Measurement of Technical Efficiency and Its Sources: An Experience of Indian Banking Sector

A parametric stochastic frontier analysis model is applied in the presentstudy to calculate the technical efficiency of Scheduled CommercialBanks in India along with the sources of inefficiency, using balancedpanel data covering the period of 2005-06 to 2009-10. The empiricalfindings prepared on the basis of Cobb-Douglas production functionaland inefficiency model indicate that the commercial banks haveshown growth in technical efficiency level over the period of time andthe relationship depends heavily on fixed assets and deposit inputs. Analyzing the sources of inefficiency, priority sector advance to total advance ratio and public owned banks are found to have significant and positive relationship with the technical efficiency of banks. Furthermore, cash-deposit ratio is also found to be positively related with technical efficiency, but is not statistically significant, and deposit to total liability ratio is experienced to have a statistically significant but negative relationship with banks technical efficiency. The results also concluded that SBI and Nationalised Bank group are relatively more efficient than Private and Foreign Banks in India and the inefficiency present in the bank groups are due to the internal factors that are under the control of banks. The study provides evidences that Antwerp Diamond Bank is found to be the most efficient bank over the period of study and also provides an evidence-based policy recommendation to enhance the technical efficiency and competitiveness of commercial banks