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  • 标题:Loan quality, ownership and efficiency of Indian banks: a bootstrap truncated regression approach.
  • 作者:Sathye, Suneeta ; Sathye, Milind
  • 期刊名称:Indian Journal of Economics and Business
  • 印刷版ISSN:0972-5784
  • 出版年度:2015
  • 期号:August
  • 语种:English
  • 出版社:Indian Journal of Economics and Business
  • 关键词:Bank management;Data envelopment analysis;Foreign banks;Loans;Regression analysis

Loan quality, ownership and efficiency of Indian banks: a bootstrap truncated regression approach.


Sathye, Suneeta ; Sathye, Milind


Abstract

Many prior studies on Indian banking efficiency have typically regressed nonparametric estimates of production efficiency on environmental variables in a two-stage process. However, Simar and Wilson (2007, 2011) have demonstrated that the studies that use such conventional approaches are invalid due to complicated and unknown serial correlation among estimated efficiencies. Using the data envelopment analysis bootstrap procedure suggested by these authors, for the first time, we analyse the technical efficiency of Indian banks and regress the bootstrap scores on a set of environmental variables using a truncated regression. Banks that are on efficiency frontier as per conventional analysis are actually away from the frontier when bootstrap scores are used. Contrary to many prior studies, state ownership was found to have significant negative impact on efficiency.

Key words: Indian banks, efficiency, truncated regression, bootstrap

1. INTRODUCTION

The objectives of this study are (a) to assess the production efficiency of Indian banks using the bootstrap approach to data envelopment analysis and (b) to examine the impact of loan quality and ownership on bias-corrected bootstrap efficiency scores. It explores these issues by addressing five related questions:

(i) What is the production efficiency of Indian banks using the unbiased bootstrap approach?

(ii) What is the effect of state ownership on bank inefficiency?

(iii) What is the effect of bank soundness on bank efficiency?

(iv) What is the effect of size on bank efficiency?

(v) What is the effect of loan quality on bank efficiency?

The paper also considers whether there was a change in bootstrap efficiency scores of Indian banks during the three periods: pre-GFC, during the GFC and post GFC.

The immediate motivation for the paper is the passage in December 2012 of the Banking Liberalisation Bill in the Indian Parliament that raises the foreign investment limits in Indian banks to 26 per cent from the present 10 per cent and liberalizes the licensing regime for banks (FT 2012). The liberalization is intended to improve the efficiency of the banking system, which is tipped to become the third largest in the world, next only to China and the United States, by 2025 (FT 2012). Further, the extant studies on Indian banking efficiency have used the nonparametric data envelopment analysis and the two-stage regression approach without bootstrapping the efficiency scores. The Reserve Bank of India (2008), for example, found that 17 out of 81 banks were on the efficiency frontier using the data envelopment approach. However, the efficiency scores were not bootstrapped. Simar and Wilson (2007) have demonstrated that these studies are invalid due to complicated and unknown serial correlation among estimated efficiencies.

Further, Dyson and Shale (2010), state that the true efficient frontier lies within the confidence limits that are produced by bootstrap procedures. This removes the main drawback that statistical inference can't be conducted with DEA efficiency scores (Halkos and Tzeremes, 2010).

Using the data envelopment analysis bootstrap procedure suggested by these authors, for the first time, we analyze the technical efficiency of Indian banks and regress the bootstrap scores on a set of environmental variables using a truncated regression. Second, while the banking sector in many countries of the developed world faced enormous problems of financial stress and sustainability, the Indian banking sector came out of the global financial crisis (GFC) relatively unscathed. Barr et al. (2000) found that banks with higher efficiency are more likely to survive than those with relatively low scores. Consequently, an examination of the efficiency of Indian banks post-GFC becomes important. Podpiera and Cihak (2005) stated that regular screening of banking efficiency is important, as it can serve as an early warning system. Third, The Economist (2012) stated that the Indian banking system runs the "risk of Spanish disease" and that "India has a bigger bad-debt problem than the rather stable level of banks' official 'non-performing" loans suggests." The magnitude of the impact of such non-performing loans (loan quality) on banking efficiency is also an issue that we examine in this paper. Fourth, few studies on Indian banking efficiency have examined the impact of ownership and credit risk (loan quality) together on production efficiency in second-stage regression. Where they have, it is either multiple regression or tobit regression that has been used on non-bootstrapped efficiency scores instead of truncated regression as suggested by Simar and Wilson (2007). Finally, the results would be of interest to researchers in emerging economies like China, Brazil, Russia and other developing countries where banks continue to be publicly owned. Fry (1995) states that a key stylised fact about developing countries is financial intermediation is mostly carried by commercial banks rather than by financial markets. Ataullah and Le (2006) emphasize that it is vital for governments in developing countries to create an environment that enhances commercial banking efficiency for overall economic growth.

