International Journal of Accounting and Financial Management Research (IJAFMR) ISSN 2249-6882 Vol.

3, Issue 1, Mar 2013, 187-192 TJPRC Pvt. Ltd.

A SIGNIFICANT STUDY OF MEASURING TECHNICAL EFFICIECNY IN BANKS USING DATA ENVELOPMENT ANALYSIS IN INDIA
SANOBAR ANJUM Prince Mohammad Bin Fahd University, Instructor, College of Business- Accounting & Finance Department, Dhahran, Al Khobar, Kingdom of Saudi Arabia Rayalaseema University, Research Scholar, Ph. D in Commerce, Kurnool, Andhra Pradesh, India

ABSTRACT
The following research article discusses the various studies conducted by authors to measure the technical efficiency ofDecision Making Units(DMUs). Decision Making Units arebusinesses set up to earn profits.Decision Making Units can be elaborated as enterprises ranging from publically held companies, Privately owned corporation, Banks, Nonprofit organization, airports etc. This research paper deals with measuring the technical efficiency of Banks in India. Efficiency means to measure how well the DMUs are doing given the circumstance & inputs. There are many ways to calculate efficiency of DMUs. Data envelopment Analysis technique is the latest methodology to benchmark performance of Banks. Data envelopment Analysis is a non-parametric approach used through linear programming to decide efficiency of similar enterprises. The following research paper discusses the various studies conducted by authors to measure the technical efficiency using Data Envelopment Analysis in India. The research paper lists in chronological order all literary work carried out by Indian authors discussing the title, name of the author, period of study, years of study, input/output used & the findings of the study.

KEYWORDS: Data Envelopment Analysis, Bank, Technical Efficiency INTRODUCTION

Data Envelopment analysis is a non-parametric method to measure efficiency occasionally called frontier analysis. Efficiency can be scale efficiency, technical efficiency, allocative efficiency, economical efficiency etc. DEA is commonly used to measure efficiency with the help of combinations of inputs & outputs. Production approach, Intermediation approach are two approaches which are widely used. Production approach is followed when the Decision making Units are believed to be producer of some product. In the context of banks, the production approach entails that the banks produce services to customers by opening bank account or process their loan requirements etc. Under the Intermediation approach, banks are treated as facilitators bridging the gap between consumer and investor. The following research paper looks at studies that have being carried out in the past 15 years and discusstheir major findings. The following table has being drawn to get better understanding of the measurement of efficiency in the banking sector in India using Data Envelopment Analysis Technique. All key factors including title of the study, authors name, type of Bank, period of the study, input/output variables & the major findings have being discussed at length.

188
S.N o

Sanobar Anjum

Title of the Study

Author's Name

Banks

Year

Input

Output

Major Findings The major findings of this paper were that the technical efficiency for all ownership groups indicates an affirmative gesture about the reform process in the Indian banking sector. Second finding states that the Nationalized banks do not reflect their learning experience in their cost minimizing behaviour due to Xinefficiency factors arising from government ownership. Only 35.25% private sector banks were found in efficient in the entire period. The results indicate that majority of private sector banks in India need to decrease the NPA level & improve their output parameters, such as deposits, advances and investment, because they have failed to acquire full efficiency score in all the years under their study. 1) De nova private sector banks dominate the formation of efficient frontier of Indian domestic banking industry;(2) The overall technical inefficiency stems primarily from managerial inefficiency rather than scale efficiency; and(3) the study concludes that ownership does not matter in the Indian domestic banking industry The study emphasizes on the performance of SCBs & DCCBs in term of its technical efficient score. The journal does not compare SCBs with DCCBs. The study concludes that the efficiency of the banks has not increased. It was also found that a few banks were better prepared to fight competition as compared to their peers. The author has chosen input/output with specific objective/policy formulation in mind. The results of the study show that foreign banks were slightly more efficient than public and private, and that there was not much of a difference in the efficiency of public and private banks. The study of the technical efficiency scores across ownership group reveal that the observed private sector banks have higher mean technical efficiency scores compared to their public sector counterparts. Commercial banks exhibit decreasing return to scale for the period under observation.

