Ownership Structure, Performance and Risk in Indian Commercial Banks

IUP Journal of Applied FinanceVol. 15 Nbr. 8, August 2009

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Summary


This paper examines the effect of ownership on performance and risk of commercial banks in India during the period 1995-2007. The study, using t-test, fixed effects and random effects models, examines whether there exists any significant difference in the performance and risk among State-Owned Banks (SOBs), Domestic Private Banks (DPBs) and Foreign Banks (FBs), controlling other factors. The empirical results show significant differences in the performance and risk, and FBs seem to be more profitable and more risk-taking than both DPBs and SOBs. Bank capital and demand deposits are positively associated and loans are negatively associated with bank profitability, whereas size of banks and growth rate of economy are negatively associated with bank risk.

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Extract


Ownership Structure, Performance and Risk in Indian Commercial Banks

(ProQuest: ... denotes formulae omitted.)

Introduction

Ownership structure of an economic unit is explained through two main dimensions. First, the degree of ownership concentration: units may differ because their ownership is more or less dispersed. Second, the kind of owners: given the same degree of concentration, two units may differ if the government holds a majority stake in one unit; similarly a stock firm with dispersed ownership is different from a mutual firm (Iannotta et al., 2007). Indian banking industry consists of different ownership structures: State-Owned Banks (SOBs), Domestic Private Banks (DPBs) and Foreign-Owned or Foreign Banks (FBs). Although their ownership is different, they are not apparently different in terms of the kind of services they provide. They provide full-fledged banking services, thereby competing in the same markets under the same regulatory conditions.

Over the years, a considerable number of studies have debated the relationship between firm ownership and performance. The conclusion relies on various theoretical explanations starting from property rights and agency theory to managerial rewards and public choice theory. According to property rights hypothesis, private enterprises perform better than public enterprise...

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