Banking 1

1
Introduction
1
Introduction
1.1. The Evolution of Indian Banking System
The first Bank in India was set up in the year 1786
named as General Bank of India. Thereafter, three more
Banks were established named as Bank of Bengal in the
year 1806, Bank of Bombay in 1840 and Bank of Madras
in 1843; which were called as Presidency Banks. These
three banks were amalgamated in 1921 and named as
Imperial Bank of India.
Thereafter, Indians established Allahabad Bank in 1865
followed by Punjab National Bank Limited in 1894 having
its headquarters at Lahore. During the period 1885 and
1913, 6 more Banks were established named as Bank of
India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank and Bank of Mysore. Then, Reserve
Bank of India was established in 1935.
The first phase witnessed very slow growth and banks
witnessed periodic failures during the period 1913 and
1948. In order to streamline the functioning and activities
of commercial banks, the Government of India brought
Banking Companies Act, 1949 which was later on changed
to Banking Regulation Act, 1949 as per Amending Act of
1965 (Act No. 23 of 1965). The Government of India vested
extensive power for the supervision of banking in India
to the Reserve Bank of India as the Central Banking
Authority.
Performance of Banking Sector in India Since 1991
The Indian banking witnessed a remarkable growth in

terms of resource mobilization, branch expansion, various
services it offered and its control over financial assets.
The development of Indian Banking Industry has passed
through various distinctive phases of growth as under:
1.1.1. The Evolutionary Phase: Banking prior to
Nationalization (1948-1968)
After independence and prior to Nationalization,
Government of India took major steps in the Indian
Banking Sector Reforms. The first major step was to
enact Banking Regulation Act in 1949.
In initial stage, it was needed to reorganize the banking
sector keeping in view the requirements of the economy.
The next step taken was Industrial finance to both heavy
and Small Scale Industries. Subsequently, banks started
financing to agriculture and small borrowers as a social
control measure.
Thus, the period from 1950 till nationalization of 14 major
banks in July, 1969, the banking sector witnessed a large
number of far-reaching changes. The banking sector during
the period 1948- 1968 presented a strong focus on class
banking on security rather than purpose based banking.
The emphasis was on laying the foundation for a strong
banking system in the country. As a measure in this
direction, Banking Regulating Act was passed in 1949 to
conduct and control operations of the commercial banks
in India. Another major step taken during this period
was merger of Imperial Bank of India into State Bank of
India with redefining of its role in the Indian economy.
Banking sector, which was earlier catering to the needs
of the government, rich individuals and traders, opened
its door and set out for the first time to bring the entire
productive sector large or small in its fold.
During this period number of commercial banks declined
from 566 banks as on December, 1951; out of which number
scheduled banks was 92 whereas 474 were non-scheduled
banks. This figure of 566 went down considerably to the
level of 281 at the close of the year 1968. The decline in
Introduction
the number of banks was due to closure of non-scheduled

banks which reached at all time low to 210.
The banking sector till 1968 depicted a strong stress on
class banking based on security rather than on purpose
based banking. Before 1968, only RBI and subsidiaries
of SBI were mainly controlled by Government. It also
provide insurance cover to deposits kept in Banks
1.1.2. The Expansion Phase: Nationalization and after
(1969-1984)
On 19th July, 1969, 14 major commercial banks in the
country were nationalized. Then, in the second phase of
nationalization, 6 more banks with deposits over 200
crores were nationalized on 15th April, 1980 to boost Indian
Banking Sector Reforms. The reason stated for the
nationalization was to give the government more control
over banking business. After the second phase of
nationalization, the Government of India controlled around
91% of the banking business of India.
After the nationalization, public sector banks branches
in India rose to about 800% whereas deposits and advances
raised by 11,000%.
In the year 1971, Credit Guarantee Corporation was
established to provide guarantee to the credit provided
by commercial banks.
Further, to meet out the requirement of rural areas,
Regional Rural Banks were established in 1975.
With the nationalization of banks, the dominance of social
considerations in banking sector compromised on the
quality of credit which resulted into poor profitability
and booking of losses by the nationalized banks.
1.1.3. The Consolidation Phase (1985-1990)
During this period of 1985 to 1990, special thrust was to
have internal control and profitability on new activities.
The branch expansion slowed down showing annual growth
rate of 2.6%. The average annual growth rate of deposits
and advances during this period was to the tune of 17.7%
and 14.6% respectively. The major thrust was on profit

which grew at an average annual growth rate of 51.7%.
The weaknesses faced by banking sector lead to the phase
of consolidation. A large number of policy decisions were
taken with the aim of slowing down the branch expansion
undertaken by the banks. The number of schedule banks
marginally increased from 264 in 1984 to 276 in 1990.
The main thrust was to improve housekeeping, customer
services, credit management, staff productivity and
profitability of the banks. Besides, rationalization of rates
of bank deposits and advances took place. During this
period, about 90% of commercial banks in the public sector
closely regulated all the aspects of main areas. Banks
commercial approach in operations and efficiency was
almost non-existent. Thus, the banks ended up
consolidating their losses rather than the profits.
During this phase, the financial health of banks
deteriorated. The customer service was in a poor stage,
work technology was outdated and the banks were unable
to meet the challenges of a competitive market. All these
aspects have necessitated devising a reform agenda for
the banking sector.
1.1.4. The Reforms Phase (1991-2002)
In India, there was need for economic reforms but the
same cannot be achieved without reforms in the financial
sector. Accordingly, there was need for financial sector
reforms.
The basic objective of the financial sector reforms was to
create an efficient, competitive and stable financial sector
which may contribute in stimulated growth. Accordingly,
the monetary policy framework made a shift from direct
instruments of monetary management to an increasing
reliance on indirect instruments. Thus, there was need
for efficient interest rates and exchange rates in the overall
functioning of financial markets. This necessitated
simultaneous development of the money market,
Government securities market and the foreign exchange
market.
Introduction
During last two decades, maturity was felt of Indias

