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International Journal of Productivity and Performance Management

Measuring efficiency, effectiveness and performance of Indian public sector banks
Sunil Kumar Rachita Gulati
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Performance
Measuring efficiency, of Indian PSBs
effectiveness and performance
of Indian public sector banks
51
Sunil Kumar and Rachita Gulati
Guru Nanak Dev University, Amritsar, India Received December 2008
Revised May 2009
Accepted June 2009
Abstract
Purpose – The purpose of this paper is to appraise the efficiency, effectiveness, and performance of
27 public sector banks (PSBs) operating in India by using a two-stage performance evaluation model.
Downloaded by University of Ghana At 17:07 27 June 2016 (PT)

Design/methodology/approach – Using the cross-sectional data for the financial year 2006/2007,
the technique of data envelopment analysis has been used for computing the efficiency and
effectiveness scores for individual PSBs. The overall performance scores have been derived by taking
the product of efficiency and effectiveness scores.
Findings – The empirical results reveal that high efficiency does not stand for high effectiveness in
the Indian PSB industry. A positive and strong correlation between effectiveness and performance
measures has been noted. Further, on the efficiency front, State Bank of Travancore appears as an
ideal benchmark, while State Bank of Bikaner and Jaipur, and State Bank of Mysore emerge as ideal
benchmarks on the effectiveness front.
Practical implications – The practical implication of the research findings is that in their drive to
improve overall performance, Indian PSBs should pay more attention to their income-generating
capabilities (i.e. effectiveness) relative to their ability to produce traditional outputs such as advances
and investments (i.e. efficiency).
Originality/value – This paper is perhaps the first to evaluate the performance of Indian banks by
considering simultaneously the aspects of efficiency and effectiveness.
Keywords Organizational effectiveness, Performance measures, Public sector organizations,
Data analysis, Banks, India
Paper type Research paper

Introduction
Since the initiation of the process of banking reforms in 1992, the share of Indian public
sector banks (PSBs) in the deposits, advances, and total assets of banking industry
has declined due to intensive price and non-price competition that emerged in the wake
of relaxed entry norms during the post-reforms years[1]. For maintaining their
share and achieving sustainable growth in the highly competitive environment, PSBs
are incessantly reorienting and redesigning their operational strategies with the
sole objective to improve their performance. At present, PSBs are offering a number of
innovative products and services, and constantly improving delivery channels to
attract new customers and retain the existing ones. Further, to offer the service quality
that is being provided by foreign and de novo private domestic banks, PSBs are International Journal of Productivity
and Performance Management
Vol. 59 No. 1, 2010
The authors would like to thank anonymous reviewers and the Editor of this journal for pp. 51-74
q Emerald Group Publishing Limited
providing useful comments and suggestions which have resulted in significant improvements in 1741-0401
the quality of the paper. Errors remain unerringly their own. DOI 10.1108/17410401011006112

1997. but also to scrutinize the degree of correlation among these measures. the findings of the present study would help the regulators to develop appropriate policies and guide the managers in making strategic actions for improving the performance of PSBs. a need for an accurate appraisal of the performance of 52 PSBs has become more pressing. Sensarma. its academic contribution. Mukherjee et al. 2006. 2002. This is because the overall performance measure has been derived as the product of efficiency and effectiveness measures. 2004. Telephone banking and online banking have become the integral part of the menu of the services available to their customers. The penultimate section presents and discusses . To the best of our knowledge.1 to information and communication technology-based modern automated banking systems from their out-dated manual-based banking systems. Sanjeev. 2007).. the common feature of all the aforementioned research investigations is that the concept of efficiency has been incorrectly dubbed as performance. Nonetheless. The present study is an attempt in this direction and intends to fill the void that seems to exist in the literature on performance evaluation of Indian banks.e. Against this background. DEA introduced by Charnes et al.. another few look at the relationship between Downloaded by University of Ghana At 17:07 27 June 2016 (PT) ownership and efficiency. The next section briefly discusses the structure of Indian banking industry. 2006. and completely ignored the effectiveness of banks in achieving their pre-determined policy objectives (Bhattacharyya et al. 2008). and performance measures for 27 PSBs using the cross-sectional data for the financial year 2006/2007. operating efficiency). The output-oriented DEA model for computing the efficiency and effectiveness scores for individual PSBs has been discussed in the succeeding section. The main objective of the present study is not only to compute the efficiency. The following section describes the two-stage performance evaluation model that has been utilized for obtaining the efficiency. provides an incomplete picture of the true performance of an organization (Ho and Zhu. Further. The rest of the paper has been structured as follows. 2007). effectiveness. both in terms of its efficiency in resource utilization process and effectiveness in realizing the pre-determined goals (Mouzas. The subsequent section provides a review of literature on the concepts of efficiency. Besides. 2004. 2004. Ram Mohan and Ray. usually referred to as decision-making units (DMUs)[2]. 2006. 1997. Shanmugam and Das. thereby neglecting either of these. there is hardly any publication in the academic journals that evaluated the performance of Indian banks by considering simultaneously the aspects of efficiency and effectiveness. Asmild et al. is a linear programming based non-parametric frontier approach for measuring the relative efficiency of a set of similar units. The ensuing section discusses the data source and adequacy of the sample size for DEA modeling in the present study. effectiveness. The existing studies on Indian banking industry have concentrated only on the measurement of efficiency of banks in terms of resource utilization (i.. while a few of these studies concentrate on the efficiency of only PSBs. Saha and Ravisankar. 2000. IJPPM making heavy investments in information technology on a regular basis to switch over 59. Ho. (1978) based on Farrell’s (1957) pioneering work. 2003. Debnath and Shankar. effectiveness. Das. Kumbhakar and Sarkar. Sathye. and performance measures for individual PSBs. For computing the efficiency and effectiveness scores for individual PSBs. It is well-established in the literature on performance evaluation that the performance of an organization should be appraised simultaneously. 2003. and performance. we made use of the technique of data envelopment analysis (DEA).

