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The IUP Journal of Bank Management

Efficiency in Indian Banking Sector: A Data Envelopment Analysis

Article Details

Pub. Date	: Feb, 2022
Product Name	: The IUP Journal of Bank Management
Product Type	: Article
Product Code	: IJBM20222
Author Name	: Preeti and Supriyo Roy
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 15

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Abstract

This study aims to measure banking efficiency by developing a non-traditional data envelopment approach model and proposes a non-parametric approach to measuring bank efficiency. It develops a non-oriented and non-radial model to calculate the productive efficiency scores of Indian public sector banks. Just about 20% of public sector banks in India were found efficient during the observed period of 2015-2019. The findings highlight the areas needing improvement and how average banks need to reduce their interest expenses and increase their other income to improve efficiencies.

Introduction

The dynamic service sector contributes almost half of world employment, one-third of world gross value-added, more than half of the global foreign direct investment flows and one-fifth of global trade (Economic Survey, 2015-16). Financial services, the most significant category within the service sector, is regarded as the stimulating sector controlling the overall progress of a country's economy (Annual Reports, 2016-17). The well-being of any country's financial system is supported by a strong banking industry, which provides financial intermediation and handles the payment system. By safeguarding public savings and financing trade and businesses, banks play a critical role in the country's economy.

The Indian banking system is the mainstay of the country's financial system. Due to wide ranging reforms since mid-1991, the sector has seen continuous changes. The rise in bad loans, fall in credit-deposit ratio, push for digitization, etc. dominate the current banking scenario. As per the RBI data, Public Sector Banks (PSBs) hold more than three-fourths of the bad loans in the entire banking system. The Basel Committee's initiative to strengthen the capital base of PSBs has been endorsed by the RBI. Under the purview of the Insolvency and Bankruptcy Code, the RBI has taken steps to resolve the problem of stressed assets in weaker PSBs. Year 2017-18 was marked by a sharp increase in provisions due to the deteriorating quality of assets. Also, the government took actions to recapitalize PSBs. The demonetization of specified bank notes in November 2016 caused significant variations in banking sector performance (Reserve Bank of India, 2018). This transforming environment of the banking system has put competitive pressure on banks to improve their efficiency. Old measures by mere calculating ratio analysis are not