Impact of digital payment adoption on Indian banking sector efficiency

Abstract

Combining Data Envelopment Analysis and dynamic panel data methods, we find that adoption of digital payment technologies by Indian banks has helped enhance their cost efficiency. Instead of directly reducing the inputs used in intermediation, the gain in efficiency may be on account of cheaper availability of such inputs when banks go digital. These gains may stem from assimilation into the entire digital payments ecosystem, as opposed to piecemeal adoption of technology. We find both cost and technical efficiencies exhibiting persistence. Banks’ relative asset holdings in the industry, non-performing assets, cost of deposits and returns on advances and equity are other important variables that drive cost efficiency.