Total Factor Productivity Change in Commercial Banking Industry in India and Pakistan

Abstract

In the early 1990s, India and Pakistan introduced a series of financial liberalisation initiatives aimed at increasing the productivity of their financial services sector. Against a background of unprecedented change, which these initiatives heralded, the paper applies a DEA-type Malmquist total factor productivity change index to examine productivity growth, efficiency change, and technical progress in the commercial banking industries of India and Pakistan during 1992-1998. Following Leightner and Lovell's (1998), a Malmquist index is constructed for two different bank service specifications. The first is derived from the corporate objectives of the commercial banks, and the second from the policy objectives of the Indian and Pakistan governments. The analysis reveals that in both countries, the improvement in total factor productivity was highest when the government's policy objective was used. In addition, the public sector banks showed very little improvement in total factor productivity due to their inability to adopt new technology and because of the presence of high non-performing loans. In contrast, foreign banks witnessed the highest improvement in total factor productivity due to an improvement in their efficiency and technological innovation.

Keywords: Total factor productivity, DEA, financial liberalisation, Indian Commercial Banks, Pakistani Commercial Banks

JEL Classification: F23, G21