Cost Efficiency of Nepalese Commercial Banks

Abstract

This study attempts to explain the cost efficiency and its determinant for an unbalanced penal set of 15-25 commercial banks of Nepal for 9 years period (2001-2009) by using semi-parametric methodology. At first stage, efficiency and growth of productivity are estimated by using Data Envelopment Analysis – a non parametric methodology. At second stage, efficiency estimates from DEA are regressed by firm specific attributes (independent variables) to find their determinants. The first stage results indicate that there is considerable level of cost inefficiency which is largely caused by technical inefficiency and there exist comparatively low level of external (particularly regulatory) influences on input mix as indicated by very low level of allocative inefficiency. The growth of productivity is low and even negative mostly resulting from lack of technological progress. The second stage results indicate that State-owned banks are less cost efficient than private banks (domestic and foreign); size has consistently inverse impact on cost efficiency; banks with higher financial capital, larger loan ratio and higher profit tend to be more cost efficient, however banks with higher credit risk tend to be less cost efficient.