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8/8/2019 Performance of Indian Public Sector Banks
1/23
AT IBS HYDERABAD
PAPER - Performance variances & efficiency parameters of
the Indian Public Sector Banks A suggestive
(Nonparametric) DEA Model_____________________________________________________
By Prof. Deepak Tandon
Professor Finance
IILM Gurgaon
Abstract
The public sector banks (PSBs) continue to be a dominant part of the banking system. As
on March 31, 2008, the PSBs accounted for 69.9 per cent of the aggregate assets and 72.7
per cent of the aggregate advances of the Scheduled commercial banking system. This
paper conducts productivity and efficiency analysis of Public Sector Banks operating inIndia .The number of instruments available, the number of services banks provide-to both
retail and corporate customers, the levels of technology involved, are the mantras for leap
bound progress of public sector banks but still there is a long way to go. Today PublicSector Banks are facing challenges of squeezed spreads, demanding customers and lack
of matching skills with private sector banks of India; this has increased pressure on
efficiency and productivity of the banks. This paper empirically defines and an attempthas been made by the authors to analyze technical efficiency of Public Sector Banks
operating in India applying Data Envelopment Analysis (DEA) Model .The performance
of Banks is assessed in DEA using the concept of efficiency or productivity, which is theratio of total outputs to total inputs. This paper will explain the performance variance and
relative efficiencies of 19 (nineteen) public sector banks excluding State Bank Group
operating in India during 2003 to 2008 financial years.
Keywords: Technical efficiency, DEA (Data Envelopment Analysis,) DMU (Decision
Making Units), Input slack, Input Target and Relative efficiency.
__________________________________________________________________
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A. Introduction
Today, 17 years after economic liberalization began; we have a vibrant banking sector,
powered by both improved-efficiency public sector banks and growth-hungry private
ones. The number of instruments available, the number of services banks provide-to both
retail and corporate customers, the levels of technology involved, would have been
considered pure imagination even ten years ago. As India Inc has gained confidence and
eyed more and more global deals, Indian banking has kept pace, with its advisory
services, financial structuring expertise, negotiating skills; indeed, they have partnered
India Inc in its global journey without missing a beat.
The industry not only acts as a facilitator for industrial and agricultural growth, but also
affects the daily life and well being of the citizens. Since Independence , Indian banks
have gone through three major changes- a period of consolidation of banks(up to 1966), a
period of historic expansion in both geographical and functional terms (from 1966 to
mid- 1980s), and a period of consolidation (from mid- 1980s to 1991). The pre-reform
banking system was characterized by unprecedented growth and the pursuit of mass
banking. This was followed by the era of reforms which imparted an altogether different
dimension to the nuances of banking through what is known as first generation reforms.
Currently banking system is in the midst of second generation reforms.
Financial sector reforms initiated by Reserve Bank of India, the regulatory norms with
respect to capital adequacy, income recognition, asset classification and provisioning
have progressively moved towards convergence with the international best practices.
These measures have enhanced transparency of the balance sheet of the banks and
infused accountability in their functioning.
Accounting standards and disclosure norms were strengthened with a view to improving
governance and bringing them in alignment with the international norms. The disclosure
requirements broadly covered capital adequacy, asset quality, and maturity distribution of
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select items of assets and liabilities, profitability, country risk exposure, risk exposures in
derivatives, segment reporting, and related party disclosures.
Reserve Bank of India
Central bank and Supreme
Monetary Authority
Scheduled Banks
Commercial
Banks
((88Scheduled) Co-operative
Banks
Scheduled Banking Structure in India
Foreign
Banks
(31)
Public
Sector
Banks (27)
Private Sector Banks (30)]
22(old) +8(new)
State Bank of
India & itsAssociate
Banks (8)
Other
Nationalized
Banks (19)
Urban Co-operative
Banks (52)
State Co-operative
Banks (16)
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(Source: Report on trend and progress of Banking in India, 2002, RBI, Mumbai) &
http://en.wikipedia.org/wiki/Banking_in_India
The Commercial Banks have a combined network of over 53,000 branches and 17,000
ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks
hold over 75 percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively.
