Productivity analysis of Sri Lankan cooperative banks: input distance function approach

Abstract

This study examined how Sri Lankan cooperative banks performed in changing markets and environmental conditions, including the COVID-19 pandemic. We analyzed quarterly financial data for 103 cooperative rural banks (CRBs) between 2016 and 2020 to estimate technical efficiency and total factor productivity (TFP) using the input distance function with multiple outputs. The technical efficiency (TE) of CRBs declined from 99 to 85% over the period and differences in TE between banks increased substantially. TFP decreased substantially, by 38%, so for further analysis, TFP change was separated into a three component-scale change, technical change, and technical efficiency change. According to TFP decomposition, the dominant factor contributing to this decline was the scale change. The loan relief program enacted during the COVID-19 crisis, as well as increased competition in the market, may have reduced the size of operations, thus possibly contributing to this decline. The second component, technical change was overall positive, but minute likely due to the reluctance of cooperative banks’ to adopt new technologies. The third component technical efficiency change was negative throughout the period, likely due to increased operating expenses and non-performing loans. These findings suggest the need for a more market-sensitive government intervention, adaptation of modern technology, and comprehensive human resource development to enhance the performance of CRB operations.