Technical Efficiency Affecting Factors In Indian Banking Sector: An Empirical Analysis

Abstract

This study examines the technical efficiency of banking sector and its affecting factors in India using a panel data during 2005–2020. It used log-linear regression model under a stochastic frontier production function approach. It considers 47 scheduled banks (18-public sector, 13-private sector and 16-foreign sector). The technical efficiency is estimated as assuming that return-on-investment and return-on-advances of banks are the important outputs. Fixed assets, total assets, total employees, total deposits, return on equity and capital adequacy rate are vital inputs to increase the performance and efficiency of banks. The empirical results show that return-on-investment of banks increases as increase in fixed assets, total assets, total employees, total deposits, total foreign currency assets, return on equity and cost of funds. Return-on-advances of banks is likely to increase as increase in total employees, total deposits, ratio of non-interest income to total assets, cost of funds and capital adequacy rate. The estimated technical efficiency of selected banks show that there is significant variation in technical efficiency across banks. Indian bank and Indian Overseas Bank have highest technical efficiency among the public sector banks in India. Syndicate bank and UCO banks have a lowest technical efficiency in Indian public sector banks. Nainital bank, Lakshmi Vilas Bank, Kotak Mahindra Bank, ICICI Banks and HDFC Banks have highest technical efficiency among the private sector banks. The technical efficiency of other banks in private sector is seemed in efficient. Bank of America, Bank of Bahrain & Kuwait, Federal Bank, Mashreq Bank, Mizuho Bank and MUFG Bank have the better technical efficiency among the foreign sector banks. Technical efficiency of banks is positively associated with fixed assets, total foreign currency assets, ratio of demand-saving deposits, ratio of non-interest income to total assets, capital adequacy rate and investment deposit ratio. Thus, Indian banks should focus on abovementioned variables to increase their technical efficiency.