Efficiency of Indian Banking Industry in the Post-Reform Era

Abstract

One of the major objectives of Indian banking sector reforms was 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 second phase of reforms began in 1997 with aim to reorganisation measures, human capital development, technological up-gradation, structural development which helped them for achieving universal benchmarks in terms of prudential norms and pre-eminent practices. 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 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-returns-to-scale (CRS) assumption of decision making units (DMUs). Variable-returns-to-scale (VRS) assumption for estimating the efficiency was not attempted. It was found from the results that national banks, new private banks and foreign banks have showed high efficiency over a period time than remaining banks.