there are two types of the banks: (1) schedule commercial banks (i. Within the category of commercial banks. PSBs command a lion’s share of Indian banking industry. and employ a large number of staff. The contribution of PSBs in India’s economic and social development is enormous and well-documented. which are listed in Schedule II of the RBI Act. the empirical results. deposits. nationalized banks (NB). Of these. It is evident . and total assets is over 70 percent. In brief. About 87 percent of branches of the commercial banks in India belong to PSBs. advances. Table I provides summary details towards the end of March 2007. and are more profitable.e. of which the former accounts for more than 90 percent of the assets of the banking system. have limited number of branches. On the other hand. deposits. and total assets has declined constantly. the market share of PSBs in terms of investments. (2) Private sector banks consists of private domestic banks (which can further be classified as old private banks that are in business prior to 1995. PSBs have a countrywide network of branches and account for over 70 percent of total banking business. their share in the total employment provided by commercial banking industry is about 81 percent. the PSBs got fierce competition from private banks. regarding different types of commercial banks (excluding RRBs). State Bank of India (SBI) and its associate banks. RRBs serve the needs for rural credit and have a diminutive share (about 3 percent) in the commercial banking industry of India. The banking system in 53 India comprises commercial and cooperative banks. have adopted modern technology. They have strong presence in the rural and semi-urban areas. 1934). and de novo private banks that were established after 1995) and foreign banks. scheduled commercial banks can be classified into three types: (1) PSBs which include: . Downloaded by University of Ghana At 17:07 27 June 2016 (PT) Depending upon the pattern of ownership. especially from de novo private domestic banks that were better equipped with banking technology and practices. (3) Others comprising regional rural banks (RRBs) and local area banks. and . advances. Consequently. Further. . de novo private domestic banks are less labour-intensive. and (2) non-scheduled commercial banks. of Indian PSBs The structure of Indian banking sector The Reserve Bank of India (RBI) is the central bank of the country that regulates the operations of other banks. manages money supply and discharges other myriad responsibilities that are usually associated with a central bank. other PSBs. The final section summarizes the discussion and highlights the Performance significant conclusions. It has been observed that the market share of PSBs in terms of investments. PSBs sponsor the RRBs and their activities are localized. Though foreign banks are more techno-savvy and have carved a niche in the market but they confine their operations in major urban centres. In the post-reforms years. Further.

094 702.794 278.5 22. SBI group 8 14.463.987 745.476 805.339 150.469 126.135 286.850 71.795 Market share (%) 24. Indian private sector banks 27 7.2 II.0 IV.696.6 30.978 465.406 Market share (%) 100.1 15. PSBs (a þ b) 28 50.5 47.132 256.4 5.1 27.5 a.5 V.4 81.6 18.5 III.0 100.781 1.191 Market share (%) 62.9 47.4 28.440.172 664.2 51.217 2.6 8.6 20.023.981.3 50. IJPPM (at March 2007) Structure of commercial banking industry in India Number Rupees in croresa Bank group No.1 29.0 Notes: Regional rural banks excluded.981 3.3 b.664 482.439.994.9 70.360.3 24. of banks Branches Staff Investments Advances Deposits Total assets I.769 1.420 Market share (%) 12.5 3.3 26. Foreign banks in India 29 268 27.812 896.200 2.724 1.7 73.307 950.124 541.016 Market share (%) 0.465 452. NB and other PSBs 20 35.285 214.981 957.123 1. Total commercial banks (I þ IV) 84 57.3 23.986 Market share (%) 87.0 100.6 48.9 20.542 729.0 100.1 Table I.225 211.9 72.755 551.0 100.645 1.5 21.634.4 69.270 167.5 23.655 414.5 6. Downloaded by University of Ghana At 17:07 27 June 2016 (PT) 54 59.002 139.697 1. a1 crore ¼ 10 millions Source: Authors’ calculations from Statistical Tables Relating to Banks in India (2006/2007) .0 100.6 22.404 Market share (%) 12. Total Indian private and foreign banks (II þ III) 56 7.1 7.426 633.

in both profit and non-profit organizations. can be defined as an appropriate combination of efficiency and effectiveness. Drucker (1977) distinguished efficiency and effectiveness by associating efficiency to “doing things right” and effectiveness to “doing the right things. It is significant to note that though efficiency and effectiveness are two mutually exclusive components of overall performance measure yet they may influence each other. Performance. The growth of PSBs of Indian PSBs is still high on the agenda of the policy makers because of their gargantuan role as an effective catalytic agent of socio-economic change in the country. The principal objective of the reforms process was to improve the performance of PSBs in their operations and to inculcate competitive spirit in them. efficiency is primarily concerned with minimizing the costs and deals with the allocation of resources across alternative uses (Achabal et al. Keh et al. 2008). For the managers. it is possible that an organization Efficiency Performance Figure 1. (2006) observed that a measure of effectiveness assesses the ability of an organization to attain its pre-determined goals and objectives. However. from the table that the PSBs are still dominating players in the Indian banking sector. effectiveness is the extent to which the policy objectives of an organization are achieved.. Against this backdrop. Effectiveness Components of performance Source: Ozcan (2008) . More precisely. these terms might be synonymous but each of these has their own distinct meaning. 2006). effectiveness and performance: a literature review Downloaded by University of Ghana At 17:07 27 June 2016 (PT) Theoretical literature Efficiency and effectiveness are the central terms used in assessing and measuring the performance of organizations (Mouzas. there seems to be some inconsistency in the use of these terms in the existing literature on the subject matter. effectiveness can be affected by efficiency or can influence efficiency as well as have an impact on the overall performance (Ozcan. It is not a measure of a success in the marketplace but a measure of operational excellence in the resource utilization process. Nevertheless. the policy makers adopted a cautious approach for introducing reform measures in the Indian banking sector on the basis of the recommendations of Narasimham Committee I (1991). an organization is effective to the degree to which it achieves its goals (Asmild et al. a measure of efficiency assesses the ability of an organization to attain the output(s) with the minimum level of inputs. While commenting on effectiveness. During the last 16 years. In sum. Narasimham Committee II (1998) and Verma 55 Committee (1999). 1984).. Performance albeit their market share has declined in the deregulatory regime. Simply. More specifically.” In his terminology. we confine our analysis to PSBs which constitute most significant segment of Indian banking sector. Figure 1 puts the argument in proper scenario. 2007). Efficiency.

but not 59. It indicates the output generated by the use of given level of inputs. it can also be effective. Further. This ratio indicates the ability of an organization to achieve the expected goals in terms of output(s). 1995). Un prof The effect of different levels of efficiency and Low High effectiveness Effectiveness Source: Mouzas (2006) . performance ¼ efficiency £ effectiveness). From the figure. Ho and Zhu (2004) used Du Pont model and decomposed the overall performance measure (proxied in terms of return on assets (ROA)) into the product of efficiency (measured as total assets turnover ratio) and effectiveness (measured as profit margin ratio) measures. it contains efficiency and effectiveness as its mutually exclusive components.e.1 efficient. IJPPM can be efficient in utilizing the inputs. Their decomposition is illustrated as 56 follows: Earning before taxation Return on assets ðROAÞ ¼ Total assets Earning before taxation Net sales + ¼ £ Net sales Total assets Profit margin ratio Total assets Turnover ratio Downloaded by University of Ghana At 17:07 27 June 2016 (PT) ðPerformanceÞ ¼ + £ + ðEffectivenessÞ ðEfficiencyÞ In the aforementioned decomposition. it is High lity abi ofit Efficiency y lit l pr bi ita era of pr em ble Eph na Low i sta Su wth e gro itabl Figure 2. the ROA is considered as a measure of overall performance and assesses the profitability of total assets before taxation for an organization. Thus. For a profit organization. Mouzas (2006) illustrated the effect of different levels of efficiency and effectiveness on the performance level of an individual organization (Figure 2). the performance measure for an organization is a product of efficiency and effectiveness measures (i. Total assets turnover ratio assesses the ability of an organization to use its assets and could be treated as efficiency. the profit margin ratio assesses the net profitability before taxation during the current accounting period and could be taken as a measure of effectiveness. but not effective.. On the other hand. overall performance measure can be seen as a means of quantifying the efficiency and effectiveness of actions (Neely et al. In a nutshell.