Productive Performance Evaluation of the Banking sector in India using Data Envelopment Analysis.

Biresh K Sahoo , JatiSengupta, &AnandadeepMan dal

26 Nationalized banks, 29 Indian Private Banks & 26 foreign banks

1997-98 to 2004-05

Intermediation - Borrowed Funds, Labour, Fixed Assets

Investments, Performing Loan assets, and NonInterest Income

"An Analysis of the Efficiency of Private Sector Banks in India"

BS Bodla&RichaVer maBajan (2010)

29 Private

1998-99 to 2005-06

ProductionInterest Expense, NonInterest Expense & NPA

Deposits, Advances, and Investments

"Assessing the effect of Ownership on the Efficiency of Indian Domestic Banks."

Sunil Kumar and RachitaGulati (2010)

53 Banks(200506) & 51 Banks (2006-07)

2005-06 to 2006-07

Intermediation - Physical Capital (Fixed Assets), Labour, Loanable Funds ( Deposits plus Borrowings)

Net-Interest Income & Non-Interest Income

"Data Envelopment Analysis of State and District Cooperative Banks in India: Exploratory Results"

N Ganesan (2009)

30 state Cooperative Banks & 20 District Central Cooperative Banks

2002 to 2006

ProductionMembership, Number of Branches, Labour, Borrowed Funds

Deposits, Advances, and Investments

"Efficiency of Indian Public Sector Banks: An Application of DEA Approach."

Gunjan M Sanjeev (2009)

27 Public Sector Banks

2002-03 to 2006-07

NEW APPROACHInterest Expense, NonInterest Expense Intermediation -Borrowings, Deposits, Fixed Assets, Net worth, and Operating Expense.

Interest Income & Fee , Commission & Brokerage

6.

"The study of Technical Efficiency of Banks in India." "Performance Evaluation of Indian Commercial Banks in the Prompt Corrective Action Framework: An Assurance Region approach.

Mihir Dash and Christabel Charles (2009)

20 Public Sector Banks, 19 Private Banks & 10 Foreign Banks

2003 to 2008

7*

Ram PratapSinha( 2008)

28 Commercial Banks

2002-03 to 2004-05

Branch, Borrowings & Net Worth

Advances & Loans, Investments, Net Interest Income & Non-Interest Income Return Of Assets , Capital to Risk weighted Asset Ratio(CRAR ), Performing Advances/Ne t Advances

A Significant Study of Measuring Technical Efficiecny in Banks Using Data Envelopment Analysis in India

189

S.N o

Title of the Study "The impact of size and group affiliation on technical efficiency of Indian Public Sector Banks: An Empirical Investigation." Data Envelopment Analysis (DEA) for measuring technical efficiency of Banks."

Author's Name

Banks

Year

Input

Output

Major Findings The study showed that the banks affiliated to State Bank of India Group are more efficient than the nationalized banks. The relationship between size and technical efficiency indicated that the small banks are more efficient than the larger counterparts The study emphasized that the efficiency of the banks has improved over time and that the foreign banks have outperformed both the Private sector banks and the public sector banks. The study concludes that the Indian banking sector is likely to witness greater thrust. The observed private sector commercial banks exhibit higher mean technical and cost efficiency scores than the observed public sector commercial banks irrespective of the output indicator chosen, although the difference is more pronounced in respect of noninterest income PSBs performed significantly better than private sector banks, but not differently from foreign banks. Superior performance of PSBs is to be ascribed to higher technical efficiency. The study found no significant difference between the efficiency of PSBs and other categories of banks. The mean efficiency score of Indian banks compare well with the world mean efficiency score. The efficiency of private sector commercial bank as a group is padoxically lower than that of public sector banks and foreign banks in India.

