How efficient are Indian banks? An application of stochastic frontier analysis
Abstract
Purpose
This study aims to investigate the efficiency of Indian commercial banks from 2002 to 2018 using the stochastic frontier analysis.
Design/methodology/approach
This study uses the parametric approach of the stochastic frontier to examine the technical efficiency of banks acknowledging exogenous shocks, omitted variables and measurement errors, filling a gap in the existing financial literature. The scope of this study was constrained to 71 scheduled commercial banks to make it manageable and productive with 1,036 observations.
Findings
The results show that the mean technical efficiency of new private banks remained constant at 92.7% during the study period because of technology diffusion in banking systems. The technical efficiency of the nationalized, old private and foreign banks has enhanced over the period because of the efficient utilization of various innovative information technology services such as mobile banking, cheque truncation system, magnetic ink character recognition. However, the foreign banks are still laggards with a mean technical efficiency of 81.7%. The empirical findings suggest that new private sector banks depict higher efficiency than nationalized, old private and foreign banks.
Research limitations/implications
This study’s sample represents all categories of banks (public, private and foreign) including the banks that merged or consolidated during the period of study. To achieve the desired results, the authors incorporate the consolidated and merged banks in their data set. Further, the authors excluded all scheduled small finance banks and scheduled payment banks from their analysis, as these entities commenced operations post-2015. Additionally, the authors also excluded regional rural banks because of their distinct mandate aimed at servicing the rural populace and agricultural sector.
Originality/value
This study contributes to the literature on the performance of conventional banks in general and emerging markets, in particular, using the most recent data and covering a relatively long period using the stochastic frontier approach.
Keywords
Acknowledgements
The authors would like to thank Jamia Millia Islamia, Woxsen University and University of the People for facilitating the support to conduct this research.
Author Contributions: All the authors have contributed equally.
Funding: This research is not being funded.
Availability of data and material: The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.
Conflicts of Interest: The authors declare no conflict of interest.
Citation
Khan, A.S., Akhtar, S. and Alam, M. (2024), "How efficient are Indian banks? An application of stochastic frontier analysis", Journal of Financial Economic Policy, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFEP-11-2023-0338
Publisher
:Emerald Publishing Limited
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