Banking industry in India is undergoing a major transformation due to changes in
economic conditions and continuous deregulation. The implementation of reforms has
had an all round salutary impact on the financial health of the banking system, as
evidenced by the significant improvements in a few salient financial indicators of the
banking system.
The average capital adequacy ratio for the scheduled commercial banks, which was
around two per cent in 1997, had increased to 13.08 per cent as on March 31, 2008. The
improvement in the capital adequacy ratio has come about despite significant growth in
the aggregate asset of the banking system. This level of capital ratio in the Indian banking
system compares quite well with the banking system in many other developed countries.
In regard to the asset quality also, the gross Non Performing Assets (NPA) of the
scheduled commercial banks, which were as high as 15.7 per cent at end-March 1997,
declined significantly to 2.4 per cent as at end-March 2008. The net NPAs of these banks
during the same period declined from 8.1 per cent to 1.08 per cent. These figures too
compare favourably with the international trends and have been driven by the
improvements in loan loss provisioning by the banks as also by the improved recovery
climate enabled by the legislative environment. It is amazing that the NPA ratios have
recorded remarkable improvements despite progressive tightening of the asset
classification norms by the RBI over the years.
The reform measures have also resulted in an improvement in the profitability of banks.
The Return on Assets (ROA) of scheduled commercial banks increased from 0.4 per centin the year 1991-92 to 0.99 per cent in 2007-08.The banking sector reforms also
emphasized the need to improve productivity of the banks through appropriate
rationalization measures so as to reduce the operating cost and improve the profitability
by increasing efficiency in terms of business level of banks in India.
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Efficiency relate to how well a bank employs its resources relative to the existing
production possibilities frontier or relative to current best practice bank, how a bank
simultaneously minimizes cost and maximizes revenue, based on an existing level of
production technology. Technical inefficient bank implies that too many inputs are
required to produce a unit of output, this happens because of weak competitive forces.
B. Literature Review:
There have been a number of studies on liberalization programmes and their impact on
efficiency in developed countries. In India, the major studies include Bhattacharya et al.
(1997), he associated performance with technical efficiency, the efficiency scores ranged
from 79.19 to 80.44 in the years 1986 through 1991.Bhatttacharya et al. analyzed data for
the period prior to reforms.
Das (1997a), Sarkar and Das(1997), Sarkar J, and Sarkar S and Bhaumik S K (1998),
Ram Mohan (2004), Das and Ghosh (2005), and Sensarma (2005) most of these studies
found that there is strong ownership effect on a banks performance. In the study of Saha
et al. (2000) efficiency scores have been estimated for only 25 public sector banks the
estimates ranged from 0.58 to 0.74 in the year 1995.
Dr. Millind Sathye has measured the efficiency of banks in India, using Data
Envelopment Analysis (DEA). He used two models to show how efficiency scores vary
with change in inputs and outputs. To measure efficiency two inputs and two output
variables, namely, interest expenses, non interest expenses (inputs) and net interest
income and non interest income as outputs had been used. A second DEA analysis was
run on DEAP software with deposits and staff numbers as inputs and net loans and non
interest income as outputs.
Sayuri, Shrai (2002) assessed the impact of reforms by examining the changes in
performance of banking sector. It found that the performance of public sector banks
improved in the second half of the 1990s.Kaveri (2001) considered nine efficiency
parameters; capital adequacy ratio, Net NPA as percentage of Net advances, Net profit to
total assets, Gross profit to working funds, net interest income to total assets, interest
expended to total assets, intermediation cost to total assets and provisions and
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contingencies to total assets. It concludes no bank can be weak or potential weak all of a
sudden. There is a gradual deterioration in the position of default and profitability.
B. Janki (2002) analyzed the effect of technology on labour productivity; he concluded
efficiency can be enhanced by using technology to develop new products and motivation
of work force. To conclude efficiency is a function of input efficiency and output
efficiency. Both input and output efficiency are function of many factors that are
allocative and technical in nature.
C.Methodology
DEA Data Envelopment Analysis; It is an application of linear programming that has
been used to measure the relative efficiency of operating units with the same goals and
objectives which are termed as Decision Making Units (DMUs).This technique aims to
measure how efficiently a DMU uses the resources available to generate a set of
outputs(Charnes et al.1978).
