ghosh ( 2001 ) ; Shirai ( 2002 ) ]

The reforms have taken topographic point in the undermentioned countries:

First and foremost were the statutory preemptions, in which there was a drastic decrease in the fiscal repression in India through decrease in the CRR and the SLR demands, which was one of the major cause low profitableness and high involvement rate spreads in the Indian banking system [ Shirai ( 2002b ) ] .

CRR was brought to around 5 % in 2003 from its extremum of 15 % in 1991. The SLR was brought down to 25 % in 1997 from its extremum of 38.5 % in 1992.

The decrease of the CRR and SLR resulted in increased flexibleness for Bankss in finding both the volume and footings of loaning loan [ Kamesam ( 2002 ) , Reddy ( 2002 ) ]

Following reform was in the country of involvement rate liberalization. Before reform the involvement rate construction was really complex with both nest eggs and imparting rates being controlled by the RBI. The deregulating of involvement rate was a major constituent of the banking sector reform that aimed at advancing fiscal nest eggs and growing of the organised fiscal system [ Reserve Bank of India, 2004 ] . As of 2004, the RBI was merely commanding the involvement rates for nest eggs history and NRI sedimentation rate. For all the other sedimentations above 15 yearss, the Bankss were free to bear down and put their ain involvement rates.

Priority sector loaning excessively came in the reform list. The commission recommended that the per centum progresss to Priority Sector should be reduced from 40 % to 10 % . However this recommendation has non been implemented boulder clay day of the month. But alternatively the definition of the Priority sector has been expanded, thereby cut downing the overall load of the Bankss.

There were reforms made in country of entry barriers. There was barely any competition before 1991. The populace sector Bankss dominated the market and all the private banks/ foreign Bankss had a miniscule market portion. Since 1994, 7 private sector Bankss entered the Indian banking industry. More than 20 foreign Bankss started their operation in India since 1994. By March 2004, the new private sector Bankss and foreign Bankss had a combined portion of 20 % of entire assets.

Deregulating the entry demands and puting up new private/ foreign Bankss has benefited the Indian banking system from the improved engineering, specialised accomplishments, better hazard direction patterns and greater portfolio variegation [ Reserve Bank of India, 2004 ]

Reforms besides aimed at public sector Bankss where one of the recommendations of the commission was to neutralize the PSBs. But the authorities decided against that recommendation. But in 1994, State Bank of India became the first PSB to raise equity in the capital markets. Further 11 PSB ‘s were partly privatised by authorities thining its portion upto 49 % .

But inspite of partial denationalization, the authorities is committed to maintain their public character by keeping strong administrative control [ Arun and Turner ( 2002 ) ; Ahluwalia ( 2002 ) ] .

Last but non the least, there was reforms in prudential norms. The commission besides recommended strengthening of the prudential norms and the supervisory model. Since so there has been a uninterrupted attempt on the portion of RBI in conveying transparence and answerability in the banking sector. Several regulations sing the capital adequateness ratio, provisioning of the NPAs, accounting norms etch were changed and brought at par with the planetary criterion.

Indian Banking Industry – 2000 onwards

Similar to the Indian economic system which grew at a high rate after 2000, even the Indian banking industry saw really high growing. Significant growing has been seen in the entire assets, sedimentations, progresss and even figure of subdivisions. The entry of private / foreign participants has made the market really competitory and brought new hazard direction techniques.

The Scheduled Commercial Banks ( SCB )[ 5 ]hold shown an impressive growing from FY04 to the mid of FY09. The banking sector recognition recorded recognition growing of 33.3 % in FY05 which was highest in the last 2A? decennaries and recognition growing surplus of 30 % for three back-to-back old ages from FY04 to FY07, was the best in the banking industry boulder clay day of the month. As there was a high growing in the existent sectors of economic system, the Bankss could see high growing in their fee-based income. There was a important betterment in the recovery of NPAs, lowest of all time addition in the NPAs combined with a crisp addition in gross progresss for SCBs which translated in the best plus quality ratios for banking industry in two decennaries [ Report on Indian Banking Sector, 2009 ]


The sum deposits grew at 19.6 % CAGR from FY03 to FY08. The addition in the sedimentations helped the Bankss to do more progresss. The diagram shows the sedimentations from FY02 to FY08.

