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IJPPM
57,7 Evaluation of technical efficiency
and ranking of public sector
banks in India
540
An analysis from cross-sectional perspective
Received October 2007
Revised March 2008
Sunil Kumar and Rachita Gulati
Accepted March 2008 Punjab School of Economics, Guru Nanak Dev University, Amritsar, India
Abstract
Purpose – The purpose of this paper is to evaluate the extent of technical efficiency in 27 public
sector banks operating in India and to provide strict ranking to these banks.
Design/methodology/approach – Two popular data envelopment analysis (DEA) models, namely,
CCR model and Andersen and Petersen’s super-efficiency model, were utilized. The cross-section data
for the financial year 2004/2005 were used for obtaining technical efficiency scores.
Findings – The results show that only seven of the 27 banks are found to be efficient and thus,
defined the efficient frontier; and technical efficiency scores range from 0.632 to 1, with an average of
0.885. Thus, Indian public sector banks, on an average, waste the inputs to the tune of 11.5 percent.
Andhra Bank has been observed to be the most efficient bank followed closely by Corporation Bank.
Further, the banks affiliated with SBI group turned out to be more efficient than the nationalized
banks. The regression results incisively indicate that the exposure to off-balance sheet activities, staff
productivity, market share and size are the major determinants of the technical efficiency.
Practical implications – The practical implication of the research findings is that apart from the
proportional reduction of all inputs equivalent to the amount of technical inefficiency, most of the
inefficient public sector banks need to reduce the use of the physical capital and augment non-interest
income to project themselves on the efficient frontier.
Originality/value – This paper is the first to provide a strict ranking of Indian public sector banks
on the basis of super-efficiency scores.
Keywords Process efficiency, Banks, India, Public sector organizations, Performance measures
Paper type Research paper
Introduction
With the advent of banking reforms in 1992, Indian banks, especially public sector
banks (PSBs), have been gradually exposed to the rigorous domestic and international
competition. Owing to the entry of de nova domestic private and foreign banks, Indian
banking sector underwent drastic changes in terms of competitive landscape and
banking practices. The declining trends in Herfindahl’s Concentration Index, Top
5-banks Concentration Ratio and net-interest margin (i.e. interest spread) during the
post-reforms period bear testimony of the fact that over the years, competition in the
International Journal of Productivity Indian banking sector has increased substantially (Barman, 2007). Consequently, the
and Performance Management
Vol. 57 No. 7, 2008
pp. 540-568 The authors would like to thank the anonymous referees of the journal for providing extremely
q Emerald Group Publishing Limited
1741-0401
constructive comments to improve the contents and quality of the paper. Nevertheless, all
DOI 10.1108/17410400810904029 mistakes, errors or omissions remain the authors’ responsibility.
share of PSBs in total assets of Indian banking industry has constantly declined Public sector
(Mohan, 2005). In the existing competitive environment, the issue of the resource use banks in India
efficiency of Indian banks particularly of the PSBs has become critical because only the
efficient banks can withstand the forces of competition and achieve sustainable growth
along with maintaining their market share.
Against this backdrop, it seems pertinent to appraise the technical efficiency (TE) of
PSBs in the production process[1]. The present study is an attempt in this direction. 541
This study has been conducted with the purpose of evaluating technical efficiency and
ranking the PSBs using the cross-sectional data. This has been accomplished through
the execution of two most popular DEA models, namely, CCR model and Andersen and
Petersen’s super-efficiency model[2]. Using linear programming technique, DEA
enables one to derive a single measure of technical efficiency that encompasses all
incommensurable inputs and outputs. Besides this, DEA provides benchmarks and
targets for the performance improvement.
The choice of DEA in the present context is driven by its intrinsic advantages over
other techniques for measuring the relative efficiency of banks[3]. First, DEA is a
non-parametric frontier approach and does not require rigid assumptions regarding
production technology or efficiency distribution. Second, DEA is particularly amenable
for small sample studies (like ours) where banks tend to produce reasonably
comparable types of outputs. Third, as a non-parametric frontier technique, DEA
identifies the inefficiency in a particular bank by comparing it to similar banks
regarded as efficient, rather than trying to associate a bank’s performance with
statistical averages that may not be applicable to that bank (Avkiran, 2006). Fourth,
DEA is one of the most popular approaches to measure the relative efficiency of banks.
This is well reflected by the fact that of the 122 studies reviewed in the extensive
survey carried out by Berger and Humphrey (1997) on the efficiency of depository
financial institutions, 62 studies (i.e. over 50 percent) employed DEA to examine the
efficiency of banking sector.
