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EFFICIENCY OF PUBLIC AND PRIVATE SECTOR BANKS IN INDIA

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EFFICIENCY OF PUBLIC AND PRIVATE SECTOR BANKS IN INDIA Sushma Vegesna, Executive Assistant Quiket Cargo Airlines Private Limited, India Mihir Dash, Professor School of Business Alliance University, India
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EFFICIENCY OF PUBLIC AND PRIVATE SECTOR BANKS IN INDIA Sushma Vegesna, Executive Assistant Quiket Cargo Airlines Private Limited, India Mihir Dash, Professor School of Business Alliance University, India 183 Introduction The financial sector reforms since the mid-1990s had brought about a striking improvement in the financial health of the commercial banks, in terms of capital adequacy, asset quality and profitability, and had strengthened risk management systems in Indian banks. These systems had helped avoid crisis during the financial meltdown of However, the current scenario of the Indian banking industry is quite different from that of the 1990s. Deregulation has opened up new opportunities for banks by diversifying services of investment banking, insurance, credit cards, depository services, mortgage financing, securitization, and so on. At the same time, liberalization has brought greater competition among banks, as well as competition from mutual funds, NBFCs, and other financial institutions. Increasing competition is squeezing profitability and forcing banks to work efficiently on shrinking spreads. Also, innovation is a maor driving force, particularly with private and foreign banks pioneering maor changes in the form of Automatic Teller Machines (ATMs), Internet banking, mobile banking, and so on. The Indian banking system is still dominated by the public sector banks, and the issues of performance and efficiency have emerged to be the touchstone for the success of such banks. There is an emerging need to develop a comprehensive framework for measuring their efficiency in transforming their resources for better performance. Such type of performance benchmarking has become extremely relevant for their success. The analysis of banking efficiency has been an area of extensive research, particularly in developed markets. There have been several studies analyzing bank efficiency in India (e.g. Rammohan and Ray, 2004; Shanmugam and Das, 2004; Das et al, 2004; Saneev, 2006; Kumar and Gulati, 2007). Most of these studies have followed the intermediation approach, wherein financial institutions are thought of as primarily intermediating funds between savers and investors, with inputs being essentially financial capital (i.e. capital, deposits, borrowings, and so on), and outputs measured by the volume of loans, investments, and income. Dash and Charles (2012) analyzed the technical efficiency of public, private and foreign banks in India. They found that there was no significant difference in the efficiency of public and private banks. However, they found some significant differences in terms of utilization/underutilization of inputs and under-production of outputs. The present study extends the methodology of Dash and Charles (2012), employing the data envelopment analysis (DEA) model to analyze the technical efficiency of banks in India, and to identify critical factors affecting the efficiency of banks. Methodology The study pertains to a sample of twenty public sector banks and twenty private sector banks operating in India, as listed in Table 1. The sample banks were selected according to data availability. The research period was The data for the study was collected from annual reports of selected banks from the Capitaline.com database. Table 4. List of Sample Public Sector Banks and Private Sector Banks Public Sector banks Private Sector banks Allahabad Bank Abhyudaya Corporation Andhra Bank Apna Sahakari Bank Bank of Baroda Axis Bank Bank of India Bombay Mercantile Co-operative Bank Bank of Maharashtra Bharat Co-operative Bank Canara Bank Catholic Syrian Bank Central Bank Citizen Credit Co-operative Bank Corporation Bank Cosmos Co-operative Bank Dena Bank Development Credit Bank Indian Overseas Bank Dhanalaxmi Bank IDBI Bank Excellent Co-operative Bank Indian Bank Federal Bank Oriental Bank of Commerce HDFC Bank Punab & Sind Bank ICICI Bank Punab National Bank Indus Ind Bank State Bank of India BNP Paribas Bank Syndicate Bank Jammu & Kashmir Bank UCO Bank Yes Bank Union Bank Tamil Nadu Mercantile Bank Viaya Bank South Indian Bank 184 The study is based on Data Envelopment Analysis (DEA), a linear programming technique for measuring efficiency (see Goncharuk, 2013). It is a non-parametric method that identifies what proportion of a unit s inputs are actually required to produce given levels of outputs, as compared to other units. Mathematically, it is represented by the model expressed below. min E s. t. w w I i w O i 1 E. I O i!