Productivity and profitability of public sector banks in India: a multi-component DEA approach

Abstract

The banking sector in India underwent a liberalisation and globalisation process in 1990s, which led to reforms in banking sector, changes in their structure and beginning of competitive environment. For survival, each bank is forced to inspect its performance and to identify improvement measures to gain further competitive advantages. For valid performance evaluation of banks, we employ a multi-component data envelopment analysis (DEA) approach. This paper seeks to measure the multi-component performance analysis of public sector banks (PuSBs) in India for the period 2008-2013. Each bank consists of two components: productivity and profitability. The empirical results show that major inefficiency lies in the productivity phase as compared to profitability phase. Sensitivity analysis validates the use of multi-component DEA instead of DEA. The findings of the study are quite useful for policy makers to identify PuSBs' efficiency, weakness and directions for improvement in either productivity phase or profitability phase or both.