Business Efficiency of Public Sector Commercial Banks: A Data Envelopment Approach

The Icfai Journal of Applied Economics, 2008, vol. VII, issue 1, pages 7-27

Abstract: Following the nationalization of 20 major commercial banks in 1969 and 1980, the government followed policies of financial repression up to the 1980s. During this period the public sector commercial banks had rapid expansion of branches, especially in the rural and semiurban areas and had reasonable success in the matter of deposit mobilization and disbursement of loans. However, the operating efficiency of public sector commercial banks, declined during the period due to various reasons. In the 1990s, the banking environment was radically transformed by certain bold initiatives taken by RBI including the dismantling of entry barriers, rate deregulation, introduction of prudential accounting norm and the implementation of Basel I capital adequacy norms. The changed competition and accounting environment compelled the commercial banks to provide unprecedented attention to cost cutting and supplementing fund-based income by fee-based income. In this backdrop, the present paper tries to compare the business performance of 27 public sector commercial banks for the period 2000-01 to 2004-05 using Data Envelopment Analysis. The results suggest no definite conclusion regarding the mean technical efficiency scores of the observed commercial banks across different bank categories, irrespective of whether business or off-balance sheet exposure is taken as the output indicator. However, in the context of returns to scale, the results reveal that the public sector commercial banks have much more room for expanding their off-balance sheet activities compared to their traditional fund-based activities.

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