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The Impact of Size and Group Affiliation on Technical Efficiency of Indian Public Sector Banks: An Empirical Investigation

Sunil Kumar and Rachita Gulati ()

The IUP Journal of Bank Management, 2008, vol. VII, issue 4, 18-40

Abstract: The paper aims to analyze the effect of size and group affiliation on the Technical Efficiency (TE) of Indian Public Sector Banks (PSBs) within a cross-sectional perspective. Since the correct functional form of the production function of the bank is not known, the technique of Data Envelopment Analysis (DEA) has been utilized for computing the TE scores of individual PSBs. The empirical results suggest that the extent of TE in the Indian public sector banking industry is to the tune of 88.5%. Further, the observed level of technical inefficiency is primarily due to managerial underperformance in organizing inputs (i.e., pure technical inefficiency) rather than divergence of actual scale of operations from the most productive scale size (i.e., scale inefficiency). Regarding group affiliation, the results revealed that the banks affiliated to State Bank of India group are more efficient than the nationalized banks. The relationship between size and technical efficiency indicates that the small banks are more efficient than their large counterparts. In addition, the results of regression analysis highlight that the hypothesis ‘the larger the bank in terms of total assets, higher is the level of its efficiency’ does not hold good in Indian public sector banking industry.

Date: 2008
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Handle: RePEc:icf:icfjbm:v:7:y:2008:i:4:p:18-40