[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/mad/wpaper/2023-252.html
   My bibliography  Save this paper

The Effect of Technology on Financial Performance of Indian Banks

Author

Listed:
  • K. Ravirajan

    (Research Scholar (Corresponding Author), Madras School of Economics, Gandhi Mandapam Road, Chennai-600 025 (India))

  • K. R. Shanmugam

    (Director and Professor, Madras School of Economics, Gandhi Mandapam Road, Chennai)

Abstract
This study empirically analyses the effect of technology on the financial performance of 50 Indian banks during 2011-12 to 2019-20. It considers three technology indicators – average amount of debit card transaction at ATM, average amount of debit card transaction at POS and average amount of NEFT transactions and three performance indicators – return on assets, return on equity and net interest margins of banks and uses them to construct the composite technology index and the composite performance index respectively. It regresses the performance indicators individually and also the composite performance index on technology indicators/technology index along with other explanatory variables and estimates these equations using the standard panel data methodology. As these regression results provide the average effect of technology indicators and technology index on banking performance, it also allows the technology index to interact with bank dummies to observe bank specific effects of technology in the alternative specification of equations. The estimation results indicate that the NEFT has a negative and significant effect on the performance index, but it has a positive and significant effect on both return on assets and return on equity. Surprisingly, both average amounts of debit card transactions at ATM and POS do not influence all performance indicators and the performance index. Thus, the technology impact is mixed based on the performance indicator and the NEFT is the dominant technology indicator in determining the profitability of banks. Results from the estimation of an alternative specification of the model indicate that the technology index has a significant negative effect on the performance index of 42 banks. However, it has a significant positive effect on both return on assets and return on equity in almost all banks, but it does not play a role in determining the net interest margin of banks. We hope that these results are useful to policymakers and other researchers to take appropriate strategies to improve the performance of the banking industry in India.

Suggested Citation

  • K. Ravirajan & K. R. Shanmugam, 2023. "The Effect of Technology on Financial Performance of Indian Banks," Working Papers 2023-252, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2023-252
    as

