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Analysis of Efficiency and Effectiveness of the Indian Banking Sector

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Analysis of Efficiency and Effectiveness of the Indian Banking Sector: Application of Data Envelopment Analysis

The banking sector is the backbone of any economy. It is a major contributor to the GDP of a country. In India, the industry contributes around 7.7% of the GDP. However, since the last decade, Indian banks have been plagued with the burgeoning Non-Performing Assets (NPA) on their financial statements. These non-performing assets have not only impacted the financial performance and the profitability of the Indian banking sector as a whole but have also questioned the competency of these banks’ top management and the corporate governance practices adopted by them.

Good governance is seen to be synonymous with best practices. The best practices in case of banks are seen in the parameters set down in corporate governance. The general perception is that good governance practices should have a positive impact on the performance of any entity. The present paper aims to investigate the relationship between the various parameters of corporate governance and the NPAs of the banks. The study utilizes corporate governance measures to assess the efficiency of the banks and the financial parameters for assessing the effectiveness of all the listed banks in India.

In the light of this, the present study aims to analyze the (in) efficiency of the Indian banking sector with the help of Data Envelopment Analysis (DEA) technique for the period 2012-2017. DEA is a non-parametric technique for measuring the relative efficiency of a set of similar units, usually referred to as decision making units (DMUs). DEA is a technique for measuring the relative performance of organizational units where the presence of multiple inputs and outputs makes comparisons difficult. Hence, DEA accommodates multiple inputs and multiple outputs of the units, provides a scalar measure of relative efficiency along with slacks and works particularly well with small samples.

Dr. Bindya Kohli

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