Nonparametric Estimation of National Promotional Banks' Efficiency and Productivity

Nonparametric Estimation of National Promotional Banks' Efficiency and Productivity

DOI: 10.4018/978-1-5225-1845-7.ch004
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Existing research on national promotional banks is still scarce, a main impediment being the lack of long time series or a predefined database comprising detailed balance sheet indicators. The only data available is that on NPBs websites, which has to be extracted from financial statements and annual reports.

As de Luna Martinez and Vicente (2012, p.2) document, the World Bank has increasingly received, during the last years, several requests concerning the availability of data as well as the elaboration of new studies about NPBs. Decision makers and financial institutions in various countries have motivated their requests by the need to strengthen the role, independence and corporate governance of their own NPBs in order to become more profitable and financially self-sustainable organizations and avoid any undue political interference in their regular business conduct.

Some papers have introduced delineation between state-owned and private-owned banks when attempting to empirically assess various features of a given banking system, but evidences are mixed in terms of efficiency and profitability across countries.

Schmit et al. (2011, p. 31) observe that public banks in developed countries are less efficient from the standpoint of profit and costs management than their privately-owned peers. The same finding is supported by Micco, Panizza, & Yanez (2007), which explain that the financial performance differential is driven by political factors and depicts a widening trend particularly during election years. By analyzing a global sample of promotional banks during the 2007-2009 years, de Luna Martinez and Vicente (2012) concluded that they maintained their financial stability and profitability although profit maximization is not a main objective.

Despite the inconclusive empirical findings in terms of state-owned banks’ efficiency and financial performance, several authors advocate for the economic and social beneficial effects and value added through the activity of NPBs which may explain their underperformance compared to private ones.

Sobreira and Zendron (2011, p.6) state that NPBs focus should always be on alleviating productive sectors’ or country’s financing needs, without being driven by profitability issues. Iannotta et al. (2011) argue that NPBs lower profitability might be due either to the pursuance of political goals or to their mere social object of activity, namely the provision of financing to investment projects that private-owned banks are reluctant to fund or in time periods of financial market stress, in order to defreeze the credit supply. Irrespective their intrinsic motivation, promotional banks’ mission is closely mirrored by their lending behavior and risk profile.

Schmit et al. (2011, p. 34) agree with the explanation of public banks’ poor performance by means of their social and development mission, which emphasizes the mitigation of financial market inefficiencies and the financing of less profitable economic sectors but with increased social utility for the local communities.

The lower profitability recorded by NPBs can also be interpreted through a different perspective, related to the degree of risk forbearance. According to Rudolph (2010, p.3), promotional banks with a public policy mandate usually depict riskier loan portfolios and higher operational costs as a result of financing riskier, unpredictable investment projects than commercial banks do. For the going concern of their business, NPBs target the achievement of reasonable returns instead of profit maximization; therefore, the quite natural lower returns shouldn’t be perceived as lack of efficiency in conducting their activity, but as a consequence of operating in difficult market segments.

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