Data Envelopment Analysis (DEA) for Measuring Technical Efficiency of Banks

The Indian banking sector has witnessed a series of reforms in the last fifteen years to improve their efficiency. The reforms focussed on the deregulation of policies, prescription of prudential norms on capital adequacy, income recognition, asset classification and provisioning for impaired assets. They allowed the opening up of the private sector, including the entry of foreign banks in order to increase competition within the Indian banking system. The reforms also gave greater freedom to the banks to manage both the pricing and quality of resources. This study makes an attempt to evaluate the technical efficiency of the banks operating in India in the post-reform era. The study uses a non-parametric linear programming-based technique. Data Envelopment Analysis (DEA) is used to determine the technical efficiency of the public, private and foreign banks operating in India. The study has also investigated the relationship between the efficiency and the percentage of non-performing assets (NPAs) of the commercial banks operating in India. The results show that the efficiency of the banks has improved over time and that the foreign banks have outperformed both private sector and public sector banks. Competition has increased sharply amongst the banks in the post-reform era. Therefore, it is evident that banks have responded positively to the reforms. It is concluded that the Indian banking sector is likely to witness greater thrust on reforms in coming years.