Banking Sector Liberalization and Efficiency of Indian Banks

The purpose of this paper is to examine the competitiveness of Indian commercial banks in the deregulated period 1996-2002. The data used for the study has been collected from annual reports of Reserve Bank of India. Data envelopment analysis and window analysis were used to find changes in pure technical efficiency, scale efficiency and the nature of returns to scale over the period among bank ownership groups namely State banks, nationalized banks, private and foreign banks. The main findings indicate increase in technical efficiency and scale efficiency of most of the banks in deregulated period. Bank profitability increased and interest margins decreased in the deregulation period. Most of the foreign banks exhibited most productive scale size, while most of the public sector banks working under decreasing returns to scale, as a result of wider branch network with a low level of technological upgrade in terms of networking (computerization) connection. The size of non-performing assets and share of non-approved investment in total investment turned out to be negatively influencing the overall efficiency of banks. Capital adequacy ratio had negative influence on scale efficiency while its influence on pure technical efficiency was positive. Number of branches had negative influence, while total assets have positive influence on pure technical efficiency and scale efficiency. Share of priority sector advances had positive influence, on scale efficiency, as priority sector lending needs widespread bank branches in rural India.