It has been observed that the companies rarely balance the achievement of efficiency and effectiveness simultaneously. In contrast. and productivity of marketing in a 49-unit Asia Pacific hotel chain. there exists a few studies which explicitly recognized the efficiency and effectiveness as two mutually exclusive components of the overall performance of an organization. The results show that the technical inefficiency of the defence is greater than that of the offence. efficiency) generally perform well in the other dimension (i. and put overemphasis on efficiency aspect of the performance. in recent years. the study finds that all the units rated as relatively inefficient can accrue increasing returns to scale in revenues from marketing activities. to measure operating efficiency (of the offence and defence). They found no apparent correlation between efficiency and effectiveness. and social effectiveness. The main empirical finding is that the bank with better efficiency does not always mean that it has better effectiveness. Keh et al. athletic or operating effectiveness. It has been concluded that integrating DEA results into current board performance funding could be a valuable instrument for promoting efficiency and effectiveness. It has been inferred that efficiency tails off when more than 12 percent of the budget is expended on marketing activities.e. 57 Empirical literature An inspection of the empirical literature provides that most of the studies on performance measurement focus merely on the operational (technical) efficiency of an organization(s) and the aspect of operational effectiveness is usually ignored. effectiveness). Garcı́a-Sánchez (2007) applied a three-stage DEA model to the Spanish professional football league. Mouzas (2006) examined the efficiency and effectiveness of manufacturer-retailer networks in Germany and Switzerland. Byrnes and Freeman (1998) utilized DEA Downloaded by University of Ghana At 17:07 27 June 2016 (PT) to assess the efficiency and effectiveness in contractor delivery of service in Franklin County Alcohol. condition and to consider effectiveness not just as an output but as a continuous process impacting on their surrounding networks. Nevertheless. In terms of effectiveness. The author suggests that the companies need to see efficiency as a necessary. They utilized client-level data for 632 behavioural health clients served by seven different non-profit providers. The author suggested that a balanced approach ensuring sustainable profitability needs an equal emphasis on both high efficiency and high effectiveness. A triangular DEA model has been utilized. the systems performing well in one dimension (i. Drug and Mental Health Board at Ohio State. effectiveness. For instance. (2006) assessed the efficiency. The researcher noticed that the teams with the most experience perform athletically in a more effective . Ho and Zhu (2004) utilized a two-stage DEA model to evaluate the performance of 41 Taiwan’s commercial banks for the financial year 2001. The results show that efficiency and effectiveness are positively related and.e. clear that mainly focusing on efficiency and neglecting effectiveness would result in an Performance ephemeral profitability. Karlaftis (2004) utilized DEA to evaluate the efficiency and effectiveness of 256 US urban transit systems over a five-year period (1990-1994). thus. but not a sufficient. neglecting efficiency and focusing on effectiveness of Indian PSBs may result in an unprofitable growth.

. It has been noted that a higher technical efficiency does not necessarily imply higher service effectiveness. and operational effectiveness which might directly influence the survival of banks is completely ignored. A two-stage DEA model has been used to compute efficiency and effectiveness scores. and technical effectiveness. freight technical efficiency. also called the service provision or value added approach. The present study is perhaps the first one which distinguishes between efficiency and effectiveness.” For instance. we have. namely passenger technical efficiency. while higher technical efficiency and/or higher service effectiveness will Downloaded by University of Ghana At 17:07 27 June 2016 (PT) lead to higher technical effectiveness. A two-stage performance evaluation model for Indian PSBs In order to appraise the efficiency. the efficiency scores for individual PSBs have been computed. and their social effectiveness is strongly related to the level of play in itself 59. (1997). and derives the performance measure for a bank as the product of its efficiency and effectiveness measures.1 and to factors linked to their league ranking. Hjalmarsson et al. almost all the studies incorrectly dubbed the “efficiency” as the “performance. Ho (2007) made an attempt to analyze the performance of 59 listed corporations of the electronic industry in Taiwan. The results show that these measures differ significantly. also called the asset approach (Humphrey. and (2) the intermediation approach. 1985. Yu and Lin (2007) proposed and applied multi-activity network DEA to measure efficiency and effectiveness of 20 selected railways in the world.. therefore. To gain more insight into the railways’ performance. whereas the production approach as pioneered by Benston (1965) is well suited for measuring branch level efficiency. IJPPM manner. As our study is based on bank level data. the most challenging task that an analyst always encounters is to select the relevant inputs and outputs for modeling bank behaviour. Also. In the literature on banking efficiency. they estimated four measures. In Stage I. service effectiveness. Berger and Humphrey (1997) suggested that the intermediation approach as proposed by Sealey and Lindley (1977) is best suited for analyzing bank level efficiency. there are mainly two approaches for selecting the inputs and outputs for a bank: (1) the production approach. effectiveness. The empirical results indicate that a company with a better efficiency does not always have better effectiveness and there is no apparent 58 correlation between these two indicators. we utilized an innovative two-stage performance evaluation model as proposed by Ho and Zhu (2004). the most cited study in Indian context is of Bhattacharyya et al. 2000). and performance of Indian PSB industry at the level of individual banks. It is noteworthy here that no study on Indian banking industry has evaluated the performance of Indian banks by considering simultaneously the aspects of efficiency and effectiveness. It is worth noting here that there is no consensus on what constitute the inputs and outputs of a bank. In computing the efficiency scores. but the authors used the terms “productive efficiency” and “performance” interchangeably. As mentioned in the introductory part of this paper that the existing studies on Indian banks concentrated only on the measurement of operational (technical) efficiency.

. In consonance of the policy objectives that are being pursued by the Indian banks. A complete presentation of the two-stage performance evaluation model for Indian PSBs is shown in the self-explanatory Figure 3. The inputs used for computing the efficiency scores are: 59 . the main policy objective of Indian banks is to augment the interest and non-interest incomes to the maximum. advances. the overall performance scores for individual PSBs have been computed by multiplying their respective efficiency and effectiveness scores. and . and take into account the income from traditional intermediary functions of the banks. Accordingly. the efficiency scores computed in the Stage I capture the ability of the banks to generate advances and investments using the inputs of physical capital. intense competition in the Indian banking sector has forced the banks to reduce all the input costs to the minimum and to earn maximum incomes from traditional and non-traditional activities with fewer inputs. Thus. In the Stage II of performance evaluation model. . loanable funds (measured as the sum of deposits and borrowings). etc. and . the variable “non-interest income” accounts for income from off-balance sheet items such as commission. for computing the effectiveness scores for individual PSBs. labour (measured as the number of employees). labour and Downloaded by University of Ghana At 17:07 27 June 2016 (PT) loanable funds. As noted above. Ram Mohan and Ray (2004) rightly remarked that in the post-reforms period. After obtaining the efficiency and effectiveness scores. it is essential to delineate the objectives of Indian banks. On the whole. the input vector in the Stage II includes: advances and investments. The variable “net-interest” income is computed by taking difference between interest earned and interest expended. the effectiveness scores for individual PSBs have been computed. It is significant to note that the effectiveness scores obtained in the Stage II indicate how effectively the PSBs are transforming the outcomes of the Stage I to accomplish the pre-determined policy objectives of the banks. The selected output variables are: . In the post-reform years since 1992. adopted the intermediation approach as opposed to the production approach for Performance selecting input and output variables for computing the efficiency scores for individual of Indian PSBs PSBs in Stage I of the performance evaluation model. Thus. physical capital (measured as the value of fixed assets). Indian banks are putting all their efforts in the business of maximizing incomes from all possible sources. we have selected: net-interest income and non-interest income as the output variables in the Stage II of the performance evaluation model. a measure of effectiveness provides the extent to which policy objectives of an organization are achieved. exchange and brokerage. The performance evaluation model as developed by Ho and Zhu (2004) takes the output variables of Stage I as the input variables in the Stage II. we can safely infer that in the post-liberalization period. investments. However. The inclusion of “non-interest income” enables us to capture the recent changes in the production of services as Indian banks are increasingly engaging in non-traditional banking activities.

