The relative efficiency of Indian commercial banks in post reforms era: DEA approach.
Srivastava, Aman ; Gupta, Rakesh
[ILLUSTRATION OMITTED]
Introduction
Banks are the important component of any financial system. They
play important role of channelizing the savings of surplus sectors to
deficit sectors. The efficiency and competitiveness of banking system
defines the strength of any economy. Indian economy is not an exception
to this and banking system in India also plays a vital role in the
process of economic growth and development. The Indian banking system
has been regulated for most of its subsistence. The key regulatory
features were interest rate regulation, credit restrictions, equity
market controls and foreign exchange controls. Although some
restrictions are still in operation, regulations, which are affecting
banks, are being relaxed after implementing the Narasimhan Committee
Report (1991). The second phase of deregulation has been finished after
the review report by the same Narasimhan Committee. The 1985 report of
the committee to review the working of the Indian monetary system and
the 1987 report by Vaghul that examined the Indian money market
activities are among the significant reports, which contributed to the
current deregulation and reform process in India. It is important to
understand that none of the deregulatory actions implemented were strong
enough to diminish the significant role played by the principally
inefficient public sector banks. While there are some improvements
within the sector, largely inefficiency remained the same (Verma Report,
1999). One of the hesitant blocks towards full deregulation may be the
public sector banks which are not ready for full scale competition. One
major reason why the Indian public sector banks are able to survive even
while making losses is the strict regulations imposed on general
economic activities of the country. Consequently the deregulation of
private sector institutions are growing rapidly yet, major commercial
banks and specialized institutions still remain within the public
sector. The public sector banks account for approximately 70-80 percent
of the total assets of the banking and financial institutions sector
during last five years, while the private sector banks and foreign banks
each account for only eight to ten percent of the total assets. Table 1
shows the group wise total deposit position of commercial banks in
India.
Since long Indian financial was dominated by public sector
commercial banks and even today these banks are the most preferred
destination of investment for depositors in India. Even today public
sector banks account for more than 70 percent of total advances and
their advance deposit ratio has gone up significantly over last five
years. Table III and IV shows the group wise total advances and advance
deposit ration of Indian commercial banks during last five years.
Banking sector is the major sector that contributes substantially
to the finance of national economy, efficiency of commercial banks is
one of the most interesting and important issues for both the government
and private sector. After the series of banking sector reforms in last
decade the Indian commercial banks has pass through certain developments
and challenges. At the one hand the efficiency and outlook of banks has
improved due to technological development and customer orientation but
at the same time increasing level of NPA's became s serious
concerns for banks. Table IV shows group wise NPA ratio of Indian
commercial banks over last five years.
This paper is an attempt to analyze the comparative efficiency and
competitiveness of Indian commercial banks. This study differs from
other studies in at least two ways: (i) the time period captured in the
analysis and (ii) the input-output variables used in the DEA model.
Besides introduction (Section 1) Section 2 discusses the brief review of
literature. Section 3 discusses the methodology of the study and details
out variables and the data used in the study; the results are discussed
in Section 4 explains results; and Section 5 concludes the study.
2. Review of Literature
The efficiency of banking sector is one of the important economic
agenda for economists all over the world. The evidence for this is that
there are numerous attempts to examine the efficiency of commercial
banks by a number of economists, both Indian and foreign economists. In
India, the main impulsion for this study was the appointment of the
(second) Narsimham Committee (1997) by the Government of India, with a
mandate to propose a programme of banking sector reforms so as to
strengthen the Indian banking system and make it globally
competitive'. This clearly requires that the relative efficiency of
Indian banks is examined and requires policy measures to enhance the
efficiency and competitiveness of Indian commercial banks.
While many similar studies have evaluated the performance of
banking sector in the US and other developed countries, very few studies
have evaluated the performance of banking sectors in developing
economies. Earlier though, Tyagarajan (1975), Rangarajan and Mampilly
(1972) and Subramanyam (1993) have analyzed the issues relating to the
performance of Indian banks, none of these studies have examined the
efficiency of bank service provision in India. A number of recent
studies did measure the efficiency in service provision of Indian banks
but they suffer from certain limitations as indicated in this paper.
Bhattacharyya, Lovell and Sahay (1997) analyzed the productive
efficiency of Indian commercial banks during 1986-1991 and found 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 Bhattacharya et al. (1997),
Chatterjee (1997) and Saha et al. (2000) have also analyzed the issues
relating to the performance of Indian banks. Sathya (2001) compared
productive efficiency of publicly owned, privately owned and foreign
owned banks operational in India in the year 1997/1998 and found that
private sector commercial banks as a group is paradoxically lower than
that of public sector and foreign banks. Shanmugam and Das (2004) on the
other hand analyzed the efficiency of Indian commercial banks during the
reform period, 1992-1999 using a parametric methodology. They found that
the foreign banks are more efficient than their counterparts namely,
public sector and privately owned domestic banks.
This study differs from other studies in at least two ways: (i) the
time period captured in the analysis and (ii) the input-output variables
used in the DEA model.
3. Research Methodology
The study uses the popular non parametric technique Data
Envelopment Analysis (DEA) to examine the relative efficiency of
commercial banks in India for the period 2004-2008 (separately for each
year). This study aims to examine the relative efficiency of each
commercial bank in India during the period 2004-2008. The reason that
the period 2004-2008 is chosen for this study is that the Indian banking
reforms were started after 1991 and the sampled period is good enough to
analyze the impact of reforms on Indian banking sector. In this study,
DEA model will be employed under two different approaches in evaluating
the relative efficiency of commercial banks in India.