The performance of DMUs is assessed in DEA using the concept of efficiency or
productivity, which is the ratio of total outputs to total inputs. Efficiencies estimated
using DEA are relative, that is, relative to the best performing DMU (or DMUs if there is
more than one best performing DMUs). The best performing DMU is assigned an
efficiency score of 100 per cent or unity and the performance of other DMUs vary,
between 0 and 100percent relative to this best performance.
The operating units of banks have multiple inputs such as staff size, salaries, and hours
of operation, advertising budget, as well as multiple outputs such as profit, market share,
and growth rate. In these situations, it is often difficult for a manger to determine which
operating units are inefficient in converting their multiple inputs into multiple outputs.
This particular area is where DEA has proven a helpful managerial tool.
Using DEA model, the efficiencies of Banks are estimated for the sample period 31st
March, 2003 to 2008. The sample banks are nineteen public sector banks, excluding State
Bank of India and its associates. State of India is excluded because of its major size,
which otherwise would have affected the efficiency scores of other public sector banks
operating in India. The empirical results are based on performance of banks on the basis
of interest expenses and operating expenses as inputs and business measure as output
during the period of 2003 to 2008. In order to have a suitable indicator for evaluating
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banks performance we have used the level of business (Advances + Investments) as
output.
Table 1.1
As on March 31 , 2003--08
S.No. BANKS Int.ExpOprExp* Business NPA
NATIONALISEDBANKS Mean Mean Mean Mean
1 Allahabad Bank 2481 1028 46040 434
2 Andhra Bank 1708 804 33045 883 Bank of Baroda 4704 2216 97297 932
4 Bank of India 4883 2117 99524 1379
5Bank ofMaharashtra 1628 673 29689 316
6 Canara Bank 6050 2243 111670 1110
7Central Bank ofIndia 3581 1653 68606 1093
8CorporationBank 1699 692 35127 180
9 Dena Bank 1251 575 23456 581
10 Indian Bank 2042 1076 41238 294
11 Indian OverseasBank 2902 1209 55730 442
12Oriental Bank ofCommerce 2854 844 50572 245
13Punjab & SindBank 904 525 16608 349
14Punjab NationalBank 5440 2930 117609 631
15 Syndicate Bank 2880 1303 56426 497
16 UCO Bank 2898 1083 52980 857
17Union Bank ofIndia 3823 1305 72915 787
18
United Bank of
India 1596 744 30074 32119 Vijaya Bank 1565 595 29571 143
*Excluding provisions and contingencies
(Source: Report on Trend and Progress of Banking in India, 2007-08, RBI, Mumbai )
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Table 1.1 depicts that interest expense of Canara Bank of Rs. 6050 crores is maximum
and minimum of Punjab and Sind Bank of Rs. 904 crores. While maximum operating
expense is of Punjab National Bank of Rs.2930 crores and minimum of Punjab and Sind
Bank of Rs. 525 crores. Business is maximum of Punjab National Bank at Rs.117609
crores and minimum of Punjab and Sind Bank at Rs. 16608 crores. Maximum NPA is of
Bank of India and Canara Bank, NPA of Corporation bank is 180 crores but of Oriental
Bank of Commerce are 245 crores and Punjab National Bank 631 crores.
Analysis
The banks consume different quantities of inputs and produce different levels of outputs.
As there is only one input and one output considered in each case, ratio computation is
simple. Details are shown in Table 1.2.
Efficiency
Output Business
= ----------------- = --------------- (1)
Input Interest Expense
Output Business
Also, --------- = --------------------- (2)
Input Operating Expense
Technical efficiency of bank is determined with respect to inputs and outputs, if the
maximum output can be achieved with minimum inputs, the bank is considered as
technically most efficient bank. The input efficiency measures the degree of efficiency
with which banks combine their inputs to produce a given level of output at minimum
expenses. A decline in the ratio of operating cost to net income of banks as well as
business of banks is an indication of some improvement in banks efficiency and
therefore, some possible gain in productivity. The level of business as a ratio of operating
cost is a crucial ratio that indicates the effectiveness of using human resources in
generating business. Banks that have been able to maintain continuous growth and
profitability as well as strength of balance sheet have been able to record better ratios of
manpower effectiveness.
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Banks cost structure normally includes interest costs and operating costs. The operating
cost is incurred to give better services to the customers that include both depositors and
borrowers.
