Measuring the Efficiency of Private Sector Banks: Evidence from India

Muhammad Mahbubur Rahman,Md Abul Kalam Azad

doi:10.5539/ijbm.v10n9p207

Abstract

This study examines the profitability of Indian private sector banks using a non-parametric test namely Data Envelopment Analysis (DEA). The study uses Malmquist total factor productivity to examine the shift (inward or outward) of banks’ efficiency frontier during the study period 2011-2013. Only secondary data has been used from the Bankscope database for this study. In this study, emphasis has been given on consolidating the efficiency of Indian private sector banks which is much more expected to the management point of view than the profitability. This study uses three input variables and three output variables to measure bank efficiency. The specific findings of this research shows that the private sector of Indian banks did not achieve progress in all respect during the study period, the banks with higher loan loss reserve and large liquidity reserve have been found as the most regressed banks, and the banks with higher progress have diversified the profit successfully from both interest and not-interest income. The limitations and policy implications of this study have been presented. The scope of future studies has also been addressed.

Highlights

Private sector banks are of immense need for facilitating the continuity of sustainable economic development (Chowdhury & Ahmed, 2009; Rezvanian, Rao, & Mehdian, 2008)
The focus of this study remains on consolidating the efficiency of the banks which is much more expected than only focusing on the profitability of Indian private sector banks
As we know that banks’ ability of making profit is largely dependent on the ability of diversification of income (Lien & Li, 2013; Lin, Chung, Hsieh, & Wu, 2012; Meslier et al, 2014; Nguyen, Skully, & Perera, 2012), this study examines and distinguishes Indian private sector banks based on their income diversity

Summary

Introduction

Private sector banks are of immense need for facilitating the continuity of sustainable economic development (Chowdhury & Ahmed, 2009; Rezvanian, Rao, & Mehdian, 2008). Taking care of all these classification, private sector banks possess a unique characteristic which is profit maximization or wealth maximization for the investors (Chowdhury & Ahmed, 2009; Rezvanian et al, 2008). Such issue of maximizing profit, in some cases, scroll to unwanted shutdown of some banks due to their undue operations and business transactions (Brockett, Cooper, Golden, Rousseau, & Wang, 2004). The focus of this study remains on consolidating the efficiency of the banks which is much more expected than only focusing on the profitability of Indian private sector banks

Methods

Results

Conclusion