TECHNICAL AND ALLOCATIVE EFFICIENCY OF
INDIAN BANKS
By
Piyush Kumar Singh
A Doctoral Dissertation Submitted in Partial Fulfillment of the
Requirements for the
Fellow Programme in Management
of the
Indian Institute of Management Indore
March, 2014
TECHNICAL AND ALLOCATIVE EFFICIENCY OF
INDIAN BANKS
A Doctoral Dissertation Submitted in Partial Fulfillment of the Requirements for the
Fellow Programme in Management
Indian Institute of Management Indore
By
Piyush Kumar Singh
March 2014
Thesis Advisory Committee:
Prof. V.K. Gupta
(Chair)
Prof. Keyur Thaker
(Member)
Prof. Arun Kumar
(Member)
TECHNICAL AND ALLOCATIVE EFFICIENCY OF INDIAN BANKS
Piyush Kumar Singh
Abstract
In India, dynamic and competitive banking environment, coupled with sectorial reforms,
provides an interesting setting to examine the efficiency of banks. This study attempts to
analyse the technical and allocative efficiency of Indian banks during 2008-2012 to offer an
understanding of the operational efficiency and trends during the period. The extant literature
suggests that conventional ratio-based performance measures are inadequate to address the
different issues related to the scope of activities of modern banking, viz. resource allocation,
optimal strategy selection, inefficiencies associated with cost and the revenue side of banking
operations. Sophisticated performance measurement techniques would be required to provide
useful insights about the effectiveness, efficiency and stability of the banks. Hence, to
examine the importance of these aspects for Indian banks, this study employs frontier
approach to estimate different efficiencies.
We use Data Envelopment Analysis (DEA), a non-parametric, mathematical programming
technique, to estimate technical and profit efficiency (PE) of 66 Indian banks (26 public, 19
private and 21 foreign banks). A two-stage approach is applied to estimate and validate the
results of technical efficiency under different scales of economics i.e. Constant Returns of
Scale (CRS) and Variable Returns of Scale (VRS). In the first stage, DEA is employed to
estimate overall technical efficiency (OTE), pure technical efficiency (PTE) and scale
efficiency (SE), under both scales of economics. In the second stage, cross validation and
value judgment analysis are conducted to examine the importance of different operational
variables in banking efficiency. Finally, profit efficiency is estimated by employing DEA at
VRS. The study reinforces the use of DEA for measurement of the operational efficiency of
Indian banks to investigate the contribution of various input and output variables. Results
indicate that small public sector banks reported higher OTE scores than larger public sector
banks, while large and small private sector banks reported improvement on OTE scores over
the study period. On the contrary, small and large foreign banks reported decreasing OTE
scores after 2008 and 2009. No significant change is observed in PTE scores of small and
large public sector banks. Unlike public sector banks, private banks yield heterogeneity in
PTE scores and small foreign banks reported a trend of decreasing PTE scores. Further
results show that large public sector banks had better scale efficiency as compared to small
public sector banks. SE scores of large and small foreign bank decreased during the study
period. Finally the study reports that large public, private and foreign sector banks were more
profit efficient than small and medium banks in their respective groups. This study provides a
better understanding of different operational efficiencies, ie. OTE, PTE, SE and PE, of Indian
banks during 2008-2012. The value judgement and cross validation analysis provide different
perspectives in banking operations. The outcomes point towards different ways of managing
bank resources for improving efficiency of operations in terms of both input (cost) and output
(revenue). Further, it stresses the importance of different variables in banking operations and
their impact on operational efficiency.
Table of Contents
Chapter Topics
1.
2.
3.
4.
Introduction………………………………………………………
Statement of the Problem.....……………...........................
Structure of the Thesis…………........................................
Review of Literature………………………………………….......
Overview of Indian Banking Industry…………………..
Banking efficiency………………………..........................
Types of Efficiencies……………………………………..
Scale and Scope efficiency……………………….………
‘X’ Efficiency………………………………….....
Technical Efficiency……………….……
Allocative Efficiency…………………...
Cost Efficiency…………………..
Profit Efficiency………………...
