Evaluation of technical efficiency and ranking of public sector banks in India

Abstract

PurposeThe purpose of this paper is to evaluate the extent of technical efficiency in 27 public sector banks operating in India and to provide strict ranking to these banks.Design/methodology/approachTwo popular data envelopment analysis (DEA) models, namely, CCR model and Andersen and Petersen's super‐efficiency model, were utilized. The cross‐section data for the financial year 2004/2005 were used for obtaining technical efficiency scores.FindingsThe results show that only seven of the 27 banks are found to be efficient and thus, defined the efficient frontier; and technical efficiency scores range from 0.632 to 1, with an average of 0.885. Thus, Indian public sector banks, on an average, waste the inputs to the tune of 11.5 percent. Andhra Bank has been observed to be the most efficient bank followed closely by Corporation Bank. Further, the banks affiliated with SBI group turned out to be more efficient than the nationalized banks. The regression results incisively indicate that the exposure to off‐balance sheet activities, staff productivity, market share and size are the major determinants of the technical efficiency.Practical implicationsThe practical implication of the research findings is that apart from the proportional reduction of all inputs equivalent to the amount of technical inefficiency, most of the inefficient public sector banks need to reduce the use of the physical capital and augment non‐interest income to project themselves on the efficient frontier.Originality/valueThis paper is the first to provide a strict ranking of Indian public sector banks on the basis of super‐efficiency scores.