Measuring efficiency, effectiveness and performance of Indian public sector banks

Purpose – The purpose of this paper is to appraise the efficiency, effectiveness, and performance of 27 public sector banks (PSBs) operating in India by using a two‐stage performance evaluation model. Design/methodology/approach – Using the cross‐sectional data for the financial year 2006/2007, the technique of data envelopment analysis has been used for computing the efficiency and effectiveness scores for individual PSBs. The overall performance scores have been derived by taking the product of efficiency and effectiveness scores. Findings – The empirical results reveal that high efficiency does not stand for high effectiveness in the Indian PSB industry. A positive and strong correlation between effectiveness and performance measures has been noted. Further, on the efficiency front, State Bank of Travancore appears as an ideal benchmark, while State Bank of Bikaner and Jaipur, and State Bank of Mysore emerge as ideal benchmarks on the effectiveness front. Practical implications – The practical implication of the research findings is that in their drive to improve overall performance, Indian PSBs should pay more attention to their income‐generating capabilities (i.e. effectiveness) relative to their ability to produce traditional outputs such as advances and investments (i.e. efficiency). Originality/value – This paper is perhaps the first to evaluate the performance of Indian banks by considering simultaneously the aspects of efficiency and effectiveness.