Furthermore, as stated by Simar and Wilson (2007), the procedure ensures the efficient estimation of the second stage estimators, a property which is not guaranteed with alternative methods. The use of truncated regression enables us to obtain more reliable evidence (Barros and Garcia-del-Barrio, 2011).

The study proceeds as follows. Section 2 provides a background of the Indian banking system in brief, section 3 reviews prior studies, section 4 provides data and analysis and section 5 provides results. Conclusions of the study are presented in section 6.

2. OVERVIEW OF THE INDIAN BANKING SYSTEM

India has a massive banking system that caters to the financial needs of over 1 billion people. At the top of the banking system is the Reserve Bank of India, which is the central bank of the country. Commercial banks are the major type of financial intermediary and consist of 26 public sector, 22 private sector and 41 foreign banks (see Table 1). Besides the commercial banks, cooperative banks, which are also state-partnered institutions, mainly cater to the needs of the rural sector. As per RBI (RTPB 2012, Table IV.1), total assets of the Indian banking sector are Rs 82,994 billion with total deposits of Rs 64,537 billion and total advances of Rs 50,746 billion (INR55/USD). The return on assets of 1.08 (2012) is comparable with that of other countries of the world. The figure for the net non-performing assets as a percentage of net advances at 1.4 does, however, indicate an area of concern, given the report in The Economist cited above that a huge amount of restructured loans are not included in the ratio.

3. PRIOR STUDIES

Studying banking efficiency is important. Fiordelisi et al. (2010) found that reduction in efficiency increases banks' future risks and indicated bad management. For measuring bank efficiency, the frontier analysis approach is increasingly being used. The approach consists of separating institutions that are performing poorly as compared to those that are performing well using a particular standard. The separation is achieved either by applying the non-parametric or parametric frontier method. The parametric approach includes stochastic frontier analysis, the free disposal hull, thick frontier and the distribution-free approaches (DFAs), while the non-parametric approach is data envelopment analysis (DEA) (Molyneux et al. 1996).

Though many empirical studies have examined banking efficiency over the years, few have used the bootstrap DEA procedures. Consequently, the results obtained through the use of conventional DEA would need to undergo renewed scrutiny. Matthews et al. (2009) examined the Malmquist productivity (not efficiency) and non-performing loans in Chinese banks using bootstrap procedures. Curi et al. (2013) examined foreign-bank bootstrap DEA efficiency in Luxemburg. Barros and Assaf (2011) and Halkos and Tzeremes (2013) examined bootstrap efficiency of Japanese and Greek banks respectively. Chortareas et al. (2013) used bootstrap DEA to examine banking efficiency in the European Union.

As can be seen from the above the bootstrap DEA efficiency studies in banking have largely been confined to developed countries. Examining banking efficiency using bootstrap is important in the context of developing countries since they generally have predominance of public sector banks which are typically known to be saddled with inefficiency (Fry, 1995; Ataullah and He, 2006). Governments in these countries need an efficient banking sector for promoting growth. The starting point of this is to accurately assess the banking efficiency in these countries. We address this gap in the literature using data of Indian banks.

Bhattacharya et al.'s paper (1997) was the first to apply frontier analysis (both DEA and stochastic frontier analysis) to assess the efficiency of 86 Indian banks during the early liberalization period (1986-1991). The study found publicly-owned banks to be most efficient, followed by foreign banks and privately-owned banks. Das (1997) used DEA to examine the efficiency of 65 Indian commercial banks for the year 1995 and compared their technical and allocative efficiency and found the former to be more efficient. Mukherjee et al. (2002) examined the technical efficiency of 68 commercial banks for the period 1996-1999. The findings were similar to those of the Bhattacharya et al. (1997) study that is, the publicly-owned banks were found to be more efficient than both private and foreign banks. Sathye (2003) examined the impact of ownership on Indian banking efficiency using DEA and found that publicly-owned banks were more efficient than foreign banks and privately-owned banks. Ram Mohan and Roy (2004) also found publicly-owned banks to be more efficient than privately-owned banks, but foreign banks had caught up with them over the years.