( Beginning: Reserve Bank of India )

The sedimentations which stood at about INR 10 Trillion grew to about INR 35 Trillion in merely 7 old ages.

( Beginning: Reserve Bank of India )

In footings of group-wise portion, the populace sector Bankss non merely continued to be the leaders, their portion besides increased, while the other Bankss groups witnessed a diminution. The diagram above clearly shows that the entire bank sedimentations of SBI and associates and other public sector Bankss combined is more than half of the aggregative bank sedimentations. The tall skyscrapers in the diagram show that still the populace sector Bankss dominate the Indian banking industry in coevals of the sedimentations from general populace. One of the of import factors for such domination of PSBs is their incursion in the Indian rural countries where private / foreign Bankss have barely any presence. In September 2009, nationalized Bankss accounted for 50.5 % of the sum sedimentations while SBI and its associates accounted for 23.8 % . The portion of other scheduled commercial Bankss, foreign Bankss and regional rural Bankss were 17.8 % , 5.6 % and 3 % severally [ RBI Quarterly Statistics on Deposits and Credit of SCB: September 2009 ] .

The current history and nest eggs account ( CASA ) sedimentations are an of import beginning of raising sedimentations at a lower for the Bankss. Recently, nevertheless the growing rate of CASA sedimentations decelerated and their entire portion in the sum sedimentations besides declined, presenting a challenge to the banking sector.

Progresss ( Loans )

The progresss grew at 27.4 % CAGR from FY02 to FY08. The ground for such an addition in the progresss was the addition in the sedimentation base of Bankss. The diagram shows the addition of progresss from FY02 to FY08

( Beginning: Reserve Bank of India )

The RBI interruptions down progresss in following classs: PSL, recognition to industry, retail recognition and recognition to the Medium and Small endeavor progresss.

The progresss increased from INR 6.2 trillion in FY02 to INR 24 trillion FY08. The diagram below shows the group-wise addition in the progresss from FY02 to FY08

( Beginning: Reserve Bank of India )

Again, it ‘s clear from the chart that even in progresss SBI and associates and public sector Bankss lead the markets. The private/ foreign Bankss are nowhere in their competition. But ICICI Bank, which is India ‘s larges private sector bank, seen whacking degree of addition in its progresss particularly the retail loans like mortgage loans, personal loans, car loans and recognition card receivables since FY06.

Entire Assetss

The entire assets of Indian banking industry stood at INR 46 Million by FY08. In FY02, the TA was INR 12 trillion. This shows that the entire assets have grown with gait of 20.7 % CAGR FY02 to FY08.

( Beginning: Reserve Bank of India )

State Bank of India and its associates and public sector Bankss hold the maximal banking assets followed by private Bankss and foreign Bankss severally. Surprisingly, the 2nd largest plus belonged to ICICI Bank which is a private bank.

Non Performing Asset ( NPA )[ 6 ]

Non Performing Assets is a really of import index about the wellness of the banking industry. A banking industry with a high New people’s army degrees is considered to be really vulnerable and weak. One of the of import policy determination taken during the banking reforms was to convey down the NPAs. Due to directed loaning patterns and hapless hazard direction accomplishments, Indian Bankss had accumulated dismaying degree of NPAs.

Between 1993 and 1999, the Government of India injected INR 120 billion in the nationalized Bankss to clean their balance-sheet. The entire re-capitalization amounted to 2 % of the GDP.

In FY98, the net executing assets were 7.63 % of the entire loans. In FY02, the figure was 7.37 % which came down 0.79 % in FY08. The decrease in the NPA % is incredibly -72 % CAGR.

( Beginning: Reserve Bank of India )

( Beginning: Reserve Bank of India )

The NPA of foreign Bankss in India was among the highest in the full group followed by the private sector Bankss in FY02 but it has drastically been reduced and brought down to the industry norm in FY08. The NPA of the SBI and its associates and other PSBs was lower compared to the private/ foreign Bankss due to the fact of re-capitalisation by the Government of India. As the latest, recapitalisation was done in 1999 by GOI, the NPA of SBI and its associates and other PSBs were exceptionally high.


