Academic journal article South Asian Journal of Management

Performance of Indian Commercial Banks (1995-2002)

Academic journal article South Asian Journal of Management

Performance of Indian Commercial Banks (1995-2002)

Article excerpt

This article investigates the efficiency and productivity in a sample of Indian commercial banks over the period 1995-2002. We measure efficiency using the data envelopment analysis technique and productivity change using Malmquist productivity index. The results reveal that there has been no significant growth in productivity during the sample period. When analyzed separately, the public sector banks reveal a modest growth in productivity that appears to have been brought about by technological change. The private sector banks indicate no growth. In general, smaller banks are less efficient and highly efficient banks have a high equity to assets and high return to average equity ratios.


Examining banking performance has been a common practice among many banking and finance researchers for a number of years. The main reason for continued interest in this area of research is the ever-changing banking business environment throughout the world. With the introduction of financial deregulation in many parts of the world, the effect of such deregulation on bank efficiency has become an important issue. Financial deregulation was first introduced in the developed countries. Therefore, most studies on the effect of deregulation on bank productivity have been confined to the developed world. Non-availability of data is another reason for the dearth of literature on the impact of financial deregulation on the performance of the banking sector in developing countries. Many countries that adopted financial deregulation policies.: are now experiencing competitive banking practices. India is no exception and she is emerging a competitive and: important market not only for financial products but also for other products. Indian banking is a considerable component in Asian financial affairs and has not been subjected to substantial research, when compared to the countries in the developed world.

A few studies assessed Indian bank performance using the Data Envelopment Analysis (DEA) technique-a nonparametric methodology to evaluate the relative efficiency of production units and can accommodate multiple inputs and outputs. For example, Bhattacharyya, Lovell and Sahay (1997) examined the productive efficiency of Indian commercial banks during 1986-1991 and reported a marginal increase in overall average performance after 1987 and the average efficiency of publicly owned banks is much higher than in the privately owned or foreign owned banks. Sathya (2001) compared productive efficiency of publicly owned, privately owned and foreign owned banks operational in India in the year 1997/ 1998 and reported that private sector commercial banks as a group is paradoxically lower than that of public sector and foreign banks. These studies differ from each other in at least two ways: (i) the time period captured in the analysis; and (ii) the input-output variables used in the DEA model. see Sathya (2001) for a demonstration of the change in efficiency scores when inputs are changed. Shanmugam and Das (2004) on the other hand investigated the efficiency of Indian commercial banks during the reform period, 1992-1999, using a parametric methodology. They observed that the state and foreign banks are more efficient than their counterparts, namely, nationalized and privately-owned domestic banks. ,

Parametric methods are used to estimate the frontier with an explicit functional form given. These types of frontier estimation methods fall under Stochastic Frontier Estimation (SFE) methods. The SFE method largely depends on the industry under study as well as data availability. An advantage of using the SFE method is that it can handle stochastic noise. However, the requirement of a priori (explicit) specification of the production function and assumption of distributions for the error term without regard to the theory are considered as shortcomings in stochastic frontier methods.

As efficient banking systems contribute extensively for higher economic growth in any country, studies in this nature are very important for policy makers, industry leaders and many others who are reliant on the banking sector. …

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