Das and Ghosh (2009: 193) examined the banking efficiency during 19922002, and found that 'medium-sized public sector banks performed reasonably well and are more likely to operate at higher levels of technical efficiency. A close relationship is observed between efficiency and soundness as determined by bank's capital adequacy ratio. The empirical results also show that technically more efficient banks are those that have, on an average, less nonperforming loans'. Ghosh (2009) studied the cost and profit efficiency of Indian banks during the period 1992-2004. The study found that big state-owned banks performed well in terms of efficiency, and a close relationship was found between efficiency and soundness as determined by a bank's capital adequacy ratio. Ray and Das (2010) examined the cost and profit efficiency of Indian commercial banks during a 7year period beginning 199697. The study found that publicly-owned banks were more profit efficient than were privately-owned banks. Gulati and Kumar (2008) found that when non-traditional activities were accounted for in the output specification, the foreign banks appeared to be more efficient than were public and private sector banks. Kaur and Kaur (2010) used DEA to examine the impact of mergers on the cost efficiency of Indian banks during the period 1990-91 to 2007-08. These authors found that the average cost efficiency of publicly-owned banks was lower than that of privately-owned banks. Dwivedi and Charyulu (2011) studied banking efficiency for the 5-year period 2005-2006 to 2009-2010 and found that new privately-owned banks and foreign banks were more efficient than were publicly-owned banks.

Our study makes several new contributions. None of the above studies have used bootstrap DEA scores. As already stated by Simar and Wilson (2007), conventional DEA approach, that is, without bootstrap can give misleading results. Thereafter we examine how ownership, size, soundness, loan quality variables impact on the bootstrap DEA efficiency scores and thus provide robust analysis of Indian banking efficiency as compared to prior studies. In particular, we examine the important issue of efficiency differences resulting from foreign vs domestic ownership as well as public vs private ownership and contribute to the literature discussing this theme. We examine whether, on average, these ownership types have positive or negative effects on bank efficiency. Furthermore, we analyse Indian banking efficiency in a period subsequent to what prior studies have analysed especially the post GFC years.

4. DATA AND METHOD

The data for the study were drawn from the Reserve Bank of India (RBI) publication A Profile of Banks available online and refer to the 5-year period 20072008 to 2011-12.

Table 1 presents the total number of banks in various categories, and, of these, the number included in our sample. The banks for which data as required for the study were not available were excluded from the sample.

DEA Efficiency Calculation

DEA is a linear programming technique initially developed by Charnes, Cooper and Rhodes (1978) to evaluate the efficiency of public sector non-profit organizations. It involves calculation of relative efficiency scores of decision-making units (DMUs) in the sample. The DMUs could be banks or branches of banks. A major advantage of DEA is the identification of peers with which the efficiency could be compared. For choosing the inputs and outputs to be used in DEA analysis, two major approaches, the production approach and the intermediation approach, are prevalent. The production approach involves use of physical inputs and outputs and relevant processes. The intermediation approach is commonly used and has some variants. The asset approach involves use of labour and capital as inputs and loans as output (Sealy and Lindley 1977). Under the user cost approach, the outputs are where the financial returns on an asset exceed the opportunity cost of the funds and the financial costs of a liability are less than the opportunity cost. If it is vice versa, it is treated as inputs (Hancock 1985). The value-added approach considers as outputs those assets or liabilities that contribute to bank value added that is, business associated with the consumption of real resources (Berger et al. 1987). According to Jemric and Vujcic (2002), yet another popular approach is the operating or income-based approach. In this approach, interest income and non-interest income are considered as outputs, and interest expenses and non-interest expenses are considered as inputs. The approach has been used in many prior studies for example, Leightner and Lovell (1998), Avkiran (1999), Sathye (2003) and Das and Ghosh (2006). In the present study, we use this approach.

Charnes et al. (1976) described the original DEA model as follows. There are N units producing J outputs, with I inputs. Efficiency is measured by maximising the ratio weighted outputs to weighted inputs for that unit under following constraints:

Max [e.sup.o] = [J.summation over (j=1)] [u.sup.o.sub.j] [y.sup.o.sub.j]/[I.summation over (i=1)] [v.sup.o.sub.i] [x.sup.o.sub.i] (1)

Subject to

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

[y.sup.n.sub.j], [y.sup.n.sub.j] represent the outputs and inputs of the nth unit called a decision making unit (DMU) and [v.sup.o.sub.i], [u.sup.o.sub.j] are the variable weights. These are determined by solving problem (1).

Given the difficulty in solving the above non-linear problem the objective function is transformed into a linear one as follows:

Max [h.sup.o] = [J.summation over (j=1)] [u.sup.o.sub.j] [y.sup.o.sub.j] (2)

Subject to

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].

The variables in (2) above are the same as in equation (1) above. Readers interested in knowing the details of the DEA procedure are advised to refer to the original paper by Charnes et al. (1976).

In the present study, we use the variable returns to scale (an input-oriented model) to compute technical efficiency. It shows the extent to which the output could be enhanced by each of the banks in the sample with the existing inputs.

