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This paper seeks to understand technology diffusion in the banking sector in India by analyzing automated teller machine (ATM) technology, its induction and spread, and the replacement of Tellers in banks in India. Evidence of the productivity effects due to adoption of this form of information technology (IT) is presented through an empirical investigation.
Before the nationalization of large banks in 1969 and 1980, Government-owned banks dominated the banking sector. Due to the lack of competition, the use of technology was minimal and quality of service was not considered for performance evaluation. Banks did not follow proper risk management systems and prudential standards were weak. All these resulted in poor asset quality and low profitability of banks. The financial markets were characterized by control of prices of financial assets, barriers to entry, high transaction costs and restrictions on the movement of funds/participants between the market segments. This, apart from inhibiting the development of the markets, also affected the efficiency of banks. It was in this situation that wide-ranging financial sector reforms were introduced in India as an integral part of the economic reforms initiated in the early 1990s. Financial sector reforms in India are grounded in the belief that competitive efficiency in the economy needs to be realized to its full potential. Thus, the principal objective of financial sector reforms was to improve the allocative efficiency of resources and to accelerate the growth process of the economy by removing structural deficiencies affecting the performance of financial institutions and financial markets. Financial reforms can be examined in two phases. The first phase began in 1991 and focused on restructuring of the balance sheets as well as the recapitalization of banks. The second phase, which began in 1997, was characterized by the introduction of competition from foreign banks and new private banks as well as the introduction of technology.
Questions regarding the business value of IT have perplexed researchers and managers for a number of years. Businesses, including banks, have continued to invest huge sums of money in computers and related technologies, presumably expecting substantial returns. Yet a variety of studies provide evidence to the contrary ([4] Brynjolfsson, 1993; [38] Wilson, 1993). There is evidence in the research both for and against the productivity of IT investments....