Interest Expenses
Interest on deposits
Interest on Refinance/inter-bank borrowings
Others
Operating Expenses or Non-interest expenses
Payments to and provisions for employees
Rent, taxes and lighting
Printing and stationery
Advertisement and publicity Depreciation on Bank's property
Director'/Auditor's fees, allowances and expenses
Law charges
Postage, etc.
Repairs and Maintenance
Insurance
Other expenses
Banks by using deposits for advancing loans and making investments brings income in
return. A credit going to industry or the service sector will fetch high earnings and if it
goes to priority sector then it will not, because loans to such sector are on concession
basis. The share of priority sector advances to total advances is also an important
determinant of profitability. The cost involved in priority sector lending is more because
of various returns and formalities to be fulfilled. Lack of security, over-dues and
litigations further add to the cost. An investment in non performing assets also adversely
affects profitability of the bank.
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Non Performing Assets
0
500
1000
1500
2000
2500
2003 2004 2005 2006 2007 2008
Years
NPAin
Rs.crores
Punjab National Bank
Oriental Bank of
Commerce
Corporation Bank
UCO Bank
Indian Overseas
Bank
Bank of India
All the banks in the graph indicate decrease in NPA in 2006 but increase in 2007 & 2008,
except Corporation Bank depicting downward trend in non performing assets of the bank.UCO Bank indicates maximum NPA in 2007 and 2008.
Non Performing Assets
0
500
1000
1500
2000
2003 2004 2005 2006 2007 2008
Years
NPAinR
s.
Crores
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of MaharastraCentral Bank of India
Dena Bank
Indian Bank
Bank of Baroda has achieved low rate of NPA over the period of 2003 to 2008.Central
Bank of India indicates upward negative trend in increase in NPA in 2006 which declined
in 2007 but still Central Bank of India is on highest level in terms of NPA with its peer
group. Dena Bank reflects positive growth in reduction of NPA over the period of 2003
to2008.
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Non Performing Assets
0
200
400600
800
1000
1200
1400
1600
2003 2004 2005 2006 2007 2008
Years
NPAinRscrores
Sydicate Bank
Union Bank Of India
United Bank of India
Vijaya Bank
Punjab and Sind
Bank
Canara Bank
Union Bank of India depicts downward trend in NPA form 2005 onwards while Canara
Bank has the highest NPA as compared to its peer group. Vijaya Bank reflects low level
of NPA from 2003 to 2008 but is higher than Punjab and Sind Bank in 2007 and 2008.
Table 1.2
As on March 31
Input
X1
Input
X2 Output Y Relative Relative
S.No. BANKS Int.ExpOprExp* Business Efficiency Efficiency Efficiency Efficiency
NATIONALISEDBANKS Average Average Average Y/X1 Y/X2
BestPerformer/
BestPerformer/
ActualPerformer
ActualPerformer
1AllahabadBank 2481 1028 46040 18.556 44.78373 85.831762 74.77301
2 Andhra Bank 1708 804 33045 19.3515 41.09086 89.511401 68.60722
3 Bank of Baroda 4704 2216 97297 20.68313 43.90378 95.670918 73.3038
4 Bank of India 4883 2117 99524 20.38066 47.01558 94.271846 78.49941
5Bank ofMaharashtra 1628 673 29689 18.24147 44.11259 84.376888 73.65244
6 Canara Bank 6050 2243 111670 18.45701 49.7897 85.373915 83.1312
7Central Bank ofIndia 3581 1653 68606 19.15951 41.50849 88.623368 69.30451
8CorporationBank 1699 692 35127 20.67635 50.73305 95.639555 84.70628
9 Dena Bank 1251 575 23456 18.75559 40.80221 86.754976 68.12528
10 Indian Bank 2042 1076 41238 20.19099 38.3125 93.394494 63.96834
11IndianOverseas Bank 2902 1209 55730 19.20188 46.0874 88.81935 76.94968
12Oriental Bankof Commerce 2854 844 50572 17.71712 59.89291 81.951495 100
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13Punjab & SindBank 904 525 16608 18.38126 31.63557 85.023498 52.82022
14PunjabNational Bank 5440 2930 117609 21.61903 40.13914 100 67.01818
15SyndicateBank 2880 1303 56426 19.59478 43.31106 90.636737 72.31417
16 UCO Bank 2898 1083 52980 18.2839 48.90493 93.310012 81.65396
17Union Bank ofIndia 3823 1305 72915 19.07418 55.86074 88.228664 93.2677
18United Bank ofIndia 1596 744 30074 18.84108 40.42263 87.15043 67.49152
19 Vijaya Bank 1565 595 29571 18.89888 49.71536 87.417787 83.00708
Table 1.2 reveals that maximum technical efficiency with respect to interest expense
input is of Punjab National Bank (21.62) & minimum is of Oriental Bank of Commerce
(17.71).Hence Punjab National Bank (PNB) is considered as most efficient bank in terms
of interest expense and maximizing business. Setting the performance efficiency of PNB
as 100%, the relative efficiencies of other banks is shown in Table 1.2.Similarly, Oriental
Bank of Commerce (OBC) is considered as most efficient in terms of operating expenseas input and business as output. Setting the performance efficiency of OBC as 100%, the
relative efficiencies of other banks is shown in Table 1.2.