The Bootstrap Approach

Simar and Wilson (1998, 1999, 2007) stated that the DEA scores calculated above have strong association with each other and using them in second-stage regression may be inappropriate. The scores are relative and not absolute, and as these are calculated and not estimated, it is difficult to obtain statistical properties of DEA. Consequently, these authors proposed a double bootstrap procedure that enables computation of confidence intervals and standard errors for the DEA scores. This computer-based method draws from the theory of re-sampling original data to assign statistical properties to it and also enables accounting for the impact of environmental variables on efficiency (Simar and Wilson 2007). These authors also did not consider the use of ordinary least squares to estimate the relationship between DEA scores and environmental variables as appropriate since regression assumption of no auto-correlation and absence of multi-collinearity get violated, and they suggested instead the use of truncated regression. The procedure for the bootstrap method has been described in detail by Simar and Wilson (2007) and is not repeated here. Descriptive statistics of inputs and outputs used in DEA are presented in Table 2.

Descriptive statistics of the bias-corrected scores for the years 2007-08 to 2011-12 are presented in the table below:

It will be seen from the above that outputs could be increased on average for all banks by approximately 12 per cent (2007-08), 16 per cent (2008-09), 19 per cent (2009-10), 13 per cent (2010-11) and 16 per cent (2011-12). As can be seen, the post-crisis average efficiency of banks has deteriorated. In 2007-08, there was scope to increase efficiency by 12 per cent, while in the year 2011-12, a 16 per cent increase in efficiency could be achieved with the given inputs.

Truncated Regression

The environmental variables that we use are drawn from relevant theory and prior empirical studies. We use the following model to assess the link between environmental variables and the bootstrap efficiency score.

[[theta].sub.i], = [[beta].sub.i] + [[beta].sub.1][ForOwn.sub.i] + [[beta].sub.1][Soundness.sub.i] + [[beta].sub.3][StateOwn.sub.i] + [[beta].sub.4][LoanQuality.sub.i] + [[beta].sub.5][Size.sub.i] + [[epsilon].sub.i],

When bootstrap procedure followed by truncated regression is used the issue of 'separability condition' becomes relevant. Simar and Wilson (2011:207) say that by separability they 'mean that the support of the output variables does not depend on the environmental variables in Z' where Z refers to environmental covariates. As the data generation process (DGP) used in our study corresponds to DGP 2 described by the above authors, separability is a reasonable assumption in this study.

For Own: Foreign versus domestic ownership is a binary variable. Foreign ownership equals 1, while domestic ownership equals zero. It is intended to detect the influence of foreign ownership on technical efficiency. The variable could have either negative or positive influence on efficiency. Studies such as that of Williams and Strum (2007) found foreign banks more efficient than domestic banks; however, in the Indian context barring Dwivedi and Charyulu (2011), other studies found domestic banks to be more efficient than foreign banks. Consequently, we do not postulate an a priori sign for this variable.

Soundness: The soundness of a bank depends upon the capital it holds vis-avis risk-weighted assets. We use the capital-to-risk-assets ratio (CRAR) as a measure of soundness. Many prior studies such as those of Das and Ghosh (2006) and Ghosh (2009) have used CRAR as a measure of soundness. Better capitalized banks are expected to be more efficient because of their ability to attract more business. Fiordilisi et al. (2010) stated that higher capital levels positively impact efficiency. Das and Ghosh (2006) stated that financial soundness reduces uncertainties and systematic risk and thus contribute to lowering inefficiency. Consequently, we expect a positive relationship a priori between soundness and technical efficiency.

State Own: State versus private ownership is a binary variable. State ownership equals 1 while non-state ownership equals zero. It is intended to detect the influence of state ownership on technical efficiency. Most prior studies in Indian banking have found that state-owned banks are more efficient than are other banking groups; however, recent study by Dwivedi and Charyulu (2011) already cited above, finds that the case is otherwise. Consequently, we do not postulate an a priori sign for this variable.

Loan Quality: Similar to prior studies (such as Das and Ghosh [2006] and Ghosh [2009]), we capture loan quality by the ratio of non-performing loans to net advances. Inadequate loan monitoring and bad debt control can lead to lesser interest income. Further, bad loans require higher supervision and monitoring, which increase operational expenses. The combined effect would be lower efficiency. This is consistent with the bad management hypothesis of Berger and DeYoung (1997). We expect that a priori this variable will have a negative sign as non-performing loans increase, efficiency will lower.

Size: As per public choice theory and principal agent framework, different types of ownership impact on efficiency differently. 'The theoretical argument is straightforward: a lack of capital market discipline weakens owners' control over management, enabling the latter to pursue their own interests, and giving fewer incentives to be efficient' (Das and Ghosh, 2006). Prior studies have used assets, deposits, advances, number of ATMs, number of employees, number of branch offices as measures of size. We use number of employees as a measure of size.

As stated by Keuleneer and Leszczynska (2011) 'Size is claimed by many to bring economies of scale and cost reductions almost per definition.' In the banking context, studies in the US indicate that economies of scale appear in small banks but not in the large banks (Short, 1979; Miller and Noulas, 1996). However, studies such as Sun and Chang (2011) have found that size impacts efficiency negatively. We postulate a negative sign for this variable a priori.