minimize the use of productive resources given the outputs (input-oriented measure). Havrylchyk (2006). First. (1993). Avkiran (1999). (2006). Oliveira and Tabak (2005). In all instances. DEA is a data-oriented approach for evaluating the performance of a set of peer entities called DMUs whose performance is characterized by multiple measures/indicators (Gregorious and Zhu. just over 50 percent). The Downloaded by University of Ghana At 17:07 27 June 2016 (PT) embryonic form of DEA method is proposed by Farrell (1957). (1990). we employed DEA for computing efficiency and effectiveness scores for individual PSBs using the cross-sectional data for the financial year 2006/2007. it can simultaneously use several inputs and outputs. it does not require any assumptions about the functional form of the production function. (2008). Drake et al. DEA calibrates the level of efficiency on the basis of estimated discrete piecewise frontier (or so-called best-practice or efficient frontier or envelopment surface) made up by a set of Pareto-efficient DMUs. compared to the others. Third. it has been utilized to derive efficiency scores in a number of banking studies including Aly et al. Fourth. Berg et al. This reference simply indicates DEA’s significance and relevance in banking efficiency analyses. (2002). DEA uses exclusively quantity information and. it calculates a maximal performance measure for each bank relative to all other banks in the sample with the sole condition that each bank lies on or below the efficient frontier. these Pareto-efficient DMUs located on the efficient frontier. especially its closest rival stochastic frontier analysis (SFA) because it has a number of advantages. However. which is an attractive feature because production in the banking industry often involves multiple inputs and multiple outputs. Kao and Liu (2004). Cook and Hababou (2001). or maximize the outputs given the inputs (output-oriented measure) and called the best-practice performers or reference units or peer units within the sample of DMUs. Drake and Hall (2003). The technique was first applied by Sherman and Gold (1985) in the banking industry and thereafter. Elyasiani and Mehdian (1990). the currently popular DEA models start from the seminal work of Charnes et al. We preferred the use of DEA over other frontier efficiency measurement techniques of banking efficiency[3]. In the 122 studies reviewed by Berger and Humphrey (1997). Fifth.e. demands neither problematic price information nor a restrictive behavioural assumption in its calculation. Second. 1995). (1994). Grabowski et al. DEA has been applied in 62 studies (i. Source: Authors’ elaboration DEA model As noted above. Kirkwood and Nahm (2006). IJPPM A two-stage performance evalution model 59. 2005). Luo (2003). it is particularly suitable for small sample studies like ours[4]. These Pareto-efficient DMUs . Fukuyama (1993. Yue (1992). Hahn (2007) and Sharkas et al.1 Physical capital Net-interest income Advances Loanable funds Stage I Stage II (Efficiency) Investments (Effectiveness) Net-interest income Labour 60 Stage I Stage II Figure 3. (1978). thus. Vivas et al.

. Also. respectively. 2001. The geometry of the surface is prescribed by the specific DEA model employed. Thus. we made use of output-oriented Charnes-Cooper-Rhodes (CCR) model. Cooper et al. x2 . y2 . . . “T” denotes the matrix transpose operator. Essentially. 1994. Moreover. u and v are chosen to maximize the efficiency measure of the DMU o subject to the constraints that the efficiency levels of all units must be less than or equal to 1. yn Þ is the s £ n output matrix. . n: The units are homogeneous with the same types of inputs and outputs. we solve for the following linear programming problem (LPP): u T yo Maximize v T xo {u. . 2007 for details on various models).. and strong disposability of inputs and outputs (Murillo-Zamorano. have a benchmark efficiency score of one that no individual DMU’s score can surpass. DEA forms a non-parametric efficient frontier over the data points to determine the efficiency of 61 each DMU relative to this frontier.e. To generate a unique solution. The weights assigned must be non-negative. . n. . and then assesses the efficiency of a given DMU by the ratio of the aggregate weighted output to the aggregate weighted input. Several different mathematical programming models have been proposed in the literature (see Charnes et al. Pareto non-optimal DMUs) and receives a score between 0 and 1. Mathematically. v $ 0 where u is the (s £ 1) vector of output weights and v is the (m £ 1) vector of input weights. In the present study. the input and output vectors for the jth DMU. .v} T ð1Þ u yj Subject to : vTxj #1 j ¼ 1. they must restrict each DMU from receiving a ratio (of the weighted output to the weighted input) that is greater than 1. (1978) to obtain a scalar measure of efficiency and effectiveness for individual PSBs. CCR model imposes three restriction on the frontier technology: constant returns-to-scale. convexity of the set of feasible input-output combinations. consider n DMUs. 2004). The CCR model assigns weights to each input and output. . named after its developers Downloaded by University of Ghana At 17:07 27 June 2016 (PT) Charnes et al. n.. 2004. Thanassoulis. j ¼ 1. xn Þ is the m £ n input matrix and Y ¼ ðy1 . The above problem has an infinite number of solutions. . Performance Further. . Coelli et al. xj is a ðm £ 1Þ column vector and yj is a ðs £ 1Þ column vector. Assume there are m inputs and s outputs. The DMUs which do not lie on efficient frontier are deemed to be relatively inefficient (i. the efficient frontier provides a yardstick against which to measure the of Indian PSBs relative efficiency of all other DMUs that do not lie on the frontier. j ¼ 1. these models seek to establish which of n DMUs determine the envelopment surface..v} ð2Þ Subject to : uT yo ¼ 1. v $ 0 The duality problem to equation (2) can be written as follows: . . . The efficiency score of each DMU can be interpreted as the radial distance to efficient frontier. . . X ¼ ðx1 . u. . . Let xj and y j denote. u.. To illustrate the CCR model. . Thus. 1999. uT yj 2 vT xj # 0. In short. when evaluating the efficiency of the DMU o. the following constraint is imposed: uTyo ¼ 1. The maximization problem then becomes: Minimize vT xo {u. .