3.1 Data Envelopment Analysis
It is usual to examine the performance of banks using financial
ratios. Yeh (1996) notes that the major limitation of this approach is
its reliance on benchmark ratios. These benchmarks could be random and
may mislead an analyst. Further, Sherman and Gold (1985) note that
financial ratios don't capture the long-term performance, and
aggregate many aspects of performance such as operations, marketing and
financing. In recent years, there is a trend towards measuring bank
performance using one of the Data Envelopment Analysis (DEA) methods.
Data Envelopment Analysis (DEA), frequently called frontier analysis, is
a performance measurement technique which can be used for analyzing the
relative efficiency of productive units, having the same multiple inputs
and multiple outputs. It is a non-parametric analytic technique which
allows us to compare the relative efficiency of decision making units
(DMU's) as benchmark and by measuring the inefficiencies in input
combinations in other units relative to the benchmark. DEA was
originally developed by Charnes, Cooper and Rhodes (1978) with the
assumption of constant return to scale (CRS) in attempt to propose a
model that generalizes the single-input, single output measure of a DMU
to a multiple inputs, multiple outputs setting. Thus DMU is an entity
that uses input to produce output. DEA was extended by Banker, Charnes
and Cooper (1984) to include variable return to scale (VRS). Up to now
the DEA measure has been used to evaluate and compare educational
departments, health care, agricultural production, banking, armed
forces, sports, market research, transportation and many other
applications. DEA is a deterministic methodology for examining the
relative efficiency, based on the data of selected inputs and outputs of
a number of entities called decision-making units (DMUs). From the set
of available data, DEA identifies relative efficient DMUs (which are
used as reference points) which define the efficiency frontier and
evaluate the inefficient of other DMUs which lie below that frontier.
DEA is an alternative analytic technique to regression analysis.
Regression analysis approach is characterized as a central tendency
approach and it evaluates DMUs relative to an average. In contrast, DEA
is an extreme point method and compares each DMU with the only best DMU.
The main advantage of DEA is that, unlike regression analysis, it does
not require an assumption of a functional form relating inputs to
outputs. Instead, it constructs the best production function solely on
the basis of observed data; hence statistical tests for significance of
the parameters are not necessary. Despite the existence of several DEA
models, this study utilizes CCR-Model which is an output-oriented model
where DMU's deemed to produce the highest possible amount of output
with the given amount of input.
3.1. 1. Intermediation Approach
This approach reflects the way of evaluating the efficiency of
commercial bank from the perspective of costs / revenues management. For
this approach, 2 inputs and 2 outputs are chosen for each commercial
bank.
Input 1 (1 x) = Labor-related expenses (gross wages) in Indian
rupee
Input 2 (2 x) = Total Deposits in Indian rupee
Output 1 (1 y) = Total Loans and Advances
Output 2 (2 y) = Non-interest incomes in Indian rupee
3.1.2 Operation Approach
This approach reflects the way of evaluating the efficiency of
commercial bank which takes commercial banks as entities which use labor
and capital to transform deposits into loans and securities. For this
approach, 2 inputs and 2 outputs are chosen for each commercial bank.
Input 1 (1 x) = Total Interest Expenses Indian rupee
Input 2 (2 x) = Total Non-Interest Expenses Indian rupee
Output 1 (1 y) = Total Interest Income Indian rupee
Output 2 (2 y) = Non-Interest Income Indian rupee
All data for the study will be taken from the end-of-year balance
sheets and income statements of each commercial bank available at the
data base of Reserve Bank of India (RBI) and Indian Banking Association
(IBA). The study includes 54 commercial banks for the year 2004-2008.
IDBI bank and Yes bank data was not available for 2004 so in that year
only 54 banks were considered for analysis. Although there were total 78
commercial banks are operating in India. But out of that there were
total 27 were foreign banks. Out of 27 foreign banks only three are
operating at full capacity in the sampled period. These banks are
Citibank, ABN AMRO and HSBC. So for doing analysis only these foreign
banks were considered.
4. Empirical Results
The summary result for the analysis via intermediation approach is
presented in Table V. According to Table V, the average efficiency of
Indian commercial banks during 2004-2008 ranges from 0.6056 to 1.000
which is considered to be very high and volatile.
In 2004, the average efficiency is 0.6923 and efficiency scores
varies from .5856 to 1. Only two commercial banks which were Citibank
and ABN AMRO Bank were considered to be efficient with the efficiency
scores of 1.0000, implying that they had produced their output on the
efficiency frontier in this year. Other Banks had to raise its output by
10 percent to 40 percent with the same amount of input so that they are
considered to be efficient. The last quarter of least efficient banks in
2004 were Indian Overseas Bank (0.64), State Bank of Saurashtra (0.64),
State Bank of India (0.64), Allahabad Bank (0.64), Syndicate Bank
(0.64), Ratnakar Bank (0.64),Bank of Maharashtra (0.63), Indian Bank
(0.63), Punjab and Sind Bank (0.62), Bank of Rajasthan (0.62), Central
Bank of India (0.62), United Bank of India (0.61) and Nainital Bank
(0.59), with the efficiency score ranging 0.59 to 0.64, indicating that
it had to increase its output by 41 percent to 36 percent with the same
amount of input to be able to operate on the efficiency frontier.