* i*. (1) The study follows the intermediation approach, with net worth, deposits, borrowings, operating expenses and fixed assets taken as inputs, and investments, advances, net interest margin and other incomes taken as outputs. A bank is technically efficient if it produces more outputs using less input resources. DEA results will classify the sample of banks into two groups: efficient banks and inefficient banks. For an efficient bank, a tight input constraint means an input, which is properly used for a given level of output. If input is not tight, it means that it is under-utilized or under-productive. In the case of inefficient banks, a tight input constraint means best-utilized input, even though it is not fully utilized. In an efficient bank a tight output constraint indicates an output which is not over-produced by the concern or in other words it is ust sufficient. In the case of an efficient bank an output is not tight means it is over-produced. In the case of an inefficient bank, tight output constraint indicates an output that is under-produced at a given level of input. 185 Findings The results of the efficiency analysis of public sector banks and private sector banks are presented in Table 2 below. Average Efficiency Efficient Banks Inefficient Banks Table 5. Average Efficiency and Tight Inputs and Outputs of Public Sector Banks and Private Sector Banks Net Worth Deposits Borrowings Operating Expenses Fixed Assets Advances & Loans Investments Net Interest Income Noninterest income public sector % 99.93% 99.81% 99.61% 99.73% private sector 99.52% 99.09% 99.28% 99.78% 98.89% public sector 68.43% 21.05% 37.84% 52.63% 21.05% private sector 28.56% 57.56% 32.67% 14.28% 28.57% public sector 42.10% 26.54% 34.58% 15.87% 26.31% private sector 50.00% 63.33% 32.12% 50.00% 32.67% public sector 73.68% 73.68% 57.89% 78.94% 52.60% private sector 78.54% 57.14% 76.88% 57.14% 78.57% public sector 57.89% 47.36% 15.79% 49.37% 47.37% private sector 43.23% 42.85% 36.83% 21.43% 42.85% public sector 34.45% 45.67% 25.56% 34.54% 23.67% private sector 42.67% 32.56% 43.67% 43.45% 43.56% public sector 50.00% 33.33% 50.00% 60.00% % private sector % 50.00% % % % public sector 75.00% 50.00% % % % private sector 33.33% % 33.33% 80.00% 50.00% public sector 50.00% % 50.00% 60.00% 0.00% private sector 50.00% 0.00% 50.00% 0.00% 25.00% public sector 50.00% 50.00% 0.00% 20.00% % private sector % 50.00% 33.33% 60.00% 50.00% Overall comparison of public sector and private sector banks: It was found that public sector banks were significantly more efficient than private sector banks (F Stat = , p = ). Also, there was a trend decrease in the average efficiency level of both public sector and private sector banks, though this was not statistically significant (F Stat = , p = ); this could be a reflection of worsening conditions some banks faced, particularly on the loan front. For the year : It was found that 100% of the public sector banks and 95% of private sector banks were efficient. Among efficient public sector banks, the most properly-utilized inputs were Borrowings and Net Worth, while Fixed Assets and Deposits were relatively underutilized. For efficient private sector banks, Borrowings were properly-utilized, while Net Worth, Fixed Assets, and Operating Expenses were underutilized. Among inefficient private sector banks, Investments were found to be insufficiently produced. For the year : It was found that 90% of private banks, and 95% of the properly-utilized, while Net Worth and Deposits were underutilized. For efficient private sector banks, Deposits were properly-utilized, while Fixed Assets were relatively underutilized. Among inefficient public sector banks, Advances & Loans were found to be insufficiently produced, whereas among inefficient private sector banks, Net Interest Income was insufficiently produced. For the year : It was found that 85% of private banks, and 90% of the properly-utilized, while Operating Expenses and Fixed Assets were underutilized. For efficient private sector banks, Borrowings were properly-utilized, while Deposits, Net Worth, and Operating Expenses were relatively underutilized. Among the inefficient public sector banks, Non-Interest Income was insufficiently produced, whereas for inefficient private sector banks, Investments and Non-Interest Income were insufficiently produced. For the year : It was found that 90% of private banks, and 85% of the properly-utilized, while Deposits and Fixed Assets were underutilized. For efficient private sector banks, Borrowings were properly-utilized, while Net Worth and Operating Expenses were relatively underutilized. Among the inefficient public sector banks, Non-Interest Income was insufficiently produced, whereas for inefficient private sector banks, Net Interest Income was insufficiently produced. For the year : It was found that 70% of private banks, and 85% of the properly-utilized, while Net Worth and Fixed Assets were underutilized. For efficient private sector banks, Borrowings were properly-utilized, while Net Worth was relatively underutilized. Among the inefficient public sector banks and inefficient private sector banks, Net Interest Income was insufficiently produced. 