we search for all 62 linear combinations of input vectors in current practices that can be provided by the input vector of the o unit. It is worth mentioning here that in March 2007. a new entrant in the PSB industry because it seems to be a potential outlier in the sample. the data for 28 PSBs were available. (2007) provides two such rules that together can be expressed as: n $ maxfm £ s. xo $ l T X. In sum. In other words. we collected the required data from two distinct sources: (1) Statistical Tables Relating to Banks in India. 1999). Note that the LPP equation (3) must be solved n times. IJPPM Maximize {fo . Given m ¼ 3 and s ¼ 2 in the Stage I. f*o $ 1. then the DMU o is efficient. While the second rule states that number of observation in the data set should be at least three times the sum of number of input and output variables.1 ð3Þ Subject to : fo yo # l T Y. respectively. and s ¼ number of outputs. The efficiency and effectiveness scores for individual PSBs that have been obtained by implementing output-oriented CCR model are given in Table II. Since. It has been observed that estimated . 3ðm þ sÞg where n ¼ number of DMUs. some discussion on the adequacy of sample size is warranted here. Cooper et al. If f*o ¼ 1. The size of the sample utilized in the present study is consistent with the various rules of thumb available in the DEA literature. all the input and output variables in the above outlined performance evaluation model are measured in rupee lacs (note that 10 lacs ¼ 1 million). Empirical results This section presents and discusses the empirical findings of the study. the efficiency score for DMU o. we dropped a bank. otherwise. 1 and DMU o is inefficient. f*o . 2006/2007: a publication of the RBI. Later. and m ¼ 2 and s ¼ 2 in the Stage II. Let f*o denote the optimal solution to equation (3). l$0 where l is a (n £ 1) column vector and fo is a scalar. once for each DMU in the sample. DEA results are influenced by the size of the sample. We then compute the maximal proportional output vector that can be produced by these linear combinations. the sample size in this study is feasible and larger than that used in some of the studies in the DEA literature (Avkiran. The first rule of thumb states that sample size should be greater than equal to product of inputs and outputs. Data source and adequacy of sample size For 27 PSBs under consideration. However. Obviously. (2) Performance Highlights of Public Sector Banks. It is significant to note here that the implementation of equation (3) with the input and output vectors of the Stages I and II yields the efficiency and Downloaded by University of Ghana At 17:07 27 June 2016 (PT) effectiveness scores. l } fo 59. we also denote 1=f*o by Eo. namely. the sample size (n ¼ 27) used in the present study exceeds the desirable size as suggested by the abovementioned rules of thumb to obtain sufficient discriminatory power. IDBI Ltd. Except labour. 2006/2007: a publication of Indian Banks’ Association. m ¼ number of inputs.

Q1 ¼ first quartile. The explicit implication of this finding is that Indian PSBs on average have the potential to increase their traditional outputs (i.7831 24 0.8228 21 0.0000 1 0.0000 1 0. only four banks. with an average of 0.8707 Table II. and characterizing no .0000 1 0.9150 12 0.9261 8 0.9634 2 0.8850 18 0.8790 19 0.8349 0.7486 18 0.9040 14 1.0000 1 0.7967 12 Indian Bank 0.e.8633 20 1.0000 1 0.7799 16 Oriental Bank of Commerce 1. effectiveness.7261 19 Bank of Maharashtra 0.78 percent with the same level of inputs (i.0000 1 0.9242 3 Punjab National Bank 0.9040 4 63 Corporation Bank 0.7151 21 0.7311 20 0.7221 20 Allahabad Bank 0.9242 10 1.6360 26 Central Bank of India 0. and loanable funds) that is currently being utilized. physical capital.9879 2 0.7634 0.9634 Q1 0. have been found to be efficient with efficiency score of one.0000 1.8143 10 0.7362 19 0.8633 8 State Bank of Indore 0.9420 5 0.9495 0.8054 10 Punjab and Sind Bank 0. This indicates that only 15 percent PSBs in the sample are fully efficient.8722 6 Bank of India 0.7052 22 0.0000 1 0.8850 0.8516 8 0.0000 1 0.9495 4 1. advances and investments) by about 8.8707 7 Dena Bank 0. Andhra Bank.6531 24 United Bank of India 0.9340 4 0.9122 0. and Oriental Bank of Commerce.0624 0.8248 9 Bank of Baroda 0.9259 5 0.7981 11 Indian Overseas Bank 0.7871 13 Downloaded by University of Ghana At 17:07 27 June 2016 (PT) State Bank of Hyderabad 0.7850 Minimum 0.0000 1 0.7059 21 Vijaya Bank 0. Q3 ¼ third quartile and performance scores Source: Authors’ calculation for Indian PSBs efficiency scores range from 0.7362 17 State Bank of Patiala 1. banks are arranged in accordance Efficiency.7799 14 0.9218 0.9002 6 0.7052 0.7831 0.9583 3 0.6284 27 Descriptive statistics Average 0.9122.9634 0.0944 Median 0. namely. Performance Efficiency Effectiveness Performance Banks Score Ranks Score Ranks Score Ranks of Indian PSBs State Bank of Travancore 1. labour.8802 7 0.7059 Q3 0.0000 0.8894 17 0.7526 17 0.e.8100 12 0.7981 22 1.6369 25 Syndicate Bank 0.6734 22 State Bank of Saurashtra 0.7311 18 Canara Bank 0.9296 7 0.7812 SD 0.8579 0. The resource utilization process of these PSBs is functioning well.7831 to 1.8915 16 0.9591 3 0.8780 5 SBI 0.9634 1 State Bank of Mysore 0.7850 14 Union Bank of India 0.9495 2 State Bank of Bikaner and Jaipur 0.7811 13 0. State Bank of Travancore.9218 11 0. Notes: Performance score ¼ efficiency score £ effectiveness score.8995 15 0.7634 16 0.9247 9 0.9078 13 0.7803 15 Andhra Bank 1.1055 0.0000 1 0.7637 15 0.8133 11 0.6615 23 UCO Bank 0. of their ranking on performance score.6284 Maximum 1.9400 6 0. The perusal of the table further tells us that out of 27 PSBs.8349 9 0.7871 23 1. State Bank of Patiala.