To run the truncated regression, data from a total of 293 banks were used, and the procedure suggested by Simar and Wilson (2007) was deployed to obtain the following results.

5. RESULTS AND DISCUSSION

Table 4 provides for the year 2012 (for other years, data are available on request from the authors) output-oriented DEA bootstrap scores and the raw scores. It indicates the extent to which output could be increased with the current input levels. The details of the variable returns to scale (VRS) technical efficiency scores of each of the 68 banks in the sample together with the bias-corrected efficiency scores, the extent of bias and the lower and upper confidence levels are presented.

Following Simar and Wilson (1999), we used 2,000 bootstrap replications (B=2,000). According to these authors, this should provide an adequate coverage of the confidence intervals.

It will be noticed that although 24 out of 68 banks are on the frontier with a score of 1 (when raw efficiency is computed), after the bias is corrected, even these banks have inefficiencies and their output could be increased. For example, in the case of first bank--AB bank--the efficiency could be improved by 9.84 per cent. The bias-corrected column shows that few banks are quite close to the frontier but are not exactly on the frontier, suggesting that there is scope to further increase output with the same inputs. The information could be useful to bank managements to take appropriate strategic actions.

Foreign ownership was found to have significant negative association with efficiency. Berger et al. (2009, 2010) in the context of Chinese banks found that foreign banks were most efficient. In the Indian context, Mohan and Ray (2004) and Das et al. (2005) found that foreign-owned and state-owned banks were not significantly different in efficiency. Our study, however, shows that foreign-owned banks had significantly lower efficiency. Thus, foreign banks in these two countries show divergent results with respect to efficiency. Berger et al. (2009) study, however, refers to the 1994-2003, that is, the pre-GFC period. Our finding is in line with that of Lensink et al. (2008), who found that foreign ownership negatively affects bank efficiency. However, in countries with good governance, this negative effect is less pronounced. Chen et al. (2013) state that efficiency flows through two channels, that is, the monitoring channel and the information channel reducing issues associated with agency problem and information asymmetry. However, corporate governance in Indian banks is wanting. A senior official of RBI recently stated 'sserious lapses observed in governance framework during the crisis, tilted the balance in favour of more rigorous regulation' (Sinha, 2013).

This could be because many foreign banks suffered badly during the GFC, and their income deteriorated also due to high bad debt provision. Many foreign banks curtailed operations due to problems in their home countries.

The soundness variable is not found to be significant. Earlier studies have found that well capitalized banks are more efficient. During the GFC, most banks were required to beef up capital given the rising bad debts; consequently, it appears that the normal salutary effect that increased capital may have on efficiency through increased business and increased income is not seen. The additional capital was to provide a buffer against bad debts rather than for expanding business because of the unusual circumstances through which the banks were passing.

The state ownership variable shows a negative significant result. This is particularly interesting. Many prior studies of Indian banks have found the relationship to be positive for medium-sized state-owned banks (Kumbhakar and Sarkar 2005; Das and Ghosh 2006; Chatterjee 2006). However, our results are consistent with recent studies such as those by Kaur and Kaur (2010) and Dwivedi and Charyulu (2011), who found that state-owned banks were less efficient than were non-state-owned banks. Lensink et al. (2008:841) also found that 'state-owned banks are, in general, less efficient than non-state owned banks'. It appears that after the GFC, the foreign and private sector banks have considerably improved their efficiency vis-a-vis the state-owned banks. Further, given the archaic labour laws in India, it may be hard for state-owned banks to take drastic measures such as curtailing staff, which could be possible for private sector and foreign banks.

The loan quality variable, which measures credit risk, has significant negative association with technical efficiency. Higher credit risk (non-performing loans) implies lower interest income and higher operational expenses in loan collections and monitoring. The result is consistent with prior work of Berger and Mester (1997), who found that poor management of credit portfolio, has an unfavorable impact on efficiency. Ghosh (2009) also found similar results for Indian banks.

Size has a significant negative influence on efficiency. As the number of employees increases, the operational costs, which include salary and wages, would increase, and unless it is compensated by increased income through increased business, the efficiency would be negatively impacted. The result is similar to those of prior studies such as Sun and Chang (2011), Ghosh (2009) and Das and Ghosh (2006). These studies found that large banks are less efficient than are small banks.

Next we examine if there was significant difference in bootstrap banking efficiency in the pre -GFC years, during GFC years and between GFC years and post GFC years. The impact of GFC (using a decline in GDP as the criteria to define GFC years) on the GDP was felt by India in the years 2008-09 and 2009-2010. The GDP growth rate which showed a rising trend prior to these years showed a sharp decline and stagnancy in these years. Thereafter, the GDP rose significantly in 2010-11 (over 10 per cent from 7 per cent in earlier years) but again sharply declined in 2011-12 to the GFC years' level.

