Banking reforms and the evolution of cost efficiency in Indian public sector banks

Abstract

This paper analyses the trends of cost efficiency and its components across Indian public sector banks (PSBs) during the post-deregulation period spanning from 1992/1993 to 2007/2008. The study also examines the issue of convergence in cost, technical and allocative efficiency levels of Indian PSBs. The empirical results indicate that deregulation has had a positive impact on the cost efficiency of Indian public sector banking industry over the period of study. Further, technical efficiency of Indian PSBs followed an uptrend, while allocative efficiency followed a path of deceleration. We note that in Indian public sector banking industry, the cost inefficiency is mainly driven by technical inefficiency rather than allocative inefficiency. The convergence analysis reveals that the inefficient PSBs are not only catching-up but also moving ahead of the efficient ones, i.e., the banks with the low level of cost efficiency at the beginning of the period are growing more rapidly than the highly cost efficient banks. In sum, the study confirms a strong presence of σ- and β-convergence in cost efficiency levels of Indian public sector banking industry.