The incursion of Bankss can be determined by the figure of subdivisions a bank has. The more subdivisions a bank has, better market incursion it has got. In India, normally the best incursion is that of SBI and its associates and PSBs as they have big figure of subdivisions in the rural sectors. One of the premier grounds for holding subdivisions in the rural sector is that the populace sector Bankss are expected to provide to rural countries even if those subdivisions are non “ profitable ” . It ‘s more of a societal duty than a fiscal determination for PSBs. For private/ foreign Bankss, although they have to open few subdivisions in the rural countries, but they have pick and take among the profitable parts.

( Beginning: Reserve Bank of India )

The diagram above shows that the growing of bank subdivisions has been nice and adding around 1500 subdivisions every twelvemonth from FY02 to FY08.

As the private / foreign Bankss are viing ferociously with their public sector opposite numbers, incursion in the pristine rural market has been the premier focal point of the scheme of their scheme. There is a untapped potency in Indian rural market which is yet to be explored. Tapping of these rural pockets would be a kitty.

Challenges Ahead

As the Indian banking industry is altering quickly, it besides faces batch of challenges. These challenges can be summed up as below:

Competition from new private and foreign participants

Comprehensive Risk Management

Capital efficiency

Conformity with the International Accounting Standards

Execution and version to new engineering

NPA direction

Enhancing the client service by keeping profitableness

The Indian banking industry has a long manner to travel to run into these challenges but the clip has shown that it has non merely met the challenges but besides learnt lessons. The competition has merely begun! !

Section III

Literature Review

As per the neoclassical theory, the spectrum of market construction can be defined by the figure of houses and size of those house in the market [ Goddard, Molyneux & A ; Wilson ( 2001 ) ] . Besides, the competition in the fiscal sectors is really critical and of import for figure of grounds. The competition affairs for the efficiency of the production of fiscal services, quality of fiscal merchandises, and grade of invention [ Claessens & A ; Laeven ( 2003 ) ] . The nexus between competition and stableness is really good recognized in theoretical every bit good as the empirical researches [ Vives ( 2001 ) ] . The research workers besides started happening relationships between competition and banking system public presentation and stableness but still it ‘s excessively early to deduce any decision based on that research. For illustration, Classen and Laeven ( 2004 ) find no supportive empirical grounds for the much awaited opposite relationship between concentration and competition.

In a contrary position, Allen and Gale ( 2000, 2004 ) represent that fiscal crisis are more likely to happen in less concentrated banking systems. Boyd and de Nicolo ( forthcoming ) illustrate in a theoretical theoretical account that powerful establishments ability to bear down higher involvement encourages risk taking behaviors such that increased concentration finally give rises to greater exposures. This is due to the absence of powerful suppliers of fiscal merchandises that can harvest benefits from high net incomes that serve as shock absorber against plus impairment.

The general outlook is that increased degree of competition in the fiscal sector would take to take down costs and enhanced efficiency, but the recent research in these country illustrate that this relationship between competition and banking system public presentation is much more complex than anticipated. Yet competition and market construction plays a decisive function in the behavior of the houses within the industry, although this statement is yet to be tested and has non proved to be wholly right, but more significantly it has neither wholly proved incorrect. Hence there have been a batch of efforts by the researcher/ academicians to mensurate the fight and the market construction in order to cognize the industry kineticss.

Coming to the steps of competition and market construction, Bikker and Haaf ( 2001 ) ] province that the literature on the measuring of competition may be divided into two mainstreams called the structural and non structural attack. The structural attack to the measuring of competition embraces the Structure-Conduct-Performance paradigm ( SCP ) and the efficiency hypothesis every bit good as figure of formal attacks with root in Industrial Organisational Theory. The SCP and EH investigates whether the extremely concentrated market causes conniving behavior among the larger Bankss ensuing in superior market public presentation, and whether it is efficiency of the larger Bankss that enhances their public presentation. The structural methods link the competition to concentration. The structural theoretical accounts are farther divided into the two major schools of idea: the formal and non formal attacks.