The table 1.2 reveals that banks which are technically 95 percent as efficient as PNB are
Bank of Baroda and Corporation Bank.90 percent to 94.5 percent as efficient as PNB are
Bank of India, Indian Bank, UCO Bank and Syndicate Bank. Relatively inefficient banks
with respect to PNB at relative efficiency level 85 per cent to 90 percent are Allahabad
Bank, Andhra Bank, Canara Bank, Central Bank of India, Dena Bank, Punjab and Sind
Bank, Union Bank of India, Vijaya Bank and United Bank of India. Least efficient banks
at 80 percent to 85 percent efficiency level are Bank of Maharastra and Oriental Bank of
Commerce. Decrease in business volume of OBC in 2005 from 48646 crores (2004) to
44220 crores in 2005, due to merger with Global Trust Bank resulted in downward shift
in efficiency of OBC .Corporation Bank indicates positive growth w.r.t non performing
assets. Punjab National Bank indicates minimum NPA in 2006 but increase over 2007
and 2008.Oriental Bank of Commerce depicts decline in NPA over 2006 and 2007 but
negative growth over 2008.
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Interest Expenses and Operating Expenses of most efficient banks and consistent
performers during a period of 2003 to 2008.
Most Efficient Bank with input, Most efficient Bank with input, Interest
Operating Expenses and Business Expenses and Business as Output.
as output.
Interes t Expneses and Operating
Expenses of
Oriental Bank of Commerce
0
1000
2000
3000
4000
5000
6000
2003 2004 2005 2006 2007 2008
Years
Interest
Expense
Operat ing
Expense
Interes t Expenses and Operating
Expenses of
Punjab National Bank
0
2000
4000
6000
8000
10000
2003 2005 2007
Years
Int.Exp&Opr.Exp
Interest
Expenses
Operating
Expenses
Most Consistent Performer Ranked Technical efficiency level at nine and eighth rank for
With respect to both inputs interest expenses and operating expenses
Interes t Expenses and OperatingExpense s of Corporation Bank
0
500
1000
1500
2000
2500
3000
3500
2003 2004 2005 2006 2007 2008
Years
Interest
Expense
Operat ing
Expenses
Interest Expenses and OperatingExpenses of
Indian Overs eas Bank
0
1000
2000
3000
4000
5000
6000
2003 2005 2007Years
Int.Exp&Opr.
Exp
Interest
Expenses
Operating
Expenses
Technical efficiency level at four and seventh Technical Efficiency level at six for both the inputs,
rank for interest expenses and operating interest expenses and operating expenses
expenses
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Interes t Expenses and Operating
Expenses of
Bank of India
0
2000
4000
6000
8000
10000
2003 2004 2005 2006 2007 2008
Years
Interest
Expenses
Operat ing
Expenses
Interes t Expenses and Operating
Expenses of
UCO Bank
0
1000
2000
3000
4000
5000
6000
2003 2005 2007
Years
Interest
Expenses
Operating
Expenses
Oriental Bank of Commerce is most efficient in terms of business per unit of operating
expenses. OBC is taken as 100 percent efficient and other banks are rated according to
OBC. The second most efficient bank at 93 percent efficiency level is Union Bank of
India. Relatively less efficient banks at 80 percent to 85 percent efficiency level are
Canara Bank, Corporation Bank, UCO Bank and Vijaya Bank. Banks above 75 percent
level of efficiency are Bank of India and Indian Overseas Bank. Above 70 percent but
less than 75 percent efficient banks are Allahabad Bank, Bank of Baroda, Bank of
Maharashtra and Syndicate Bank. The least efficient bank is Punjab and Sind Bank at
52.82 percent efficiency level.
