Performance of Commercial Banks in India: DEA Measurement and Determinants of Technical Efficiency

Abstract

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As commercial entities, commercial banks are expected to maintain profitability in the face of stiff competition, while serving the mandatory government priorities and policy commitments, and central bank regulations. The performance of commercial banks crucially depends on their technical efficiency of realising the full potential output, which the banks invariably do not. This paper measures the technical efficiency of 94 public, private, foreign, and small financial commercial banks in India in 2019 using the data envelopment analysis (DEA) method; the determinants of technical efficiency are analysed by applying the Tobit regression method. The estimated technical efficiency scores of public sector banks are below average and private banks do little better than average, while the technical efficiency of foreign banks varies widely. The Tobit estimates show that capital adequacy and return on assets positively influence technical efficiency, while bank size reduces the technical efficiency of the banks. The managerial quality, bank profitability, and diversification are irrelevant to the technical efficiency levels of commercial banks. The results suggest that the performance of commercial banks in India may be improved by choosing a proper input-output mix and an appropriate scale size.<

Keywords: Commercial Bank Performance, Potential Output, Technical Efficiency, DEA Estimation, Determinants, Tobit Regression

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