Non structural theoretical accounts viz. , the Iwata theoretical account ( Iwata, 1974 ) , the Bresnahan theoretical account, and the Panzar-Rosse theoretical account ( Panzar and Rosse, 1987 ) were developed in reaction to the theoretical and empirical lacks of the structural theoretical accounts.

Assorted numerical steps of concentration have been used by empirical research workers for surveies in the banking industry. Hall and Tideman ( 1967 ) suggested list of six desirable belongingss for steps of concentration. They are:

A concentration ratio index should be a unidimensional step

Concentration in an industry should be independent of the size of the industry

Concentration should increase if the portion of any house is increased at the disbursal of a smaller house

If all houses are divided into K parts so the concentration index should be reduced by a proportion 1/K

If all houses are divided into N equal parts so the concentration should be a decreasing map of N ;

A concentration step should be between zero and one.

Concentration steps like k-bank concentration ratio, Herfindahl-Hirschman index ( HHI ) are extensively used to mensurate the banking sector public presentation as a map of market construction [ Barth et Al ( 2004 ) ; Beck at EL ( 2006 ) ] . But Bikker ( 2004 ) besides states that to a great extent trusting on the steps of bank concentration like HHI and k-bank ratio tend to overstate the degree of competition in little states and are progressively undependable when the figure of Bankss is little.

K-bank concentration ratio

For mensurating the concentration of houses, the most frequent used ratio is “ k-bank ” concentration ratio ( Bikker, 2004 ) . The really ground this ratio is so often and widely used is because of its simpleness and limited informations demand for its computation. k-bank ratio is dominantly used in the applied work on banking literature [ Bikker and Haff ( 2002 ) ; Bikker ( 2004 ) ; Schaeck et Al ( 2006 ) ] .

The concentration ratios can be 3-bank concentration ratio, 5-bank concentration ratio or 5 % concentration ratio ( k5 % ) . The research workers have used different sort of ratios in their researches. The 3-bank concentration ratio measures the concentration of the top 3 biggest bank in the industry. The 5-bank concentration ratio measures the concentration of the top 5 Bankss within the industry. The k5 % concentration step is defined as the 5th percentile of the largest Bankss divided by the entire assets in the banking system [ Alegria and Schaeck ]

Although Alegria and Schaeck in their paper province that usage of 3 or 5 bank concentration ratio gives rise to job when the k3 values are compared to samples of different sizes and that the usage of k5 % overcomes the issue well, the research workers have often used the 3- or 5-bank concentration ratio.

Herfindahl Hirschman Index

It is another benchmark step for mensurating the bank concentration and gives more weight to larger Bankss. Contrary to k3 and k5 % , the HHI extends to all the Bankss in the system therefore has representation from all the market participants and non merely the larger 1s as in the instance of k-bank. Therefore by taking all the market participants it avoids the arbitrary cut-offs. Bikker ( 2004 ) has highlighted its extended usage for the research intent. The outstanding characteristic of HHI is that it non merely plays of import function in empirical researches, it is practically really critical for cardinal Bankss for estimating the concentration of domestic banking system. In United States, HHI plays a important function in the enforcement procedure of antimonopoly Torahs in banking. An application for the amalgamation of two Bankss will be approved without farther probe if the basic guidelines for the rating of the concentration in sedimentation markets are satisfied. Cetorelli ( 1999 ) has stated that HHI plays a statutory function in the US for the blessing of bank amalgamations, where the post-merger market HHI must non transcend 0.18 and that the alteration in the index should be less than 0.02.

Al-Muharrami, Mathhews and Khabari ( 2006 ) have used HHI in order to happen out the concentration in GCC states viz. Qatar, Oman, Bahrain, Kuwait, Saudi Arabia and UAE.

Although so widely used in research, Rhoades ( 1995 ) shows that market portion inequality and the figure of houses in the market have an consequence on bank ‘s profitableness and that is independent of HHI despite the fact that HHI takes both these factors in consideration. Furthermore, Berger and Hannan ‘s ( 1989 ) , Hannan ( 1997 ) extends Rhoades ( 1995 ) that HHI fails to take into history market portion inequality and figure of houses. Davies ( 1979 ) analyses the sensitiveness of the HHI to its two component parts i.e. the figure of Bankss in the market and the inequality in the market portions among the different Bankss and discoveries that the index becomes less sensitive to alterations when the figure of Bankss becomes larger.

