Dynamics of technical efficiency in the Indian banking sector: a metafrontier DEA approach

This study aims to examine the long-term efficiency pattern of Indian banks. To gauge efficiency scores, we employed a non-parametric DEA-based technique using metafrontier framework and estimated three efficiency measures, namely, overall technical efficiency, pure technical efficiency, and scale efficiency, for the period from 2000 to 2023. We have used two approaches viz. intermediation and operating approaches to estimate the efficiency. Further, we have evaluated the technology gap ratio (TGR) to assess the technology differences among the ownership groups. Moreover, in the second stage, dynamic panel data regression using Generalised methods of moment (GMM) is applied to link the variation in technical efficiency to various explanatory variables. The results obtained suggest that the performance of the Indian banks is inefficient under both approaches during the period of study. We found that foreign banks are the most efficient group under the intermediation approach, while the operating approach exhibits PSBs as the most efficient. The TGR values show that foreign banks (FBs) lead the Indian banking sector in production technology, indicating significant opportunities for both public and private sector banks to enhance their efficiency through the adoption of metatechnology. Further, we found that both the Global Financial Crisis (GFC) and COVID-19 hurt the efficiency of Indian banks. The result shows that the decline in efficiency is more abrupt under the intermediation approach than the operating approach. The GMM results indicate persistence in efficiency performance, with profitability positively affecting and capitalization negatively impacting the bank's efficiency.