International Journal of Management and Social Sciences Research (IJMSSR)

Volume 2, No. 6, June 2013

ISSN: 2319-4421

Efficiency of Old Private Sector Banks in India: A DEA

Approach
Vinod R. R., Assistant Professor, Business Administration, Rajagiri College of Social Sciences, Cochin

ABSTRACT
Indian banking has seen a total change in the scenario
during the last decade or so. The process of deregulation
which was set in motion has brought in a marked
transformation in Indian Banking. As of now, the country
has public sector, old private sector, new private sector
and foreign banks operating side by- side and giving cutthroat competition to each other. This study assessed the
consistency of efficiency of old private sector banks from
2008 to 2012 using Data Envelopment Analysis (DEA) .It
was observed that only 25% of the old private sector
banks taken in this sample were consistently efficient. It
was also found that few banks which were least efficient
can enter the big league if due consideration are given to
improve their performance in the specified areas.

Keywords
Technical Efficiency, Data Envelopment Analysis,
Consistency, Old Private Sector Banks, Efficient frontier.

1. INTRODUCTION
India is the largest country in South Asia with a huge
financial system characterized by many and varied
financial institutions and instruments. There was
significant presence of both foreign and domestic banks
and well developed stock market (Bery, 1996, p. 245).
Indian banking industry has been the backbone of the
countrys economy and it is the banking rules and
regulation framework of India which played a key role in
the prevention of economic catastrophe from reaching
terrible volume in the country. Our banking industry is a
mixture of public, private and foreign ownerships. One of
the major objectives of Indian banking sector reforms post
liberalization era was to encourage operational selfsufficiency, flexibility and competition in the system and
to increase the banking standards in India to the
international best practices.1

Dr. Y.V. Reddy (2002), Monetary and Financial

Sector Reforms in India: A Practitioners
Perspective, The Indian Economy Conference,
Program
on
Comparative
Economic
Development (PCED) at Cornell University,
USA.

The more efficient a financial system is in resource

generation and in its allocation, the greater is its
contribution to economic growth (Mohan, 2005). An
enhanced efficiency in banking can result in greater and
more appropriate innovations, improved profitability as
well as greater safety and soundness when the
improvement in productivity is channeled towards
strengthening capital buffers that absorb risk (Casu,
Giraradone and Molyneux, 2002). Profitability and capital
adequacy have become the most important parameters for
banks. An efficient banking system has significant
positive externalities, which increases the efficiency of
economic transactions in general. Therefore, one of the
important objectives of financial reforms was to improve
the efficiency of banking system (RBI, 2002).It is not
surprising then, that considerable attention has been
focused on the performance of commercial banks in India
in recent years. In the context of increased competition
and the importance of banks in financial markets, it
becomes very much essential to evaluate whether these
banks operate efficiently. In the above backdrop, this
paper assesses the efficiency of old private sector banks in
India. The main focus of this paper to analyze the
consistency of the technical efficiency of the old private
sector banks in India.
The remaining section of the paper is organized in the
following way. Section 2 briefly reviews the literature on
efficiency of banks. The conceptual declaration and
research objectives are exposed in Section 3.Section 4
associates with the database and research methodology
used in the present study. Interpretation of results and
summarization are presented in Section 5.The final section
concludes with the implication of the study and suggests
the areas for future research.

2. LITERATURE REVIEW
There have been several studies that analyzed bank
efficiency in India. The pioneering studies on analyzing
the performance of the Indian banks, and comparison
among them, are Rangrajan and Mempilly (1972) and
Thyagrajan (1975). Later Angadi (1983) used data on
operating costs and output (measured in terms of total
deposits and deposit accounts and total credit and credit
accounts) to construct and determine operational
efficiency. Angadi (1987) ranked twenty-eight public
sector banks by accounting and economic profits.

