Profit efficiency and determinants of Indian banks; A truncated bootstrap and data envelopment analysis

Abstract

The study applies two-stage data envelopment analysis (DEA) and bootstrap to estimate the Profit Efficiency (PE) and its factors for Indian bank groups. Recognizing the heterogeneity in the bank sizes, we perform DEA to estimate PE for small, medium, and large banks across different ownership. The results show that large public, private, and foreign sector banks are more profit efficient than small and medium banks. Over the period, private banks showed the highest improvement in efficiency, followed by foreign banks while the efficiency of Public sector banks was highest in 2008 showed imporvement for next few years and declined moderately in 2012. In the second stage, we use both normal Tobit and methodogically superior truncated bootstrap regression to capture the exogenous factors affecting the PE. We find GDP growth rate and capital adequacy ratio were not significant, while return on assets, equity-to-asset ratio, size of the operation, number of branches, Herfindahl-Hirschman Index(HHI), and ownership structure are significant determinants of bank efficiency. The study contributes to the literature by introducing sample variation and bias in examining the determinants and comparison of efficiency scores across bank groups and using a more appropriate measure in Indian contest. The new findings have vital implications for the banking industry and resarchers.

Keywords

• data envelopment analysis
• profit efficiency
• truncated bootstrapping
• determinants