Major steps were taken in Indian banking sector in the early 1990s to liberalise commercial bank functioning in order to improve their efficiency. The measurement of bank efficiency provides the foundation for consequent inquiry into reasons producing efficiency differences. This article measures technical efficiency of balanced panel of 54 commercial banks operating in India during 1991–92 to 2006–07 using Data Envelopment Analysis (DEA) with an aim to study effects of reforms and ownership on bank efficiency. Since existing literature lacks uniformity in methodology used for identifying determinants of efficiency in banking, this study employs a blend of tests including profitability analysis (suggested by Spong et al., 1995) and found evidence that financial reform, ownership and listing of bank shares have influenced bank efficiency in India. However, no conclusive evidence was found regarding a relationship between size and efficiency. In addition, ‘most’ efficient banks were found to be characterised by higher Net Profit as percentage of Total Assets (NPTA) and higher Profits per Employee (PPE) while ‘least’ efficient banks reported higher levels of Non-Performing Assets (NPAs).
AliA.L.SeifordL.M. (1993), ‘The Mathematical Programming Approach to Efficiency’, In FriedH.O.KnoxLovell C. A.SchmidtS.S. (eds.). The Measurement of Productive Efficiency: Techniques and Applications. Oxford University Press, New York: 120–159.
2.
ArunT. G.TurnerJ. D. (2002), ‘Financial Sector Reforms in Developing Countries: The Indian Experience’, World Economy, 25(3): 429–45.
3.
AttaullahA., CockerillHangLe, (2004), ‘Financial Liberalization and Bank Efficiency: A Comparative Analysis of India and Pakistan’, Applied Economics, 36: 1–10.
4.
BankerR. D.CharnesA.CooperW. W. (1984), ‘Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis’, Management Science, 30(9): 1078–92.
5.
BhattacharyaA.LovellC. A. K.SahayP. (1997), ‘The impact of liberalization on the productive efficiency of Indian commercial banks’European Journal of Operational Research, 98(2): 332–345.
6.
BergerA. N.HumphreyD. B. (1997), ‘Efficiency of Financial Institutions: International Survey and Directions for Future Research’, European Journal of Operational Research, 98(2): 175–212.
7.
BergerA. N.MesterL.J. (1997), Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?Journal of Banking and Finance, 21: 895–947.
8.
BergS. A.ForsundF. R.JansenE. S. (1991), ‘Bank output measurement and the construction of best practice frontiers. Journal of Productivity Analysis, 2: 127–142.
9.
BergS.ForsundF.JansenE. (1992), “Technical efficiency of Norwegian banks: The non-parametric approach to efficiency measurement”, Journal of Producivity Analysis, 2: 127–142.
10.
BergS.ForsundF.HjalmarssonL.SouminenM. (1993), “Banking efficiency in the Nordic countries”, Journal of Banking and Finance, 17: 371–388.
11.
BhattacharyaA.LovellC. A. K.SahayP. (1997), ‘The Impact of Liberalization on the Productive Efficiency of Indian Commercial Banks’, European Journal of Operational Research, 98(2): 332–45.
12.
BhaumikSumon K.DimovaRalitza D. (2004), ‘How Important Is Ownership in a Market with a Level Playing Field? The Indian Banking Sector Re-visited’, Journal of Comparative Economics, 32(1): 165–80.
13.
BhaumikSumon K.PiesseJenifer (2004), ‘The Risk Aversion of Banks in Emerging Credit Markets: Evidence from India’, William Davidson Institute Working Paper No. 774.
14.
BrockettP. L.CharnesA.CooperW. W.Huang.Z. M.SunD. B. (1997), ‘Data transformations in DEA cone ratio envelopment approaches for monitoring bank performance’, European Journal of Operational Research, 2: 250–268.
15.
BukhP. N. D.ForsundF. R.BergS. A. (1995), ‘Banking efficiency in the Nordic countries: A four-country Malmquist index analysis’, Bank of Norway, Working Paper Research Department.
16.
CasuB.GirardoneC.MolyneuxP. (2004). ‘Productivity change in European banking: A comparison of parametric and non-parametric approaches.’Journal of Banking and Finance, 28(10): 2521–40.
17.