D. Analysis &Findings:
Relative Efficiency is calculated with respect to the most technical efficient bank, in
terms of minimum input and maximum output. The bank which can produce the same
level of output as most efficient Bank or close to it is considered more efficient than the
bank which produces same level of output by using 60 percent more input than efficient
bank, is considered as inefficient bank and needs to reduce inputs to reach at the same
efficient level as PNB and OBC with respective inputs of interest expenses and operating
expenses. This has been highlighted as input slack and input slack percentage in the
paper.
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The most efficient Public Sector Bank has operated in an environment similar to the
others and hence using its performance as a benchmark is realistic. Input Target for
inefficient bank is the amount of interest expense and operating expenses that will enable
the bank to have the same ratio of business added to interest expenses and operating
expenses incurred by the most efficient bank. For relatively inefficient banks, Input
Target will be less than Actual Input; this difference is known as Input Slack. Input slack
percentage depicts the level of surplus input percentage the decision making unit is using
and it needs to decrease the same percentage to be as efficient as the most efficient
decision making unit with respect to the inputs and outputs taken into consideration.
Most Efficient Bank among 19 public sector banks are:
Corporation Bank, Punjab National Bank and Oriental Bank of Commerce
Return on Assets
0.00
0.50
1.00
1.50
2.00
2.50
2003 2004 2005 2006 2007
Years
Return
on
advances
adusted
Punjab National Bank
Oriental Bank of
Commerce
Corporation Bank
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Cost of Funds
0.00
1.00
2.003.00
4.00
5.00
6.00
7.00
8.00
2003 2004 2005 2006 2007
Years
CostofFunds Punjab National Bank
Oriental Bank of
Commerce
Corporation Bank
Business Per Employee
0.00
200.00
400.00
600.00
800.00
1000.00
2003 2004 2005 2006 2007
Years
Business/Emp Oriental Bank of
Commerce
Punjab National Bank
Corporation Bank
Wages as percentage to Total Expenses
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
2003 2004 2005 2006 2007
Years
Wagesas%
toTotalExp
Punjab National Bank
Oriental Bank of
Commerce
Corporation Bank
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Table 1.3
As on March 31 Input InputInputSlack
InputSlack Input Slack Input Slack Efficiency Effici
S.No. BANKS Target Target Percentage Percentage Scores ScoreNATIONALISEDBANKS Input Input
Int.Exp Opr.E
1 Allahabad Bank 2130 768.71 352 259 14.17 25.23 15
2 Andhra Bank 1528.5 551.727 179 252 10.49 31.39 8
3 Bank of Baroda 4500.5 1624.52 204 592 4.329 26.7 2
4 Bank of India 4603.5 1661.7 280 455 5.728 21.5 4
5 Bank of Maharashtra 1373.3 495.706 254 177 15.62 26.35 18
6 Canara Bank 5165.3 1864.49 885 378 14.63 16.87 16
7 Central Bank of India 3173.4 1145.48 407 507 11.38 30.7 10
8 Corporation Bank 1624.8 586.492 74 106 4.36 15.29 3
9 Dena Bank 1085 391.635 166 183 13.25 31.87 14
10 Indian Bank 1907.5 688.531 135 388 6.606 36.03 5
11Indian OverseasBank 2577.8 930.489 324 279 11.18 23.05 9
12Oriental Bank ofCommerce 2339.2 844.374 515 0 18.05 0 19
13 Punjab & Sind Bank 768.23 277.302 135 248 14.98 47.18 17
14Punjab NationalBank 5440.1 1963.66 0 966 0 32.98 1
15 Syndicate Bank 2610 942.123 270 361 9.363 27.69 7
16 UCO Bank 2703.8 884.573 194 199 6.69 18.35 6
17 Union Bank of India 3372.7 1217.42 450 88 11.77 6.732 11
18 United Bank of India 1391.1 502.137 205 242 12.85 32.51 13
19 Vijaya Bank 1367.8 493.728 197 101 12.58 16.99 12
The above table depicts that if the Oriental Bank of Commerce has to be as efficient as
PNB; it should operate using 18 percent less interest expenses and achieve the same
business level as PNB. Bank of Maharastra should operate by using 15.62 percent less
interest expenses to achieve the same efficiency level as PNB. Bank of Baroda and
Corporation Banks have to decrease interest expenses by 4.32 percent and 4.36 percent to
be as efficient as PNB. If the Corporation Bank has to be as efficient as OBC it has to
operate by reducing its operating expense as input by 15.29 percent and Union Bank of
India has to decrease its operating expenses by 6.732 percent to be as efficient as OBC.
