An Innovative Method to Measure the Efficiency of Indian Commercial Banks - DEA Approach

Abstract

This study proposes a three stage data envelopment analysis model to assess the efficiency of Indian commer - cial banks. 65 commercial banks comprising public, private and foreign sector banks were evaluated. This study proposed a new methodology to evaluate the efficiency of banks. The performance indicator variable NPA has been used to identify the en- vironment of a bank. The overall technical efficiency is decomposed to scale, environmental risk and pure technical efficiency. The empirical results reveal that public sector banks hurt more from environmental risk inefficiency. Banking system plays a predominant role in the growth of any Country's Economy. Banks provide financial services to the cus- tomers and businesses. These banks were viewed as financial intermediaries in some efficiency studies as they channel funds between the savers and borrowers. In Indian context, banking business has been functioning under different ownerships. The policies to promote their assets are different from one manage- ment to another management. In India, the banks were func- tioning under public, private and foreign ownerships. The pub- lic sector banks are functioning under the government policies and regulations. The public sector banks have been functioning as the mediators between public and government to channel the credit for priority sectors. The major objective of the public sec- tor banks is to channel the credit to optimize the social benefits and expand geographically to meet the growing needs of the people. Private and foreign sector banks are mostly functioning in urban areas. The policies adopted by these banks are far away from the rural area people. These banks have their own policies to benefit the urban and rural people. There is a huge competition among these ownerships to strengthen their bank business. To promote their products these banks offering different schemes and finally some of the banks were committed to risk environment. There may the huge number of risk factors in banking system, to de- teriorate the efficiency of the effective banks. To known which bank is working in effective environment, we need to assess the commercial banks in mathematical perspective.