Banking Efficiency in Indian Context........……................
Research Gap………....………………..............................
Research Objectives…....………………………................
Research Questions…………....……………….................
Methodology……………………………………………...............
Evolution of Different Methodologies..………………....
Ratio Analysis......………………………...............
Frontier Approach..………....…………….............
Deterministic Approach………………...........
Non Parametric Techniques….....................
Data Envelopment Analysis (DEA).....
Model ‘A’………………………...
Stage I.………....................
Stage II………....................
Model ‘B’…………………...........
Model ‘C’…………………...........
DEA in Indian Context…………
Frontier Development for Indian Banks………………..
Data……………………………………………….……...
Small and Large Banks………….......................................
Input/ Output Variables selection..............
Result Analysis...............................................................................
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no.
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0
5.
6.
7.
8.
Technical Efficiency…………........……………...............
Stage I……………………………....…................
Overall Technical Efficiency (OTE).........
Pure Technical Efficiency (PTE)................
Scale Efficiency (SE)........……..............................
Stage II………………….......…...............
Cross Validation Analysis……......
Value –Judgment Analysis……....
Profit Efficiency (PE)............….........................................
Discussion………………………………………………………...
Mapping of Technical and Allocative Efficiency...............
Overall Technical Efficiency, Scale Efficiency
and Pure Technical Efficiency................................
Cross Validation & Value Judgement Analysis.....
Profit Efficiency......................................................
Constraint of Technical and Allocative efficiency.............
Trends of the Technical and Allocative Efficiency............
Implications…………………………….............................
Conclusions……………………………………………….............
Contributions………………....…………………...............
Limitation and Future Research……………......................
References………………………………………………………...
Appendix……………………………………………..……...........
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1
Index of Figures
Figures
Description
Figure 1:
Figure 2:
Composite framework of banking efficiency
Inefficiency measurement in deterministic and stochastic
approaches
Methodological framework
OTE, PTE and SE measures
Isoquant curve development of bank ‘A’
A group of isoquant curves for a group of banks
Development of frontier from a group of isoquant curves
Approximate positioning of Indian banks on frontier chart
Illustration of Frontier Approach
Approximate positioning of Indian banks in profit efficiency
frontier chart
Intermediation approach of banking operation
Average OTE of large and small public sector banks under CRS
Average OTE of large and small private sector banks under
CRS
Average OTE of large and small foreign banks under CRS
Average OTE of small public, private and foreign banks under
CRS
Average OTE of large public, private and foreign banks under
CRS
Mean OTE of public, private and foreign banks under CRS
Standard deviation of OTE of public, private and foreign banks
under CRS
Average PTE of large and small public sector banks under VRS
Average PTE of large and small private sector banks under VRS
Average PTE of large and small foreign banks under VRS
Average PTE of public, private and foreign banks under VRS
Standard deviation of PTE of public, private and foreign banks
under VRS
Average PTE of large public, private and foreign banks under
VRS
Average PTE of small public, private and foreign banks under
VRS
Average SE of large and small public sector banks under VRS
Average SE of large and small private sector banks under VRS
Average SE of large and small foreign banks under VRS
