This paper aims to examine the efficiency, benchmarks and targets for private sector banks operating in India. Keeping in view the limitations of ratio analysis techniques, production approach of Data Envelopment Analysis (DEA) was applied to judge the efficiency of private sector banks. In this model, banks are considered as service providers, and while interest expenses, non-interest expenses and the Non-Performing Asset (NPA) ratio, i.e., net NPAs to net advances, are considered as input variables, deposits, advances and investments are considered as the output variables. The paper analyzes the efficiency of 29 private sector banks with the dataset ranging from the period 1998-99 to 2005-06. The results of the study indicate that there is a lot of scope for the private sector banks to improve their efficiency level, as, at the most, only 31.25% private sector banks were found efficient during the entire study period. The results indicate that a majority of private sector banks in India need to take steps to decrease the NPA level and improve their output parameters, such as deposits, advances and investments, because they have failed to acquire full efficiency score in all the years under study.

Commercial banks are the backbone of any economy. The more efficient the banking sector of an economy, the stronger would be that economy. Everywhere, the banking industry was the first to experience the impact of financial sector reforms. India, being an emerging economy, is not an exception to the above reforms, as banking institutions in India have been assigned a significant role in financing the process of planned economic growth. Since 1991-92, several reform measures, such as dismantling of administered lending and deposit rates, permission to undertake newer activities (such as investment banking, securities trading, and insurance), the easing of entry barriers and the introduction of stringent accounting norms (relating to income recognition, assets classification, provisioning and securities valuation), have been initiated to strengthen the financial system and to improve the functions of various segments of Indian financial service industry. Entry norms for private and foreign banks have been liberalized significantly.

All the reforms initiated during the last 15 years have changed the anatomy of banks in India. The ever-changing banking business environment throughout the world has succeeded in attracting the attention of banking and financial researchers. Of course, with the introduction of financial deregulation in many parts of the world, the effect of such deregulation on bank efficiency has become an important topic of research. However, despite being a considerable component in the emerging Asian financial markets, Indian banking has not succeeded in attracting the attention of banking and financial researchers compared to the countries in the developed world (Galagedera and Edirisuriya, 2003). It is generally accepted that performance measurement is the means by which an institution can assess whether its operations are aimed at achieving the desired goals or not. On the above grounds, the efficiency/performance of banks has become a major concern for economic planners and policy makers due to the fact that the gains of the real sector of the economy depend on how efficiently the banks are performing the function of financial intermediation. In view of the above, this study investigates the relative performance of private sector banks operating in India for a period of eight years (from 1998-99 to 2005-06) using the Data Envelopment Analysis (DEA) approach.

Bank Management Journal, Private Sector Banks, Data Envelopment Analysis, DEA, Banking Industry, Commercial Banks, Performance Measurement, Banking Business Environment, Investment Banking, Indian Banking Sectors, Decision Making Units, Efficiency Measurement System.