Digital Density Escalates Cost-efficiency of Indian Commercial Banks: Myth or Reality? A Non-parametric DEA Approach

Abstract

This article examines the impact of digitization of banking services on cost-efficiency of Indian commercial banks. The study develops an index named as the Digital Density Index (DDI) to measure the degree of banks’ digitization and examines its impact on cost-efficiency scores as estimated by the non-parametric data envelopment analysis technique. Results identify the scope of cost savings potentiality on the part of the banks which is higher in the case of private-sector banks than that of the public-sector banks. The sector also displays a rising trend in digitization as exhibited by the index value of DDI over the study period. DDI is found to be positively associated with the cost-efficiency of banks. However, the results are opposite for the country-level indicators of digitization which impact the cost-efficiency scores of the banks negatively. This is ascribed to the initial stage of digitization requiring huge outlay on building digital infrastructure. The results would change over time as the country matures in its level of technological change and development and with the adaptation of the bank with the changing circumstances.