Average SE of public, private and foreign banks under VRS
Figure
Figure
Figure
Figure
Figure
Figure
Figure
Figure
3:
4:
5:
6:
7:
8:
9:
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Figure 11:
Figure 12:
Figure 13:
Figure 14:
Figure 15:
Figure 16:
Figure 17:
Figure 18:
Figure
Figure
Figure
Figure
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Figure 24:
Figure 25:
Figure
Figure
Figure
Figure
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81
2
Figure 30: Standard deviation of SE of public, private and foreign banks
under VRS
Figure 31: Average SE of large public, private and foreign banks under
VRS
Figure 32: Average SE of small public, private and foreign banks under
VRS
Figure 33: Average profit efficiency of public sector banks
Figure 34: Trend of standard deviation of APE of public sector banks
Figure 35: Average profit efficiency of private sector banks
Figure 36: Trend of standard deviation of APE of private sector banks
Figure 37: Average profit efficiency of foreign banks
Figure 38: Trend of standard deviation of APE of foreign banks
Figure 39: Trend of standard deviation of APE of large public, private and
foreign banks
Figure 40: Trend of standard deviation of APE of medium public, private
and foreign banks
Figure 41: Trend of standard deviation of APE of small public, private and
foreign banks
82
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95
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3
Index of Tables
Tables
Description
Table
Table
Table
Table
Table
1:
2:
3:
4:
5:
Table
6:
Table
Table
Table
Table
7:
8:
9:
10:
Table
11:
Table
12:
Table
13:
Table
14:
Table
15:
Table
16:
Table
17:
Table
18:
Table
19:
Table
20
Table
21:
Table
22:
Table
23:
Table
24:
Key Ratios of Indian Banks
Balance Sheet Details of Indian Banks
Income Statement Details of Indian Banks
Classification of Loan Assets - Bank Group wise
Amalgamation of Banking Efficiencies and
Frontier Approaches
Different Approaches of Variable Selection
(International Studies)
Data Envelopment Analysis in India context
Variables of Different Models
Abbreviation of the Banks
Over all Technical Efficiency (OTE) of Public
Sector Banks under CRS
Average OTE of Large and Small Public Sector
Banks under CRS
Summary of the Output Slacks of Public Sector
Banks (2008) under CRS
Summary of the Input Slacks of Public Sector
Banks (2008) under CRS
Summary of the Output Slacks of Public Sector
Banks (2009) under CRS
Summary of the Input Slacks of Public Sector
Banks (2009) under CRS
Summary of the Output Slacks of Public Sector
Banks (2010) under CRS
Summary of the Input Slacks of Public Sector
Banks (2010) under CRS
Summary of the Output Slacks of Public Sector
Banks (2011) under CRS
Summary of the Input Slacks of Public Sector
Banks (2011) under CRS
Summary of the Output Slacks of Public Sector
Banks (2012) under CRS
Summary of the Input Slacks of Public Sector
Banks (2012) under CRS
Over all Technical Efficiency (OTE) of Private
Sector Banks under CRS
Average Overall Technical Efficiency of Large
and Small Private Sector Banks under CRS
Summary of the Output Slacks of Private Sector
Banks (2008) under CRS
Page
No.
132
133
134
135
Location
Appendix
Appendix
Appendix
Appendix
136
Appendix
137
138
140
141
Appendix
Appendix
Appendix
Appendix
59
60
142
Appendix
143
Appendix
144
Appendix
145
Appendix
146
Appendix
147
Appendix
148
Appendix
149
Appendix
150
Appendix
151
Appendix
62
63
152
Appendix
4
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
25: Summary of the Input Slacks of Private Sector
Banks (2008) under CRS
153
26: Summary of the Output Slacks of Private Sector
Banks (2009) under CRS
154
27: Summary of the Input Slacks of Private Sector
Banks (2009) under CRS
28: Summary of the Output Slacks of Private Sector
Banks (2010) under CRS
29: Summary of the Input Slacks of Private Sector
Banks (2010) under CRS
30: Summary of the Output Slacks of Private Sector
Banks (2011) under CRS
