Evaluating the Performance of Indian Domestic Banks Through the Lens of Pareto–Koopmans Efficiency

Abstract

In this article, we use data envelopment analysis to obtain Pareto–Koopmans (PK) measures of technical efficiency (TE) of India’s domestic commercial banks for the period between the global financial crisis and merger of the State Bank of India and its associates. This article aims to contribute to the growing body of literature on the efficiency of Indian banks by adopting the concept of PK efficiency to overcome the restrictive nature of radial and orientation-specific TE measures. To the best of our knowledge, this article is the first of its kind where one can disaggregate overall TE into two separate components by measuring input and output efficiency in the Indian banking sector. We assume a three-input three-output technology for both groups and utilize a balanced panel of 26 public sector banks (PSBs) and 19 private banks (PVBs) from 2010–2011 to 2016–2017. The mean PK efficiencies across the study period are 0.86 and 0.72 for PSBs and PVBs, respectively. Hence, there is considerable scope of improvement in the productive performance of PVBs. The disaggregation of PK efficiencies into input- and output-specific components reveals that for PSBs, the inefficiencies primarily result from physical assets, while for PVBs, they emerge mainly from other incomes. Hence, the management should specifically target these aspects of banking operations to improve their performance. Second-stage regression analysis reveals that PK-TE has a non-linear relationship with the size of a bank. Deposit to liability ratio and management quality negatively impact PK efficiency, while priority sector lending positively influences it.