The J-Curve of Disruption: A Stochastic Frontier Analysis of AI's Strategic Impact on the Performance of India's Pioneer Banks

Abstract

Purpose: The basic objective of this study is to assess the impact of Artificial Intelligence (AI) on financial performance. This study examines data from three representative Indian banks over a 15-year period, from 2009 to 2024. It is extremely important for banks and policymakers to understand the impact of Artificial Intelligence (AI) on costs and profitability.

Methods: Two analytical methods were used for this study. The first is the Stochastic Frontier Analysis (SFA), and the second is a fixed-panel regression model.

Results: The results of the SFA are extremely positive, showing that after the adoption of AI, the average cost efficiency of banks increased from 90.6% to 99.9%. This proves that AI plays a vital role in improving banks’ internal operations and reducing costs. The Panel Regression Model shows that after controlling for other variables (bank size, CAR), the AI Dummy showed a significant (-0.81, p < 0.001) gain in ROA (profitability).

Originality: This study provides a comprehensive review of AI in the Indian banking sector. This study highlights cost-benefit integration over profit-centric evaluation, emphasizing AI’s immediate cost reduction and long-term profitability potential.