Sunil Kumar and RachitaGulati (2008)

27 Public Sector Banks

2005

Intermediation -Physical Capital, Labour, Loanable funds

Spread( Netinterest Income) & Non- Interest Income

Gunjan M Sanjeev (2006)

27 Public Sector Banks 33 Private Sector Banks 38 foreign Banks

1997 to 2007

NEW APPROACHInterest Expense, NonInterest Expense

Interest Income & Fee , Commission & Brokerage

10

"Cost Efficiency and Commercial Bank lending: Some Empirical results."

Chatterjee and Sinha (2006)

30 Banks

1996-97 to 2002-03

Intermediation Number of Branches , Borrowed Capital

Net-Interest Income NonInterest Income &: loan

11

"Productivity Growth & Efficiency in Indian Banking: A comparison of Public, Private and foreign banks."

Ram Mohan & Ray (2004)

58 Banks

19922000

Revenue Maximization efficiency approach Deposits & Operating Cost Intermediation -Financial analysis Interest Expense & Non Interest Expense. OperationalDeposits & Staff Intermediation Borrowed funds( Deposits & other borrowings), Number of Employees, fixed assets & Equity Branches, Staff, establishment expenditure and nonestablishment expenditure (Excluding interest expenditure)

Loans, Investments & other Incomes

12

Efficiency of Banks in a developing economy: The case of India."

SathyeMilind (2003)

Scheduled Commercial Bank

1997 to 1998

Financial analysis-Net Interest Income & Non- Interest income. Operational Net Loans & Non-Interest Income

13

"Efficiency of Public sector banks in India: An application of Data Envelopment Analysis Model."

Abhiman Das (2000)

27 Public sector banks

1998

Investments, Performing Loan assets, and NonInterest Income

The major conclusion of this study was that Non-performing assets, poor management and congestion of labour are the main cause of poor performance in PSBs.

14

" Rating of Indian Commercial Banks: A DEA Approach"

Saha and Ravisankar (2000)

1991-92 to 1994-95

25 PSBs

Deposits, Advances, Investments, spread, total income, interest income , non-interest income & working finds

PSBs have improved their efficiency scores over the study period. The study noted that a few banks such as Corporation Bank, Oriental Bank of Commerce, SBI, Canara Bank, SBH, Bank of Baroda and Dena Bank were found to be consistently efficient banks.

190

Sanobar Anjum

S.N o

Title of the Study

Author's Name

Banks

Year

Input

Output

Major Findings The Publicly owned banks were found to be the most efficient, followed by foreign banks and domestic private banks. The authors found temporal improvements in the performance of foreign-owned banks, virtually no trends in the performance of privately owned banks and a temporal decline in the performance of public owned Indian banks. The banks belonging to State Bank of India (SBI) group are more efficient than nationalised banks. Main source of inefficiency was technical in nature rather than allocative. However PSBs have improved their allocative efficiency in the post liberalization period.

15

"The Impact of Liberalisation on the Productive Efficiency of Indian Commercial Banks."

Bhattacharya et al (1997)

70 Commercial Banks

1986 to 1991

Production Interest Expense, Operating Expense

Advances, Investments & Deposits

16

Technical, allocative and Scale Efficiency of Public Sector Banks in India."

Abhiman Das(1997)

27 Public Sector Banks

1970, 1978, 1984, 1990 & 1996

Intermediation Labour, Loanable Funds (Deposits + Borrowings)

