Efficiency of Indian banks during 1999?2008: a stochastic frontier approach

This paper compares the efficiency of Indian banking industry over two time periods, 1999–2003 and 2004–2008. Ownership effects in determining the efficiency are also compared in this paper. A Cobb–Douglas stochastic frontier model is adopted in order to estimate the bank efficiency. The analysis suggests that there is a substantial efficiency improvement in the Indian banking sector during 2004–2008 as compared with 1999–2003. The overall mean efficiency of Indian banks increased to 64% in 2004–2008 as compared to 30% during 1999–2003. In between labour and capital inputs, labour is found to be the dominant input factor in determining the overall banking efficiency. Labour efficiency improved significantly from 74% in 1999–2003 to 98% during 2004–2008. Among three ownership groups, domestic private sector banks are found to be most efficient in generating the banking output measured in terms of total business and total income. The improvements in the Indian banking sector are mainly attributed due to globalisation, deregulation and advances in information technology. Nevertheless, still there is a wide scope for Indian banking industry to improve efficiency further.