Operational Performance of Banks: Frontier-Based Data Envelopment Analysis with Undesirable Output

Abstract

The current banking scenario marks the rising level of non-performing loans (NPLs), which negatively impacts the operational performance of banks. There is a need for an operating performance model that integrates the NPLs into the measurement of operational efficiency to provide the overall performance profile for Indian banks. The study applies a non-radial data envelopment analysis model developed by Tone (2001) and incorporates NPLs as undesirable output. The study draws empirical insights on operational performance for Indian banks for a recent five-year period. With the adoption of the non-orientation approach of the developed model, the significant contribution of the study is related to mean factor efficiency analysis, which allows the identification of inefficient sources causing operational inefficiency within banks. The robustness test result throws light on efficiency differences between two ownership categories of banks. Implications of empirical findings suggest that the regulators devise measures to control the level of NPLs to help improve the operational efficiency of the Indian banking system.