In 2005, the average efficiency has gone down marginally from .6923
in 2004 to .6541. Only three commercial banks which were IDBI Ltd.,
Development Citibank and Yes Bank were considered to be efficient with
the efficiency scores of 1.0000, implying that they had produced their
output on the efficiency frontier in this year. Other Banks had to raise
its output by 14 percent to 44 percent with the same amount of input so
that they are considered to be efficient. The last quarter of least
efficient banks in 2005 were Punjab and Sind Bank (0.60), City Union
Bank (0.60), Syndicate Bank (0.60), Bank of Maharashtra (0.59), Central
Bank of India (0.59), Lakshmi Vilas Bank (0.59), UCO Bank (0.59), Jammu
and Kashmir Bank (0.59), Catholic Syrian Bank (0.58), State Bank of
Saurashtra (0.58), Dhanalakshmi Bank (0.58), Nainital Bank (0.57) and
Ratnakar Bank (0.56) with the efficiency score ranging 0.56 to 0.60,
indicating that it had to increase its output by 40 percent to 44
percent with the same amount of input to be able to operate on the
efficiency frontier. In 2006, the average efficiency has gone marginally
up from .6541 in 2004 to 0.6575. Again same three commercial banks which
were IDBI Ltd., Citibank and Yes Bank were considered to be efficient
with the efficiency scores of 1.0000, implying that they had produced
their output on the efficiency frontier in this year. Other Banks had to
raise its output by 15 percent to 41 percent with the same amount of
input so that they are considered to be efficient. The last quarter of
least efficient banks in 2006 were Allahabad Bank (0.61), Tamilnad
Mercantile Bank (0.61), Punjab National Bank (0.60), Dhanalakshmi Bank
(0.60), Bank of Maharashtra (0.60), State Bank of Saurashtra (0.60),
United Bank of India (0.60), Catholic Syrian Bank (0.60), Indian Bank
(0.59), Central Bank of India (0.59), Ratnakar Bank (0.59), Punjab and
Sind Bank (0.59), Nainital Bank (0.59) and Bank of Rajasthan (0.58) with
the efficiency score ranging 0.58 to 0.61, indicating that it had to
increase its output by 20 percent to 23 percent with the same amount of
input to be able to operate on the efficiency frontier.
In 2007, the average efficiency of Indian commercial banks via
intermediation approach has significantly gone up from .6575 in 2006 to
0.7161. Once again the same three commercial banks which were considered
to be efficient. IDBI Ltd., Citibank and Yes bank whose efficiency
scores were 1.0000, indicating that they had operated on the efficiency
frontier. The last quarter of least efficient banks in 2007 were Vijaya
Bank (0.68),South Indian Bank (0.67),Punjab National Bank (0.67), Indian
Bank (0.67), State Bank of Saurashtra (0.67), Bank of Maharashtra
(0.67), Central Bank of India (0.65), Punjab and Sind Bank (0.65), Bank
of Rajasthan (0.64), United Bank of India (0.64), Dhanalakshmi Bank
(0.64), Catholic Syrian Bank (0.64), Ratnakar Bank (0.63) and Nainital
Bank (0.63) with the efficiency score ranging 0.63 to 0.68, indicating
that it had to increase its output by 32 percent to 37 percent with the
same amount of input to be able to operate on the efficiency frontier.
In 2008, the average efficiency of Indian commercial banks via
intermediation approach was up from .7161 in 2007 to .7458. There were
four commercial banks which were considered to be efficient. They were
IDBI Ltd., Citibank, Yes bank and Standard Charted Bank whose efficiency
scores were 1.0000, indicating that they had operated on the efficiency
frontier. The last quarter of least efficient banks in 2008 were City
Union Bank (0.71), Jammu and Kashmir Bank (0.71), Dena Bank (0.71), HDFC
Bank (0.70), Indian Bank (0.70), Karnataka Bank (0.70), Lakshmi Vilas
Bank (0.70), Central Bank of India (0.70), United Bank of India (0.68),
Catholic Syrian Bank (0.67), Dhanalakshmi Bank (0.67), Bank of Rajasthan
(0.67), Nainital Bank (0.66), and Ratnakar Bank (0.65) with the
efficiency score ranging 0.65 to 0.71, indicating that it had to
increase its output by 8 percent to 11 percent with the same amount of
input to be able to operate on the efficiency frontier.
After considering individual bank via intermediation approach
during 2004-2008, the results indicate that IDBI bank, Citibank and Yes
bank were efficient in every year. Moreover, IDBI Bank and Yes Bank were
efficient in the year of their emergences (2005). Although standard
charted bank was efficient only in recent year 2008, its average
efficiency scores during 2004-2008 are very high (0.8631). Indian Bank
(0.70), Catholic Syrian Bank (0.67), Dhanalakshmi Bank (0.67), Nainital
Bank (0.66), and Ratnakar Bank (0.65) were relatively inefficient and
had produced their outputs under the efficiency frontier in every year,
with their average efficiency scores during 2004-2008 ranging from 0.61
to 0.64. Eventually, Ratnaker bank, Nanital bank, Dhanlakshmi bank
Catholic Syrian bank and Indian bank were repeatedly the least efficient
bank during 2004-2008 due to its average efficiency score between 0.61
to 0.64.
The summary result for the analysis via operation approach is
presented in Table VI. According to Table VI, the average efficiency of
Indian commercial banks during 2004-2008 ranges from 0.8725 to 1.000
which is considered to be very high and stable.
