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State-owned banks manage employee costs better

Despite rapid technology adoption, Indian banks have become less efficient in managing employee costs between 2005 and 2018, says RBI study

The banking sector has been completely revolutionized by technology over the past few decades but Indian banks have struggled to bring down employee costs in the 2005-18 period, a new study by K.M Neelima and others of the Reserve Bank of India shows.The deterioration was more pronounced during 2011-2016, a period that was characterized by severe stress in the banking sector, the study said.

Surprisingly, state-owned banks have been able to manage employee costs better than their private peers. The researchers argue that the efficiency of private banks could have been pulled down by the poor performance of older banks post 2007, when they witnessed very low growth in deposits and loans and advances.

The authors compute a measure called the labour cost efficiency (LCE) for the banks for each year. A LCE score of 1 means that inputs have been optimally used. In the year 2005, the LCE score of Indian banks was 0.72, which means that at a given level of input, 28 per cent cost could have been reduced while producing the same level of output. In 2018, this score worsened to 0.61. Here, output refers to deposits, loans and advances, investments and non-interest income of the banks, while inputs represents number of employees and fixed assets.

Larger banks have been more efficient compared to the smaller ones over time as they managed to reap advantage of scale, the study finds. The study suggests that further consolidation of banks could be on the cards.

Also read: Labour Cost Efficiency of Indian Banks: A Non-Parametric Analysis

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