Is Inefficiency of Banks in India a Cause for Concern? Evidence from the Post-Reforms Era

Abstract

Cost inefficiency of banks in many countries is quite high. Financial sector reforms in India are also aimed at improving efficiency, productivity and profitability of banks via increased competitiveness. An assessment based on a fairly general framework in the Indian context has found that cost inefficiency of domestic banks in the post-reforms period is not very high. Data also supports a declining trend in inefficiency over time. Slightly higher average inefficiency in public sector banks points to a need for granting more autonomy and instituting a proper incentive structure. Branch rationalisation may also lead to lowering their costs. However, as methodology for efficiency estimation is not fully settled, the need for testing robustness of the results through alternative formulations is stressed.