How Important is Ownership in a Market with Level Playing Field? The Indian Banking Sector Revisited

Abstract

It has long been argued that private ownership of firms leads to better firm performance. However, theory as well as empirical evidence suggest that factors like agency problems may not allow privately owned firms to operate more efficiently or perform better that state owned firms. At the same time, it has been argued that competition and hard budget constraints can induce state owned firms to operate efficiently. In India, banking sector reforms were initiated in 1992-93, leading to entry and other forms of deregulation, and a level playing field for all banks. Data for 1995-96 through 2000-01 suggest that by 1999- 00 ownership was no longer a significant determinant of performance; induced by competition, public sector banks were able to eliminate the performance/efficiency gap that existed between them and domestic private sector and foreign banks.