Lending Efficiency of Indian Commercial Banks: A Data Envelopment Approach

The lending environment in the Indian commercial banking industry changed considerably in the reform years following widening of priority sector definition, dismantling of Credit Authorisation Scheme and introduction of risk based supervision. In this context, the present paper attempts to compare the performances of commercial banks in the reform period in respect of lending (in a cost minimisation framework) making use of Data Envelopment Analysis – a non-parametric method which is quite suitable for making inter-(productive)unit comparison. The commercial banks have been assumed to obey constant returns to scale. The results obtained from the study are as under: (i) The observed private sector commercial banks exhibited higher mean cost efficiency than the observed public sector commercial banks. This is perhaps indicative of the problems that persist in the lending environment which caused the public sector commercial banks to shy away from lending. (ii) The difference in cost efficiency scores emanated mainly from differences in mean allocative efficiency scores exhibited by the two bank groups. Further, the observed commercial banks show considerable fluctuations in allocative efficiency scores across the years.