effectiveness. It has been noted that estimated performance scores range from 0.9634. namely. Indian Bank.1 observed which ranges from 5.69 percent[5]. obtained the effectiveness score equal to one. does not exhibit best practices in efficiency and effectiveness facets simultaneously.e. Besides. with an average of 0.05 to 21. ability to generate incomes by using advances and investments). their ability to produce advances and investments using physical capital. all the six banks that attained effectiveness score equal to one in the Stage II can enhance their performance by increasing their efficiency (i. this. thus. Dena Bank.845 * 1 coefficients of efficiency.6284 to 0. Punjab and Sind Bank. with an average of 0. it has been noted that estimated effectiveness scores range from 0. the bank appearing best on efficiency front does not always stand best on effectiveness front. labour. For example.7052 to 1. some degree of ineffectiveness has been observed that ranges from 3. It is quite interesting to note that none of the PSBs has attained overall performance score equal to one and. The correlation Efficiency Effectiveness Performance Efficiency 1 Table III. Thus. Oriental Bank of Commerce ranks first on the efficiency front but ranks 19th on the effectiveness front. and Punjab National Bank. To draw a more accurate inference about the relationship between efficiency. State Bank of Mysore.216 1 Pearson’s correlation Performance 0.8579. In the remaining 85 percent of PSBs. In addition.36 to 29. This explicitly indicates that there is no apparent correlation between efficiency and effectiveness measures. and performance measures in Indian PSB industry. only 22 percent PSBs in the sample are fully effective in generating incomes. Effectiveness 2 0. The implication of this result is that these banks are effectively using advances and investments available at their disposal to generate net-interest and non-interest incomes. IJPPM input waste. Recall that the overall performance score for a bank can be obtained by multiplying Downloaded by University of Ghana At 17:07 27 June 2016 (PT) efficiency and effectiveness scores for that bank. In the remaining 78 percent of PSBs.7812. For example.2 percent by utilizing the same level of advances and investments. It is significant to note that PSBs would be able to improve their performance either by improving their efficiency or effectiveness or both. and vice-versa. effectiveness. The results indicate that in the sample of 27 PSBs under consideration. only 64 six banks.336 0. All the banks that do not define best-practice frontier in the either stage of performance evaluation model can improve their performance only by enhancing efficiency and effectiveness simultaneously. some degree of inefficiency has been 59.01 level (two-tailed) performance scores Source: Authors’ calculations . Indian PSBs can effectively increase their net-interest and non-interest incomes by about 14. all the four efficient banks that obtained efficiency score equal to one in the Stage I can improve their overall performance by increasing their effectiveness (i. This indicates that on an average.e. and Note: *Correlation coefficient is significant at the 0. out of 27 PSBs. and loanable funds). Further.48 percent[6]. we computed Pearson’s correlation coefficients among these measures (Table III). Table II also reports the overall performance scores for 27 PSBs along with their ranks that are obtained on the basis of these scores. State Bank of Bikaner and Jaipur.

a positive but weak. and performance measures for individual PSBs. Effect of size and group affiliation Besides analyzing the efficiency.1134 0. Thus.7831 0. effectiveness.0854 0. 13 banks have been observed as large banks and the remaining 14 banks have been included in the category of small banks.0000 0.7052 0.0472 0.0742 0. This implies that high efficiency does not stand of Indian PSBs for high effectiveness in the Indian PSB industry. we also made an attempt to explore the effect of size on these Downloaded by University of Ghana At 17:07 27 June 2016 (PT) measures. and performance measures differ significantly between large and small banks. and (2) small banks. For this. small banks have been found to be more effective than large banks in generating net-interest and non-interest incomes (0. effectiveness and performance scores for large and small PSBs. and statistically insignificant correlation has been noted between efficiency and performance measures.8816 0. analysis reveals that there is a negative and statistically insignificant correlation Performance between efficiency and effectiveness. Further.0000 1. Maximum 1.8143 0.7160 0.9131 0.8816 vs 0. Q3 0.9119 0.8845 0.9591 1.8325 0.9231 vs 0.9021 0.1126 Minimum 0.7926 SD 0.6369 Table IV.7151 0. effectiveness.7803 0.7939 vs 0.6284 0.7939 Median 0. Further.0000 0.7498 0. and Large banks Small banks Statistics Efficiency Effectiveness Performance Efficiency Effectiveness Performance n 13 13 13 14 14 14 Mean 0. (2007).0000 0.9634 Descriptive statistics of Q1 0.9502 0. we utilized the Mann-Whitney U-test as suggested by Cooper et al. The most significant finding relates with the correlation between effectiveness and performance measures.8325). in order to identify whether the efficiency. Further.7675 0.9231 0. The results further delineate that the overall performance of small banks is better than the large banks (0. Out of 27 PSBs. The results pertaining to efficiency score indicate that large banks are more efficient than small banks in producing advances and investments (0. The null hypotheses are that both large and small banks have same level of efficiency. effectiveness.8381 0.0000 1.9218 0.6704 efficiency. It has been noted that a positive and strong correlation exists between effectiveness and performance measures. effectiveness.8967 0.8228 0.9040 1. we bifurcated the entire sample of 27 PSBs into two categories: (1) large banks.9021). Table IV provides the summary statistics of efficiency.7731 0. The implication of this finding is that the PSBs can improve their performance by improvising their effectiveness in terms of income generation.8896 and performance scores: Source: Authors’ calculations large vs small banks .8470 0. Large banks are defined as those banks which have total assets greater than the median of total assets of the entire sample. the underperformance of large banks has been observed primarily due to their relative ineffectiveness in generating incomes.7675). 65 this correlation has been noted to be statistically significant. However.0939 0.

Effectiveness 66.0872 Minimum 0.8476 0.7634 0.9040 0.9224 0.9506 vs 0.1063 0.7569 Median 0.8054 and performance scores: SBI vs NB groups Source: Authors’ calculations .1084 0.0000 0.8824 vs 0.8790 0. 66 effectiveness and performance.9432 0. If p-value is less than equal to 0.7831 0. SBI group consists of eight banks including SBI itself (majority equity holding being Downloaded by University of Ghana At 17:07 27 June 2016 (PT) with the RBI) and its seven associate banks (majority holding being with SBI).65 0.8390 0. 59.7446 0.6284 Table VI.1063 0.9909 0.8476). effectiveness and performance scores for SBI and NB groups are reported in Table VI.9591 0. Thus. IJPPM performance. It has been clearly observed that all the three null hypotheses under consideration are not to be rejected when comparison between large and small banks is made on the basis of efficiency.e.8133 0.9040 Descriptive statistics of Q1 0. The results of Mann-Whitney U-test are shown in Table V.9458 0.1 then the underlined null hypotheses are rejected.16 0. we followed the prevailing categorization in the Indian banking industry and bifurcated 27 PSBs into two groups: (1) State Bank of India (SBI). Regarding effectiveness.6733 efficiency.8961 0.65 0.8633 0.0000 1.0000 0. Maximum 1.9970 0. (2) Nationalized banks (NB).0631 0. the large and small banks do not differ significantly in terms of efficiency.0000 1.2462 Do not reject H 0 Results of Mann-Whitney Performance 77 0.9634 1.6615 0.8485 0.9506 0. effectiveness. it has been noted that the banks affiliated with SBI group are more effective in generating net-interest and non-interest incomes than the banks belonging to NB group (0.5180 Do not reject H 0 Table V.7732 0.0431 0. effectiveness Q3 0. In order to study the effect of group affiliation on efficiency. while NB group includes 19 NB (majority equity holding is with the Government of India). The results pertaining to efficiency scores indicate that the banks in SBI group are more efficient in producing advances and investments than the NB (0.7311 0.9296 0.5 1.8961). The descriptive statistics of efficiency. and performance measures. U-statistics Z p-value Inference Efficiency 77 0. effectiveness and performance measures.8888 0. level of significance ¼ 5 percent).8824 0.5186 Do not reject H 0 U-test: large vs small banks Source: Authors’ calculations SBI group NB group Statistics Efficiency Effectiveness Performance Efficiency Effectiveness Performance n 8 8 8 19 19 19 Mean 0.7052 0.05 (i.7799 SD 0.

