Spread Efficiency Of Indian Commercial Banks

This paper makes a comparative assessment of public and private sector bank intermediation cost efficiency during the reform period, taking spread or net interest margin as the output indicator. The years covered in the study are 1996-97, 1998-99, 2000-01 and 2002-03. The study concentrates on 20 public and 10 Indian private sector banks. The paper makes use of two non-parametric methods: the Free Disposal Hull (FDH) approach and the Data Envelopment approach for construction of the cost frontier for measurement of efficiency. In the FDH approach, the author takes segments of the cost frontier as the benchmark. In the DEA approach, he takes a linear version of the entire frontier as the benchmark. As per the FDH results, the observed public sector commercial banks exhibit higher mean efficiency scores (when the year-wise figures are averaged) than the observed private sector banks. In terms of DEA, however, the observed private sector commercial banks have higher mean cost and higher technical and cost efficiencies than the observed public sector commercial banks. The author conducts a test of significance to examine if the mean cost efficiencies of the two bank groups are significantly different across bank groups. The results are positive for both FDH and DEA.