In 2004, the average efficiency is 0.9058. Eight commercial banks
which are Punjab and Sind Bank, Development Credit Bank, ICICI Bank, ING
Vysya Bank, Karur Vysya Bank, Ratnakar Bank, Tamilnad Mercantile Bank
and ABN Amro Bank are considered to be efficient with the efficiency
scores of 1.0000, implying that they had produced their output on the
efficiency frontier in this year. Other Banks had to raise its output by
3 percent to 21 percent with the same amount of input so that they are
considered to be efficient. The last quarter of least efficient banks in
2004 were State Bank of Bikaner and Jaipur (0.86), Andhra Bank (0.86),
Vijaya Bank (0.86), State Bank of Mysore (0.86), Citibank (0.86), State
Bank of Saurashtra (0.85), State Bank of India (0.85), SBI Comm. and
Intl. Bank (0.83), Hong Kong and Shanghai Banking Corpn. (0.83), State
Bank of Indore (0.83) , State Bank of Patiala (0.83) , Standard
Chartered Bank (0.79), with the efficiency score ranging 0.79 to 0.86,
indicating that it had to increase its output by 14 percent to 21
percent with the same amount of input to be able to operate on the
efficiency frontier.
In 2005, the average efficiency has gone down from .9058 in 2004 to
0.8539. Only five commercial banks which were IDBI Ltd., Development
Credit Bank, Dhanalakshmi Bank, Jammu and Kashmir Bank and Yes Bank were
considered to be efficient with the efficiency scores of 1.0000,
implying that they had produced their output on the efficiency frontier
in this year. Other Banks had to raise its output by 2 percent to 23
percent with the same amount of input so that they are considered to be
efficient. The last quarter of least efficient banks in 2005 were State
Bank of Travancore (0.80), Standard Chartered Bank (0.80), Bank of
Baroda (0.80), Citibank (0.80), Indian Overseas Bank (0.79), State Bank
of Bikaner and Jaipur (0.79), Andhra Bank (0.79), Corporation Bank
(0.77) and Hong Kong and Shanghai Banking Corpn.(0.77), with the
efficiency score ranging 0.77 to 0.80, indicating that it had to
increase its output by 20 percent to 23 percent with the same amount of
input to be able to operate on the efficiency frontier.
In 2006, the average efficiency was marginally down from .8539 in
2005 to 0.8382. Only five commercial banks which were Bank of
Maharashtra, IDBI Ltd, Bank of Rajasthan, Development Credit Bank, ABN
Amro Bank and Lakshmi Vilas Bank were considered to be efficient with
the efficiency scores of 1.0000, implying that they had produced their
output on the efficiency frontier in this year. Other Banks had to raise
its output by 5 percent to 27 percent with the same amount of input so
that they are considered to be efficient. The last quarter of least
efficient banks in 2006 were State Bank of Travancore(0.78), Canara Bank
(0.78), State Bank of Patiala (0.78), Yes Bank (0.78), City Union Bank
(0.78), HDFC Bank (0.78), Federal Bank (0.77), Corporation Bank (0.77),
Karur Vysya Bank (0.77), Standard Chartered Bank (0.76), Tamilnadu
Mercantile Bank (0.76) with the efficiency score ranging 0.73 to 0.78,
indicating that it had to increase its output by 22 percent to 27
percent with the same amount of input to be able to operate on the
efficiency frontier.
In 2007, the average efficiency of Indian commercial banks via
operation approach has significantly gone up from .8382 in 2006 to
0.9479. There were nine commercial banks which were considered to be
efficient. They were IDBI Ltd., ICICI Bank, Jammu and Kashmir Bank,
Karnataka Bank, Nainital Bank, Tamilnad Mercantile Bank, Hong Kong and
Shanghai Banking Corpn., Standard Chartered Bank and Federal Bank whose
efficiency scores were 1.0000, indicating that they had operated on the
efficiency frontier. The last quarter of least efficient banks in 2007
were State Bank of Saurashtra (0.92), State Bank of Bikaner and
Jaipur(0.92), State Bank of India (0.92), State Bank of Mysore (0.91),
SBI Comm. and Intl. Bank (0.91), IndusInd Bank (0.91), Bank of Rajasthan
(0.91), Catholic Syrian Bank (0.89), Dhanalakshmi Bank (0.88), Kotak
Mahindra Bank (0.87), Ratnakar Bank (0.87), ING Vysya Bank (0.8 6),
Development Credit Bank (0.83) with the efficiency score ranging 0.89 to
0.92, indicating that it had to increase its output by 8 percent to 11
percent with the same amount of input to be able to operate on the
efficiency frontier.
In 2008, the average efficiency of Indian commercial banks via
operation approach was marginally down from .9479 in 2007 to .9456.
There were eight commercial banks which were considered to be efficient.
They were IDBI Ltd., Federal Bank, Jammu and Kashmir Bank, Nainital
Bank, SBI Comm. and Intl. Bank, Citibank, Union Bank of India and City
Union Bank whose efficiency scores were 1.0000, indicating that they had
operated on the efficiency frontier. The last quarter of least efficient
banks in 2008 were Bank of Maharashtra (0.92), Lakshmi Vilas Bank
(0.92), Central Bank of India (0.92), Axis Bank (0.92),Indus Ind Bank
(0.91),ABN Amro Bank (0.90), Bank of Rajasthan (0.90), United Bank of
India (0.90), Kotak Mahindra Bank (0.90), State Bank of Saurashtra
(0.89), Catholic Syrian Bank (0.88), Dhanalakshmi Bank (0.87), ING Vysya
Bank (0.86), Development Credit Bank (0.85) with the efficiency score
ranging 0.89 to 0.92, indicating that it had to increase its output by 8
percent to 11 percent with the same amount of input to be able to
operate on the efficiency frontier.