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 2, No. 6, June 2013

Subrahmanyam (1993) studied the productivity growth of

Indian public sector banks for the period 1970 to 1989.
Studies by Sarkar et al. (1998) compared banks of public,
private and foreign sectors in India to study the effect of
ownership type on different bank performance measures.
Another study to compare operational efficiencies of
different banks over a period of time was conducted by
Rammohan (2002, 2003). Bhattacharya et al (1997)
measured the productive efficiency of Indian commercial
banks in the late 1980s to early 1990s where it
showcases the impact of policy measures undertaken
during liberalization in 1980s on the performance of
various banks. It has been empirically found that banks
receiving high efficiency scores are much more likely to
survive than banks which have relatively low scores (Barr
and Siems, 1996).Yildirim (2002) analyzed the efficiency
performance of Turkey commercial banks during
deregulated period by adopting Data Envelopment
Analyses. The analysis revealed that the banks suffered
with decreasing returns to scale and pure technical
efficiency and scale inefficiency were positively related to
size. Noulas and Ketkar (1996) measured the efficiency of
public sector banks of India by using the Data
Envelopment Analysis. The study considered 18 public
sector banks and the necessary information for analysis
have been collected from the RBI publications for the year
1993. The study identified that pure technical efficiency
was 1.5 percent and scale inefficiency was 2.25 percent
and none of the banks were operating under decreasing
returns to scale.Milind Sathye (2003) compared the
efficiency of Indian commercial banks with the efficiency
of foreign banks by employing a nonparametric approach
of Data Envelopment Analysis. Annual data consists of 27
public sector commercial banks, 33 private sector
commercial banks and 34 foreign banks were considered
for the analysis have been obtained from the Indian
Banks Association for the year 1997-1998. The analysis
revealed that public sector banks such as State Bank of
India, and Bank of Baroda and Indus Ind private bank
have been recorded with higher mean efficiency,but most
of the Indian banks had lower mean efficiency as
compared to the foreign banks. The study recommended
that the bringing down non-performing assets and
curtailing
the
establishment
expenditure
and
rationalization of rural branches could help Indian banks
to improve their efficiency.Shanmugam and Das (2004)
analyzed the technical efficiency of banks in four different
ownership groups in India by using stochastic frontier
approach with specification of Cobb-Douglas production
function. The analytical results in general indicated that
due to technical inefficiency actual output of Indian banks
was less than potential output and the State Bank of India
group and private foreign group performed better than
their counterparts. Ataullah et al (2004) compared the
technical efficiency of commercial banks in India and
Pakistan by employing the Data Envelopment Analysis
for the period 1988-1998. The sample included all the

ISSN: 2319-4421

commercial banks in India and Pakistan for which data for

at least three years were available. The study identified
that after 1995-1996 the overall technical efficiency of the
banking in both countries improved. In the case of India,
efficiency increased due to improvement in both pure
technical efficiency and scale efficiency, while in Pakistan
it was due to an improvement in scale efficiency. The
analysis also revealed that due to high non-performing
loans in the asset portfolios of banks in the two countries a
gap in efficiency has been created and the implementation
of the financial liberalization closed the efficiency gap
between large and small banks.

3. CONCEPTUAL DECLARATION AND

RESEARCH OBJECTIVES
3.1 Concept of productivity and efficiency
Productivity is in industrial engineering defined as the
relation of output (i.e. produced goods) to input (i.e.
consumed resources) in the manufacturing transformation
process. Productivity is therefore, on the one hand, closely
connected to the use and availability of resources. The
higher is the unit of output per unit of output, higher is the
productivity. Efficiency on the other hand, relates to how
well an organization employs its resources relative to
existing production possibilities frontier. It measures the
performance of an organization in a normative sense by
comparing it with the industry leader within or across
borders.
3.2 Measurement of efficiency:There are two approaches for determining efficiency of a
firm: parametric and non-parametric. The first approach is
based on the underlying relationship between the
parameter under the study and the various observed
independent variables. Therefore, it requires a specific
pre-specified function form of cost or production function.
Non-parametric approach is based on the optimizing
behavior of firms under study. This approach does not
require any pre-specified function. It takes data of actual
operations of the firms under study and frontier is formed
as the piecewise linear combination of the most efficient
observations. Thus efficiency is relative to the observed
best rather than an absolute value.
3.3 Research Objectives
1) To analyze the consistency of the technical efficiency
of the Old Private Sector banks in India.
2) To identify the least efficient bank in each year and
analyze the scope for improvements to be in the efficient
frontier.

