The Engagement of Indian Private Banks in the Economy Through Off-Balance Sheet Activities: A Malmquist Exploration

The Engagement of Indian Private Banks in the Economy Through Off-Balance Sheet Activities: A Malmquist Exploration

Hariom Gurjar (Poornima University, India), Akhilesh Tripathi (State Bank of India, India) and Mahesh Chandra Joshi (Lovely Professional University, Punjab, India)
Copyright: © 2020 |Pages: 22
DOI: 10.4018/978-1-7998-2364-3.ch005

Abstract

After financial reform, banks in India adopted financial innovations to earn more profits through various off-balance-sheet tools. To gauge the impact of these items on the efficiency of the top private banks, the authors used the non-parametric Malmquist method. They calculated efficiency with and without the inclusion of these items. Technical and technological efficiency changes were calculated to make a total factor productivity change index for ten years, 2008 to 2017. The results for the banks strengthened the dominant view in the current literature, removing off-balance sheet items led to the biased efficiency of these banks. The presence of these items increased the efficiency of the banks. Nonetheless, it also supported that increments in efficiency were more due to technological change. Despite the odd distribution of these items among these banks, they made a significant piece in the income of banks and overlooking them eroded the efficiency of the banks.
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Introduction

The off-balance sheet items (OBSI) are nontraditional activities as they are not recorded on the balance sheet. The firms maneuvered their corporate financial tactics based on these items. So off-balance sheet items fund assets in such a way that they become stealth on the balance sheet. Firms using these financial tactics for various reasons. If these reasons become uncontrollable than Enron happens else, they try to increase the wealth for firms and shareholders.

OBSI are creating a significant portion of nontraditional income wizard for private and public banks in India. As nationalized banks did not give much significance to these items but since the liberalization of the Indian economy, they have to find a modern source of income. The completion could not be won only relying on core banking products. Indian banking is changing but slowly and painfully.

The status quo has changed significantly amid the following reforms:

  • The Deregulation

  • Branch Licensing Policy

  • The Asset Classification beginning,

  • The source of Income

  • Strict CAR Norms

  • Stiff completion in the generation of non-traditional income

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Main Focus Of The Chapter

This chapter is intending to find the effect of off-balance sheet items on efficiency through Data Envelopment Analysis (DEA)-Malmquist model. This method is further breaking up Total Factor Efficiency (TFE) into and Technological change and Efficiency change to evaluate the effect of these items on the efficiency.

The Focus:

  • To analyze effect of off-balance sheet items on the efficiency of top private banks in India

Key Terms in this Chapter

Boot Strapped Regression Model: Bootstrapping is a nonparametric approach to statistical inference that substitutes computation for more traditional distributional assumptions and asymptotic results.

Stochastic Frontier Analysis (SFA): Refers to a body of statistical analysis techniques used to estimate production or cost functions in economics, while explicitly accounting for the existence of firm inefficiency.

Off Balance Sheet Items (OBSI): Off-balance- sheet Activities stand for those exposures or activities which generate income but generally not captured under traditional accounting standard with no classification as asset or liabilities.

Malmquist Productivity Index (MI): A bilateral index that can be used to compare the production technology of two economies. It is named after Professor Sten Malmquist; on whose ideas it is based. The MI is based on the concept of the Production function.

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