Panzer and Rosse H-statistics

There are two widely used techniques following a non-structural attack to through empirical observation measures the grade of competitory behavior in the market, termed contestability, are those developed by Breshnan ( 1982 ) and Lau ( 1982 ) and Panzar and Rosse ( 1987 ) .

This attack of mensurating the contestability was expanded by Panzer and Rosse ( 1982, 1987 ) . It is a non-structural attack. It is abbreviated as PR hence Forth and uses the house ( or bank ) -level informations. It investigates the extent to which a alteration in a factor input monetary value is reflected in grosss earned by a specific bank. Under perfect competition, an addition in input monetary value rises both the fringy cost and entire gross by same sum as the rise in cost. Under monopoly, an addition in input monetary value will increase the fringy cost but cut down the end product and hence cut down the entire gross [ Cleassens and Laeven ] .

The PR theoretical account besides provides with the H-statistics, which is a step between 0 and 1 for the grade of fight of the industry. The value of this statistic determines whether the industry has a perfect competition, monopolistic competition or monopoly. The advantage of PR theoretical account is that it uses the bank-level informations and allows for bank-specific differences in production map. It besides allows one to analyze differences between the types of Bankss like big vs. little, foreign vs. domestic etc.

De Bant and Davis ( 2000 ) shows that the PR attack require a figure of working premises. First, the Bankss should be treated as a individual merchandise houses alternatively of the multiple merchandise houses. The input of the bank is labour, physical capital and fiscal capital and is believed to be bring forthing intermediation services. Second, higher input monetary values must non be correlated with higher quality services that would bring forth higher net incomes as such an premise would corrupt the H-statistics. The concluding premise is that Bankss are in long-term equilibrium.

The usage of PR has been increasing in the banking related surveies. Shaffer ( 1982 ) in his work on New York Bankss, observed monopolistic competition. Nathan and Neave ( 1989 ) found perfect competition in the Canadian Bankss for 1982 but monopolistic competition for 1983-84. In their survey Llyod-Williams et Al ( 1991 ) and Molyneux et Al ( 1996 ) revealed perfect collusion for Japan. Molyneux et Al ( 1994 ) besides tested the PR statistic on a sample of French, German, Italian, Spanish and British Bankss from 1986-1989 in order to measure the competitory status of European states. The consequences he obtained was that all states were holding monopolistic competition and hence the hypothesis of monopoly was rejected.

The usage of PR method is summarized in the below tabular array


Time period of survey



Shaffer ( 1982 )


New York

Monopolistic Competition

Nathan and Neave ( 1989 )



1982: Perfect competition ; 1983-84 monopolistic competition

Llyod-William et Al ( 1991 )




Molyneux et Al ( 1994 )


France, Germany, Italy, Spain, UK

Monopoly: Italy ; Monopolistic Competition: France, Germany, UK and spain

Vesala ( 1995 )



Monopolistic competition for all but two old ages

Molyneux et Al ( 1996 )




Coccorese ( 1998 )



Monopolistic competition

Rime ( 1999 )



Monopolistic competition

Hondroyiannis et Al ( 1999 )



Monopolistic competition

Bikker and Groeneveld ( 2000 )


15 EU states

Monopolistic competition

De Bandt and Davis ( 2000 )


France, Germany, Italy

Large Bankss: monopolistic competition in all states ; little Bankss: monopolistic competition in Italy, monopoly in France and Germany

Bikker and Haaf ( 2002 )


23 OECD states

Monopolistic competition

Gelos and Roldos ( 2002 )


Argentina, Brazil, Chile, Czech Republic, Mexico, Hungary, Poland and Turkey

Monopolistic competition

Hempell ( 2002 )



Monopolistic competition

Philippatos and Yildrim ( 2002 )


15 Central and Eastern European states

Monopolistic competition except the big Bankss which had Perfect competition

Belaisch ( 2003 )