After considering individual bank via operation approach during
2004-2008, the study results indicate that except IDBI bank there was no
commercial bank which is considered to be efficient in every year. Jammu
and Kashmir Bank was efficient in three out of five year period. There
were no inefficient bank repeatedly in every year, eventually, State
bank of Saurashtra and to some extent Catholic Syrian bank were the
relatively least efficient bank during 2004-2008 due to its average
efficiency score between 0.86 to 0.89.
According to the summary results in Table V and Table VI, it is
noticeable that Indian commercial banks are more efficient in Operation
Approach than in intermediation approach. This result could reasonably
yield the conclusion that during 2004-2008 the performance of Indian
commercial banks in costs / revenues management is better than the
performance in using labors and capitals to transform deposits into
loans and investments. In other words, this result reflects that during
2004-2008 Indian commercial banks are capable of efficiently utilizing
inputs of production such as labors and capitals to generate revenues;
whereas they did not work efficiently as financial intermediaries of
which the most important role is to intermediate between people who have
an excess demand for funds and those who have an excess supply of funds.
The reason for the lower efficiency in intermediation role of
Indian commercial banks is probably the past experience with enormous
Non-Performing Assets (NPAs) in almost every commercial bank. It does
take almost a decade with the strong efforts of the government, the Bank
of India and private sector to eliminate the NPAs from Indian banking
sector. Undoubtedly, this terrible experience with NPAs problem causes
Indian commercial banks more cautious in approving loans (specially
public sector banks which dominate the banking industry in India),
leading to too much liquidity situation in banking sector. This is
because commercial banks are still unlimitedly and continuously
collecting deposits from people; whereas it is harder for people to
obtain loans from commercial banks. That is why the efficiency of Indian
commercial banks via intermediation approach is not as high as the
efficiency via operation approach.
The analysis of relative efficiency of Indian commercial banks via
Operation Approach and intermediation approach discussed above may lead
to the question that "Why are Indian commercial banks considerably
efficient in utilizing inputs to generate revenues from the perspective
of costs/ revenues management despite the fact that they hardly lend but
unlimitedly and continuously collect deposit?" (Loans are the major
source of interest incomes, while deposits incur interest expenses for
commercial banks.) The answer for this question is the gap between
lending interest rate and saving interest rate. At this moment (February
20th, 2008), the average cost of fund during 2004-2008 is between 4
percent-6.5 percent. On the contrary, the average lending rate is not
less than 8 percent-10 percent; whereas the interest rate for personal
loan is incredibly high at the maximum of 20 percent per annum. Such a
huge gap between saving and lending interest rate mentioned above leads
to the efficiency in generating revenues even though the increase in
loans approved is lower than the increase in deposits.
5. Conclusion
In this study, Data Envelopment Analysis (DEA) is utilized to
analyze the relative efficiency of Indian commercial banks during
2004-2008. Overall, the analysis leads to the conclusion that the
efficiency of Indian commercial banks during 2004-2008 via operation
approach which investigates the efficiency of commercial banks from the
perspective of costs / revenues management is very high and stable with
the average efficiencies approximately 90 percent during 2004-2008.
Nevertheless, the efficiency of Indian commercial banks during 2004-2008
via intermediation approach which evaluates the efficiency of commercial
banks as intermediaries which use labors and capitals to transform
deposits into loans and securities is moderately low but somewhat
volatile with the average efficiencies about 70 percent during
2004-2008. Thus it is noticeable that Indian commercial banks are more
efficient via Operation Approach than via intermediation approach during
2004-2008. The reason for the lower efficiency in intermediation role of
Indian commercial banks is probably the terrible experience with NPAs
problem in the past (especially public sector banks which dominates the
banking industry in India). It does take nearly a decade with the strong
efforts of the government, the Bank of India and private sector to
eliminate the NPAs from Indian banking sector.
Unquestionably, this experience causes Indian commercial banks more
cautious and tougher in approving loans, leading to too much liquidity
situation in banking sector. That is why the efficiency of Indian
commercial banks via intermediation approach is not as high as the
efficiency via operation approach. Even though the analysis via
intermediation approach which investigates the efficiency of commercial
banks as intermediaries utilizing labors and capitals to transform
deposits into loans and investments suggests that it will be tough and
complicated to obtain loans from commercial banks since they are highly
cautious in approving loans. Finally the findings of the paper clearly
suggests that the commercial banks which lies below the efficient
frontier are required to increase their output efficiency but with
proper risk and NPA's management. These banks can also increase
their efficiency scores by becoming more cost efficient. Because more
focus on output efficiency (aggressive lending at higher rate of
interest to low credit rating customers) may lead to NPA's which
will again be very damaging for banks. The recent proposal to merge the
SBI associates with SBI and smaller banks into larger banks is a welcome
step in this direction because this type of strategic measures can
increase the efficiency level of those banks which are at lower
efficiency levels.
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Yeh, Q. "The Application of Data Envelopment Analysis in
Conjunction with Financial Ratios for Bank Performance Evaluation',
Journal of Operational Research Society, Vol. 47, 980-988. 1996.