Nevertheless, DEA also suffers from some limitations. First, the efficiency estimates
by this technique are believed to be sensitive to measurement errors or other noise in
the data (Sharma et al., 1999). Second, because of inherent dimensionality constraint,
the efficiency measures obtained from DEA may also be sensitive to alteration in
sample size as well as the number of input and output variables. While addressing the
limitations of DEA especially pertaining to the measurement error and statistical noise,
Yildirim (2002) pointed out that in a DEA analysis, it is necessary to check the
sensitivity of the results obtained to different definitions of inputs and outputs, and to
the elimination of outliers. In the present study, we paid adequate attention to address
aforementioned limitations of DEA. The appropriateness of selected input and output
variables in terms of discriminatory power of the model has been checked on the basis
of a sensitivity analysis. Further, for addressing the issue of measurement error, we
scrutinized the data for outliers and errors in data entry before running DEA. In
particular, we followed Avkiran (2006) to detect outliers in the sample on the basis of
super-efficiency scores in the pre-DEA run. A post-DEA sensitivity analysis, which is
popularly known as Jack-knifing, has also been carried out to analyze the stability of
the reference set. The stability of the reference set indicates the overall robustness of
the results and it is said to occur if the efficient units identified by a particular DEA
IJPPM run, get a place in the different reference sets that are observed by implementing the
57,7 same DEA model to different permutations on the sample.
The present study makes two notable contributions to the existing literature on
banking efficiency in India. To the best of our knowledge, none of the published studies
on the efficiency of Indian banking sector have carried out a sensitivity analysis to
check the appropriateness of selected input and output variables. As noted above, the
542 present study made an effort in this direction. Further, the literature on the efficiency of
Indian banking sector has focused either on the efficiency differences across different
groups defined on the basis of ownership or the analysis of the impact of banking
reforms on the efficiency of Indian banking sector or both. Also, these studies reported
only the efficiency scores and did not specify any non-zero input and output slacks for
the potential efficiency improvement at the level of individual banks. In the present
study, a slack analysis for inefficient banks has also been conducted to work out the
potential efficiency improvement in these banks. The strict ranking of banks and the
factors explaining the efficiency differences among banks are the other areas in the
empirical research on the efficiency of Indian banking industry where a scant attention
has been paid. Our study also focuses on these neglected research areas.
To sum up, the aim of this paper is three-fold:
(1) to obtain a measure of technical (in)efficiency for individual public sector banks;
(2) to rank the public sector banks on the basis of super-efficiency scores; and
(3) to explain the factors determining the technical efficiency of Indian public
sector banking industry.
The remainder of the paper is organized in the following ways. The next section briefly
discusses the structure of Indian banking industry. The following section reviews the
literature on the efficiency of Indian banking sector. The subsequent section describes
the DEA models used in the present study. The description of the data and the
specification of input and output variables are reported in the succeeding section. Also,
a sensitivity analysis to check the appropriateness of the chosen input and output
variables is presented in this section. The penultimate section presents the empirical
results. The final section outlines the most relevant conclusions along with the scope
for future research.
In India, PSBs have a country-wide network of branches and account for over 75
percent of total banking business. The contribution of PSBs in India’s economic and
social development is enormous and well documented. They have strong presence at
rural and semi-urban areas and employ a large number of staff. On the other hand, de
nova private sector banks are less labour-intensive, have limited number of branches,
have adopted modern technology, and are more profitable. Though foreign banks are
equipped with better technology, and risk management skills but they confine their
operations in major urban centres. The regional rural banks serve the needs for rural
credit and have a diminutive share (about 3 percent) in the commercial banking
industry of India. Table I provides summary details of different types of commercial
banks (excluding regional rural banks) as on the end March, 2005. It has been observed
that the market share of PSBs in terms of investments, advances, deposits and total
assets is over 70 percent. About 88 percent of branches of the commercial banks in
India belong to PSBs. Further, their share in the total employment provided by
commercial banking industry is about 87 percent. In brief, PSBs command a lion’s
share of Indian banking industry.
