An Analysis of the Efficiency of Private Sector Banks in India

This paper aims to examine the efficiency, benchmarks and targets for private sector banks operating in India. Keeping in view the limitations of ratio analysis techniques, production approach of Data Envelopment Analysis (DEA) was applied to judge the efficiency of private sector banks. In this model, banks are considered as service providers, and while interest expenses, non-interest expenses and the Non-Performing Asset (NPA) ratio, i.e., net NPAs to net advances, are considered as input variables, deposits, advances and investments are considered as the output variables. The paper analyzes the efficiency of 29 private sector banks with the dataset ranging from the period 1998-99 to 2005-06. The results of the study indicate that there is a lot of scope for the private sector banks to improve their efficiency level, as, at the most, only 31.25% private sector banks were found efficient during the entire study period. The results indicate that a majority of private sector banks in India need to take steps to decrease the NPA level and improve their output parameters, such as deposits, advances and investments, because they have failed to acquire full efficiency score in all the years under study.