186 Discussion The results of the study show that public sector banks were more efficient than the private sector banks, and that there was a trend decrease in the average level of efficiency. There were also some significant differences in terms of utilization/underutilization of inputs and under-production of outputs. Fixed assets were found to be under-productive for efficient public sector banks. This may be due to capacity considerations. Both public and private sector banks have considerably expanded their market base in recent years, and would continue to do so in the immediate future. Excess capacity would thus be expected. On the other hand, net worth was found to be under-productive for efficient private sector banks. Thus, private sector banks may need to streamline funds to optimize their utilization of net worth. Non interest income was found to be under-produced in inefficient public sector banks, while Net interest income was found to be under-produced in inefficient private sector banks. Thus, public and private banks may need to pursue more aggressive loans and investment policies. Of course, the global credit crisis is a warning that such policies should be undertaken cautiously, within the statutory regulatory framework. There must be more reforms and renovations in the public sector banks in order to increase the efficiency of these banks. Moreover, there must be special efforts from the part of Government to revive the smaller banks in the country. The maor limitation of the study is dependence on only one model of analysis, i.e. DEA. Excessive dependence on one model of analysis can give misleading results, as the banks are compared only in terms of efficiency. Other factors such as competition, government regulations, and requirements from other legal institutions should also be taken into consideration to give a more balanced picture. 187 References Das, A., Nag, A., and Ray, S. C. (2004), Liberalization, Ownership, and Efficiency in Indian Banking: A Nonparametric Approach, Economics Working Papers, University of Connecticut. Dash, M. and Charles, C. (2012), A Study of Technical Efficiency of Banks in India, IUP Journal of Bank Management, Vol. 9 No. 3, pp Goncharuk, A. G. (2013), About the Influence of High Gas Price on an Efficiency , Journal of Applied Management and Investments, Vol. 2 No. 1, pp Kumar, S. and Gulati, R. (2007), Evaluation of Technical Efficiency and Ranking of Public Sector Banks in India, International Journal of Productivity and Performance Management, Vol. 57 No. 7, pp Rammohan, T. T. and Ray, S. C. (2004), Comparing Performance of Public and Private Sector Banks: A Revenue Maximisation Efficiency Approach, Economic and Political Weekly, Vol. 39 No. 12, pp Saneev, G. M. (2006), Data Envelopment Analysis (DEA) for Measuring Technical Efficiency of Banks, VISION-The Journal of Business Perspective, Vol. 10 No. 1, pp Shanmugam, K. R. and Das, A. (2004), Efficiency of Indian Commercial Banks During the Reform Period, Applied Financial Economics, Vol. 14, pp EFFICIENCY OF PUBLIC AND PRIVATE SECTOR BANKS IN INDIA Sushma Vegesna Quiket Cargo Airlines Private Limited, India Mihir Dash Alliance University, India Abstract The Indian banking system is still dominated by the public sector banks, and the issues of performance and efficiency have emerged to be the touchstone for the success of such banks. There is a need to develop a comprehensive framework for measuring their efficiency in transforming their resources for better performance. Such performance benchmarking has become extremely relevant for their success. The current study focuses on the technical efficiency of banks in India using Data Envelopment Analysis (DEA), to identify critical factors affecting the efficiency of banks. The inputs taken include net worth, deposits, borrowings, operating expenses, and fixed assets, while the outputs taken are investments, advances, net interest income and non-interest income. The results of the study show that public sector banks were more efficient than the private sector ones, and that there was a trend decrease in the average level of efficiency. There were also some significant differences in terms of utilization/underutilization of inputs and under-production of outputs. Keywords: technical efficiency, Data Envelopment Analysis (DEA), banks
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