In the post-reforms years, the PSBs got fierce competition, particularly in urban
centres, from private banks especially from de nova domestic private banks that were
better equipped with banking technology and practices. Consequently, the market
share of PSBs in terms of investments, advances, deposits and total assets has declined
constantly since 1992/1993 (see Table II). It is evident from the table that the PSBs are
still dominating players in the Indian banking sector, albeit their market share has
dipped in the deregulatory regime. The growth of 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. During the last 15 years, 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),
Narasimham Committee II (1998), and Verma Committee (1999). The principle
objective of the reforms process was to improve the efficiency of PSBs in their
operations and to inculcate competitive spirit in them. Against this background, we
confined our analysis to public sector banks which constitute most significant segment
of Indian banking sector.
57,7
544
Table I.
IJPPM
March 2005)
banking in India (as on
Structure of commercial
Number Rupees in Crores
Bank group No. of banks Branches Staff Investments Advances Deposits Total assets
Source: Authors’ calculations from statistical tables relating to banks in India (2004/2005)
Public sector
Market share (%)
Year Deposits Investments Advances Total sssets banks in India
1992/1993 87.9 85.9 89.3 87.2
1993/1994 86.8 86.3 87.3 87.1
1994/1995 85.9 87.0 85.1 85.2
1995/1996 85.4 87.6 82.2 84.4 545
1996/1997 83.6 85.3 79.9 82.7
1997/1998 82.6 83.5 80.1 81.6
1998/1999 82.6 81.5 80.5 81.0
1999/2000 81.9 80.6 79.4 80.2
2000/2001 81.4 80.1 78.9 79.5
2001/2002 80.5 77.2 74.4 75.3
2002/2003 79.6 78.7 74.3 75.7
2003/2004 77.9 78.0 73.2 74.5 Table II.
2004/2005 78.2 79.1 74.3 75.4 Market share of public
sector banks: 1992/1993
Source: Authors’ calculations from statistical tables relating to banks in India (various issues) to 2004/2005
Methodology
Data envelopment analysis
The DEA is a linear (mathematical) programming based method first originated in the
literature by Charnes et al. (1978) as a reformulation of the Farrell’s (1957)
single-output, single-input radial measure of technical efficiency to the multiple-output,
multiple-input case. The subsequent technical development of DEA is extensive,
certainly to the point of precluding a survey in this instance. Interested parties are
directed to those provided by Seiford and Thrall (1990), Ali and Seiford (1993), Charnes
et al. (1994), Ray (2004) and Cooper et al. (2007). What follows is a general discussion of
DEA, with primary attention directed to model formulation. DEA calibrates the level of
technical efficiency (TE) on the basis of an estimated discrete piece-wise frontier (or so
called “efficient frontier or best-practice frontier or envelopment surface”) made up by a
set of Pareto-efficient decision making units (DMUs)[4]. In all instances, these
Pareto-efficient DMUs located on the efficient frontier, compared to the others, use
minimum productive resources given the outputs (input-conserving orientation), or
maximize the output given the inputs size (output-augmenting orientation) and are
called the best-practice performers or reference units or peer units within the sample of
DMUs. These Pareto-efficient DMUs have a benchmark efficiency score of unity that
no individual DMU’s score can surpass. In addition, it is not possible for the
Pareto-efficient unit to improve any input or output without worsening some other
input or output. It is significant to note that the efficient frontier provides a yardstick
against which to measure the relative efficiency of all other DMUs that do not lie on the
frontier. The DMUs which do not lie on the efficient frontier are deemed relatively
inefficient (i.e. Pareto non-optimal DMUs) and receives a TE score between 0 and 1.
The efficiency score of each DMU can be interpreted as the radial distance to the
efficient frontier. In short, the DEA forms a non-parametric surface frontier (more
formally a piecewise-linear convex isoquant) over the data points to determine the
efficiency of each DMU relative to this frontier.
A graphical conceptualization of the technique is represented in Figure 1. The
best-practice or efficient frontier is constructed from the most technically efficient
DMUs in the sample. Figure 1 illustrates a two-dimension efficient frontier in input
space (i.e. an isoquant Lð yÞ) in which all four DMUs (A, B, C and D) produce the same
IJPPM
57,7
548
Figure 1.
Measurement of technical
efficiency and input slack
amount of output y, but with varying amounts of inputs x1 and x2 . The efficient frontier
in input space is defined by DMUs C and D that require minimum inputs to produce the
same level of output. These units are labeled as efficient DMUs and have TE score
equal to 1. On the other hand, DMUs A and B are inefficient because both A and B
requires more of each input to produce the same amount of output. The measures of TE
for DMUs A and B are defined as TE A ¼ OA0 =OA and TE B ¼ OB0 =OB, respectively.
