After the onset of banking sector reform in India, the Reserve Bank of India initiated a system of Prompt Corrective Action (PCA) with various trigger points and mandatory and discretionary responses by the supervising authority on a real time basis. The PCA framework relies on three major indicators of banking sector performance: Net Non Performing Asset (NPA), Capital-To-Risk-Weighted Assets Ratio (CRAR) and Return on Assets (ROA). The present paper seeks to combine the ratio approach adopted by the Reserve Bank of India with the Assurance Region based measure of technical efficiency to find out a composite Data Envelopment Analysis (DEA) based efficiency indicator of 28 observed commercial banks for 2002-03 to 2004-05. The results show that the observed private sector commercial banks have higher mean technical efficiency score compared to those of the public sector commercial banks. Out of the 28 observed commercial banks considered for the study, six were found to be efficient. A study of the technical efficiency scores across ownership groups reveal that the observed private sector banks have higher mean technical efficiency scores compared to their public sector counterparts. Finally, most of the observed commercial banks exhibit decreasing returns to scale for the period under observation.

As an integral part of banking sector reform in India, the Reserve Bank of India (RBI) adopted a system of Prompt Corrective Action (PCA) with various trigger points and mandatory and discretionary responses by the supervising authority depending on the three major indicators of banking sector health: Net Nonperforming Asset (NPA), Capital-to-Risk-Weighted Assets Ratio (CRAR) and Return on Assets (ROA). The present paper seeks to integrate the ratio approach adopted by the RBI with the Assurance Region approach of measuring the technical efficiency of select Indian commercial banks to find out a composite Data Envelopment Analysis (DEA) based ranking in respect of each observed commercial banks.

The Prompt Corrective Action Framework (PCA) originated in the USA following the passage of Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991. The FDICIA, 1991, stipulates that each federal banking agency will take PCA for resolving the problems of insured financial intermediary in a way which results in the least possible long-term loss to the deposit insurance fund. PCA is essentially meant for insured financial institutions which are not adequately capitalized. As per the PCA framework, banks are placed in one of the following five tiers: (1) Well Capitalized (2) Adequately Capitalized (3) Undercapitalized (4) Significantly Undercapitalized and (5) Critically Undercapitalized on the basis of three capital ratios (CRAR, Tier I to Risk Weighted Assets and Tier I to Total Assets).

Apart from the US, a system of PCA regime is in existence in many other countries. Rules based on compulsory quantitative triggers (in relation to capital levels) for action by supervisors modeled on the rules set in the FDICIA, 1991 have been devised in some industrial economies and in a number of emerging market economies (e.g., Korea, Argentina, Chile, Colombia, the Czech Republic, and Hong Kong). Some of the countries (Singapore, Brazil, Mexico, Peru, Hungary, and Poland, etc.), have established a rule-based system for initiating action against banks which are unable to meet the obligations, doing business not in the interests of depositors or creditors, and which are suffering from illiquidity, insolvency, large losses, etc.

Banking sector, Reserve Bank of India, Prompt Corrective Action, PCA, Indian commercial banks, Net Non Performing Asset, NPA, Capital-To-Risk-Weighted Assets Ratio, CRAR, Return on Assets, ROA, Statistical Analysis, Operational Research, Indian public sector banks.