What drives the profitability of Indian banks: Level or growth efficiency?

This study investigates the determinants of profitability among Indian commercial banks from 2005 to 2024, with a specific focus on the novel role of dynamic growth efficiency ( ), a concept capturing a bank's ability to transform input growth into output growth, alongside conventional static efficiency measures such as level efficiency ( ) and cost-to-income ratio ( ). As the first to operationalize in the Indian context, the study employs data envelopment analysis ( ) on a panel dataset of 50 commercial banks (12 public, 17 private, and 21 foreign). Results from a system GMM estimator reveal to be a consistently significant driver of profitability, outperforming both and across various market power indicators and model specifications. A key methodological advance supporting this analysis is the inclusion of technology expenditures (which account for 29% of operating and 13% of total expenses in 2024) as a fundamental input, correcting a major misspecification in prior literature. We demonstrate that omitting this crucial input artificially inflates market power and deflates efficiency estimates. The positive impact of is more pronounced for public-sector and new private banks, underscoring divergent strategic drivers across ownership structures and highlighting the paramount importance of fostering dynamic capabilities for sustaining profitability in a rapidly evolving banking landscape. • This study is the first to incorporate dynamic growth efficiency ( ), alongside static efficiency measures such as level efficiency ( ) and cost-to-income ratio ( ), for modelling bank profitability. Our findings establish as a more robust determinant of profitability than both and , particularly within a dynamic and technologically evolving banking environment. • This study introduces a critical methodological refinement by integrating technology expenditure as a fundamental input, a factor essential to banking services that has been overlooked in prior literature. This inclusion rectifies a model misspecification, leading to more robust estimates; specifically, it shows that conventional models overstate market power and understate efficiency. • The analysis reveals divergent strategic drivers across ownership types: profitability for public sector and new private banks is derived from dynamic capabilities, whereas foreign and old private banks exhibit a greater reliance on advantages of market power and diversification.

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Journal
International Review of Economics & Finance
Published
2026-02-02
DOI
https://doi.org/10.1016/j.iref.2026.104978
Primary Topic
Efficiency Analysis Using DEA
Type
article
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article

What drives the profitability of Indian banks: Level or growth efficiency?

Biresh K. Sahoo, Biswa Swarup Misra
International Review of Economics & Finance
Efficiency Analysis Using DEA
article

What drives the profitability of Indian banks: Level or growth efficiency?

Biresh K. Sahoo, Biswa Swarup Misra
article en

Abstract

This study investigates the determinants of profitability among Indian commercial banks from 2005 to 2024, with a specific focus on the novel role of dynamic growth efficiency ( ), a concept capturing a bank's ability to transform input growth into output growth, alongside conventional static efficiency measures such as level efficiency ( ) and cost-to-income ratio ( ). As the first to operationalize in the Indian context, the study employs data envelopment analysis ( ) on a panel dataset of 50 commercial banks (12 public, 17 private, and 21 foreign). Results from a system GMM estimator reveal to be a consistently significant driver of profitability, outperforming both and across various market power indicators and model specifications. A key methodological advance supporting this analysis is the inclusion of technology expenditures (which account for 29% of operating and 13% of total expenses in 2024) as a fundamental input, correcting a major misspecification in prior literature. We demonstrate that omitting this crucial input artificially inflates market power and deflates efficiency estimates. The positive impact of is more pronounced for public-sector and new private banks, underscoring divergent strategic drivers across ownership structures and highlighting the paramount importance of fostering dynamic capabilities for sustaining profitability in a rapidly evolving banking landscape. • This study is the first to incorporate dynamic growth efficiency ( ), alongside static efficiency measures such as level efficiency ( ) and cost-to-income ratio ( ), for modelling bank profitability. Our findings establish as a more robust determinant of profitability than both and , particularly within a dynamic and technologically evolving banking environment. • This study introduces a critical methodological refinement by integrating technology expenditure as a fundamental input, a factor essential to banking services that has been overlooked in prior literature. This inclusion rectifies a model misspecification, leading to more robust estimates; specifically, it shows that conventional models overstate market power and understate efficiency. • The analysis reveals divergent strategic drivers across ownership types: profitability for public sector and new private banks is derived from dynamic capabilities, whereas foreign and old private banks exhibit a greater reliance on advantages of market power and diversification.

International Review of Economics & FinanceVol. 106
XIM University (IN)
Reduced inequalities
Openalex Percentile: Top 73%
Efficiency Analysis Using DEA
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