We use Kruskal-Wallis test to assess whether there was significant difference in banking efficiency in the above periods. The computation returned chi square value of 4.889 (with 1 d.f.) and probability of 0.027. This demonstrates that the GFC years did affect banking efficiency. While comparing GFC years with the post-GFC years, an interesting result can be found. When we compare the efficiency scores GFC years with 2010-11 (GDP rose significantly exceeding 10 per cent), we get the chi square value of 5.378 (with 1 d.f.) and a probability of 0.020 indicating that post GFC year there was significant difference in efficiency. However, if we use the year 2011-12 data as well, then the results are not significant. This was because in 2011-12, India's GDP sharply declined to GFC years' level. Overall, when we compare pre-GFC year with post-GFC years, no significant difference in banking efficiency was noticed.

As indicated by Podpiera and Cihak (2005), regular screening of banking efficiency is important as it can serve as early warning system. Indian banking efficiency does show signs of stress in the post GFC years. It appears that the Government of India too is concerned about the inefficiencies that plague the Indian banking system and has taken policy measures like the recent Banking Reforms Bill 2012, which raises limit on foreign capital to 26 per cent from 10 per cent. Hopefully, these measures would help improve Indian banking efficiency over the years. Berger et al. (2009) observation in the context of Chinese banking could be equally applicable to Indian situation. 'The "real" reward of such reforms may be continued economic growth because an open and flexible banking environment not only provides more credit, but a better allocation of credit, funding more positive net present value projects that contribute to economic growth'.

5. CONCLUSION

In the current study, we provide a bootstrap efficiency analysis of Indian banks for the 5-year period from 2007-08 to 2011-12 using Simar and Wilson's (2007) method. Such an analysis is being done for a developing country for the first time, to our knowledge. These authors have already demonstrated that DEA analysis using conventional methods (non-bootstrap) may not provide reliable results. In the current paper, we not only rectify the situation in the Indian banking context but also provide results from truncated regression, which has not been employed in prior studies on Indian banking. Consequently, our study provides more appropriate analysis of Indian banking efficiency than found in studies hitherto.

Interestingly, contrary to prior studies, we find that state ownership has a negative impact on efficiency in the Indian context. Similarly, foreign ownership also was found to have negative influence on efficiency. The bad management hypothesis finds support, as the loan quality variable was found to have significant negative impact on efficiency.

The bootstrap scores suggest that there is room for expanding output with current input levels by banks. It is hoped that the study would provide an impetus for similar studies that use bootstrap efficiency analysis and second-stage truncated regression so as to draw valid conclusions.

Besides the above conceptual contributions, the study is expected to help bank managements in further improving efficiency by suitable strategic actions such as reducing inputs or making better use of inputs and to policy makers to continue with banking reforms agenda. Regulatory authorities in developing countries may also like to consider conducting similar studies of banks in their respective countries so that efficiency is accurately measured so as to draw valid conclusions for policy actions.

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SUNEETA SATHYE AND MILIND SATHYE *

* Faculty of Business, Government and Law, University of Canberra, ACT 2601 (Australia)

** Professor of Banking and Finance, Faculty of Business, Government and Law, University of Canberra, ACT 2601 (Australia), E-Milind.Sathye@canberra.edu.au
Table 1
Distribution of banks in India and banks in the sample

                        2007-08    2008-09    2009-10

Foreign banks
  total                    28         31         32
  in the sample             9         14         17
Private sector banks
  total                    23         22         22
  in the sample            19         19         19
Public sector banks
  total                    28         27         27
  in the sample            26         26         26
Total                      79         80         81
in the sample              54         59         62

                        2010-11    2011-12    Total

Foreign banks
  total                    34         40
  in the sample            14         14
Private sector banks
  total                    21         20
  in the sample            19         19
Public sector banks
  total                    26         26
  in the sample            26         26
Total                      81         86       407
in the sample              59         59       293

Table 2
Descriptive statistics of input and outputs used for DEA

Year 1 Variable           Obs.       Mean      Std. Dev.

