Frontier Production Function Models for Measuring Banking Efficiency

Abstract

This paper makes an attempt to compare the inter-temporal business performance measured in terms of mean efficiency of total business and total income of Indian banking industry over three time periods 2005-2008, 2009-2012 and 2013-2016. Efficiency across various bank-groups also attempted to examine whether there exists any ownership structured effects in determining bank efficiency. To estimate efficiency of banks, a stochastic frontier production function model is adopted as an exclusive technique of analysis. The results suggested that Total business as a dependent variable, the overall mean efficiencies exhibited for three time periods are 82%, 80% and 84%. Similarly total income as a dependent variable the overall mean efficiencies are 99%, 99% and 87% over the time periods. Among the four ownership bank groups, SBI and its associates, nationalized banks are found quite efficient in the generating outputs, namely total business as well as total income compared to the other ownership groups i.e. private and foreign banks. In generating both the outputs viz. total business and total income, significant improvement in the labour efficiency is noticed as compared to capital efficiency during the three time periods. In the case of total business output variable, labour efficiency improved from 74% during 2005-2008 to 82% during the 2013-2016.In the case of total income labour efficiency increased 64% during 2005-2008 to 67% during 2013-2016.