Table VII provides the results of Mann-Whitney U-test.8579). the null hypotheses are not to be rejected.e. For this. This resulted in efficiency-effectiveness matrix containing four distinct quadrants.9122 and 0. The null hypotheses are that both SBI and NB groups have the same population of the efficiency. it can be safely concluded that banks affiliated with SBI group are more efficient than the banks belonging to NB group. These quadrants are labeled as: (1) lucky. To test whether the differences of efficiency. The banks falling in this quadrant should be treated as prime candidates for a drive towards an efficiency improvement. The resource utilization process of these banks requires overhauling so as to minimize the waste of primary inputs. Performance 40 1. There is a likelihood that.8390 vs 0. Figure 4 shows the efficiency-effectiveness matrix for Indian PSB industry. It has been observed that we reject the 67 null hypothesis when the comparison between two groups is made on the basis of efficiency.5830 Do not reject H 0 Results of Mann-Whitney Source: Authors’ calculations U-test: SBI vs NB groups . A particular diamond in the figure represents the efficiency-effectiveness relationship for an individual bank. Downloaded by University of Ghana At 17:07 27 June 2016 (PT) Efficiency-effectiveness matrix In order to obtain the enhanced picture of bank’s performance. U-statistics Z p-value Inference Efficiency 38 2. from effectiveness and performance dimensions. effectiveness and performance scores of Indian PSBs between SBI and NB groups are statistically significant. DEA-based efficiency and effectiveness scores have been plotted. the relationship between efficiency and effectiveness at the level of individual banks has been explored. The results further indicate that the banks in SBI group outperform the banks Performance affiliated to NB group (0. the lucky banks would be able to earn more incomes than they had earned earlier. and performance scores. On the whole. This helps us to infer that banks belonging to these groups have similar level of effectiveness and performance.7569). we again applied Mann-Whitney U-test. It is worth mentioning here that these quadrants are mutually exclusive in nature and separated by the mean values of efficiency and effectiveness scores (i. and (4) unlucky.4791 Do not reject H 0 Table VII. 0. The Bank of India. effectiveness.747 0. Thus. (3) underdog. The north-west quadrant labeled as “lucky” contains those banks which have the value of efficiency score below the sample average and the value of effectiveness score above the sample average.021 0. both groups differ significantly in terms of efficiency.0445 Reject H 0 Effectiveness 62 0.912 0. The high effectiveness experienced by these banks is more likely to be a consequence of a highly favourable environment rather than better resource utilization. with the improvement in efficiency. However. (2) ace.

800 0. Banks 0. Oriental Bank of Commerce. On the whole.” Those banks are positioned in this quadrant that are below average in terms of both efficiency and effectiveness. . The reason for low effectiveness of these banks should be carefully studied to see whether some improvement in income earning capacity is possible through the adoption of a different product mix and business strategies. State Bank of Bikaner and Jaipur. Indian Bank.300 0.” The banks in this quadrant have both efficiency and effectiveness scores which are above the sample average. United Bank of India. Allahabad Bank.700 Effectiveness 68 0. and Union Bank of India are found to be the affiliates of this quadrant. These banks may probably be operating under favourable conditions.900 0. Thus.000 Ace 0.1 1. State Bank of Patiala.200 0. Canara Bank. IJPPM Lucky 59.600 0.900 1. these banks can be considered as distressed or weak banks and may be taken as the target banks in any potential merger scenario that may appear in Indian PSB industry. The south-west quadrant is labeled as “underdog.500 0. The basic characteristic of an unlucky bank is that it has a value of efficiency score above the sample average and effectiveness score below the sample average.600 0. The underdog banks lack vitality in terms of efficiency in the use of resources.700 0. The underdog quadrant includes State Bank of Saurashtra.000 industry Downloaded by University of Ghana At 17:07 27 June 2016 (PT) Efficiency Dena Bank. The north-east quadrant is labeled as “ace.400 0. Punjab National Bank. we identified 12 banks that are lying in the lucky and underdog quadrants. State Bank of Mysore. These banks are most suitable for others to benchmark and can become role models for the inefficient and ineffective banks.400 Unlucky 0. State Bank of Travancore. Out of 27 PSBs. six banks have been noted to be the ace banks. State Bank of Indore. Central Bank of India. Punjab and Sind Bank. UCO Bank.100 0.000 0. The resource utilization process of these banks is not functioning well and featuring the presence of considerable waste of resources. The banks in “ace” quadrant are the most efficient in terms of resource utilization and effective in terms of income generating capacity.200 Figure 4. Bank of Maharashtra. and Vijaya Bank. Syndicate Bank.300 0. Andhra Bank. and Indian Overseas Bank have been placed in this quadrant. The SBI. The State Bank of Hyderabad. The south-east quadrant is labeled as “unlucky” and contains those banks which are operating with high efficiency and low effectiveness that probably occurs due to an unfavourable environment.000 0.100 Efficiency-effectiveness matrix for Indian PSB 0.500 Underdog 0. The banks located in this quadrant are flagship units and present the examples of superior banking practices.800 0.

with an average of 0. Bank of Baroda. From the dimension of overall performance. Further. The results further delineate . with an average of 0. effectiveness. from the dimension of effectiveness. with an average of 0. In Stage I. respectively. The resource utilization process of these banks has been found to be functioning well. Indian PSBs can effectively augment their net-interest and non-interest incomes by about 14. This indicates that.8579. Further. Out of 27 PSBs. the large banks underperform due to their relative ineffectiveness in generating incomes. the efficiency scores have been computed using an output vector containing advances and investments and an input vector containing physical capital. Further. Further. the State Bank of Bikaner and Jaipur. none of the PSBs has attained overall performance score equal to one and. On the Performance efficiency front. and featuring no wastage of inputs. (1978) has been deployed for computing efficiency and effectiveness scores for individual PSBs in the Stage I and Stage II of performance evaluation model. The effectiveness score in the Stage II have been computed using an output vector including net-interest and non-interest incomes and an input vector including advances and investments. thus. This suggests that PSBs can improve their performance by concentrating more on their income generating capabilities. effectiveness scores for the PSBs range from 0. effectiveness. only 15 percent of banks have been observed to be fully efficient.78 percent with the same level of primary inputs. on an average.6284 to 0. the results indicate that high efficiency does not stand for high effectiveness in the Indian PSB industry. the output variables of Stage I have been treated as input variables in the Stage II.2 percent by utilizing the same level of advances and investments. The overall performance scores have been obtained by multiplying the efficiency and effectiveness scores. A two-stage performance evaluation model as proposed by Ho and Zhu (2004) has been followed. The Downloaded by University of Ghana At 17:07 27 June 2016 (PT) technique of DEA as developed by Charnes et al. and Corporation Bank occupied a place in this quadrant. only 22 percent of banks are found to be fully effective in generating incomes in the Stage II of performance evaluation model. 69 Conclusions The present study aims to evaluate the efficiency. However. Further. labour and loanable funds. The empirical results indicate that efficiency scores for the PSBs range from 0.7831 to 1.7052 to 1. and performance measures indicates that a positive and strong correlation exists between effectiveness and performance measures. The results pertaining to the effect of size on the performance and its components reveal that in comparison of small banks. The analysis of correlation between efficiency. it has been noted that the estimated performance scores for an individual banks range from 0. and performance of 27 Indian PSB using the cross-sectional data for the financial year 2006/2007. does not exhibit best practices both in efficiency and effectiveness dimensions.7812. The novel feature of performance evaluation model used is that it computes the overall performance measure as a product of efficiency and effectiveness measures. and State Bank of Mysore can be considered as ideal benchmarks for ineffective banks since both of these banks attained the effectiveness score equal to one and the efficiency score greater than the sample average.9634. the State Bank of Travancore turned out to be an ideal benchmark for of Indian PSBs the inefficient banks since it has efficiency score equal to one and the effectiveness score above the sample average. This implies that Indian PSBs on average have the potential to increase their traditional outputs such as advances and investments by about 8.9122.

