Ashis Taru Deb

Operationalizing and Measuring Competition: Determinants of Competition in Private Banking Industry in India

Using an appropriate theoretical framework and econometric methodology, the study has sought to measure and model competition in private banking industry in India in an attempt to analyse the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation provided the motivation behind the study. It used the concept of competition proposed by Stigler (1961) and measured it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure-Conduct-Performance paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price cost margin, One basic contention of the study is that competition goes beyond “conduct” and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.

Business Group Ownership of Banks: Issues and Implications

The paper for the first time provides a theoretical framework for the conduct of business group owned banks. It introduces the phenomenon of business groups in the theory of financial intermediation by banks developed by Diamond (1984) with a view to analyze their impact on the result of financial intermediation. Two kinds of business groups are distinguished depending on the relationship between the firms and the bank comprising the group. It is argued that result of financial intermediation depends on the type of business groups. Diverse historical experiences relating to India and Japan are found to be in line with the theoretical formulation. The contemporary experience in India analyzed in the paper in the form of three case studies is also found to be in agreement with the above theory. The theory developed in the paper and the evidence in its favor through case studies leads to rejection of the idea of business group owned banks in India. The paper made a pioneering attempt to econometrically examine the impact of group ownership on conduct of a bank in an emerging economy like India. The paper substantiates the findings from case studies through estimating a logit model using panel data with the help of a Generalized Estimating Equation. The results clearly show that group banks differ in their conduct from non group banks. Firstly, groups exploit the bank by getting larger funds to augment the group�s fund position. It is also evident that the group bank is subjected to higher risk and is more fragile. A hypothesis that the group cross subsidizes its activities through owning a bank is found to be true. Some of the obvious corporate governance issues like collusion with the auditor do not come out very sharply.

Sub Prime Crisis in US: Emergence, Impact and Lessons

The sub prime crisis in US is the result of excessive amounts of loans made to people who could not afford them and excessive amounts of money thrown into the mortgage arena by investors who were very eager for high return. The crisis represents the other side of a phase when a low rate of interest, rising home prices and mortgage securitization brought huge gains. A number of factors like legislations like Community Reinvestment Act, low rate of interest, mortgage brokers and lenders, rating agencies played their role in generating crisis. Three important dimensions of the sub prime saga relate to poor regulation of investment banks, relaxation in lending standards led by greed in a regime of unbridled competition and failure of the asset market to realize the dues from the defaulter. It once again brings home the fact that financial sector is distinctive in nature and can be exposed to unbridled and unregulated competition only at the cost of a complete peril.

Theoretical Framework of Competition as Applied to Banking Industry

Concepts evolve through time and over time they assume different meanings. The concept of competition is no exception. This paper discusses the evolution of the concept of competition in general with a view to derive a theoretical framework for analyzing competition in banking industry. Starting from the classical notions of competition it proceeds to some of the latest approaches (Northcott (2004), Neuberger (1998), Toolsema (2003), Bolt and Tieman (2001)). The ordinary Structure-Conduct-Performance approach does not involve any analysis of market dynamics. Our approach introduces various aspects of industry dynamics and growth. It provides a methodology to arrive at the market form in banking industry through an analysis of all the aspects of basic conditions, structure, conduct and performance. It is argued that sustained growth and dynamics of the industry is not price led. Growth arises out of changing basic conditions and dynamics arises out of sharing the new market created by basic conditions. Hence the prime mover of competition is rivalry among firms to control market share and to internalize externalities rather than adjustments brought about by the price mechanism.

The Determinants and Trends of the Dynamics of Market Concentration: The Case of Deregulating Private Banking Industry in India

Extant studies treat the impact of entry on concentration and market structure mechanically; with some going further to naively identify fall in concentration as the cause of competition. It is the intention of this paper to critically examine these contentions by studying trends and determinants of the dynamics of market concentration with a view to gain an insight into the limitations of these extant approaches. Deregulation of domestic private banking industry in India, since early nineties, provides an opportunity for such a study. This paper is the first of its kind to identify a distinct pattern of change in the concentration ratio and explains its determinants in terms of a cubic form equation. The determinants of Herfindals Concentration Ratio are - number of firms, average asset size of the firms and their skewness. The process of competition is explained through the empirics and analysis of the estimating equation. The study also points out to a possible generalised pattern that market concentration follows upon deregulation of industry.