31: Summary of the Input Slacks of Private Sector
Banks (2011) under CRS
32: Summary of the Output Slacks of Private Sector
Banks (2012) under CRS
33: Summary of the Input Slacks of Private Sector
Banks (2012) under CRS
34: Over all Technical Efficiency (OTE) of Foreign
Banks under CRS
35: Average Overall Technical Efficiency of Large
and Small Foreign Bank under CRS
36: Summary of the Output Slacks of Foreign Banks
(2008) under CRS
37: Summary of the Input Slacks of Foreign Banks
(2008) under CRS
38: Summary of the Output Slacks of Foreign Banks
(2009) under CRS
39: Summary of the Input Slacks of Foreign Banks
(2009) under CRS
40: Summary of the Output Slacks of Foreign Banks
(2010) under CRS
41: Summary of the Input Slacks of Foreign Banks
(2010) under CRS
42: Summary of the Output Slacks of Foreign Banks
(2011) under CRS
43: Summary of the Input Slacks of Foreign Banks
(2011) under CRS
44: Summary of the Output Slacks of Foreign Banks
(2012) under CRS
45: Summary of the Input Slacks of Foreign Banks
(2012) under CRS
46: Pure Technical Efficiency (PTE) of Public
Sector Banks under VRS
47: Average PTE of Large and Small Public Sector
Banks under VRS
Appendix
Appendix
155
Appendix
156
Appendix
157
Appendix
158
Appendix
159
Appendix
160
Appendix
161
Appendix
64
64
162
Appendix
163
Appendix
164
Appendix
165
Appendix
166
Appendix
167
Appendix
168
Appendix
179
Appendix
170
Appendix
171
Appendix
68
69
5
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
48: Summary of the Output Slacks of Public
Banks (2008) under VRS
49: Summary of the Input Slacks of Public
Banks (2008) under VRS
50: Summary of the Output Slacks of Public
Banks (2009) under VRS
51: Summary of the Input Slacks of Public
Banks (2009) under VRS
52: Summary of the Output Slacks of Public
Banks (2010) under VRS
Sector
172
Appendix
173
Appendix
174
Appendix
175
Appendix
176
Appendix
177
Appendix
178
Appendix
179
Appendix
180
Appendix
181
Appendix
Sector
Sector
Sector
Sector
53: Summary of the Input Slacks of Public Sector
Banks (2010) under VRS
54: Summary of the Output Slacks of Public Sector
Banks (2011) under VRS
55: Summary of the Input Slacks of Public Sector
Banks (2011) under VRS
56: Summary of the Output Slacks of Public Sector
Banks (2012) under VRS
57: Summary of the Input Slacks of Public Sector
Banks (2012) under VRS
58: Pure Technical Efficiency (PTE) of Private
Sector Banks under VRS
59: Average PTE of Large and Small Private Sector
Banks under VRS
60: Summary of the Output Slacks of Private Sector
Banks (2008) under VRS
61: Summary of the Input Slacks of Private Sector
Banks (2008) under VRS
62: Summary of the Output Slacks of Private Sector
Banks (2009) under VRS
63: Summary of the Input Slacks of Private Sector
Banks (2009) under VRS
64: Summary of the Output Slacks of Private Sector
Banks (2010) under VRS
65: Summary of the Input Slacks of Private Sector
Banks (2010) under VRS
66: Summary of the Output Slacks of Private Sector
Banks (2011) under VRS
67: Summary of the Input Slacks of Private Sector
Banks (2011) under VRS
68: Summary of the Output Slacks of Private Sector
Banks (2012) under VRS
69: Summary of the Input Slacks of Private Sector
Banks (2012) under VRS
70: Pure Technical Efficiency (PTE) of Foreign
Banks under VRS
70
71
182
Appendix
183
Appendix
184
Appendix
185
Appendix
186
Appendix
187
Appendix
188
Appendix
189
Appendix
190
Appendix
191
Appendix
72
6
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
71: Average PTE of Large and Small Foreign Banks
under VRS
72: Summary of the Output Slacks of Foreign Banks
(2008) under VRS
73: Summary of the Input Slacks of Foreign Banks
(2008) under VRS
74: Summary of the Output Slacks of Foreign Banks
(2009) under VRS
75: Summary of the Input Slacks of Foreign Banks
(2009) under VRS
76: Summary of the Output Slacks of Foreign Banks
(2010) under VRS
77: Summary of the Input Slacks of Foreign Banks
(2010) under VRS
