Impact of Competition on the Operational Effciency of Indian Banks Vinod R. R.*, Mohammed Khalid Azam** * Assistant Professor, Bhavan’s Royal Institute of Management, Tripunuthira, Cochin, Kerala, India. Email: vinurr1@rediffmail.com ** Professor, Department of Management Studies, Aligarh Muslim University, Aligarh, Uttar Pradesh, India. Email: mkhalidazam@rediffmail.com Abstract During the last three decades, the issues & challenges faced by most banking industries worldwide have been widely debated both in academic and policy level circles. Some of the topics more profoundly examined in the banking literature relate to the study of the effect of market power on managerial efficiency. Although there is no dearth of literature, majority of them have been confined to developed economies and the results also are inconclusive. Accordingly, this study tries to address this gap in the literature. In this study, inverse of concentration measure (HHI) is taken as a proxy for competition. For operational efficiency, cost to income ratio for banks is used. Results report that despite addition of more players, operational efficiency of Indian scheduled commercial banks has come down. One solution to enhance their operational efficiency is to shift their focus from traditional banking services to modern banking services. Further, private sector banks seem to be more operationally efficient that government owned banks. On analysing the flow of direction, there exists a causality running from competition to efficiency, thus rejecting the existence of quiet life hypothesis in Indian banking industry. Keywords: Quiet Life Hypothesis, Competition, Operational Efficiency, Granger Causality Test Article can be accessed online at http://www.publishingindia.com 1. Introducton Over the last four decades, worldwide, banking industry has witnessed many changes. Issues and challenges faced by banks worldwide have invited a remarkable interest both in academic and policy circles. Some of the topics more profoundly examined in the banking literature relate to the structure-conduct-performance (SCP) paradigm (Bain, 1956), and the ensuing effcient-structure (ES) hypothesis (Demsetz, 1973). Another branch of studies tried to examine the effect of market power on managerial effciency, particularly, testing the evidence of quiet life hypothesis. The term “quiet life” has been introduced by Hicks to the feld of economics. “It seems not at all unlikely that people in monopolistic positions will very often be people with sharply rising subjective costs; if this is so they are likely to exploit their advantage much more by not bothering to get very near the position of maximum proft, than by staining themselves to get very close to it. The best of all monopoly proft is a quiet life” (1935, p 8). Going by the defnition, quiet life hypothesis (QLH) states that banks (frms) enjoy the advantage of market power in terms of foregone revenue or cost savings (Hicks, 1935). This motivates them to enjoy lazy banking, thus remaining to be ineffcient in their operations. In other words, there exists a negative correlation between concentration (market power) and effciency. On reviewing existing studies, it is found that though the relationship between proftability, market concentration and effciency of the banking industry has been tested in many studies, the available empirical evidence on the quiet life hypothesis is scarcer. Moreover, it is found that majority of studies seem to have been