It is significant to note that both TE A and TE B are less than 1. Further, the inefficient
DMU B can move on to the efficient frontier (and in a way get the status of efficient
DMU in Farrell’s sense) by a radial (proportion) reduction in inputs by amount BB0 .
Similarly, the required radial (proportion) reduction in inputs for DMU A for getting
the status of efficient DMU in Farrell’s sense is AA0 . However, despite this radial
reduction in inputs by amount AA0 , the DMU A cannot labeled as a Pareto-efficient
DMU since a further reduction of input x2 is still possible by amount A0 C (an input
slack) with no reduction in output. Besides input-slack, we can also envisage
output-slack in a DEA analysis. The output-slack is defined as the output that is
under-produced (Avkiran, 1999a). For graphical conceptualization of the presence of
output slack, we need to consider an output-oriented framework with two outputs ( y1
and y2) and single input (x) so as to show how the one output can be expanded even
after proportional augmentation (i.e. radial increase) of the both the outputs for
reaching the efficient frontier (that can be shown by a production possibility curve).
Owing to the space considerations, the interested readers are referred to the works of
Coelli et al. (2005) and Jacobs et al. (2006).
Several different mathematical programming DEA models have been proposed in
the literature (see Charnes et al., 1994; and Cooper et al., 2007). Essentially, each of these
models seeks to establish which of n DMUs determine the envelopment surface. The
geometry of this surface is prescribed by the specific DEA model employed. In the
present study, we have utilized the CCR model to reduce the multiple-input,
multiple-output situation for each DMU (i.e. bank in our case) to a scalar measure of Public sector
technical efficiency. The results obtained using CCR model groups the DMUs into two banks in India
sets: efficient and inefficient. Since our interest lies in a comprehensive ranking beyond
this simple dichotomized classification, we have also utilized super-efficiency DEA
model proposed by Andersen and Petersen (1993).
!
X
m X
s
ði Þ k
min TE ¼ uk 2 1 s2
i þ sþ
r
uk ;l;s2
i
;sþ
r
i¼1 r¼1
subject to:
X
n
ðiiÞ lj yrj 2 sþ
r ¼ yrk r ¼ 1; 2; . . .; s
j¼1
X
n
ðiiiÞ lj xij þ s2
i ¼ uk xik i ¼ 1; 2; . . .; m ð1Þ
j¼1
þ
ðivÞ s2
i ; sr $ 0
ðvÞ lj $ 0 j ¼ 1; 2; . . .; n
The solution to model (1) is interpreted as the largest contraction in inputs of DMU
k that can be carried out, given that DMU k will stay within the reference
technology. The restrictions ii ) and iii ) form the convex reference technology. The
þ
restriction iv) restricts the input slack ( s2i ) and output slack (sr ) variables to be
non-negative. The restriction v) limits the intensity variables to be non-negative.
Parameter 1 is a non-Archimedean infinitesimal. Since the model measures the
efficiency of single DMU (i.e. DMU k), it needs to be solved n times to obtain
*
efficiency score of each DMU in the sample. The optimal value uk reflects the TE
*
score of DMU k. This efficiency score is within a range from zero to one,0 , uk # 1,
* 2* þ*
with a high score implying a higher efficiency. If uk ¼ 1 and si ¼ sr ¼ 0 then
DMU k is Pareto-efficient. For DMU k, we define the technical inefficiency score
* *
(TIE k ) as 1 2 uk . In fact, 1 2 uk gives the necessary reduction in all inputs of DMU
k to be rated as fully efficient. It is worth mentioning here that the model (1) is an
input-oriented model since the objective is to utilize minimum level of inputs with
the same level of production.
IJPPM Super-efficiency model
57,7 It is significant to note that all efficient DMUs have the same efficiency scores equal
to 1 in the CCR model. Therefore, it is impossible to rank or differentiate the
efficient DMUs with the CCR model. However, the ability to rank or differentiate the
efficient DMUs is of both theoretical and practical importance. Theoretically, the
inability to differentiate the efficient DMUs creates a spiked distribution at
550 efficiency scores of 1. This poses analytic difficulties to any post-DEA statistical
inference analysis. In practice, further discrimination across the efficient DMUs is
also desirable to identify ace performers. For getting strict ranking among efficient
DMUs, Andersen and Petersen (1993) proposed the super-efficiency DEA model.