78: Summary of the Output Slacks of Foreign Banks
(2011) under VRS
79: Summary of the Input Slacks of Foreign Banks
(2011) under VRS
80: Summary of the Output Slacks of Foreign Banks
(2012) under VRS
81: Summary of the Input Slacks of Foreign Banks
(2012) under VRS
82: Scale Efficiency (SE) of Public Sector Banks
under VRS
83: Average SE of Large and Small Public Sector
Banks under VRS
84: Scale Efficiency (SE) of Private Sector Banks
under VRS
85: Average SE of Large and Small Private Sector
Banks under VRS
86: Scale Efficiency (SE) of Foreign Banks under
VRS
87: Average SE of Large and Small Foreign Banks
under VRS
88: Cross Validation Results of OTE of Public
Sector Banks under CRS in 2008
89: Weights of Variables of Public Sector Banks in
OTE Estimation in 2008
90: Cross Validation Results of OTE of Public
Sector banks under CRS in 2009
91: Cross Validation Results of OTE of Public
Sector banks under CRS in 2010
92: Cross Validation Results of OTE of Public
Sector banks under CRS in 2011
93: Cross Validation Results of OTE of Public
Sector banks under CRS in 2012
72
192
Appendix
193
Appendix
194
Appendix
195
Appendix
196
Appendix
197
Appendix
198
Appendix
199
Appendix
200
Appendix
201
Appendix
76
77
78
78
80
80
86
87
202
Appendix
203
Appendix
204
Appendix
205
Appendix
7
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
Table
94: Cross Validation Results of OTE of Private
Sector banks under CRS in 2008
95: Cross Validation Results of OTE of Private
Sector banks under CRS in 2009
96: Cross Validation Results of OTE of Private
Sector banks under CRS in 2010
97: Cross Validation Results of OTE of Private
Sector banks under CRS in 2011
98: Cross Validation Results of OTE of Private
Sector banks under CRS in 2012
99: Cross Validation Results of OTE of Foreign
Sector banks under CRS in 2008
100: Cross Validation Results of OTE of Foreign
Sector banks under CRS in 2009
101: Cross Validation Results of OTE of Foreign
Sector banks under CRS in 2010
102: Cross Validation Results of OTE of Foreign
Sector banks under CRS in 2011
103: Cross Validation Results of OTE of Foreign
Sector banks under CRS in 2012
104: Original Data Set of Public Sector Banks for
2008
105: Analysis of the OTE of Bank of Baroda in 2008
106: Value Judgement Analysis of the OTE of Bank
of Baroda in 2008 (1/2)
107: Value Judgement Analysis of the OTE of Bank
of Baroda in 2008 (2/2)
108: Analysis of the OTE of Punjab National Bank in
2009
109: Value Judgement Analysis of the OTE of
Punjab National Bank in 2009 (1/2)
110: Value Judgement Analysis of the OTE of
Punjab National Bank in 2009 (2/2)
111: Analysis of the OTE of Corporation Bank in
2010
112: Value Judgement Analysis of the OTE of
Corporation Bank in 2010 (1/2)
113: Value Judgement Analysis of the OTE of
Corporation Bank in 2010 (2/2)
114: Analysis of the OTE of Allahabad Bank in
2011
115: Value Judgement Analysis of the OTE of
Allahabad Bank in 2011 (1/2)
116: Value Judgement Analysis of the OTE of
Allahabad Bank in 2011 (2/2)
117: Analysis of the OTE of Bank of Baroda in 2012
206
Appendix
207
Appendix
208
Appendix
209
Appendix
210
Appendix
211
Appendix
212
Appendix
213
Appendix
214
Appendix
215
Appendix
90
91
92
93
216
Appendix
217
Appendix
218
Appendix
219
Appendix
220
Appendix
221
Appendix
222
Appendix
223
Appendix
224
225
Appendix
Appendix
8
Table 118: Value Judgement Analysis of the OTE of Bank
of Baroda in 2012 (1/2)
Table 119: Value Judgement Analysis of the OTE of Bank
of Baroda in 2012 (2/2)
Table 120: Average Profit Efficiency (APE) of Public
Sector Banks
Table 121: Standard Deviation of APE of Public Sector
Banks
Table 122: Average Profit Efficiency of Private Sector
Banks
Table 123: Standard Deviation of APE of Private Sector
Banks
Table 124: Average Profit Efficiency of Foreign Banks
Table 125: Standard Deviation of APE of Foreign Banks
Table 126: Weight Summary of Input/Output Variables of
PSB for 2008
226
Appendix
227
Appendix
94
94
96
96
97
98
104
9