Asian Journal of Research in Banking and Finance

One of the major areas of macro-economy that has been the subject of focused attention is the efficiency of the banking sector. The major objectives of Indian banking sector reforms were to encourage operational self-sufficiency, flexibility and competition in the system and to increase the banking standards in India to the international best practices. The present study attempts to examine the changes in the productive efficiency of Indian commercial banks after financial sector reforms were initiated in 1992. Analysis of production based efficiency can be viewed as another form of representation of the financial performance of the micro level units of the banking sector. This paper seeks to determine the impact of various market and regulatory initiatives on efficiency improvements of Indian banks. Efficiency of firm is measured in terms of its relative performance that is, efficiency of a firm relative to the efficiencies of firms in a sample. Data Envelopment Analysis (DEA) has been used to identify banks that are on the output frontier given the various inputs at their disposal. The present study is confined only to the Constant-Return-to-Scale (CRS) assumption of decision making units(DMUs).

We have classified Indian Commercial banks in three categories a) Public sector banks b) Private commercial banks and d) foreign banks. Considering Input and Output data set on the relevant parameters such as deposits, net profits, advances as given by each individual banks, non-interest income, interest spread, net worth, borrowings of the banks, operating expenses, number of employees in the country and number of bank branches in the country for the period 2000–2010, the present paper intends to represent efficiency change of Indian commercial banks in the liberalized regime. Comparison of efficiency change among different categories of banks seems also to be significant while trade and financial sector liberalization has been emergent in pushing the efficiency level upward both for private as well as public commercial banks. The better performance of the micro units of the banking sector indicates better financial inclusion of different stakeholders like firms, small investors, common households, etc.