This paper examines the inter-bank relative efficiency of public and private sector commercial banks in India. This study includes analysis of slacks which remain to be explored for getting a clear picture about the causes of inefficiency. Though the issue is important, no recent study, to the best of our knowledge, has addressed it. Data Envelopment Analysis (DEA) approach has been used to examine the efficiency level achieved and to identify the slacks. The results reveal that private (Indian) sector banks are relatively more efficient compared to public sector banks. It was found that State Bank of Hyderabad, Bank of Maharashtra, Central Bank of India, United Bank of India, Dhanlaxmi Bank and ING Vysya could not achieve 100% efficiency even in a single year, whereas the Federal Bank, HDFC Bank, Kotak Mahindra Bank, Nainital Bank and Yes Bank Ltd., all private sector banks, achieved full efficiency in all the ten years. The strategies suggested in this study to the comparatively less efficient banks would help them not only in improving their efficiency, but also in lowering the cost of their products for the overall benefit of their customers. Efficiency is also found to be directly affecting the profitability of banks.

In the present environment where competition is emerging not only from the domestic enterprises but at the global level, survival of the business enterprises is subject to the efficiency level achieved in operations. Banking sector is no exception to this. Ever since the initiation of the economic reforms process, banks in India have witnessed a sea change in their functioning. Deregulation of interest rates, freedom to design loan as well as deposit products, freedom to diversify and expand branch network, relaxed rules for entry of new foreign and private Indian banks, etc. have made the whole Indian banking industry highly pulsating. Efficiency in operations is the fundamental basis for survival in the industry. Therefore, it becomes imperative to assess the efficiency level of these organizations, identify less efficient banks so that strategies can be designed to improve their efficiency level. Amongst the various kinds of efficiency measures, technical efficiency is an important one. Technical efficiency is characterized by the relationship between observed output and potential output.

Further, profitability is an index of efficiency and is regarded as a measure of efficiency and management guide to greater efficiency. The measurement of efficiency helps banks to channelize their focus to remain competitive, profitable and viable in a highly competitive banking industry like India. It would also help to benchmark an individual bank against the ‘best practice’ bank as well as evaluate the impact of various policy measures on the efficiency and performance of these institutions. This paper endeavors to measure the relative efficiency of public and private sector banks in India and also check the association between technical efficiency and profitability in Indian public and private sector banks.