The foreign Bank’s Saga in the Context of Financial Reforms in India

This paper is an attempt to examine the total productivity growth of foreign banks for the period 2002-2003 to 2013-2014. Data of ten major foreign sector banks for twelve years were used for the analysis and interpretation. Malmquist Productivity Index and Input oriented CRS data envelopment analysis are being used to measure the productivity of these banks over the years. Along with the productivity of foreign sector banks, their performances were also determined through ratios. The results show that the foreign sector banks has obtained an excellent mean TFP of 1.06 and nine foreign sector banks has obtained an eligible score of one which depicts that foreign sector banks are doing well in the country. The excellent performance of foreign sector banks in the banking industry is further substantiated with the ratios. The study has revealed that by enlarging the scope of foreign banks will obviously bring growth, development and technological advancement in the Indian banking Sector.


Introduction
The banking sector reforms in India were stimulated by the report of the Committee on financial system, popularly known as Narasimham Committee (RBI, 1991). This committee, which submitted its report in 1991, suggested various measures to improve the efficiency and health of banking sector by making it more competitive and vibrant (Ahluwalia, 2002). It affected the productivity, profitability and efficiency of the banks to a large extent (Mohan, 2005). During this scenario, the Reserve Bank of India (RBI) is planning to come out with major reforms in the banking sector that will allow foreign banks to enter India in a big way that will even enable them to take over domestic lenders.
As two decade has elapsed, after the banking sector reforms, hence it is high time to analyze, how the new banking policy will affect the banking operations of the different banks.

Statement of the problem
The purpose of this paper is to analyse the productivity of the foreign sector banks in India. The proposed reforms in the banking sector by the central bank of India opens new avenues for the foreign sector banks, which could even contemplate in taking over of Indian banks and so on. Hence it is essential to check the productivity of foreign banks surviving in the Indian financial system.

Objectives of the study
The objectives for the study was focused on to find out the total factor productivity of foreign banks in India and to study the Technical Efficiency and performance of the same.

Research Methodology
The study is conducted in two phases. In the phase one, the first two objectives of the study are addressed through Malmquist Productivity Analysis (MPI) (Gebremichael, 2012) and Input oriented CRS data envelopment analysis (Charnes, and banker). Data from 2002Data from -2003 to 2013-14 of major 10 foreign banks in India have been obtained for this study.
According to Grifell-Tatje (1996) this method has three main advantages. Firstly, it does not require the profit maximization or cost minimization assumption.
Secondly, there is no need of input and output prices. Thirdly, the method allows the decomposition of productivity into two if there is panel data. The present paper uses the Malmquist productivity index as adopted by (Fare.R, 1998) as follows.
M0(yt+1 , xt+1 , yt , xt) = -----(1) The above equation represents the productivity of production points (xt+1, y t+1) relative to the production point (xt, yt), the value greater than 1 implies total productivity growth from period t to the next period t+1, however the index is the geometric mean of the two outputs based Malmquist indices .The index uses period t technology and the other period t+1 technology. The above Malmquist productivity Index can be decomposed, according to Fareet al (1989,1992) (Fare.R, 1998) (Fare.R, 1998) as follows: The above equation the term outside the brackets implies the measurement change in relative efficiency in the technical efficiency between periods of time i.e. between (t) and (t+1). On the other hand the terms inside the brackets indicates the geometry of the two ratios in the equation, which indicates the shift in technology of two units, in our case we refer to the commercial banks.
This is to say the efficiency change is obtained by calculating the ratio of efficiency in (t+1) period in proportion to efficiency in (t) period. Again to obtain efficiency change and technological change we split the equation above, as shown below.
In case of no significant change between periods of time, which can be illustrated by xt=xt+1, as well as yt= yt+1, then the MPI is equal to 1. The Malmquist Total factor productivity can be obtained by solving a series of linear programming equations under a constant return to scale as shown below (Fare.R, 1998) (Worthington, 1999 =maxθ λθ Subject to In the both these methods it is very important to select appropriate inputs and outputs. Being a service industry, banking sector has different inputs and outputs as compared to other sectors. In the literature relating to this field, there is no consensus regarding the inputs and outputs that have to be used in the analysis of the efficiency of the activity of commercial banks (Humphrey, 1997).
In the studies in the field, five approaches for defining inputs and outputs in the analysis of the efficiency of a bank were developed, namely: the intermediation approach; the production approach; the asset approach; the user cost; the value added approach. The first three approaches are developed according to the functions that banks fulfil (Favero, 1995). The production and the intermediation approaches are the best known ones and the most used in the quantification of bank efficiency (Sealey, 1977).
In the production-type approach, banks are considered as deposit and loan producers and it is assumed that banks use inputs such as capital and labour to produce a number of deposits and loans. According to the intermediation approach, banks are considered the intermediaries that transfer the financial resources from surplus agents to the fund deficit ones. In this approach it is considered that the intermediation approach has been applied in selecting the inputs and outputs for the present study. Table 1 shows the inputs and outputs used in the present study. Based on this inputs and outputs, the productivity level benchmarks by Malmquist productivity analysis are furnished as follows:

