An Analysis of Efficiency–Profitability Relationship in Indian Public Sector Banks

Abstract

Based on cross-sectional data for 27 banks, this article has endeavoured to explore the relationship between Technical Efficiency (TE) and profitability in the Indian public sector banking industry. The technique of Data Envelopment Analysis (DEA) has been utilized to compute the TE score for each bank in the year 2005. The mean level of TE for the industry is found to be 88.5 per cent. This implies that public sector banks can produce 1.13 times as much output from the same inputs, if they operate at ‘efficiency frontier’. In 20 inefficient banks, the technical inefficiency ranges from 2.6 per cent to 36.8 per cent. Also, the banks affiliated with ‘State Bank of India Group’ outperform the banks belonging to the ‘Nationalized Banks Group’ in terms of operating efficiency. An analysis of efficiency–profitability matrix based on the efficiency scores and Return on Assets (ROA) reveals that 13 banks that fall in the ‘lucky’ and ‘underdog’ quadrants have the TE score below the industry average. The resource utilization process in these banks features the presence of considerable wastage of resources. The ‘ace’ quadrant contains 9 banks which are flagship units in the industry in terms of both efficiency and profitability. Both Andhra Bank and Corporation Bank appear as an ideal benchmark for the laggards on the efficiency and profitability dimensions of performance evaluation.