Technical Efficiency, Ownership, And Reforms: An Econometric Study of Indian Banking Industry

The paper attempts to empirically investigate the ownership-liberalisation-efficiency issue of the Indian banking industry using a panel data set for the years 1985 to 1995-96. It tries to estimate time-invariant and time-variant technical efficiency of the banks in the Indian banking industry. It distinguishes between three ownership groups of the banking industry: public sector, domestic private sector, and foreign sector. A stochastic frontier production function incorporating the Cobb-Douglas technology with four inputs and two alternative measures of output is estimated. Our results show that the efficiency of the banking industry has not improved after liberalisation and the foreign-owned banks as a group has the highest efficiency regardless of the choice of the output measure. Between public sector banks and domestic private banks the results are sensitive to the output measure. Our results also show that for more than 70 per cent of the banks the hypothesis of time-invariant technical efficiency holds. In the post-liberalisation period, technical efficiency has increased for only 14 banks out of 18 banks for which time-variant model is more appropriate. The Bank of Tokyo-Mitsubishi has gained most in technical efficiency whereas the Vijaya Bank is worst affected in the post-liberalisation period. Among the public sector banks, the State Bank of Indore has gained most in technical efficiency in the post-liberalisation era.