Monopolistic except the foreign Bankss

Levy-Yeyati and Micco ( 2003 )


Argentina, Brazil, Chile, Costa Rica, El Salvador and Peru

Monopolistic competition

Coccorese ( 2004 )



Monopolistic Competition

Prasad and Sibal ( 2006 )



Monopolistic Competition

Al-Muharrami et Al. ( 2006 )


GCC states ( Oman, Qatar, Bahrain, Kuwait, UAE and Saudi Arabia )

Kuwait, Saudi Arabia and UAE: Perfect competition ; Oman, Qatar and Bahrain: Monopolistic Competition

Gunalp and Celik ( 2006 )



Monopolistic Competition

Parera et Al ( 2006 )


South Asiatic states

Monopolistic Competition

Yildrim ( 2007 )


Central and Eastern European states

Monopolistic Competition except Federal Yugoslavia Republic of Macedonia and Slovakia

One of restriction of this attack is that the increasing relationship between H and competition may non keep in certain oligopoly equilibria [ De Bant and Davis ( 2000 ) ] .


There are two chief viing attacks with respect to market construction and concern public presentation viz. the structure-conduct-performance ( SCP ) paradigm, which emphasis market collusion, and the efficiency hypothesis, which stress the superior operating efficiency of peculiar houses.

The SCP paradigm is based on the proposition that market concentration Fosters collusion among houses in the industry. Harmonizing to the hypothesis, the grade of concentration of a market exerts a direct influence on the grade of competition among its houses. The more concentrated the market, the less the grade of competition. This hypothesis would be supported if the impact of the market concentration was found to be significantly positive, irrespective of the efficiency of the house. Therefore, more houses in more concentrated markets will gain higher net incomes ( for collusive or monopolistic grounds ) than houses runing in less concentrated 1s, irrespective of their efficiency [ Llyod-Williams and Molyneux ( 1992 ) ] . In another words, SCP paradigm investigates whether a extremely concentrated market causes conniving behavior among larger Bankss ensuing into superior market public presentation [ Bikker and Haff ( 2002 ) ] .

The SCP looks closely at the basic supply and demand conditions. The services of Bankss is a map of supplying liquidness, information and plus transmutation ( of hazard, footings and size ) which the Bankss does by at the same time taking sedimentations and allowing loans. Banks are besides a multi-product houses being active on sedimentation market, the loan market and the securities market.

The construction of Bankss can be determined by:


Merchandise distinction

Barriers to entry.

The behavior is determined by the policies aimed at haling the challengers and policies towards set the monetary value. The variables of the behavior can be branch web, the denseness of machine-controlled Teller machines, the repute for solvency, and the quality of staff or of the premises ( Neven 1990 )

The public presentation of any house can be measured in footings of their productive ( cost and net income ) .

There have been legion empirical surveies utilizing SCP for mensurating the collusion in the banking industry. In their paper on the Spanish Banking, Lloyd-William and Molyneux ( 1994 ) stated the consequence of the authorities and regulative force per unit area on the Bankss which prompted them to unify and their subsequent effects upon the market construction and behavior in Spain. In 1995, Molyneux and Forbes deployed the SCP paradigm to the 18 states and concluded that “ grade of concentration ” had an consequence on the degree of competition within the industry [ Katib, N ( 2004 ) ] .

The recent surveies have opted for to utilize net incomes as the step of public presentation instead than monetary values since it alleviates the job of pay control and besides as banking is a multi-product in nature it at times includes “ cross-subsidisation ” amongst goods and services offered [ Molyneux and Forbes ( 1995 ) ]

Abbreviation used

GDP: Gross Domestic Product

New people’s army: Non Performing Assetss

CRR: Cash Reserve Ratio

SLR: Statutory Liquidity Ratio

Bureau of intelligence and research: Indian Rupee

SBI: State Bank of India

PSB: Public Sector Banks

CAGR: Compounded Annual Growth Rate

PSL: Precedence Sector Lending

SCB: Scheduled Commercial Banks

HHI: Herfindahl Hirschman Index

SCP: Structure Conduct Performance

Praseodymium: Panzer Rosse

CRk: Concentration Ratio for k-banks


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