In the 1990s, the onset of reform in the Indian commercial banking sector facilitated some major structural changes. The relaxation of entry for the private sector banks (resulting in the entry of a host of new private sector commercial banks) and the reform in the branch licensing policy resulted in intense competition in both the deposit and the lending market. Further, the withdrawal of administrative controls on deposit and lending rates also gave the commercial banks considerable freedom in pricing their deposits. The public sector banks also focused on efficiency through technological upgrading, restructuring of the banking network, and manpower rationalization.
It is in this context that the present study seeks to compare the performance of 40 Indian commercial banks for the period 2000-2001 to 2005-2006, using the bilateral comparison framework in the context of the Slacks-Based Measure model advanced by Tone (2001).
The most immediate consequence of the Farrell measure of efficiency has been the decomposition of efficiency into technical efficiency, price (or allocative) efficiency and the overall efficiency corresponding to a firm. The radial contraction/expansion connecting inefficient observed points with (unobserved) reference points on the production frontier, as the basis for the measures, is the hallmark, and due to fundamental duality between production and cost functions, identical measures can also be defined using the latter. Thus, the Farrell approach has enabled us to identify at least three efficiency measures. |