Results and discussion
The analysis part of the study begins with determining the productivity and technical efficiency of foreign sector banks. This part of analysis is done under phase-1 and the performance of the foreign sector banks done through ratio analysis is executed under phase-2.    Table 5 shows year wise total factor productivity of foreign sector banks.

(a) Phase-1
The total factor productivity focuses on both the efficiency change and technological change. In the year 2010, foreign sector banks secured the highest score of 1.162 and the least score of 0.967 in the year 2011. Which states that the change in efficiency and the technology was highest in 2010, but afterwards for two consecutive years it was less than one. But in 2013 it again displayed a score of more than one, which signals a positive trend of foreign sector banks. Further the overall total factor productivity growth of Foreign Sector Banks witnesses a significant improvement in their performance and has increased their contribution in the banking sector.

(b) Phase-2
Under phase-2 the performance of foreign sector banks are judged through following ratios:

a. Labour Productivity Ratios
The labor productivity ratios of foreign sector banks are determined with the elements like: Deposit per Employees, Advance per Employees and Business per Employees.

b. Branch Productivity Ratios
It highlights the branch productivity of the foreign sector banks, which depicts the capacity of a branch to produce. These three elements depict an increasing trend, which are a signal of positive contribution towards the growth of the economy and the prosperity of society. The difference between spread percentage and burden percentage results in the net profit percentage of working fund. Higher the spread ratio better for the banks and lower the burden ratio beneficial for the banks. Table 8 depicts an increasing trend in the spread ratio which is a cushion for the firm and a declining trend in the burden ratio is better for the banks. This phenomenon resulted in the best utilisation of working fund by the foreign sector banks. This ultimately reflects on the efficient performance of banks.

c. Non-Interest Income and Non Performance Assets
Non-interest income ratio shows the banks' efficiency in earning income from fee based activities. The table 9 explains that foreign banks are not only concerned on improving the traditional functions of banks but focuses on those aspects that acts as a lubricant to the growth of the Indian financial system.

Conclusion
The findings of the present paper are divided on the basis of phase-1 and phase-2. The results indicate that the top performer of foreign sector banks in terms of total factor productivity growth is Bank of Tokyo. There is also statistical evidence that foreign banks contribution has improved in the Indian banking sector during the period of study. The year wise total factor productivity performances reveal that eight foreign sector banks have obtained score more Technical efficiency of only one foreign sector bank is less than one which means that around nine foreign bank sector out of ten banks taken for the study is overall technically efficient. The mean score of foreign sector banks is 0.992. The performance of the foreign sector banks in India, determined through ratios depicts a good position for the foreign sector banks in Indian financial system.
Present study reveals the contribution of foreign sector banks over the defined study period. The study may be helpful in identifying the contribution of foreign sector banks to researchers and bankers and policy makers to assess the changing face of banking sector.
The productivity and performance of the foreign sector banks, analysed in this study reveals that the proposed reforms in banking sector, which would enable the foreign banks in enlarging their scope will bring growth, development and technological advancement in the Indian Banking Sector.