Efficiency and technology gaps in Indian banking sector: Application of meta-frontier directional distance function DEA approach

Abstract

Government of India aims at making the Indian Banks internationally competitive. In the wake of intense competition and changing global and national business environment, the efficiency issues have emerged as an important pillar of success in the Indian banking sector. Therefore, it is an essential task to comprehend the efficiency levels of the overall Indian banking sector and also across different ownership structures (viz. Public, Private and Foreign). The present study endeavors to carry out an assessment of intra-sector efficiency in the Indian banking sector based on a cross-sectional data of 66 banks for the year 2015-16. The authors employ directional distance function based meta-frontier DEA approach and the results reveal that the Indian banking sector is 73.44% efficient. It also confirms the existence of different production functions across different ownership structures of the industry. Among the different ownership structures, the group frontier of foreign banks coincides with the meta-frontier. The group frontier of private sector banks is the second closest to the meta-frontier and public sector banks are found to be the laggards in the overall industry. The study gains special significance in the backdrop of the recommendations floated by the Reserve Bank of India and Ministry of Finance (Government of India) to consolidate the public sector banks in order to retain fewer but healthier banks. The finding of the study fully support these recommendations and affirms that consolidation in the industry will bring positive synergies and will lead to the enhancement of efficiency levels in the industry. Keywords: Efficiency, DEA, Directional distance function, Meta-frontier, Banking, India, Ownership structure