Net Interest Income & Interest Income

CONCLUSIONS
Extensive empirical studies of banking efficiency have been conducted with U.S. and European commercial banks. However, few studies have been carried out to investigate banking efficiency in developing countries, especially in South Asian countries. Since more empirical work is needed on banking efficiency in Asian countries, the primary objectiveof this study is to evaluate all the technical efficiency of the banking system in the South Asian countries to fill the gap of literature in this area. Thus, we can say that the empirical studies in banking efficiency on the Indian commercial banks are minimal.The literature work has being put in chronological order. Overall, the literature of measuring banking efficiency that has been represented here yield useful comparatives and provides information that can lead to significant improvement and that can alert banks to new business practices, Furthermore, the literature enables us to choose convenient inputs and outputs to use in further studies. The studies show that most of the technical efficiency has being carried out till the early 2000s. This leaves scope for much work to be carried out to gather trends for the later years as well. A major research work can be carried out which includes all the Public Sector Banks , Private sector banks & Foreign banks to measure technical efficiency through both the production and intermediation approach. This would help us to formulate policies &procedures & prepare best practices for Banks.

REFERENCES
1. B S Bodla and RichaVerma Bajaj (2010), An Analysis of the Efficiency of Private Sector Banks in India. The IUP Journal of Bank Management, Vol IX, Nos. 1 & 2, 2010. 2. Bhattacharyya A, Lovell C and Sahay P (1997), The Impact of Liberalization on the Productive Efficiency of Indian Commercial Banks, European Journal of Operational Research, Vol. 98, No. 2, pp. 332-345. 3. Biresh K Sahoo and AnandadeepMandal (2011), Examining the Performance of Banks in India: Post Transition Period. The IUP Journal of Bank Management, Vol X, No. 2, 2011. 4. Chatterjee B and Sinha R P (2006), Cost Efficiency and Commercial Bank Lending: Some Empirical Results, the Indian Economic Journal, Vol. 54, No. 1, pp. 145-165.

A Significant Study of Measuring Technical Efficiecny in Banks Using Data Envelopment Analysis in India

191

5.

Das Abhiman (1997), Technical, Allocative and Scale Efficiency of Public Sector Banks in India, RBI Occasional Papers, Vol. 18, Nos. 2 and 3.

6.

Das Abhiman (1999-2000), Efficiency of Public Sector Banks in India: An Application of Data Envelopment Analysis Model, Prajnan, Vol. 28, No. 2, pp. 119-131.

7.

Gunjan M Sanjeev (2006), Data Envelopment Analysis for measuring the technical efficiency of Banks. The journal of Business Perspective, Vol. 10, No.1 , January- March 2006

8.

Gunjan M Sanjeev (2009), Efficiency of Indian Public Sector banks: An Application of DEA Approach. The IUP Journal of Applied Finance, Vol. 15, No. 11, 2009

9.

Mihir Dash and Christabel Charles( 2009) , The study of the Technical efficiency of Banks in India. http://ssrn.com/abstract=1417376 (2009)

10. N Ganesan (2009), Data Envelopment Analysis of State and District Cooperative Banks in India: Exploratory Results. The IUP Journal of Bank Management, Vol VIII, Nos. 3 & 4, 2009. 11. Ram Mohan T and Ray S Banking: A Comparison of Public, Private and Foreign Banks, Department of (2004), Productivity Growth and Efficiency in Indian Economics, Working Paper No. 2004/27, University of Connecticut, Connecticut. 12. Ram PratapSinha (2008), Performance Evaluation of Indian Commercial Banks in the Prompt Corrective Action Framework: An Assurance Region Approach. The Icfai Journal of Financial Risk Management, Vol. V, No. 1, 2008 13. Saha A and Ravisankar T S (2000), Rating of Indian Commercial Banks: A DE Approach, European Journal of Operational Research, Vol. 124, No. 1, pp. 187-203 14. Sathye, M. (2001), Efficiency of Banks in a Developing Economy: The Case of India, Australia: University of Canberra. 15. Sunil Kumar and RachitaGulati (2008), The Impact of size and group affiliation on technical efficiency of Indian Public Sector Banks An Empirical Investigation. The Icfai Journal of Bank Management, Vol. VII, No. 4, 2008. 16. Sunil Kumar and RachitaGulati (2010), Assessing the effect of Ownership on the efficiency of Indian Domestic Banks. The IUP Journal of Bank Management, Vol IX, No. 3, 2010.