Canara Bank, UCO Bank and Vijaya Bank have to reduce their operating cost by more
than 16 percent but less than 20 percent to reach at the level of most efficient bank.
Punjab and Sind Bank is the least efficient bank, it has to reduce its operating expenses
by 47.18 percent to be as efficient as OBC. Relatively inefficient banks are those who
have to reduce their operating expenses by more than 30 percent and to achieve the same
level of output as OBC. These banks are Andhra Bank, Central Bank of India, Dena
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Bank, Indian Bank, Punjab National Bank and United Bank of India. The table depicts
the most consistent performer among all the public sector banks is Corporation Bank with
technical efficiency score of third from the top with respect to both the inputs. Second in
the order is UCO Bank with sixth ranking with respect to interest expense and operating
expense as inputs.
Best Bank revealing consistency in performance is Corporation Bank with input slack
percentage of 4.36 for interest expenses and 15.29 percent input slack of operating
expenses with respect to most efficient banks. As well as non performing assets of 180
crores. Least efficient bank among 19 public sector banks in terms of interest expenses
and operating expenses as inputs and business as output is Punjab and Sind Bank 14.98
percent reduction in interest expenses and 47.18 percent reduction in operating expenses
is required to achieve the desired efficiency level. Punjab Sind Bank has higher level of
NPA at 349 crores which is higher than not only Corporation Bank but also from Oriental
Bank of Commerce.
Input Slack of Interest Expenses and Operating Expense of Public Sector Banks
operating in India during 31st
March 2003 to 2008.
0
200400600
8001000
1200
Input
Slacks
Int. Exp
Slack
Banks
Input Slack of Interest Expenses and
Operating Expenses
Vijay Bank
United Bank of India
Union Bank of India
Syndicate Bank
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0200400600800100012001400
Input
Slacks
Int.
Exp
Slack
Opr
Exp
Slack
Banks
Input Slack of Interest Expenses and
Operating Expenses
Punjab & Sind Bank
Indian Bank
Dena Bank
Central Bank of India
0
5001000
1500
2000
2500
Input
Slacks
Int.Exp
Salck
Banks
Input Slack of Interest Expenses and
Operating Expenses
Uco Bank
Punjab National Bank
Oriental Bank of
CommerceIndian Overseas Bank
Corporation Bank
Bank of India
0
500
1000
1500
2000
Input
Slacks
Int.
Exp
Slack
Banks
Input Slack of Interest Expenses and
Operating Expenses
Canara Bank
Bank of Maharastra
Bank of Baroda
Andhra Bank
Allahabad Bank
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E . Conclusions & Recommendations
DEA is a powerful tool when used wisely because it can handle multiple inputs and
outputs, DMUs are directly compared against a peer or group of peers, inputs and outputs
can have different units. At the same time DEA is good at estimating relative
efficiency of an DMU , it can depict where the DMU lies with respect to the peer group
but not with respect to the theoretical maximum value.
(i) The model reveals relative efficiency of decision making units with respect to the
most efficient decision making unit in a given sample. The paper includes two inputs and
one output. Considering one input and one output at a time reveals two different banks as
most efficient banks PNB and OBC with interest expense and operating expense of
respective inputs but for same level of output.
