Information technology and profitability: evidence from Indian banking sector

Purpose Information Technology has transformed the banking sector with respect to various systems and processes. Banks have adopted various measures to quicken their business activity and also save cost and time. That is why there has been large requirement of IT in the banking sector. The question arises whether this investment is enhancing the profitability of the bank or not. The purpose of this paper is to examine the presence of profitability paradox in Indian Banking Sector. Design/methodology/approach Data are collected from ten nationalized banks and three private sector banks from 2006 to 2013. The impact of IT expenditure on return on assets and profit efficiency is examined. Profit efficiency is determined using Stochastic Frontier Analysis. Data are collected from annual reports of the banks. Data on IT expenditure are collected through Right to Information Act 2005. Correlation and Panel Regression are used to investigate the relationship between IT expenditure and ROE or Profit Efficiency. Findings The findings of the paper confirm the presence of profitability paradox in the Indian Banking sector. Research limitations/implications Extension of this study to other developing countries of the world will help to identify if any common pattern is there among the developing countries as far as productivity or profitability paradox is concerned. Originality/value There are some studies on the impact of IT on the banking sector in USA and Europe. This type of study however is rare in the context of India or for that matter other developing countries. Therefore, this paper will add new dimension to the existing literature and pave the way for future research in this area.