Adequacy of deterministic and parametric frontiers to analyze the efficiency of Indian commercial banks

Abstract

This study applies data envelopment analysis and the stochastic frontier approach to a sample of Indian commercial banks to discuss the inconsistencies between these models. We find that DEA average efficiency scores are, in general, lower than those from the SFA model. However, both models indicate similar trends on efficiency scores over the years, which we state is more relevant than efficiency levels themselves. We also find that the rank correlation between these efficiency scores is low. This means that the application of only one frontier model may yield misleading conclusions. We point out that a thorough consideration of the suitability of a deterministic or a parametric frontier to the framework in analysis should guide the choice between the application of parametric or non-parametric methodologies.