2007-08
Interest expenses          54      36785.56     54625.04
Non-interest expenses      54      13313.89     20515.99
Interest income            54      54028.81     79550.46
Non- Interest income       54      10247.56     16724.3

2008-09
Interest expenses          59      43938.03     66450.71
Non-interest expenses      59      15080.78     23701.45
Interest income            59      64497.95     96153.47
Non- Interest income       59       12699       20665.51

2009-10
Interest expenses          62      43255.61     68959.56
Non-interest expenses      62      15827.39     27866.65
Interest income            62      65902.77     102390.4
Non- Interest income       62      12537.65     22054.29

2010-11
Interest expenses          59      50393.9      73581.3
Non-interest expenses      59      20619.08     32746.39
Interest income            59      82555.22     120504.3
Non- Interest income       59      13183.97     23115.34

2011-12
Interest expenses          59      110027       158398.5
Non-interest expenses      59      14207.14     22714.62
Interest income            59      72571.31     98984.41
Non- Interest income       59      22960.72     37077.77

Year 1 Variable             Min        Max

2007-08
Interest expenses            4        319291
Non-interest expenses       27        126086
Interest income             45        489503
Non- Interest income        36        88108

2008-09
Interest expenses            6        429153
Non-interest expenses       34        156487
Interest income             14        637884
Non- Interest income        46        126908

2009-10
Interest expenses            4        473225
Non-interest expenses       40        203187
Interest income             11        709939
Non- Interest income       1010       149682

2010-11
Interest expenses            7        488680
Non-interest expenses       43        230154
Interest income             12        813944
Non- Interest income        35        158246

2011-12
Interest expenses         23.298     1065215
Non-interest expenses     995.57     143514.5
Interest income            8.479     632303.7
Non- Interest income      49.522     260689.9

Table 3
Descriptive statistics of bias-corrected efficiency scores

Year       Banks      Mean      Std. Dev.      Min       Max

2007-08       54    1.124906     0.097194    1.0212     1.523
2008-09       59    1.158169     0.109709    1.0286    1.5036
2009-10       62    1.193563       0.2211    1.0178    2.1587
2010-11       59    1.125178     0.095275    1.0194    1.4239
2011-12       59    1.159812     0.150925    1.0346    1.8622

Table 4
Bootstrap efficiency scores of banks in the sample
for the year 2011-12

S. No.    Bank                         Tech. eff.        Bias
                                             VRS    corrected

1         AB bank                              1       1.0984
2         Abu Dhabi                       1.4213        1.459
3         American                             1        1.101
4         Antwerp                         1.4903       1.5698
5         Bank of America                      1       1.0572
6         Bank of Bahrain and Kuwait       1.348        1.393
7         Bank of Ceylon                       1       1.0874
8         BNP Paribas                     1.6843       1.7566
9         Citibank                             1       1.0853
10        Credit Agricole                      1       1.0946
11        Credit Suisse                        1       1.0995
12        DBS Bank                        1.2615       1.3044
13        Deutsche                             1       1.0969
14        JPMorgan                             1         1.09
15        Krung Thai                           1       1.0943
16        Mizuho                               1       1.1001
17        Oman                                 1       1.0928
18        Shinhan                         1.0323       1.0627
19        Societe Generale                1.4571       1.4976
20        Sonali                               1       1.1025
21        Standard Chartered                   1       1.0968
22        State Bank of Mauritius         1.0866       1.1358
23        Bank of Nova Scotia                  1       1.0995
24        Bank of Tokyo                   1.0562       1.1086
25        HSBC                                 1       1.0758
26        Royal Bank of Scotland          1.1808       1.2325
27        City Union                      1.1911        1.227
28        ING Vyasya                      1.3272       1.3612
29        TMB                             1.2209       1.2605
30        Federal                         1.0513       1.0635
31        Jammu Kashmir                    1.008        1.019
32        Karnataka                       1.2324       1.2542
33        Karur                           1.1419       1.1641
34        Lakshmi Vilas                   1.3519       1.3903
35        Nainital                        1.4008       1.4515
36        Ratnakar                        1.7611       1.8344
37        South Indian                    1.1435       1.1589
38        HDFC                                 1         1.06
39        ICICI                                1        1.099
40        IndusInd                        1.2055       1.2431
41        Kotak Mahindra                  1.1774       1.2104
42        Yes Bank                        1.0538       1.0913
43        Allahabad                       1.0233       1.0393
44        Andhra                               1       1.0127
45        Bank of Baroda                       1        1.041
46        Bank of India                   1.0424       1.0833
47        Bank of Maharashtra             1.1258       1.1424
48        Canara Bank                          1       1.0539
49        CBI                             1.1286       1.1513
50        Corporation Bank                1.0161       1.0576
51        Dena Bank                       1.0666        1.077
52        Indian Bank                     1.0111       1.0278
53        Indian Overseas Bank            1.0769       1.0975
54        Oriental                        1.0216       1.0454
55        PSB                             1.1643       1.1764
56        PNB                                  1       1.0438
57        Syndicate                       1.0452       1.0616
58        UCO                             1.0097       1.0344
59        Union                           1.0514       1.0774
60        United                          1.0655       1.0769
61        Vijaya                          1.0786        1.099
62        SBI                                  1       1.0959
63        SBBJ                            1.1048       1.1195
64        SB Hyderabad                    1.0248       1.0391
65        SB Mysore                       1.1615       1.1787
66        SB Patiala                      1.0634       1.0765
67        SB Travancore                   1.1297       1.1419
68        IDBI                                 1       1.0897

