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Banking has been an important issue during transition. All transition countries have faced
one or more banking crises. In most of these countries, the question of relative comparison of
banks by size or type of ownership has been a point of issue. An understanding of the bank's
relative performance during its post transition period compared to the market is important for
analysts, practitioners and policy makers. The objective of this study is to measure and explain
the measured variations in the performance and the productive efficiency of the Indian banks
after the era of liberalization in a Constant Returns to Scale (CRS) environment.
Efficiency measurement of banking institutions serves two important purposes: it helps to scale the
relative efficiency of an individual bank against the best practices of the other peer banks, and it
helps to explain the effects of the impact of the various policy measures on the performance
and efficiency of these institutions. Banking system in general provides transaction services
and payment system. Hence, an efficient banking system has significant productive
externalities, which upgrade the competence of economic transactions in general.
The global financial environment has altered significantly since 1970s. Deregulation
of international financial market, technological revolutions, liberalization of cross-border
movement of capital and financial liberalization across the developing countries have established a
new international financial architecture. Globalization of financial markets has also
intensified competition leading to consolidation and establishment of colossal financial
institutions worldwide. In the Indian perspective, many policy measures have been implemented
since 1991. The core business of banks has been mobilizing deposits and utilizing the same
for credit accommodation. However, it should be taken into consideration that the banks
are not allowed to use the entire amount for extending credit. In order to promote certain
prudential norms for healthy banking practices, a majority of the developed economies require all
banks to maintain minimum liquid and cash reserves. As such, banks are required to ensure
that these statutory reserve requirements are met before directing on their credit plans.
Statutory reserve requirements are broadly classified into Cash Reserve Ratio
(CRR) and Statutory Liquidity Ratio
(SLR). Steady reduction in CRR and SLR, deregulation of interest
rates, progressive reduction of constraints on banks' sheets and introduction of prudential
measures have enhanced efficiency and productivity of this sector. Competition has been further
intensified by liberal policy measures. In this scenario, Indian banks are trying to enlarge their size
to enhance their asset base and profit, so as to reach the global standard. A significant intent
of these policies is to have a radical transformation in the operating landscape of the
Indian banks. Conversely, measuring the efficiency of the banking sector is not specific because
of its inability to precisely define and measure either the inputs or the outputs of the
bank. Further, the actual outputs produced by the banks may not be the same. Moreover, there
are various concepts of efficiency that can be employed to compute the comparative
efficiency scores of individual banks. In broad spectrum, there exists two ways in which
efficiency measurement can be computed. Once the efficiency scores are worked out, analysis of
the empirical results may lead to the design of appropriate policies to enhance efficiency,
provided the performers and the non-performers get suitably demarcated. This paper measures
the efficiency scores of all the commercial banks in India having a minimum level of
retail presence, and employing a variety of efficiency measures. For computing the efficiency,
we have used the nonparametric method of Data Envelopment Analysis (DEA). |