The core idea of super-efficiency DEA model is to exclude the DMU under
evaluation from the reference set. This allows a DMU to be located on the efficient
frontier i.e. to be super-efficient. Therefore, the super-efficiency score for efficient
DMU can, in principle, take any value greater than or equal to 1. This procedure
makes the ranking of efficient DMUs possible (i.e. the higher the super-efficiency
score implies higher rank). However, the inefficient units which are not on the
efficient frontier, and with an initial DEA score of less than 1, would find their
relative efficiency score unaffected by their exclusion from the reference set of
DMUs.
In the super-efficiency DEA model, when the linear programme (LP) is run for
estimating the efficiency score of DMU k, the DMU k cannot form part of its reference
frontier and hence, if it was a fully-efficient unit in the original standard DEA model
(like CCR model in the present study) it may now have efficiency score greater than 1.
This LP is required to be run for each of the n DMUs in the sample, and in each of these
LPs, the reference set involves n-1 DMUs. In particular, Andersen and Petersen’s model
for estimating super-efficiency score for DMU k (denoted by TE k;super ) can be outlined
as below:
!
super
X
m Xs
k;super 2 þ
ði Þ supermin2 þTE ¼ uk 21 si þ sr
uk ;l;si ;sr
i¼1 r¼1
subject to:
X
n
ðiiÞ lj yrj 2 sþ
r ¼ yrk r ¼ 1; 2; . . .; s
j¼1
j–k
X
n
super
ðiiiÞ lj xij þ s2
i ¼ uk xik i ¼ 1; 2; . . .; m ð2Þ
j¼1
j–k
þ
ðivÞ s2
i ; sr $ 00
ðvÞ lj ð j – kÞ $ 0 j ¼ 1; 2; . . .; n
Besides providing the ranks to efficient DMUs, the results of super-efficiency DEA Public sector
model can be used in sensitivity testing, identification of outliers, and as a method of
circumventing the bounded range problem in a second stage regression method so that
banks in India
standard ordinary least squares regression method can be used instead of Tobit
regression (Coelli et al., 2005).
The number of full-time staff has been used as a measure of labour input. The input
variable physical capital represents the book value of premises and fixed assets net of
depreciation. The input variable loanable funds is obtained by adding both deposits
and borrowings. All the input and output variables except labour are measured in
Rupee lacs (note that 10 lacs ¼ 1 million).
Since DEA results are influenced by the size of the sample, some discussion
on the adequacy of sample size is warranted here. The size of the sample
utilized in the present study is consistent with the various rules of thumb
available in literature. Cooper et al. (2007) provides two such rules that can be
expressed as:
where:
Empirical results
In this section, the TE scores obtained from the input-oriented CCR model have been
provided and their contents are discussed. It is significant to note that input-oriented
efficiency measures address the question: “By how much can input quantities be
proportionally reduced without altering the output quantities produced?” Table IV
presents the TE scores of 27 PSBs, along with the magnitude of technical inefficiency
(TIE). The results indicate that Indian public sector banking industry has been
characterized with large asymmetry among banks as regards their TE scores that
ranges between 0.632 and 1. The average of TE scores turned out to be 0.885 for 27
57,7
554
IJPPM
Table III.
DEA model
Results of sensitivity
analysis on the baseline
Case A
Items (Baseline model) Case B Case C Case D Case E Case F Case G Case H
Panel A
Outputs
Advances U U U U U U
Investments U U U U U U
Interest Spread(Net-interest Income) U U U U
Non-interest Income U U U U U U
Inputs
Labour U U U U U U U U
Physical Capital U U U U U U U U
Loanable Funds U U U U U U U U
Number of Branches U U U U
Panel B
Estimated results
Correlation with Case A – 0.945* 0.376** 0.389** 0.241 0.254 0.644* 0.582*
Number of efficient banks 7 9 13 13 10 10 18 17
Mean efficiency score 0.885 0.898 0.971 0.972 0.969 0.970 0.987 0.987
Standard deviation 0.102 0.103 0.038 0.038 0.038 0.037 0.024 0.024
Minimum efficiency 0.632 0.649 0.866 0.866 0.866 0.866 0.890 0.890
Inference Preferred Rejected Rejected Rejected Rejected Rejected Rejected Rejected
Notes: * indicate that the correlation coefficient is statistically significant at 5% levels of significance; ** indicate that the correlation coefficient is
statistically significant at 1% levels of significance. The term “Rejected” connotes that the particular Case is rejected in favour of Case A on the basis of a
priori decision criteria (see text for decision criteria)
Source: Authors’ Calculations
Banks Technical efficiency scores Technical inefficiency (%) Super-efficiency scores Rank
super-efficiency scores
555
Table IV.