CharnesA.CooperW.W.LewinA. Y.SeifordL. M. (1995), Data envelopment analysis: Theory, methodology and applications. The Netherlands: Springer.
18.
CharnesA.CooperW. W.RhodesE. (1978), ‘Measuring the Efficiency of Decision Making Units’, European Journal of Operational Research, 2(6): 429–44.
19.
ChatterjeeGautam (2006), ‘Is Inefficiency of Banks in India a Cause for Concern? Evidence from the Post Reform Era’, Journal of Emerging Market Finance, 5(2): 151–82.
20.
ChienChen-FuFeng-YuLoLinJ. T. (2003), ‘Using DEA to measure the relative efficiency of the service center and improve operation efficiency through reorganization,’Power Systems, IEEE Transactions on Power Systems, 18(1): 366–73.
21.
ChenT.-Y. (2001). ‘An estimation of X-inefficiency in Taiwan’s banks’.’Applied Financial Economics, 11(3): 237–242.
22.
ColwellR. J.DavisE. P. (1992), ‘Output and Productivity in Banking’, Scandinavian Journal of Economics, 94(Supplement): 111–29.
23.
DasAbhimanNagAshokRaySubhash (2004), ‘Liberalisation, Ownership, and Efficiency in Indian Banking: A Nonparametric Approach’, Working Papers 2004–29, University of Connecticut, Department of Economics.
24.
DasAbhimanGhoshSaibal (2006), ‘Financial Deregulation and Efficiency: An Empirical Analysis of Indian Banks during the Post Reform Period’, Review of Financial Economics, 15(3): 193–221.
25.
DebreuG. (1951), ‘The Coefficient of Resource Utilisation’, Econometrica, 19(3): 273–92.
26.
DrakeL. (2001). ‘Efficiency and productivity change in UK banking.’Applied Financial Economics, 11: 557–571.
27.
DrakeL.HowcraftB. (1994), ‘Relative Efficiency in the Branch Network of a UK Bank: An Empirical Study’, Omega, 22(1): 83–90.
28.
ElyasianiE.MehdianS. M., (1995), The Comparative Efficiency Performance of Small and Large U. S. Commercial Banks in the Pre- and Post- Deregulation Eras, Applied Economics, 27: 1069–79.
29.
FarellM. J. (1957), ‘The Measurement of Productive Efficiency’, Journal of Royal Statistical Society, 120(3): 253–81.
30.
FaveroC.PapiL. (1995), ‘Technical efficiency and scale efficiency in the Italian banking sector: A non-parametric approach. Applied Economics, 27: 385–95.
31.
FukuyamaH. (1995), ‘Measuring efficiency and productivity growth in Japanese banking: A non-parametric frontier approach’, Applied Financial Economics, 5: 95–117.
32.
GirardoneC.MolyneuxP.GardenerE. P. (2004), ‘Analysing the Determinants of Bank Effi ciency: The Case of Italian Banks’. Applied Economics, 36: 215–227.
33.
HaagS. E.JaskaP. V., (1995), ‘Interpreting Inefficiency Ratings: An Application of Bank Branch Operating Efficiencies, Managerial and Decision Economics, 16: 7–14.
34.
JacksonWilliam (1972), ‘Commercial Banking Performance and Structure: A Factor Analysis Approach’, Working Paper No. 74-5, Federal Reserve Bank of Richmond.
35.
JacksonP. M.FethiM. D. (2000), ‘Evaluating the technical efficiency of Turkish commercial banks: An application of DEA and Tobit analysis.’Efficiency and Productivity Research Unit.
36.
JemricI.VujcicB. (2002), ‘Efficiency of banks in Croatia: A DEA approach.’Comparative Economic Studies, 44(2): 169–193.
37.
KoontzH.O’DonnellC. (1978), Essentials of Management, 2nd ed. New York: McGraw-Hill.
38.
KoopmansT. C. (1951), ‘An Analysis of Production as an Efficient Combination of Activities’, in KoopmansT. C. (ed.), Activity Analysis of Production and Allocation, Cowles Commission for Research in Economics, Monograph No. 13. New York: Wiley.
39.
KumbhakarSubal, C.LovellC. A. Knox (2000), Stochastic Frontier Analysis. Cambridge: Cambridge University Press.
