A Non-Parametric Approach to Estimate Profit Efficiency of Indian Banks Profit Efficiency of Indian Banks

Abstract

This study attempts to analyse the profit efficiency of Indian banks during 2008-2012 to offer an understanding of their business performance and trends during the period. The extant literature suggests that conventional ratio-based performance measures are inadequate to address the different issues related to the scope of activities of modern banking, viz. resource allocation, optimal strategy selection, inefficiencies associated with revenue side of banking operations. Sophisticated performance measurement techniques would be required to provide useful insights about the effectiveness, efficiency and stability of the banks. Hence, to examine the importance of these aspects for Indian banks, this study employs non parametric approach to estimate profit efficiencies of Indian banks. We use Data Envelopment Analysis (DEA), a non-parametric, mathematical programming technique, to estimate profit efficiency (PE) of 66 Indian banks (26 public, 19 private and 21 foreign banks). Profit efficiency is estimated by employing DEA at variable returns of scale (VRS). The study reinforces the use of DEA for measurement of the profit efficiency of Indian banks to get better insight about the banking operations. The study reports that large public, private and foreign sector banks were more profit efficient than small and medium banks in their respective groups. The outcomes point towards different ways of managing bank resources for improving efficiency of operations in terms of both input (cost) and output (revenue).