This paper makes a comparative assessment of public and private sector bank intermediation cost efficiency during the reform period, taking spread or net interest margin as the output indicator. The years covered in the study are 1996-97, 1998-99, 2000-01 and 2002-03. The study concentrates on 20 public and 10 Indian private sector banks. The paper makes use of two non-parametric methods: the Free Disposal Hull (FDH) approach and the Data Envelopment approach for construction of the cost frontier for measurement of efficiency. In the FDH approach, the author takes segments of the cost frontier as the benchmark. In the DEA approach, he takes a linear version of the entire frontier as the benchmark. As per the FDH results, the observed public sector commercial banks exhibit higher mean efficiency scores (when the year-wise figures are averaged) than the observed private sector banks. In terms of DEA, however, the observed private sector commercial banks have higher mean cost and higher technical and cost efficiencies than the observed public sector commercial banks. The author conducts a test of significance to examine if the mean cost efficiencies of the two bank groups are significantly different across bank groups. The results are positive for both FDH and DEA.
In
India, the government pursued policies of financial repression with great vigor
during the 1970s and 1980s, following nationalization of the major commercial
banks. This has been a period when the public sector commercial banks had rapid
expansion of branches, especially in the rural and semi-urban areas and had reasonable
success in the matter of deposit mobilization and disbursement of loans. However,
this has also been a period when efficiency considerations had taken a back seat.
The net interest margin of commercial banks were protected by administrative controls
on the deposit and lending rates.
In
the 1990s, however, the banking environment was transformed radically, following
the bold initiatives from the RBI relating to dismantling of entry barriers, rate
deregulation, introduction of prudential accounting norm and the implementation
of Basel I capital adequacy norms. The relaxation in private sector entry in the
banking sector led to the formation of nine new private sector banks. Many foreign
banks also entered the Indian banking sector. The changed competition and accounting
environment literally forced the commercial banks to provide unprecedented attention
towards productivity and efficiency. The traditional source of income (Net interest
Margin ) was being compressed due to the pressure of competition. Between 1991-92
and 1999-2000, the net interest margins of the commercial banks operating in India
declined from 3.31% to 2.72%. Consequently, the commercial banks had to face the
twin challenge of finding out new sources of income (mainly through off-balance
sheet activities and income from fees) and containing overhead expenses. Therefore,
the results exhibited by the commercial banks in this regard are an area of interest
for researchers and policymakers. |
