Abstract
The Indian banking industry is going through a period of intense change, where liberalized business environment has affected the banking business by way of increasing competition, rising customer expectations, shrinking spreads and increasing disintermediation. Ongoing changes in the structure of Indian banking are clearly visible. This paper investigates the levels and determinants of efficiency of schedule commercial banks of this vital sector of the Indian economy by using firm-level data. For this purpose, a two stage data envelopment analysis has been used. In the first stage, super technical efficiency analysis of 89 sample firms has been undertaken. This study specifies two outputs: total loans and other earning assets and three inputs: labour, fixed capital and total customers and short term funding and the prices are personnel expenses to average number of personnel for labour, total capital expenses to total fixed assets for fixed capital and interest expenses to average total customers and short term funding for the years 1980–81 to 2012–13. In the second stage, the efficiency scores obtained from the first stage are regressed on external environmental factors like fiscal deficits, private investment and the share of foreign banks using a censored regression model, viz. Tobit model. In this context, the term environment is used to describe factors that could influence the efficiency of a firm, where such factors are not traditional inputs and are not under the control of management (17). The results confirm that the varying market condition and the presence of foreign banks will contribute positively to economic growth.
Highlights
The importance of financial systems for economic development is well recognized worldwide [30, 36, 35, 41] as well as in India [44, 9]
The public sector banks continue to dominate the banking industry, in terms of lending and borrowing, and it has widely spread out branches which help greatly in pooling up of resources as well as in revenue generation for credit creation
The government used banking sector to finance its own deficit by frequently increasing cash reserve ratios (CRR) and statutory liquidity ratio (SLR)
Summary
The importance of financial systems for economic development is well recognized worldwide [30, 36, 35, 41] as well as in India [44, 9]. The role of banks in accelerating economic development of the country has been increasingly recognized since the nationalization of fourteen major commercial banks in 1969 and six more in 1980. This facilitated the rapid expansion of banking in terms of its geographical reach covering rural India, in turn leading to significant growth in deposits and advances. Inefficiency and lack of competition caused the non-performing assets in the public sector banks to rise from 14 percent in 1969 to 35 percent in 1990. The competition has forced the institutions to reposition themselves in order to survive and grow These reforms are expected to have an impact on the operations of commercial banks. The study dealt with the efficiency and performance of Indian commercial banks according to its ownership structure and further evaluated banking sector reforms since globalization
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