(1998). and Chang and Chiu (2006) with 26 observations. Haag and Jaska (1995) with 14 observations. PSBs should pay more attention to their income generating capabilities (i. References Achabal. effectiveness) relative to their ability to produce traditional outputs such as Downloaded by University of Ghana At 17:07 27 June 2016 (PT) advances and investments (i. D.7. and State Bank of Mysore appeared as ideal benchmarks for ineffective banks. the distribution free approach. 22 percent of PSBs occupied a place in the “ace” quadrant. Vol.e. and the thick frontier approach as well as non-parametric methods like the DEA. there is a possibility to analyze the efficiency. In sum.2 percent during the financial year 1992/1993 to 73. the empirical findings suggest that in their drive to improve overall performance. and the free disposal hull. (1978) introduced the generic term “DMUs” to describe the collection of firms. “Issues and perspectives on retail productivity”.4 percent during the financial year 2006/2007. or divisions which have multiple incommensurate inputs and outputs and which are being assessed for efficiency.H. departments. (1984). The future work could extend our research in various directions not considered in this study.3. 6. advances. Inefficiency (percent) ¼ (1 2 efficiency score) £ 100. 107-27. These banks fall in the “underdog” and “lucky” quadrants and have potential to improve the overall performance by enhancing their efficiency. efficiency). J. The efficiency-effectiveness matrix reveals that the resource utilization process of 12 PSBs is not functioning well and. IJPPM that the banks affiliated with SBI group outperform NB in terms of operating 59. These techniques are generally grouped into parametric methods like the SFA. 2. A brief review of these techniques can be found in Bauer et al. featuring the presence of considerable wastage of the primary inputs. and total assets of Indian banking industry has declined from 87. 89. Heineke. 3. The State Bank of Travancore has been observed to be an ideal benchmark for the inefficient banks. we could examine the inter-temporal variations in performance and its components using longitudinal data for PSBs. Charnes et al. and McJntyre. Vassiloglou and Giokas (1990) with 20 observations. In their original paper. and 70. respectively. 5. . 72. the State Bank of Bikaner and Jaipur. pp. using the data across different ownership groups. (1990) with 20 observations. DMUs refer to the PSBs. Second. S. In the empirical literature.D. Giokas (1991) with 17 observations. 4.. Journal of Retailing. First. Also. Notes 1. 60 No. There are a number of frontier techniques that are used in academic research to measure banking efficiency.9. and 87. This is evident from the fact that the share of PSBs in deposits. effectiveness and performance of PSBs vis-à-vis their private counterparts.M.9. Avkiran (1999) with 16 observations. The parametric approaches are econometric methods while the non-parametric approaches are mathematical programming techniques. 70 Further. 3. These banks are flagship units in the Indian PSB industry in terms of both efficiency and effectiveness. Ineffectiveness (percent) ¼ (1 2 effectiveness score) £ 100. many examples appear in which DEA has been utilized on small sample.e.1 efficiency. Few such examples are Oral et al. In the present study.

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paper presented at The 2008 World Conference on National Accounts and Economic Performance Measures for Nations. (2008). R. Guru Nanak Dev University. Omega: International Journal of Management Science.T. 31-45. Sunil Kumar is the corresponding author and can be contacted at: sunil12eco@yahoo. Punjab. 1. Global Business Review. India. Journal of Productivity Analysis. M.T. (2007). since 1994. 41 No. she taught at BBK DAV College for Women. (2006). 145-65. Journal of Operational Research Society. Productivity and Factor Substitution: Theory and Analysis. five research scholars are working for PhD degrees under his guidance. D. He has also completed his MPhil and PhD degrees from Punjab School of Economics. A. 7. K.M. Washington DC.P. International Review of Economics. pp.L. He received a mark of distinction for his MSc (Hons) in Economics degree. 1005-17. International Review of Economics. M. Previously. (1990).com/reprints . 74 No. pp.. J. 59-77. 18 No. 54 No. Further reading Downloaded by University of Ghana At 17:07 27 June 2016 (PT) Chatterjee. and Pastor. To purchase reprints of this article please e-mail: reprints@emeraldinsight. “Performance and profitability of Indian banks in the post liberalization period”. Vol. 1. and The ICFAI Journal of Bank Management. “Cost efficiency and commercial bank lending: some empirical results”. Amritsar. Her research interests include the performance measurement using DEA and SFA and Indian banking sector. and Sinha. Vivas. Artha Vijnana: Indian Journal of Development Economics. 59. 591-7. Amritsar. S. Vol.com Rachita Gulati is currently a PhD Candidate at Punjab School of Economics. Punjab. He also wrote a research book entitled. pp. About the authors Sunil Kumar has been a Reader in Economics at Punjab School of Economics. “A study of the relative efficiency of bank branches: an application of data envelopment analysis”. 74 Yu. May 13-17. “Data envelopment analysis and commercial bank performance: a primer with applications to Missouri banks”. and Lin. J. 1. The Indian Journal of Economics. Productivity (Journal of National Productivity Council ). Vol. Ketkar. Pastor. Yue. “An efficiency comparison of European banking systems operating under different environmental conditions”. Amritsar. and Ketkar. She received MSc (Hons) in Economics degree with distinction and qualified for the prestigious National Eligibility Test for Lectureship and Junior Research Fellowship.emeraldinsight. pp. (2002). Louis Review. and Giokas. Punjab. At present. 36 No. He has credited more than two dozen research papers in various journals including International Journal of Productivity and Performance Management. Guru Nanak Dev University. Federal Reserve Bank of St. B. The Indian Economic Journal. His professional memberships include the Indian Society of Regional Science and Indian Economic Association. Prajnan: Journal of Social and Management Sciences.J. pp. Vol. 6.W. P. (1992).com Or visit our web site for further details: www.1 Vol.L. Her publications have appeared in International Journal of Productivity and Performance Management. E. India. India in the capacity of Lecturer in Economics. IJPPM Vassiloglou. “Efficiency and effectiveness in railway performance using a multi-activity network DEA model”.

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