4.0 DATABASE AND METHODOLOGY

The study has measured the consistency of the technical
efficiency of Old Private Sector Banks in India during the

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 2, No. 6, June 2013

recent five years from 2007-2008 to 2011-2012.While

there are 15 old private sector banks working in present,
but due to non-availability of complete data of three
banks, such banks have been excluded from the sample.
The names of those banks are Lakshmi Vilas Bank, SBI
Commercial and International Bank, United Western
Bank. Thus in this study a sample of 12 banks namely
City Union Bank, ING Vysya Bank, Tamilnadu
Mercantile Bank, Catholic Syrian Bank, Dhanalakshmi
Bank,Federal Bank, Jammu and Kashmir Bank, Karnataka
Bank, Karur Vysya Bank, Nainital Bank, Ratnakar Bank,
South Indian Bank were taken which is sufficiently large
to tackle the constrain imposed by the requirements of the
DEA model. The data has been collected through
secondary source. Capitaline database were used for
accessing the data.
4.1 Methodology
Data Envelopment Analysis (DEA) involves the use of
linear programming methods to construct a nonparametric piecewise surface (or frontier) over the data, so
as to be able to calculate efficiencies relative to this
surface.
Charnes, Cooper and Rhodes (1978) proposed a model
which had an input orientation and assumed constant
returns to scale (CRS). It is possible to measure technical
efficiency from input-orientation method as well from
output orientation method. The two measures provide the
same result under CRS but are different when variable
returns to scale (VRS) is assumed. Essentially, the
researcher should select an orientation according to
whether the manager has more control over the inputs or
the outputs. The present study is confined only to the CRS
assumption of decision making units (DMUs) & not the
VRS assumption for estimating the efficiency.
In this paper an intermediation approach has been adopted
and each observation included two outputs i.e., interest
income (Y1) per annum and non-interest income (Y2) per
annum. In the input category, two variables were
included. They were interest expense (X1), and noninterest expense (X2). The DEA model was estimated
using DEAP 2.0 algorithm (Coelli, 1996)

5.0

RESULTS & DISCUSSIONS

Objective 1:To analyze the consistency of the technical efficiency of

the Old Private Sector banks in India.

ISSN: 2319-4421

Table 1. 0

OPSB
CUB
VBL.
TMB
CSB
DBL.
FBL.
JKB
KBL
KVB
NBL
RBL.
SIB
Avg

201
2008
2009
2010
1
Input Oriented Approach- CRS
0.98
0.99
0.98
0.99
1
1
1
1
1
0.96
0.98
1
0.90
0.92
0.83
0.85
0.91
0.99
0.88
0.87
0.97
0.98
0.97
1
1
1
0.99
0.98
0.98
1
1
0.96
1
1
1
1
1
1
1
1
1
1
0.99
1
1
0.97
0.96
0.97
0.98
0.98
0.96
0.97

201
2
1
1
0.97
0.82
0.75
0.91
0.95
0.89
1
1
1
0.88
0.93

The table 1.0 exhibits that out of 12 old private sector

banks; only 25% of the total is consistent in technical
efficiency from 2008 to 2012 and the 3 banks are ING
Vysya Bank Ltd; The Karur Vysya Bank Ltd & Nainital
Bank Ltd. During 2008 of the 12 banks 58.33% where
efficient while during 2009 the percentage came down to
50%. The major losers were Tamilnadu Mercantile Bank
(3.1%) followed by The South Indian Bank (2.8%) and
there were 5 banks which relatively gained over 2008 but
only The Karnataka Bank Ltd could reach the efficiency
frontier (1.21%).During 2010 the overall percentage of
efficient banks came down to 33.33% where only ING
Vysya Bank Ltd, Karur Vysya Bank Ltd & Nainital Bank
Ltd only The Karnataka Bank Ltd could retain its
efficiency score. The two banks which lost their way from
the efficiency frontier were The Ratnakar Bank (0.7%) &
The Jammu & Kashmir Bank (1%).During 2011, the
percentage of efficient banks shot up to 50%. The major
drivers apart from ING Vysya Bank Ltd, Karur Vysya
Bank Ltd & Nainital Bank Ltd were Tamilnadu
Mercantile Bank (1.32%), The Federal Bank Ltd (2.88%),
The Ratnakar Bank (0.704%).During 2012 the percentage
of efficient banks plunged down to 41.67% as two banks
namely Tamilnadu Mercantile Bank (2.2%) & The
Federal bank Ltd (8.3%) completely lost their way out
from the efficiency frontier.
Objective 2:To identify the least efficient bank in each year and
analyze the scope for improvements to be in the efficient
frontier.

