The objective of this paper is to examine the performance of the Indian banking sector, measured and compared through the construct of productive efficiency using the non-parametric frontier methodology, Data Envelopment Analysis (DEA). The efficiency scores, for three groups of banks, viz., State Bank and its subsidiaries, other nationalized banks and privately owned banks are determined for the three year period, 1999-2002. The determinants of productive efficiency are found using regression. This paper is based on the Intermediation approach as opposed to the Production approach. Hence, the inputs and outputs are measured in monetary value rather than physical value. The study shows that the public sector State banks, as a group, have highest efficiency, followed by private sector banks, and the other nationalized banks in India.
These results are consistent over a three year period, but, the efficiency differences diminish over a period of time. The study also finds that profitable banks are more productive and that CAR has significantly positive impact on the productive efficiency. The performance of the financial institutions has been a major concern for both, the regulators
and the policy makers, since it has a strong linkage with the performance of the economy.
The banking industry, which is a major channel of funding the productive sector, is facing
serious challenges with the opening up of the economy and its integration with the global
economy.
The industry has undergone a major metamorphosis in the last decade, with public
sector dominance and protection giving way to a competitive industry with increasing
participation by the foreign banks. Today, the foreign banks, which have large operations
worldwide, form more than 1/3rd of the major banks, in number, though their market share is
still small at about 5-6%. In the years to come, through aggressive play, they are likely to
garner significant market share. It is obvious that in the long run only the efficient banks will
survive. The Indian banks, which have long been protected, are suspected to be less efficient.
The performance of the banking sector has been analyzed by many researchers using
different methods. The standard method, of comparing financial parameters and financial
ratios has its limitations, as it fails to capture long term trends and also does not identify the |
