Banks in India- Technical and Scale Efficiency in Financing Entrepreneurs and Small Businesses: DEA approach

Banks are one of the mediums of implementing Government schemes that facilitate easy access to capital for small businesses and entrepreneurs. We for the first time analyze the bank’s efficiency in implementing a government scheme that promotes entrepreneurship. We empirically study the relative technical and scale efficiency of 42 Indian banks including a comparative efficiency between private and public sector banks in providing loans under the Pradhan Mantri MUDRA Yojana PMMY scheme launched by the Government of India to promote entrepreneurship and facilitate easy access to capital for small and micro units including the start-ups under the scheme using data on the number of loans sanctioned and amount of loan disbursed under the scheme as on March 2016. We have used the Data Envelope Analysis (DEA) - a non-parametric technique for measuring the relative efficiencies of the Indian banks. We found that while Indian banks have been less efficient in implementing the PMMY, in comparison the public sector banks are more efficient in providing loans under the scheme and providing loans to start-ups under the scheme than the private sector banks. The study implies that the banks’ efficiency scores give the policy makers a better picture of their relative performances it takes into account the differences in size, branch network, back end technology and profitability unlike the number of loans sanctioned. The efficiency levels provide information to the policy makers on how many more loans can be sanctioned by each bank with their existing resources. The lower efficiency of private sector banks mandates separate and stricter norms for implementation of PMMY for private banks.