The paper aims to analyze the effect of size and group affiliation on the Technical Efficiency (TE) of Indian Public Sector Banks (PSBs) within a cross-sectional perspective. Since the correct functional form of the production function of the bank is not known, the technique of Data Envelopment Analysis (DEA) has been utilized for computing the TE scores of individual PSBs. The empirical results suggest that the extent of TE in the Indian public sector banking industry is to the tune of 88.5%. Further, the observed level of technical inefficiency is primarily due to managerial underperformance in organizing inputs (i.e., pure technical inefficiency) rather than divergence of actual scale of operations from the most productive scale size (i.e., scale inefficiency). Regarding group affiliation, the results revealed that the banks affiliated to State Bank of India group are more efficient than the nationalized banks. The relationship between size and technical efficiency indicates that the small banks are more efficient than their large counterparts. In addition, the results of regression analysis highlight that the hypothesis `the larger the bank in terms of total assets, higher is the level of its efficiency' does not hold good in Indian public sector banking industry.
In India, the Public Sector Banks (PSBs) are currently restructuring their operations for maintaining viability and improving competitiveness. On the one side, these banks are tackling with the problems of Non-Performing Assets (NPAs) and shrinking net-interest margins while, on the other, they are facing fierce competition from de novo private domestic and foreign banks that have a significant edge in terms of banking know-how and technology. The development of new technologies in information processing and risk management compelled the PSBs to modify the ways to manage their business. On the whole, these developments have directed the PSBs to reassess their technological capabilities and to reevaluate their performance to find out the ways and means to improve their operating and profit efficiencies. Against this background, it is pertinent to know-how well the management of these banks is aligning technology, human and other resources to produce their financial products and services. Alternatively, it is difficult to make out that how efficiently these banks are allocating resources in the production process. The present study centers around this issue and, in particular, aims to measure the extent of Technical Efficiency (TE) of Indian PSBs. In addition, the effect of the size and group affiliation on the TE of PSBs has also been scrutinized.
In the recent years, some notable attempts have been made by the researchers to analyze the efficiency of Indian banking sector. Bhattacharyya et al. (1997) found that the PSBs had the highest efficiency followed by foreign banks. The private banks were observed to be least efficient. Das (1997a) observed that the main source of inefficiency in Indian banking industry was technical in nature, rather than allocative. Das (1997b) observed no statistical significant difference in efficiency of public and private banks. Except scale efficiency, the foreign banks differ significantly from public and private banks. Saha and Ravisankar (2000) observed that barring a few exceptions, the efficiency of PSBs has improved during the period 1991/92 to 1994/95. Mukherjee et al. (2002) noticed that the PSBs are more efficient than both private and foreign banks. Also, the performance of PSBs improved during the period 1996-1999. Sathye (2003) found that the efficiency of private banks is paradoxically lower than that of PSBs and foreign banks. Mohan and Ray (2004) observed that PSBs perform significantly better than private banks but not differently from foreign banks. Further, the superior performance of PSBs is due to their higher technical efficiency. Sanjeev (2006) found that the relationship between size and TE of PSBs is inconclusive. |