IJPPM PSBs (see Table V). This suggests that an average PSB, if producing its outputs on the
57,7 efficient frontier instead of at its current (virtual) location, would have needed only 88.5
percent of the inputs currently being used. In other words, the magnitude of TIE in
Indian public sector banking industry is to the tune of 11.5 percent. This suggests that,
by adopting best practice, PSBs can, on an average, reduce their inputs of physical
capital, labour and loanable funds by at least 11.5 percent and still produce the same
556 level of outputs. However, the potential reduction in inputs from adopting best
practices varies from bank to bank. Alternatively, PSBs have the scope of producing
1.13 times (i.e. 1/0.885) as much as outputs from the same level of inputs.
Of the 27 PSBs, 7 (i.e. 26 percent) banks were found to be technically efficient since
they had a relative TE score of 1. These banks together define the best-practice or
efficient frontier and, thus, form the reference set for inefficient banks. The production
process of these banks is functioning well and thus, characterizing no waste of inputs. In
DEA terminology, these banks are called peers and set an example of good operating
practices for inefficient banks to emulate. The remaining 20 (i.e. 74 percent) banks have
TE scores less than 1 which means that they are relatively technically inefficient. The
results, thus, indicate a presence of marked deviations of the banks from the best-practice
frontier. These inefficient banks can improve their efficiency by reducing inputs.
Further, TE scores among the inefficient banks range from 0.632 for Bank of India to
0.974 for Indian Overseas Bank. This finding implies that Bank of India and Indian
Overseas Bank can potentially reduce their current input levels by 36.8 percent and 2.6
percent, respectively while leaving their output levels unchanged. This interpretation of
efficiency scores can be extended for other inefficient banks also. On the whole, we
observed that TIE levels ranged from 2.6 percent to 36.8 percent among inefficient PSBs.
Statistics All banks Efficient banks Inefficient banks SBI Group NB Group
N 27 7 20 8 19
ATE 0.885 1.000 0.844 0.951 0.857
SD 0.102 0.000 0.088 0.062 0.104
Minimum 0.632 1.000 0.632 0.859 0.632
Q1 0.806 1.000 0.802 0.879 0.801
Median 0.889 1.000 0.859 0.980 0.859
Q3 1.000 1.000 0.911 1.000 0.945
Maximum 1.000 1.000 0.975 1.000 1.000
ATIE(%age) 11.5 0.0 15.6 4.9 14.3
Interval (0.783;0.987) (1.000;1.000) (0.756;0.932) (0.889;1.013) (0.753;0.961)
Table V.
Descriptive statistics of Notes: ATE ¼ Average technical efficiency; SD ¼ Standard deviation; Q1 ¼ First quartile;
technical efficiency scores Q 3 ¼ Third quartile; ATIE(%age) ¼ Average technical inefficiency ¼ (1-ATE) * 100; and
for Indian public sector Interval ¼ (ATE-SD; ATE þ SD)
banking industry Source: Authors’ calculations
compare the bank under evaluation with a linear combination of all other banks Public sector
excluding the one under reference in the sample. Under this approach, it is possible for an banks in India
efficient bank to increase its input vector proportionally while preserving efficiency. The
bank obtains, in that case, an efficiency score above 1. Thus, this approach provides an
efficiency rating of efficient banks similar to the rating of inefficient banks. Table IV also
provides the super-efficiency scores of PSBs and their ranks. At the ladder of efficiency
ranking, Andhra Bank emerges as numero uno bank which is followed in accordance of 557
their ranking by Corporation Bank, State Bank of Bikaner and Jaipur, State Bank of
Travancore, Punjab and Sind Bank, State Bank of Patiala, and State Bank of Mysore.