AMAN SRIVASTAVA, Assistant Professor, Jaipuria Institute of
Management, Noida.
RAKESH GUPTA, Associate Professor, Integrated Institute of Learning
and Management Greater Noida.
Table--I
Total Deposits
(Rupee crore)
SBI and Public Private Foreign Total
Associate Sector Banks Sector Banks Banks
2004 54379.5 41811.95 11042.29 15635 122868.7
2005 63206.25 46544.6 13327.77 17011.25 140089.9
2006 67801.38 54003.6 18402.05 23297.75 163504.8
2007 79184.38 68036.2 24269.27 30718.25 202208.1
2008 96734.25 83999.65 29693.68 36153.50 246581.1
Table--II
Total Advances
(Rupee crore)
SBI and Public Private Foreign
Associate Sector Banks Sector Banks Banks Total
2004 27564.5 21711.63 7151.333 11934 68361.46
2005 35594.13 28473.05 9489.591 15134.5 88691.27
2006 46459.88 36730.35 13544.05 20104.25 116838.5
2007 60283.63 47893.8 18286.73 26123.75 152587.9
2008 74215.25 60189.05 22828.27 30513.5 187746.1
Table--III
Advance Deposite Ratios (Rupee crore)
SBI and Public Private Foreign Total
Associate Sector Banks Sector Banks Banks
2004 0.51 0.52 0.65 0.76 0.61
2005 0.56 0.61 0.71 0.89 0.69
2006 0.69 0.68 0.74 0.86 0.74
2007 0.76 0.70 0.75 0.85 0.77
2008 0.75 0.71 0.68 0.69 0.71
Table--IV
Net NPA Ratio
2004 2005 2006 2007 2008
SBI and Associate 1.215 1.40375 1.20125 0.87125 0.7975
Public Sector Banks 3.30684 2.1655 1.292 0.949 0.7645
Private Sector Banks 4.0581 2.76909 1.57591 0.97909 0.80136
Foreign Banks 0.875 0.7425 0.8025 0.75 0.925
Table--V
Efficiency Scores of Commercial Banks
(Operation Approach) (In Percentage)
DMU 2004 2005 2006
1 State Bank of Bikaner and Jaipur 64.52 62.37 63.26
2 State Bank of Hyderabad 65.03 64.98 61.87
3 State Bank of India 64.27 60.91 60.99
4 State Bank of Indore 67.74 60.78 62.64
5 State Bank of Mysore 65.16 65.74 63.49
6 State Bank of Patiala 67.78 60.79 62.31
7 State Bank of Saurashtra 64.37 58.14 60.03
8 State Bank of Travancore 66.52 62.23 62.44
9 Allahabad Bank 64.24 61.21 60.69
10 Andhra Bank 66.71 67.46 61.43
11 Bank of Baroda 64.70 61.33 61.22
12 Bank of India 68.88 61.40 61.88
13 Bank of Maharashtra 63.43 59.42 60.07
14 Canara Bank 66.85 61.83 62.03
15 Central Bank of India 61.56 59.41 58.96
16 Corporation Bank 68.92 66.10 63.54
17 Dena Bank 67.74 60.76 63.28
18 IDBI 100.00 100.00
19 Indian Bank 63.06 60.49 59.06
20 Indian Overseas Bank 64.45 61.96 61.58
21 Oriental Bank of Commerce 68.59 60.58 63.08
22 Punjab and Sind Bank 62.44 60.44 58.69
23 Punjab National Bank 65.36 61.13 60.46
24 Syndicate Bank 64.08 59.67 61.57
25 UCO Bank 65.19 58.69 61.73
26 Union Bank of India 67.59 61.01 63.14
27 United Bank of India 60.82 60.75 59.83
28 Vijaya Bank 65.77 60.67 60.70
29 Axis Bank 72.43 67.22 69.14
30 Bank of Rajasthan 62.35 56.13 57.83
31 Catholic Syrian Bank 65.13 58.24 59.77
32 City Union Bank 66.87 59.72 62.36
33 Development Credit Bank 69.56 66.27 62.22
34 Dhanalakshmi Bank 65.42 57.69 60.24
35 Federal Bank 67.94 61.17 62.30
36 HDFC Bank 76.85 68.04 66.94
37 ICICI Bank 90.85 86.28 77.49
38 Induslnd Bank 83.68 73.98 66.13
39 ING Vysya Bank 71.03 60.94 63.98
40 Jammu and Kashmir Bank 66.78 58.60 62.17
41 Karnataka Bank 66.09 64.64 61.12
42 Karur Vysya Bank 71.24 63.53 63.15
43 Kotak Mahindra Bank 68.75 70.95 72.24
44 Lakshmi Was Bank 68.24 59.29 61.79
45 Nainital Bank 58.56 56.55 58.69
46 Ratnakar Bank 63.50 56.44 58.87
47 SBI Comm. and Intl. Bank 85.88 71.27 72.23
48 South Indian Bank 66.43 60.62 61.90
49 Tamilnad Mercantile Bank 64.84 60.53 60.63
50 ABN Amro Bank 100.00 75.06 80.67
51 YES BANK 100.00 100.00
