Productivity and efficiency at public and private sector banks in India

T. T. Ram Mohan and Subhash Ray

No WP2003-06-01, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: India public sector banks (PSBs) are compared unfavourably with their private sector counterparts, domestic and foreign. This comparison rests, for the most part, on financial measures of performance, and such a comparison provides much of the rationale for privatisation of PSBs. In this paper, we attempt a comparison between PSBs and their private sector counterparts based on measures of efficiency and productivity that use quantities of outputs and inputs. Efficiency measures a firm’s performance relative to a benchmark at a given point in time; productivity measures a firm’s performance over time. Both measures are relevant in attempting a comparison between the private and public sectors. We employ three measures: Tornquist total factor productivity growth, Malmquist efficiency and revenue maximisation efficiency. We attempt these comparisons over the period 1992-2000, comparing PSBs with both domestic private and foreign banks. Out of a total of six comparisons we have made, there are no differences in three cases, PSBs do better in two, and foreign banks in one. To put it differently, PSBs are seen to be at a disadvantage in only one out of six comparisons. It is difficult, therefore, to sustain the proposition that efficiency and productivity have been lower in public sector banks relative to their peers in the private sector.

Date: 2003-06-01
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