Canara Bank (23) Syndicate Bank (17) Central Bank of India Indian Overseas Bank
(13) (8)
Union Bank of India State Bank of Punjab National Bank State Bank of
(24) Hyderabad (18) (14) Saurashtra (9)
Bank of Maharashtra Indian Bank (19) Bank of Baroda(15) Oriental Bank of
(25) Commerce (10)
UCO Bank (26) United Bank of India State Bank of India (16) State Bank of Indore
(20) (11)
Bank of India (27) Allahabad Bank (21) Vijaya Bank (12)
Dena Bank (22)
Notes: The “Most inefficient” category includes those banks which have TE score below the first
quartile; Those banks are included in the “Below average” category whose TE score lies between first
and second quartile; The “Above average” category consists of the banks wherein TE score lies
between median and third quartile; The banks with TE scores above the third quartile are included in Table VI.
the “Marginally inefficient” category; Figures in brackets are ranks; Q1 ¼ 0.802, Median ¼ 0.859, and Classification of
Q3 ¼ 0.911 inefficient public sector
Source: Authors’ calculations banks
IJPPM inefficient and operate close to the efficient frontier. Further, these banks can attain the
57,7 status of efficient banks by bringing little improvements in the resource utilization
process. In fact, these banks are would-be champions. Therefore, the regulators must
pay special attention to enhance their efficiency.
Slack analysis
The optimum solution of linear programme (1) provides non-zero input and output
slacks corresponding to input and output constraints. As noted above, slacks exist only
for those DMUs that are identified as inefficient in a particular DEA run. These slacks
provide the vital information pertaining to the areas which an inefficient bank needs to
improve on in its drive towards attaining the status of efficient one. Coelli et al. (2005)
clearly pointed out that both the Farrell measure of TE and any non-zero input and
output slacks should be reported to provide an accurate indication of technical
efficiency of a firm in a DEA analysis. Thus, the slacks should be interpreted along
with the efficiency values. However, slacks represent only the leftover portions of
inefficiencies; after proportional reductions in inputs or outputs, if a DMU cannot reach
the efficient frontier (to its efficient target), slacks are needed to push the DMU to the
frontier (target) (Ozcan, 2008). The presence of non-zero slacks for a DMU implies that
the DMU under scrutiny can improve beyond the level implied by the estimate of
technical efficiency (Jacobs et al., 2006). In the input-oriented DEA model, the
input-slack represents the input excess and output slack indicates the output which is
under-produced (Avkiran, 1999a; and Ozcan, 2008).
Table VII provides the input and output slacks for 20 inefficient PSBs in India. For
interpreting the contents of the table, consider the case of a single bank, say, Oriental
Bank of Commerce. The TE score of Oriented Bank of Commerce is 0.945, implying
that the bank could become technically efficient (under the Farrell’s definition)
provided if all of its inputs are proportionally reduced by 5.5 percent (i.e. (1-TE score)
Public sector
Loanable Physical Non-interest Interest
Labour funds capital income spread banks in India
Bank TE score (Number) (Rs. Lac) (Rs. Lac) (Rs. Lac) (Rs. Lac)
Jack-knifing analysis
To investigate the robustness of the DEA results in terms of stability of reference set,
we followed Myrtveit and Stensrud (1999), Mostafa (2007a, b) and performed a
procedure known as Jack-knifing. For this, we dropped all the efficient banks one by
one and studied the impact of their removal on the average TE and composition of the
reference set. Since we have seven efficient banks in our original DEA analysis, we ran
seven additional DEA analyses. Table VIII presents the results of Jack-knifing
analysis. It has been noted that none of the efficient bank observed in the DEA analysis
is extreme because its removal did not bring any significant change in average TE of
Indian public sector banking industry. Further, the composition of reference set
Average of
technical Number of
efficiency efficient
Bank removed from the analysis scores banks New bank in the reference set
Expected
Predictor Symbol Description sign
results
Best subsets regression
banks in India
Public sector
Table X.
563
IJPPM coefficient of MS is significantly different from zero and has the expected sign. Thus,
PSBs with high market share in the industry’s deposits are more efficient than those
57,7 having smaller share. The coefficient of SIZE is negative and observed to be
significantly related to bank efficiency. This finding suggests that efficiency at larger
PSBs is lower than their peers and agrees with the results of Akhigbe and McNulty
(2003), Craigwell et al. (2003), Girardone et al. (2004) and supports the information
564 advantage hypothesis of Nakamura (1993) and Mester et al. (1998), which proposes that
there would be less agency problems between the bank and the loan officer since senior
management is closer. Another factor which significantly explains the technical
efficiency of Indian PSBs has been observed to be SP which captures the productivity
of staff. The results of preferred model indicate that the banks with high staff
productivity have high level of technical efficiency. The most influencing determinant
of banking efficiency turned out to be OFFBALANCE which was statistically highly
significant and its coefficients had sign in agreement with a priori expectation. Thus,
the PSBs with extensive exposures to off-balance sheet activities are more efficient.
