Profit Efficiency and Its Determinants: Evidence From Indian Commercial Banks

Abstract

This study examines profit efficiency and its determinants in Indian commercial banks during the post-reform period by using a stochastic frontier approach (SFA), specified by Battese and Coelli (1995). For the purpose of specifying the parameters in the SFA, translog functional form has been adopted. Assuming banking markets are not perfectly competitive, alternative profit function is estimated. Intermediation approach has been employed to define bank inputs and outputs. An unbalanced panel data of 103 commercial banks for the period 1996–2008 have been constructed for the empirical analysis. All the required data for the analysis were obtained from various publications of the Reserve Bank of India. The study found that profit efficiency of Indian commercial banks is increasing over the study period. However, on average, Indian banks could meet only three-fourths of their profit-generating potentialities relative to the best-practice bank, due to technical inefficiency, which is arising within the banks. Among the bank groups, it is revealed that the state-owned banks are relatively more efficient than their counterparts. The technical inefficiency effects model shows that bank-specific, market, and organizational characteristics play an important role in determining the profit efficiency of banks.