Non-parametric Analysis of Technical Efficiency of Public Sector Banks (PSBs) in India

Abstract

The aim of the article is to analyze and evaluate technical efficiency scores of public sector banks (PSBs) in India. The study also determines the nature of return to scale (RTS) of individual banks and thereby identifies the leaders and laggards in the PSBs. To measure the extent of overall technical efficiency, pure technical efficiency and scale efficiency (SE), the non-parametric approach, that is, data envelopment analysis (DEA) is used to determine the causes of inefficiency. The sample of the study includes 26 PSBs operating in India during the time period from 2007–2008 to 2011–2012. The results show that although the PSBs have more or less similar efficiency scores, that is, higher than 0.900, still out of 22 banks falling in the category of efficient banks in 2007–2008, only 7 of them were left by the year 2011–2012. Overall analysis of PSBs during the time period of the study explains that a greater part of inefficiency among PSBs is attributed to scale inefficiency. In addition, the number of banks operating at constant return to scale (CRS) came down to 9 in 2011–2012 from 23 in 2007–2008. Simultaneously, there was a reduction in leaders and increase in laggards. It is suggested that banks must optimize their scale of operations and adopt technological innovations.