(ii)In case of most efficient bank Punjab National Bank with input interest expense, has a
very high level of input slack of 32.98 percent of surplus operating expenses as compared
to Oriental Bank of Commerce. Punjab national bank incurred maximum expenditure on
wages 20.08 in 2007-08 as compared to group average of public sector banks at 13.98
percent. Bank needs to reduce expenses on wages and channelize the resources for
technological upgradation and enhancement of human resources in the organization to
achieve overall efficiency in the banking industry.
(iii)Also, OBC as most efficient bank with input operating expenses has a high level of
input slack of interest expense for the same level of output as Punjab National Bank. At
the same time cost of funds for OBC was 6.83 crores as compared to group average of
5.83 crores in 2007-08, otherwise also OBC incurred huge cost of funds over the study
period of 2003 to 2008.OBC needs to manage its funds in more efficient manner to
reduce the cost of funds and achieve higher level of input efficiency.
(iv)To minimize the level of error, research study takes care of consistent performance of
the bank in terms of both the inputs and the most efficient bank which has performed
consistently well over the years from 2003 to 2008 is Corporation Bank. Corporation
Bank achieved business per employee of 839 crores as compared to group average of
618.35 crores in 2007-08 and profit per employee of 6.52 as compared to 3.77 of group
average. Over the study period Corporation Bank has achieved higher level of business
per employee depicting employee productivity as well as net NPA ratio of the bank has
continuously decreased from 1.80 in 2003 to 0.32 in 2007-08, while the group average in
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2007-08 was 0.77.Wages as percentage to total expenses has also decreased over the
period of 2003 to 2008.Corporation Bank has emerged as most efficient bank with
respect to its peer group of public sector banks operating in India..
(v)On the other extreme the bank which has failed in terms of both the inputs is Punjab
and Sind Bank. Prime areas where Punjab and Sind Bank needs to activate are on
reducing expenses on wages as percentage to total expenses, curtailing cost of funds
which has continuously increased over the study period, expansion of operations,
enhancing technological skills and increasing non interest income as well as advances to
generate higher level of business at lower cost. Union Bank of India, Canara Bank and
Central Bank of India reflects higher level of input slack and need to check their interest
expenses to achieve higher level of efficiency while Syndicate Bank, Indian Bank and
Bank of Baroda needs to decrease their operating cost to be on a higher level of
efficiency. At the same time increase in operating cost should be substantiated with
increase in business and technological up gradation of the bank.
F. References:
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introduction to Data Envelopment Analysis with some of its models and their
uses, in Chan, J. L., Patton J.M. (Eds.) Research in Government and Non Profit
Accounting , Vol.5. ZJai Press, Greenwich CN, pp125-63.
Bhattacharya, A., Lovell, C.A.K., and Sahay,P.1997. The impact of
liberalization on the productive efficiency of Indian commercial banks, European
Jornal of Operations Research, 98,pp332-345
H. David Sherman and Joe Zhu. Service Productivity Management, Improving
Service performance using DEA- Data Envelopment Analysis, pp55-69
Das Abhiman(1997): Technical ,Allocative and Scale Efficiency of Public Sector
Banks in India, RBI Occasional Papers, Vol. 18, pp2-3
RBI: Trends and Progress of Banking in India, 2007-08, www.rbi.org.in
Janki B (2002), Unleashing Employee Productivity: Need for a Paradigm Shift,
Indian Banking Association Bulletin , Vol. 24, March, pp7-9
Dr. Millind Sathye, School of Accounting , Banking and Finance, University of
Canberra, Bruce ACT 2617, Efficiency of Banks in a developing Economy: The
Case of India ,pp 6-8
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Sarkar J, Sarkar S and Bhaumik S K (1998), Does Ownership Always Matter?
Evidence from the Indian Banking Industry, Journal of Comparative Economics,
Vol. 26, pp262-79
Ran Mohan T T (2002), Deregulation and Performance of Public Sector Bank,
Economic and Political Weekly, vol.50, No. 12,pp. 1198- 1200.
Saha. A, and T. S. Ravishankar. 200. Rating of Indian Commercial Banks: A
DEA approach, European Journal of Operations Research, 124,pp187-203
Sensarama Rudra(2005), Cost and Profit Efficiency of Indian Banks During
1986-2003, Economic and Political Weekly, Vol. 50, pp. 1198-1200
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