The finding that OFFBALANCE is a significant factor in explaining technical
efficiency is not surprising since this determinant of efficiency is more related to the
ability of the banks to generate non-interest income. In the post-reforms period since
1992, the Indian banks are concentrating more and more on non-traditional activities
and the share of non-interest income from commission, exchange and brokerage, etc., in
total income is rising substantially. In the year 2005, this share was 16.62 percent
against 10.72 percent in the year 1992. The results, further, delineate that the positive
sign of the coefficient of PRIORITY is not logical and theoretically relevant. Also, its
coefficient turned out to be statistically insignificant. Accordingly, the proposition that
more advances to priority sector in relation to total advances leads to lower technical
efficiency does not appear to hold good in Indian public sector banking industry in the
current scenario. However, this may be a valid proposition in the pre-reforms years (i.e.
before 1992).
Conclusions and future research
The objective of this paper is to evaluate the extent of technical (in)efficiency in the
Indian public sector banking industry. Also, the strict ranking of the PSBs on the basis
of super-efficiency scores is sought. The TE scores for individual PSBs have been
obtained by using two popular DEA models namely, CCR model and Andersen and
Petersen’s super-efficiency model. The analysis is confined to a cross-section of 27
public sector banks operating in the year 2004/2005. The results show that TE scores
range from 0.632 to 1, with an average of 0.885. Thus, the overall level of technical
inefficiency in Indian public sector banking industry has been found to be around 11.5
percent. The banks affiliated with SBI group outperform the nationalized banks in
terms of operating efficiency.
The results of CCR model provide that seven banks with TE score equal to 1 define
the efficient frontier and the remaining 20 banks have TE score less than 1 and thus,
operate away from this frontier. On the basis of super-efficiency scores, Andhra Bank
emerges as numero uno bank which is followed closely by Corporation Bank. The
jack-knifing analysis provides that the efficiency results are quite robust because none
of the efficient bank has been observed to be extreme, and the composition of reference
set remained unaltered in the most of cases. The slack analysis provides that in
addition to the proportional reduction in all inputs by the amount of observed technical
inefficiency, most of the inefficient public sector banks need to reduce the use of the Public sector
physical capital and augment non-interest income to move on to the efficient frontier. banks in India
On the basis of the results of regression analysis, the study concludes that:
.
PSBs with high market share in the industry’s deposits are more efficient than
those having smaller share;
.
technical efficiency of large PSBs is lower than their small peers (i.e. size does not
matter in Indian public sector banking industry); 565
.
PSBs with high staff productivity have high level of technical efficiency; and
.
PSBs with extensive exposures to off-balance sheet activities are more efficient.
The future work could extend our research in various directions not considered in this
study. First, one could decompose the technical efficiency into its non-additive
mutually exclusive components:
.
pure technical efficiency; and
. scale efficiency.
Second, using the data over a longer period, one may perhaps analyze the
inter-temporal variations in technical efficiency of individual PSBs.
Notes
1. In the present study, the concept of technical efficiency refers to the ability of the banks to
transform multiple resources into multiple financial services.
2. CCR model is named after its originators Charnes et al. (1978).
3. Other popular techniques for measuring relative efficiency of banks are Stochastic Frontier
Analysis (SFA), Thick Frontier Analysis (TFA), Distribution Free Approach (DFA) and Free
Disposal Hull (FDH). Except FDH, the remaining techniques can be clubbed as the parametric
frontier approaches which require the specification of the functional form of the frontier.
4. In DEA, the organization under study is called a DMU (Decision Making Unit). The
definition of DMU is rather loose to allow flexibility in its use over a wide range of possible
applications. Generically, a DMU is regarded as the entity responsible for converting inputs
into outputs and whose performance are to be evaluated (Cooper et al., 2007). In the present
context, the DMUs refer to public sector banks.
5. In the present study, we have to test H 0 : mSBI ¼ mNB againstH A : mSBI . mNB where
mSBI andmNB refer to the mean efficiency of SBI and NB groups, respectively. The calculated
value of statistic T has been observed to be 2.277 which is greater than critical value of Z
(standard normal variate) equal to 1.645 at 5 percent level of significance for a right tailed
test. Thus, we reject H 0 and conclude that mean efficiency of SBI group is statistically
greater than the mean efficiency of NB group.
6. Here, the uni-directional relationship implies either strictly negative or positive relationship.
7. Ramanathan (2002) provided that as a rule of thumb, the value of R 2 in the range of 60
percent to 70 percent may be reasonable to indicate the adequacy of the model in a
cross-section data analysis.
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