S. No.       BIAS         SD      lower      upper

1         -0.0984     0.0096     1.0022     1.3816
2         -0.0377     0.0005     1.4254     1.5132
3          -0.101     0.0101     1.0033     1.3926
4         -0.0795     0.0028      1.494     1.6963
5         -0.0572     0.0011     1.0022     1.1272
6          -0.045     0.0008     1.3513     1.4637
7         -0.0874     0.0057     1.0025     1.2627
8         -0.0723     0.0023     1.6887     1.8726
9         -0.0853     0.0047     1.0024     1.2274
10        -0.0946      0.007     1.0026     1.2813
11        -0.0995     0.0095     1.0027     1.3737
12        -0.0429     0.0011      1.265     1.3879
13        -0.0969      0.009     1.0019     1.3395
14          -0.09     0.0059     1.0028     1.2505
15        -0.0943     0.0079     1.0022     1.3048
16        -0.1001     0.0097     1.0033      1.385
17        -0.0928     0.0073     1.0025      1.289
18        -0.0304     0.0003     1.0353      1.104
19        -0.0405     0.0006     1.4606     1.5613
20        -0.1025     0.0104     1.0024     1.3914
21        -0.0968     0.0094     1.0024     1.3569
22        -0.0492     0.0011     1.0897     1.2244
23        -0.0995     0.0092     1.0027     1.3562
24        -0.0524     0.0016     1.0595     1.2083
25        -0.0758     0.0035     1.0026     1.2229
26        -0.0517     0.0012     1.1845     1.3196
27        -0.0359     0.0003     1.1939     1.2712
28         -0.034     0.0003     1.3303     1.4009
29        -0.0396     0.0004     1.2241     1.3046
30        -0.0122     3.7903     1.0535     1.0775
31         -0.011     3.4933     1.0095     1.0322
32        -0.0218     0.0001      1.235     1.2808
33        -0.0222     0.0001     1.1448     1.1905
34        -0.0384     0.0004     1.3549     1.4388
35        -0.0507     0.0009     1.4051     1.5232
36        -0.0733     0.0018     1.7658     1.9283
37        -0.0154     7.9498     1.1455     1.1792
38          -0.06      0.002      1.003      1.177
39         -0.099     0.0093     1.0035     1.3598
40        -0.0376     0.0003     1.2087     1.2856
41         -0.033     0.0003     1.1803     1.2458
42        -0.0375     0.0007     1.0558     1.1663
43         -0.016      9.055     1.0253     1.0618
44        -0.0127      4.451     1.0019     1.0282
45         -0.041     0.0005     1.0028     1.0916
46        -0.0409     0.0005     1.0453     1.1369
47        -0.0166     7.6105      1.128     1.1616
48        -0.0539     0.0017     1.0027     1.1621
49        -0.0227     0.0001     1.1305     1.1822
50        -0.0415     0.0012     1.0187      1.156
51        -0.0104     3.4057     1.0681       1.09
52        -0.0167     8.3148     1.0134     1.0483
53        -0.0206     0.0001     1.0796     1.1244
54        -0.0238     0.0002     1.0242     1.0849
55        -0.0121     4.6666     1.1663     1.1924
56        -0.0438     0.0009     1.0027     1.1244
57        -0.0164     0.0001     1.0469     1.0869
58        -0.0247     0.0003     1.0122     1.0801
59         -0.026     0.0002     1.0531     1.1129
60        -0.0114      3.542     1.0678     1.0909
61        -0.0204     0.0001      1.081     1.1352
62        -0.0959     0.0095     1.0022     1.3924
63        -0.0147     5.8062     1.1074      1.137
64        -0.0143     4.9514     1.0275     1.0554
65        -0.0172     7.1753     1.1644     1.1968
66        -0.0131     4.7428     1.0658     1.0925
67        -0.0122     3.9716      1.132      1.156
68        -0.0897     0.0071     1.0028     1.2974

Table 5
Truncated regression results

Variable                  Co-eff     Std Error    p-value

Foreign-owned=1          -0.06093        0.024       0.01
Soundness                -1.7E-05        0.001       0.99
State-owned=1            -0.09497        0.019       0.00
Loan Quality              -0.0148        0.006       0.02
Size (staff numbers)    -5.93E-07     3.06E-07       0.05
Constant                 1.201007        0.023       0.00

Log likelihood: 168.47 (Prob > chi square = 0.000)

No. of observations=293, LL=0, Wald chi2(5) = 42.66


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