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Volume 2, No. 6, June 2013

Year
2008
2009
2010
2011
2012

Name of the least efficient

bank
The Catholic Syrian Bank Ltd
The Catholic Syrian Bank Ltd
The Catholic Syrian Bank Ltd
The Catholic Syrian Bank Ltd
The Dhanalakshmi Bank Ltd
Table 1.1

Efficiency
Score
0.90
0.92
0.83
0.85
0.75

The above table clearly depicts that from 2008 to 2011 the
least efficient bank is The Catholic Syrian Bank Ltd and
in 2012 The Dhanalakshmi Bank Ltd has the least
efficient score.
The advantage of DEA analysis can be obtained by
considering the data for the bank with the lowest
efficiency score, i.e. The Catholic Syrian Bank. The
results are summarized in table 2.0.The reference banks
making up the facet to which The Catholic Syrian bank is
compared and lambda a measure of the relative
importance of each reference bank in the facet is given.
The table shows that three reference banks namely The
Karur Vysya Bank Ltd, The Ratnakar Bank Ltd &
Nainital Bank Ltd compose the facet for The Catholic
Syrian Bank Ltd of which The Ratnakar Bank play a
major role followed by Nainital Bank & The Karur Vysya
Bank a relatively less role.
The value measures in the first column in the lower half of
the table shows the value of inputs and outputs for The
Catholic Syrian Bank in 2008.The second column gives
the value measure that the bank would have to achieve in
order to be DEA efficient. Difference between these is
presented in the third column. Bank in order to be
efficient it should reduce its interest expense and non
interest expense by 9.32% for this level of interest income
and non-interest income. A similar analysis can be
conducted for each inefficient bank to determine its
reference banks and the way it can become DEA efficient.
Detailed result for The Catholic Syrian Bank Ltd-2008
Efficiency Score
0.907
Facet
Lambda

Outputs
Interest Income
Non
Interest
Income

Inputs
Interest Expense
Non
Interest
Expense

KVB
0.221

RBL
1.775

NBL
0.276

Value
measures
481.26

Value if
efficient
481.26

Difference
0

61.06

61.06

Value
measures
317.18

Value if
efficient
287.63

Difference
-29.55

188.58

171.01

-17.57

Table 2.0

ISSN: 2319-4421

6.0 CONCLUSION AND IMPLICATIONS

Only 3 old private sector banks are being consistent from
2008 to 2012 out of 12 old private sector banks taken as
sample for analyzing the technical efficiency. The above
key areas, if monitored closely, will ensure the inefficient
banks to be in the efficient frontier which the top
management would be eagerly looking forward to
achieve. The quality of products, services and process will
be highly critical for the success of any business
enterprise in the new era. Only the business that offers top
quality products and services will succeed in the days to
come.
However, as mentioned by Avkiran (1999), DEA gives an
intuition on the areas that need to be improved but it lacks
information on what are the ways in which the
improvement need to be done. Future researches are very
much required in order to probe various approaches for
each bank to increase operation profit by moving towards
the efficient frontier.

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ABOUT THE AUTHOR

Vinod R R: A post graduate diploma in management
(Financial Management) holder has to his credit 6 years of
industry experience & 3 years of teaching. Presently he is
a member of faculty in finance group, Rajagiri College of
Social Sciences, Cochin

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