40.
LovellC. A. K. (1993), ‘Production frontiers and productive efficiency, In: FriedO. HaroldLovellandC. A. K.SchmidtS. S., (eds), The Measurement of Productive Efficiency: Techniques and Application, pp. 3–67. Oxford University Press.
41.
LovellC. A. K. (1996), ‘Applying Efficiency Measurement Techniques to the Measurement of Productivity Change’, The Journal of Productivity Analysis, 7: 329–340.
42.
MaheshH. P.RajeevMeenakshi (2006, 1October), Liberalisation and Productive Efficiency of Indian Commercial Banks: A Stochastic Frontier Analysis, MPRA Paper No. 827.
43.
MillerS. M.NoulasA. G. (1996). ‘The technical efficiency of large bank production.’Journal of Banking and Finance, 20(3): 495–509.
44.
NarasimhamM. (1991), ‘Report of the Committee on Financial System’. Mumbai: Reserve Bank of India.
45.
PiL.TimmeS.G. (1993), ‘Corporate Control and Bank Efficiency’, Journal of Banking and Finance, 20(2–3): 515–530.
46.
PortelaM.ThanassoulisE.SimpsonG. (2004), ‘Negative data in DEA: A directional distance approach applied to bank branches. Journal of the Operational Research Society, 55: 1111–1121.
47.
RakeshMohan (2007), ‘Capital account liberalisation and conduct of monetary policy – the Indian experience’, Paper presented at International Monetary Seminar on Globalisation, Inflation and Financial Markets, Bank of France, Paris.
48.
RamMohan, T. T.RaySubhash (2004), ‘Productivity Growth and Efficiency in Indian Banking: A Comparison of Public, Private and Foreign Banks’, Working Paper, University of Connecticut.
49.
ReddyAmarender (2004), ‘Technical Efficiency and its Decomposition in Indian Banks in Post Liberalisation’, 8th Capital Markets Conference, Indian Institute of Capital Markets.
50.
ReddyY. V. (2005), Address by Dr Y. V. Reddy, Governor, Reserve Bank of India at the Institute of Bankers of Pakistan, Karachi.
51.
SarkarJayatiSarkarSubrataBhaumikSumon K. (1998), ‘Does Ownership Always Matter? Evidence from Indian Banking Sector’, Journal of Comparative Economics, 26(2): 262–81.
52.
SathyeMilind (2003), ‘Efficiency in a Developing Economy: The Case of India’, European Journal of Operational Research, 148(3): 662–71.
53.
SealyC. W., Jr.LindleyJ. T. (1977), ‘Inputs, Outputs and a Theory of Production and Cost at Depository Institutions’, Journal of Finance, 32(4): 1251–66.
54.
SeifordL. M.ThrallR. (1990), ‘Recent Developments in DEA: The Mathematical Programming Approach to Frontier Analysis, Journal of Econometrics, 46(1–2), 7–38.
55.
ShanmugamK. R.LakshmanasamyT. (2002), ‘Production Frontiers and Efficiency Measure: An Analysis of Banking Sector in India’, Asia-Africa Journal of Economics and Econometrics, 1(2): 211–28.
56.
ShermanH. D.GoldF. (1985), ‘Bank Branch Operating Efficiency: Evaluation with Data Envelopment Analysis’, Journal of Banking & Finance, 9(2): 297–315.
57.
ShermanH.LadinoG. (1995), ‘Managing bank productivity using data envelopment analysis (DEA)’, Interfaces, 25: 60–73.
58.
SpongKennethSullivanRichard J.DeYoungRobert (1995), ‘What Makes a Bank Efficient? A Look at Financial Characteristics and Management and Ownership Structure’, Financial Industry Perspectives, Federal Reserve Bank of Kansas City, 2(December): 1–19.
59.
SturmJan-EgbertWilliamsBarry (2005, November), ‘What Determines Differences in Foreign Bank Efficiency? Australian Evidence’, CESifo Working Paper Series No. 1587.
60.
WykoffF. C. (1992), ‘Comments on Measurements and Efficiency in Banking’, in GrillichesZ. (ed.), Output Measurement in Service Sectors, pp. 279–87. Chicago: University of Chicago Press.
