The Impact of Digital Financial Services on the Performance of Commercial Banks in India

Abstract

This research tried to analyse the impact of digital financial services on the performance of commercial banks in India. Digital financial service comprises of a broad range of financial services, including payments, credit, savings, remittances, and so on, accessed and delivered through digital channels such as the internet, mobile phones, Automated Teller Machines (ATMs), Point of Sales (POS) terminals, etc. In this study, the performance of the banks is measured in terms of profitability, efficiency and productivity. The present research is based on the panel data of 44 banks from the financial year 2012-13 to 2019-20. To examine the objectives framed in the study, various methodologies and statistical tools were used, namely, Panel Corrected Standard Error (PCSE) Regression, Window Data Envelopment Analysis (WDEA), T test, Wilcoxon test and Sign test, Malmquist Productivity Index (MPI), Panel Regression Analysis, CAMEL Analysis, Pairwise Pearson Correlation, Pairwise Granger Causality Test and Structural Equation Modelling. The profitability of the banks was measured by considering Return on Asset (ROA), Return on Equity (ROE), Net Interest Margin (NIM) and Non-Interest Income (NII). The analysis shows mixed results, indicating that digital banking facilities could proficiently enhance banks' financial performance. It also shows that the banks have to ensure making the process more efficient and cost-effective. The bank's efficiency was analyzed using Window Data Envelopment Analysis. The findings clearly show that digital financial services could bring significant changes in the banking industry's efficiency in India. Malmquist Productivity Index (MPI) and panel data regression were used to measure banks' productivity. It is evident from the results that digital financial services significantly increase the Technical Changes (TECHCH) and Total Factor Productivity Changes (TFPCH) of nationalized banks in India. The pre and post adoption analysis of digital financial banking were conducted and tested using CAMEL analysis. The results showed that most ratios were not significantly improved except capital adequacy and management efficiency. Further, Pearson Correlation, Pairwise Granger Causality Tests and Sequential Equation Modelling showed that asset quality of the banks is an important element which is impacting majority of the banking performance variables. It is found out from the analysis that if the bank concentrate on improving the asset quality the financial performance also can be improved. Overall, it is evident from the analysis that the digital financial services can enhance the efficiency and productivity of the commercial banks in India, but profitability of the banks was not improved as expected because it is heavily affected by bad quality of loans and advances reported in the given period.