Private ownership of firms is often argued to lead to better firm performance than public ownership. However, the theoretical literature and the empirical evidence indicate that agency problems may affect the performance of privately owned firms. At the same time, competition and hard budget constraints can induce state-owned firms to operate efficiently. In India, banking sector reforms and deregulation were initiated in 1992, encouraging entry and establishing a level playing field for all banks. Data for the financial years 1995–1996 through 2000–2001 suggest that, by 1999–2000, ownership was no longer a significant determinant of performance. Rather, competition induced public-sector banks to eliminate the performance gap that existed between them and both domestic and foreign private-sector banks.
- banking sector reforms