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Comparison of Indian Public Sector Banks' Cost and Profit Efficiencies in the Post-Reform Period

Comparison of Indian Public Sector Banks' Cost and Profit Efficiencies in the Post-Reform Period

Anshuman Vijay Magar (Lexicon Management institute of Leadership and Excellence, India), Gitanjali Shrivastava (Symbiosis Law School, Symbiosis International University, India), Namita Rajput (Sri Aurobindo College, University of Delhi, India), Aradhana Sahu (Rungta College of Engineering and Technology, India), Bhupendra Kumar (Galgotias University, India), Sabyasachi Pramanik (Haldia Institute of Technology, India), and Digvijay Pandey (Government of Uttar Pradesh, India)
Copyright: © 2024 |Pages: 17
DOI: 10.4018/979-8-3693-1182-0.ch002
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Abstract

The chapter compares and analyzes the cost and profit efficiency of India's public sector banks (PSBs). The information was obtained and examined between 1995 and 2017, or from the start of the post-liberalization era until the big State Bank of India merger in 2017. For each PSB in India, the average profit efficiency (PE) and cost efficiency (CE) ratings were examined year by year. Using non-parametric Friedman's two-way Annova and Wilcoxon signed rank tests, the distribution and median of efficiency scores in two subperiods were also evaluated. The findings showed that PSBs in the chosen time period had profit inefficiencies. PE scores are lower than CE scores for the whole time period. The results also showed significant variances amongst public sector banks between 1995 and 2022. In addition, since India's 1991 banking sector reform, the PE of PSBs has been falling.
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Efficiency Of Public Sector Banks In Terms Of Cost And Profit

The efficacy of the financial system is connected with economic efficiency. The PSBs in the Indian economy are being consolidated or privatized due to a lack of efficiency. The operating issues among PSBs became more severe in the wake of COVID 19 (Pandey, D. et al. 2021). Apart from the growing NPAs, the mandated social responsibility standards of PSBs also put a strain on banks. It is now required to determine the efficiency (or lack thereof) of each PSB and consider prospective growth areas. Due to PSBs' deteriorating performance, it is also critical to assess their effectiveness. Given this, the present research uses Data Envelopment Analysis (DEA) (Pramanik, S. et al. 2022) to examine the Cost Efficiency (CE) and Profit Efficiency (PE) of PSBs in India. The Indian banking system is a desirable case study due to a number of factors:

  • (i)

    It categorizes “best practices” and “worst practices” involved in efficiency score calculations and aids in improving PSB performance in India;

  • (ii)

    Examining the dynamics of efficiency based on bank ownership is useful for policymakers in an economy.

Although there is a wealth of information on assessing the technical efficiency of commercial banks throughout the years, there is little information on measuring and examining the cost and profit efficiency (Samanta, D. et al. 2021) of PSBs in India. The majority of the relevant research focuses on utilizing financial ratios to measure and analyze banks' profitability. These financial measures don't account for all aspects of a corporation and have issues estimating competitive advantage. There are six parts in this chapter, including: The study is introduced in part 1, and previous investigations are covered in section 2. With data descriptions and criteria for choosing inputs and outputs, Section 3 describes the DEA technique for computing the CE and PE of PSBs. Section 4 discusses the main results, Section 5 brings the study to a close, and Section 6 discusses the ramifications.

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A Review Of Previous Studies

Table 1. The following is a survey of the literature related to the measurement and causes of efficiency in the banking sector:

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