Technical, Pure Technical and Scale Efficiency of New and Old Private Sector Banks in India – Data Envelopment Analysis

Abstract

This study proposes to examine the technical efficiency of New and Old Private Sector Banks in India in recent years. Many firms in the service industry face the problem of dissimilar results in terms of efficiency. In particular, the last decade has witnessed continuous changes in regulation, technology and competition in the global financial services industry, and Indian Banks are no exception to this change. The efficient operation of banks has become an important issue in India. Rising cost-income ratio and declining profitability reflect the enhanced competitive pressure. An efficient banking system contributes, in an extensive way, to higher economic growth in any country. Hence studies of banking efficiency are important for policy makers, industry leaders and many others. The Data Envelopment Analysis (DEA) Approach has been used to measure the relative technical efficiency. The Efficiency Scores of the banks are also decomposed into Pure Technical Efficiency (PTE) and Scale Efficiency (SE). It has been noticed that the observed technical inefficiency in the Indian private sector banks is due to poor input utilization (i.e., managerial inefficiency) and failure to operate at most productive scale size (i.e., scale inefficiency).