Performance of Indian Public Sector Banks

8/8/2019 Performance of Indian Public Sector Banks

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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.


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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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


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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Expenses of

Bank of India

0

2000

4000

6000

8000

10000

2003 2004 2005 2006 2007 2008

Years

Interest

Expenses

Operat ing

Expenses


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


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


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


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


Operating Expenses

Punjab & Sind Bank

Indian Bank

Dena Bank

Central Bank of India

0

5001000

1500

2000

2500

Input

Slacks

Int.Exp

Salck

Banks


Operating Expenses

Uco Bank


Oriental Bank of

CommerceIndian Overseas Bank

Corporation Bank

Bank of India

0

500

1000

1500

2000

Input

Slacks

Int.

Exp

Slack

Banks


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:

Banker, R.D., Charnes, A. Cooper, W.W., Swarts, J, Thomas, D.A. 1989. An

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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Performance of Indian Public Sector Banks

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