52 Citibank 100.00 100.00 100.00
53 Hongkong and Shanghai Banking Corpn. 77.59 84.84 85.42
54 Standard Chartered Bank 84.01 74.05 83.34
AVG 69.23 65.41 65.75
DMU 2007 2008 AVG
1 State Bank of Bikaner and Jaipur 69.69 71.81 66.33
2 State Bank of Hyderabad 69.32 72.88 66.82
3 State Bank of India 69.28 73.20 65.73
4 State Bank of Indore 70.58 73.65 67.08
5 State Bank of Mysore 69.09 72.44 67.18
6 State Bank of Patiala 70.34 74.79 67.20
7 State Bank of Saurashtra 66.81 71.20 64.11
8 State Bank of Travancore 70.48 74.16 67.17
9 Allahabad Bank 68.10 71.61 65.17
10 Andhra Bank 68.11 71.77 67.10
11 Bank of Baroda 68.12 72.70 65.61
12 Bank of India 68.89 73.78 66.97
13 Bank of Maharashtra 66.66 70.96 64.11
14 Canara Bank 68.37 71.50 66.12
15 Central Bank of India 64.83 69.56 62.86
16 Corporation Bank 71.03 73.86 68.69
17 Dena Bank 67.90 70.84 66.10
18 IDBI 100.00 100.00 100.00
19 Indian Bank 66.93 70.33 63.97
20 Indian Overseas Bank 67.78 72.01 65.56
21 Oriental Bank of Commerce 70.94 74.78 67.59
22 Punjab and Sind Bank 64.80 71.49 63.57
23 Punjab National Bank 67.32 71.27 65.11
24 Syndicate Bank 67.75 71.44 64.90
25 UCO Bank 68.25 71.09 64.99
26 Union Bank of India 69.49 72.74 66.79
27 United Bank of India 64.29 67.52 62.64
28 Vijaya Bank 67.58 71.60 65.26
29 Axis Bank 75.38 77.06 72.25
30 Bank of Rajasthan 64.39 66.64 61.47
31 Catholic Syrian Bank 64.24 66.85 62.85
32 City Union Bank 67.62 70.91 65.50
33 Development Credit Bank 70.19 73.96 68.44
34 Dhanalakshmi Bank 64.29 66.66 62.86
35 Federal Bank 70.34 73.78 67.11
36 HDFC Bank 72.13 70.36 70.86
37 ICICI Bank 91.37 89.02 87.00
38 Induslnd Bank 75.53 76.13 75.09
39 ING Vysya Bank 72.30 73.71 68.39
40 Jammu and Kashmir Bank 69.23 70.91 65.54
41 Karnataka Bank 68.63 70.10 66.12
42 Karur Vysya Bank 69.60 73.25 68.15
43 Kotak Mahindra Bank 76.62 77.23 73.16
44 Lakshmi Was Bank 68.10 70.10 65.50
45 Nainital Bank 62.91 66.07 60.56
46 Ratnakar Bank 63.39 64.51 61.34
47 SBI Comm. and Intl. Bank 72.64 79.12 76.23
48 South Indian Bank 67.36 71.51 65.56
49 Tamilnad Mercantile Bank 67.95 71.37 65.06
50 ABN Amro Bank 74.85 76.26 81.37
51 YES BANK 100.00 100.00 100.00
52 Citibank 100.00 100.00 100.00
53 Hongkong and Shanghai Banking Corpn. 85.16 86.76 83.95
54 Standard Chartered Bank 90.13 100.00 86.31
AVG 71.61 74.58 69.54
Table--VI
Efficiency Scores of Commercial Banks (intermediation approach)
DMU 2008 2007 2006
1 IDBI Ltd. 1.0000 1.0000 1.0000
2 Jammu and Kashmir Bank 1.0000 1.0000 0.8407
3 Ratnakar Bank 0.9808 0.8685 0.8744
4 Yes Bank 0.9370 0.9851 0.7802
5 Bank of Maharashtra 0.9219 0.9295 1.0000
6 Nainital Bank 1.0000 1.0000 0.8552
7 Development Credit Bank 0.8469 0.8272 1.0000
8 Punjab and Sind Bank 0.9307 0.9317 0.9021
9 Lakshmi Was Bank 0.9215 0.9257 0.9495
10 ABN Amro Bank 0.9043 0.9874 1.0000
11 ING Vysya Bank 0.8615 0.8626 0.9374
12 Bank of Rajasthan 0.9029 0.9108 1.0000
13 ICICI Bank 0.9332 1.0000 0.8315
14 City Union Bank 0.9990 0.9891 0.7765
15 Union Bank of India 0.9996 0.9876 0.8059
16 UCO Bank 0.9271 0.9351 0.8888
17 Dhanalakshmi Bank 0.8748 0.8846 0.9180
18 Karnataka Bank 0.9662 1.0000 0.8159
19 Tamilnad Mercantile Bank 0.9661 1.0000 0.7603
20 South Indian Bank 0.9566 0.9641 0.8334
21 Karur Vysya Bank 0.9789 0.9876 0.7695
22 Federal Bank 1.0000 0.9954 0.7731
23 Induslnd Bank 0.9077 0.9115 0.9382
24 State Bank of Hyderabad 0.9665 0.9674 0.7972
25 Citibank 1.0000 0.9761 0.8475
26 Oriental Bank of Commerce 0.9856 0.9840 0.7927
27 Kotak Mahindra Bank 0.8954 0.8732 0.9097
