Efficiency of Commercial Banks in India: A Non-parametric study using Data Envelopment Analysis

Abstract

One of the major areas of macro-economy that has been the subject of focused attention is the efficiency of the banking sector. The major objectives of Indian banking sector reforms were to encourage operational self-sufficiency, flexibility and competition in the system and to increase the banking standards in India to the international best practices. The present study attempts to examine the changes in the productive efficiency of Indian commercial banks after financial sector reforms were initiated in 1992. Analysis of production based efficiency can be viewed as another form of representation of the financial performance of the micro level units of the banking sector. This paper seeks to determine the impact of various market and regulatory initiatives on efficiency improvements of Indian banks. Efficiency of firm is measured in terms of its relative performance that is, efficiency of a firm relative to the efficiencies of firms in a sample. Data Envelopment Analysis (DEA) has been used to identify banks that are on the output frontier given the various inputs at their disposal. The present study is confined only to the Constant-Return-to-Scale (CRS) assumption of decision making units(DMUs).