    Download full text from publisher

    File URL: https://www.mse.ac.in/wp-content/uploads/2024/01/Working-Paper-252.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Georg Licht & Dietmar Moch, 1999. "Innovationa and information technology in services," Canadian Journal of Economics, Canadian Economics Association, vol. 32(2), pages 363-383, April.
    2. Sangjoon Jun, 2006. "The Nexus between IT Investment and Banking Performance in Korea," Global Economic Review, Taylor & Francis Journals, vol. 35(1), pages 67-96.
    3. Sangita Dutta Gupta & Ajitava Raychaudhuri & Sushil Kumar Haldar, 2018. "Information technology and profitability: evidence from Indian banking sector," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 13(5), pages 1070-1087, November.
    4. K. R. Shanmugam & Rakesh Nigam, 2020. "Impact of technology on the financial performance of Indian commercial banks: a clustering based approach," Innovation and Development, Taylor & Francis Journals, vol. 10(3), pages 433-449, September.
    5. Carlos J. Navarrete & James B. Pick, 2002. "Information Technology Expenditure and Industry Performance: The Case of the Mexican Banking Industry," Journal of Global Information Technology Management, Taylor & Francis Journals, vol. 5(2), pages 7-28, April.
    6. S J Ho & S K Mallick, 2010. "The impact of information technology on the banking industry," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(2), pages 211-221, February.
    7. Baba Prasad & Patrick T. Harker, 1997. "Examining the Contribution of Information Technology Toward Productivity and Profitability in U.S. Retail Banking," Center for Financial Institutions Working Papers 97-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mohammad Ashraful Ferdous Chowdhury & Mohammad Abdullah & Nurun Nowshin Chowdhury Nazia & Debarshi Roy, 2023. "The nonlinear and threshold effects of IT investment on the banking sector of Bangladesh," Economic Change and Restructuring, Springer, vol. 56(6), pages 4253-4283, December.
    2. Abdur Chowdhury, 2003. "Information technology and productivity payoff in the banking industry: evidence from the emerging markets," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 693-708.
    3. Fatima Chalabi, 2020. "The Impact of Innovation on Banking Performance: Evidence from Lebanese Banking Sector," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(6), pages 1-9.
    4. Mohammed T. Abusharbeh, 2024. "Technology-Profitability Paradox in Banking Sector: Evidence from Palestine," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 14855-14873, September.
    5. Bettina Peters & Rebecca Riley & Iulia Siedschlag & Priit Vahter & John McQuinn, 2014. "Innovation and Productivity in Services: Evidence from Germany, Ireland and the United Kingdom," JRC Working Papers on Corporate R&D and Innovation 2014-04, Joint Research Centre.
    6. Chen, Zhongfei & Wanke, Peter & Tsionas, Mike G., 2018. "Assessing the strategic fit of potential M&As in Chinese banking: A novel Bayesian stochastic frontier approach," Economic Modelling, Elsevier, vol. 73(C), pages 254-263.
    7. Rajiv Kohli & Sarv Devaraj, 2003. "Measuring Information Technology Payoff: A Meta-Analysis of Structural Variables in Firm-Level Empirical Research," Information Systems Research, INFORMS, vol. 14(2), pages 127-145, June.
    8. Gangopadhyay, Partha & Jain, Siddharth & Bakry, Walid, 2022. "In search of a rational foundation for the massive IT boom in the Australian banking industry: Can the IT boom really drive relationship banking?," International Review of Financial Analysis, Elsevier, vol. 82(C).
    9. A Mukherjee & P Nath & M Pal, 2003. "Resource, service quality and performance triad: a framework for measuring efficiency of banking services," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 54(7), pages 723-735, July.
    10. Faridah Djellal & Faïz Gallouj, 2007. "Innovation and Employment Effects in Services: A Review of the Literature and an Agenda for Research," The Service Industries Journal, Taylor & Francis Journals, vol. 27(3), pages 193-214, April.
    11. Gunasekaran, Angappa & Subramanian, Nachiappan & Papadopoulos, Thanos, 2017. "Information technology for competitive advantage within logistics and supply chains: A review," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 99(C), pages 14-33.
    12. Capuano, Stella & Hauptmann, Andreas & Schmerer, Hans-Jörg, 2020. "Trade and unions: Does size matter?," Economic Modelling, Elsevier, vol. 84(C), pages 66-75.
    13. Hipp, Christiane & Grupp, Hariolf, 2005. "Innovation in the service sector: The demand for service-specific innovation measurement concepts and typologies," Research Policy, Elsevier, vol. 34(4), pages 517-535, May.
    14. Bettina Peters & Rebecca Riley & Iulia Siedschlag & Priit Vahter & John McQuinn, 2018. "Internationalisation, innovation and productivity in services: evidence from Germany, Ireland and the United Kingdom," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 585-615, August.
    15. Brigitte Preissl, 2003. "E-Business in Service Industries: Usage Patterns and Service Gaps," Discussion Papers of DIW Berlin 373, DIW Berlin, German Institute for Economic Research.
    16. MARTIN Ludivine, 2007. "The impact of technological changes on incentives and motivations to work hard," IRISS Working Paper Series 2007-15, IRISS at CEPS/INSTEAD.
    17. Zhou, Dan & Kautonen, Mika & Dai, Weiqi & Zhang, Hui, 2021. "Exploring how digitalization influences incumbents in financial services: The role of entrepreneurial orientation, firm assets, and organizational legitimacy," Technological Forecasting and Social Change, Elsevier, vol. 173(C).
    18. Stiroh, Kevin J., 2000. "How did bank holding companies prosper in the 1990s?," Journal of Banking & Finance, Elsevier, vol. 24(11), pages 1703-1745, November.
    19. Thomas Hempell, 2005. "Does experience matter? innovations and the productivity of information and communication technologies in German services," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 14(4), pages 277-303.
    20. Falk, Martin & Seim, Katja, 1999. "Workers' skill level and information technology: evidence from German service firms," ZEW Discussion Papers 99-14, ZEW - Leibniz Centre for European Economic Research.

    More about this item

    Keywords

    Technology Index; The Performance Index of Banks; Panel Data Methods; Indian Commercial Banks.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mad:wpaper:2023-252. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Geetha G (email available below). General contact details of provider: https://edirc.repec.org/data/mseacin.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.