28 Catholic Syrian Bank 0.8763 0.8886 0.9206
29 Syndicate Bank 0.9482 0.9503 0.8328
30 Central Bank of India 0.9207 0.9282 0.8462
31 Indian Overseas Bank 0.9745 0.9756 0.7957
32 Bank of India 0.9727 0.9259 0.8174
33 Allahabad Bank 0.9689 0.9650 0.7929
34 Punjab National Bank 0.9449 0.9492 0.8068
35 Indian Bank 0.9406 0.9406 0.8142
36 Dena Bank 0.9409 0.9371 0.7862
37 Canara Bank 0.9493 0.9621 0.7829
38 Corporation Bank 0.9754 0.9844 0.7712
39 United Bank of India 0.8954 0.9342 0.8086
40 Hongkong and Shanghai Banking Corpn. 0.9678 1.0000 0.8017
41 State Bank of Travancore 0.9467 0.9545 0.7848
42 Vijaya Bank 0.9544 0.9563 0.7909
43 State Bank of Bikaner and Jaipur 0.9254 0.9182 0.8602
44 Axis Bank 0.9171 0.9420 0.7902
45 State Bank of Patiala 0.9662 0.9705 0.7814
46 Andhra Bank 0.9494 0.9398 0.8113
47 Standard Chartered Bank 0.9943 1.0000 0.7648
48 Bank of Baroda 0.9368 0.9320 0.8123
49 State Bank of Indore 0.9492 0.9410 0.7913
50 HDFC Bank 0.9296 0.9416 0.7753
51 State Bank of Saurashtra 0.8910 0.9243 0.8032
52 State Bank of Mysore 0.9282 0.9131 0.7968
53 State Bank of India 0.9336 0.9161 0.7923
54 SBI Comm. and Intl. Bank 1.0000 0.9128 0.7336
Average 0.9456 0.9479 0.8382
DMU 2005 2004 Average
1 IDBI Ltd. 1.0000 NA 1.0000
2 Jammu and Kashmir Bank 1.0000 0.9049 0.9491
3 Ratnakar Bank 0.9810 1.0000 0.9409
4 Yes Bank 1.0000 1.0000 0.9405
5 Bank of Maharashtra 0.8692 0.9548 0.9351
6 Nainital Bank 0.8840 0.9359 0.9350
7 Development Credit Bank 1.0000 1.0000 0.9348
8 Punjab and Sind Bank 0.9003 1.0000 0.9330
9 Lakshmi Was Bank 0.9202 0.9395 0.9313
10 ABN Amro Bank 0.8129 NA 0.9262
11 ING Vysya Bank 0.9658 1.0000 0.9255
12 Bank of Rajasthan 0.9242 0.8737 0.9223
13 ICICI Bank 0.8454 1.0000 0.9220
14 City Union Bank 0.8923 0.9340 0.9182
15 Union Bank of India 0.8417 0.9440 0.9158
16 UCO Bank 0.8665 0.9543 0.9144
17 Dhanalakshmi Bank 1.0000 0.8932 0.9141
18 Karnataka Bank 0.8151 0.9733 0.9141
19 Tamilnad Mercantile Bank 0.8385 1.0000 0.9130
20 South Indian Bank 0.8882 0.9141 0.9113
21 Karur Vysya Bank 0.8163 1.0000 0.9105
22 Federal Bank 0.8261 0.9202 0.9030
23 Induslnd Bank 0.8346 0.8935 0.8971
24 State Bank of Hyderabad 0.8315 0.9181 0.8961
25 Citibank 0.7955 0.8575 0.8953
26 Oriental Bank of Commerce 0.8401 0.8684 0.8942
27 Kotak Mahindra Bank 0.8599 0.9275 0.8931
28 Catholic Syrian Bank 0.8875 0.8919 0.8930
29 Syndicate Bank 0.8474 0.8861 0.8930
30 Central Bank of India 0.8231 0.9387 0.8914
31 Indian Overseas Bank 0.7949 0.9154 0.8912
32 Bank of India 0.8542 0.8774 0.8895
33 Allahabad Bank 0.8234 0.8913 0.8883
34 Punjab National Bank 0.8545 0.8714 0.8854
35 Indian Bank 0.8083 0.8949 0.8797
36 Dena Bank 0.8543 0.8780 0.8793
37 Canara Bank 0.8188 0.8782 0.8783
38 Corporation Bank 0.7678 0.8779 0.8753
39 United Bank of India 0.8105 0.9228 0.8743
40 Hongkong and Shanghai Banking Corpn. 0.7677 0.8321 0.8739
41 State Bank of Travancore 0.8008 0.8817 0.8737
42 Vijaya Bank 0.8059 0.8593 0.8734
43 State Bank of Bikaner and Jaipur 0.7944 0.8644 0.8725
44 Axis Bank 0.8345 0.8733 0.8714
45 State Bank of Patiala 0.8082 0.8290 0.8711
46 Andhra Bank 0.7904 0.8636 0.8709
47 Standard Chartered Bank 0.7996 0.7937 0.8705
48 Bank of Baroda 0.7990 0.8704 0.8701
49 State Bank of Indore 0.8252 0.8301 0.8674
50 HDFC Bank 0.8054 0.8835 0.8671
51 State Bank of Saurashtra 0.8501 0.8513 0.8640
52 State Bank of Mysore 0.8124 0.8580 0.8617
53 State Bank of India 0.8096 0.8458 0.8595
54 SBI Comm. and Intl. Bank 0.8157 0.8339 0.8592
Average 0.8539 0.9058 0.8987
