A study on operational efficiency of scheduled commercial banks in India

Abstract

Banking institutions play an important role in the economic development of the entire nation. Financial services industry is dominated by banking sector. Performance of any economy largely depends on the efficiency of commercial banks. Efficiency of banks depends upon diversified banking system that attracts savings and channelizes them into productive investments to generate income. The strength of the bank depends on newlineefficiency of these operations. Banks need to convert its deposits into loans, advances and investments efficiently. Efficiency in operations results in productivity. Productivity brings in faster economic growth. The cost of these operations should be kept to the minimum in order that they are efficient. With stiff competition that characterises banking industry, the competitive advantage that one bank has over the other depends on various efficiencies. This research attempts to measure the various efficiencies of scheduled commercial banks in India and investigate the factors that influence the same. Review of related newlineLiterature has been carried out to identify the research gap. Scheduled commercial banks in India include public sector banks, private newlinesector banks, foreign banks and regional rural banks. Regional rural banks are excluded from the study. As per the RBI report, currently (as on 31 March 2014) there are 26 public sector banks, 22 private sector newlinebanks and 43 foreign banks. However, this study considers the banks which have existed before, during and after the study period in order to measure the technical and cost efficiency of each bank and compare those efficiencies within the group as well as across the group. Accordingly 25 PSBs, 18 PvSBs and 25 FBs have been considered for the present study. Operational efficiency in this study includes the banks with technical and newlinecost efficiency. Technical efficiency is measured using the primary operating variables like fixed assets, loanable funds, employees, loans and advances and investments.