Reforms, Ownership and Determinants of Efficiency: An Empirical Study of Commercial Banks in India

Major steps were taken in Indian banking sector in the early 1990s to liberalise commercial bank functioning in order to improve their efficiency. The measurement of bank efficiency provides the foundation for consequent inquiry into reasons producing efficiency differences. This article measures technical efficiency of balanced panel of 54 commercial banks operating in India during 1991–92 to 2006–07 using Data Envelopment Analysis (DEA) with an aim to study effects of reforms and ownership on bank efficiency. Since existing literature lacks uniformity in methodology used for identifying determinants of efficiency in banking, this study employs a blend of tests including profitability analysis (suggested by Spong et al., 1995) and found evidence that financial reform, ownership and listing of bank shares have influenced bank efficiency in India. However, no conclusive evidence was found regarding a relationship between size and efficiency. In addition, ‘most’ efficient banks were found to be characterised by higher Net Profit as percentage of Total Assets (NPTA) and higher Profits per Employee (PPE) while ‘least’ efficient banks reported higher levels of Non-Performing Assets (NPAs).JEL Classification: G21, G32