Page 1 of 12

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 05

April 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 296

Review on the Productive Efficiency of Banks in

Developing Country

BHADRAPPA

Research Scholar

Department of commerce and management

OPJS University Churu Rajasthan

Guide Name is

Dr.Shrawan kumar saini

ASSOCIATE PROFESSOR DEPARTMENT OF commerce AND management

OPJS UNIVERSITY CHURU Rajasthan

ABSTRACT

Banks are found to have substantially lower average efficiency than indicated by previous studies.

Efficiency is determined by sample size, the number of inputs and outputs of the model, the choice

of input and outputs and the degree of homogeneity of the sample. Homogeneity appears to be one

of the stronger drivers of average efficiency. Some intermediation models may be biased toward

finding higher average efficiency and lack criteria to determine whether the intermediation

process is profitable. The average bank is found to be competitive, but the low average efficiency

scores found seems to be a result of a small percentage of banks that temporarily manage to attain

some degree of super-efficiency. The inputs and the outputs used in data envelopment analysis are

standardized by utilizing accounting definitions and foundational finance concepts. This allows

modeling a bank’s productive process for the measurement of total productive efficiency and

provides a way to include the profitability of a bank productivity process. This standardized model

can then be extended to analyze other industries. The Indian banking sector, which was

predominantly controlled by the government, was liberalized in early 1990s. The resultant

competitive forces, coupled with more stringent regulatory framework, have created pressure on

the banks to perform. Efficiency has become critical for banks’ survival and growth. This paper

analyzes the performance of the Indian banking sector, measured and compared in two stages:

Through the construct of productive efficiency using the non-parametric frontier methodology,

DEA and finding the determinants of productive efficiency through TOBIT model. Inputs and

outputs are measured in monetary value and efficiency scores determined for the period 1999-

2003. The study shows that SBI and its group have the highest efficiency, followed by private

banks, and the other nationalized banks. The results are consistent over the period, but efficiency

differences diminish over period of time. The capital adequacy ratio is found to have a significantly

positive impact on the productive efficiency. In this thesis we study about the Productive Efficiency

of Banks & Financial Institution in India.

Page 2 of 12

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 05

April 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 297

INTRODUCTION

The performance of the financial institutions is a major concern for both, the regulators and the

policy makers, since it has a strong linkage with the performance of the economy. The financial

sector is reasonably well developed in India. Though small in comparison to, say, USA, it has a

strong banking system, a set of large and small stock and commodity exchanges, strong equity

culture, large number of mutual funds, development institutions like Industrial Development Bank

of India, non-Banking finance companies, other specialized financial institutions, besides a large

informal sector. India, since 1950s chose the mixed economy model, with strong emphasis on

public sector.

The banking sector comprises three major segments: Scheduled Commercial banks, State

Cooperative banks, and other banks like NABARD. The scheduled commercial banks include all

major banks and account for more than 98% of all the assets in the banking sector. The Indian

banking industry, which is a major channel of funding the productive sector, was largely in the

private sector until 1969 when all the major Indian banks in private sector were nationalized.

Another set of banks was nationalized in 1980s. Several private sector banks and some foreign

banks did operate, but on a relatively small scale. By 2009, most banking assets were in public

sector. Facing major economic crisis, India started liberalizing its economy in 2009, reducing or

eliminating controls on many sectors, and allowing private sector to participate where it wasearlier

either denied or restricted. Financial sector, including banking sector was also liberalized. The

government also decided to streamline the capital market, which was hitherto monopolized by one

major stock exchange. A major new stock exchange and new regulatory body were established.

In 2010, the government constituted a committee under Dr. Narsimhan, to study and recommend

reforms for the banking sector. Consequent on the recommendations, a series of reforms were

introduced. The government allowed new private sector to enter the banking sector from 2000,

and further, the foreign banks from 1994. Several new private sector banks were established in

1994-2005 period and several foreign banks established their branches or expanded existing

network. The government also introduced more stringent and rigorous controls in line with Basle- I.

As a result of three major factors, more liberalized banking sector, stronger regulatory framework,

and stronger capital market as a competitor, the banking sector has undergone a major

metamorphosis in the last decade with public sector dominance and protection giving way to a

competitive industry. New opportunities have also arisen in form of fund-based activity, and move

towards universal banking. The Indian banks, which have long been protected, are suspected to be

less efficient. the private sector bank (including foreign banks) deposits have increased from 10.3

percent of total deposits with the scheduled banks in 2000 to 21.8 percentin 2004-2005. The