financial markets. The various governments took major
steps in the financial sector reforms of the country. The
important achievements in the following fields, is discussed
under separate heads:
Financial markets
Regulators
The banking system
Non-banking finance companies
The capital market
Mutual funds
Overall approach to reforms
Deregulation of banking system
Capital market developments
Consolidation imperative
With a view to strengthen the financial health of
commercial banks, their efficient functioning and
profitability, the Government of India appointed a
committee called The Committee on Financed System
Reforms under the Chairmanship of Sri M. Narasimham,
ex-Governor of Reserve Bank of India which gave its
recommendations in November 1991. The Committee
recommended a series of measures including greater
flexibility to bank operations, statutory stipulations, credit
program, asset quality, prudential norm, disclosures,
housekeeping, etc. to enhance efficiency, productivity and
profitability of commercial banks. All recommendations
witnessed a landmark in the evolution of banking system
to more market-oriented system. Deregulation and
liberalization facilitated banks to go in for innovative
banking measures with a view to develop business and
earn profits. According to the Narasimham Committee,
it was felt that it will improve the solvency, health and
efficiency of banks. These measures were aimed at ensuring
a degree of operational flexibility, internal autonomy for
public sector banks in their decision-making process, and
providing greater degree of professionalism in banking

operations. The Reserve Bank of India grouped the first
phase of reform measures into five different groups (a)
Liberalization measures, (b) Prudential norms, (c)
Competition directed measures, (d) Supportive measures,
and (e) Other measures as under:
(A) Liberalization Measures
The SLR and CRR measures were originally designed to
give the RBI two additional measures of credit control,
besides protecting the interests of depositors. Under the
SLR, commercial banks were required to maintain
minimum 25 per cent of their total net demand and time
liabilities in the form of cash, gold and unencumbered
eligible securities (under the Banking Regulation Act,
1949) with the RBI.
(B) Prudential Norms
In April 1992, the RBI guided a phased introduction of
prudential norms in order to ensure safety and sound
health of banks and also to impart higher transparency
in accounting operations. The main objective was to
strengthen the financial stability of banks. Inadequacy
of capital was a serious cause for concern. Then RBI
introduced capital adequacy norms as per Basle Committee
which prescribed that banks should achieve a minimum
of 4 per cent capital adequacy ratio in relation to risk
weighted assets by March 1993, of which Tier I capital
should not be less than 2 per cent. Each Bank was required
to evaluate its assets on the basis of their realizable
value before arriving at the capital adequacy ratio of
each bank. Those banks whose operations are profitable
were required to approach capital market for enhancement
of capital. However, in other Banks the Government was
required to meet out the shortfall by direct subscription
to capital by providing loan. As per the recommendations
of the Narasimham Committee banks were not required
to recognize interest income on advances on assets which
is not received within two quarters after it is became
Introduction
due. The assets are now classified on the basis ,of their
performance into 4 categories: (a) standard, (b) substandard, (c) doubtful, and (d) loss assets. Adequate
provision is required to be made for bad and doubtful
debts (substandard assets). Besides, a credit exposure
norm of 15 per cent to a single party and 40 per cent to
a group has been prescribed. The Committee also
recommended provisioning norms for non-performing assets
(NPA).
(C) Competition Directed Measures
The RBI announced new guidelines for opening of private
sector banks and public limited companies as a policy
January 1993 when the criteria for setting up of new
banks in private sector were: (a) capital of Rs. 100 crore,
(b) most modern technology, and (c) head office at a nonmetropolitan centre. In January 2001, paid-up capital of
these banks was increased to Rs. 200 crore which was to
be raised to Rs. 300 crore. The promoters share was
required to be at least 40 per cent. After the issue of
guidelines in 1993, 9 new banks were set up in the private
sector besides foreign banks were also permitted to setup subsidiaries, joint ventures or branches. Banks were
also permitted to rationalize their existing branches,
opening of specialized branches, convert the existing nonurban rural branches into satellite offices. Banks were
also permitted to close down branches except in rural
areas. Banks who maintained capital adequacy norms
and prudential accounting standards were allowed to setup new branches without the prior approval of RBI. Foreign
banks were also allowed free entry for opening their
branches.
(D) Supportive Measures
A new format for balance sheet and profit and loss account
was introduced from the accounting year 1991-92. The
RBI evolved a risk-based supervision methodology with
international practices. Financial Supervision Board was
set-up in the RBI to tighten up the supervision of banks.
The system of external supervision was revamped in

November 1994 with the Board of Financial Supervision
and with the operational support of the Department of
Banking supervision. As per international practices of
supervision, a three-tier supervisory model having external
inspection, off-site monitoring and periodical external
auditing based on CAMELS (Capital Adequacy, Asset
quality, Management, Earnings, Liquidity and System
controls) had been put in its place. Special Recovery
Tribunals were also set-up to expedite loan recovery
process. The SARFAESI Act, 2002 (Securitization and
Reconstruction of Financial Assets and Enforcement of
Security Interests Act, 2002) enabled the regulation of
securitization of and reconstruction of financial assets
and enforcement of security interests by secured creditors.
The Act enabled banks to dispose of securities of defaulting
borrowers to recover its debt.
(E) Other Measures
The Banking Companies (Acquisition and Transfer of
Undertaking) Act was amended with effect from July
1994 permitting public sector banks to raise capital up
to 49 per cent from the public. There are number of
other recommendations of the Narasimham Committee such as reduction in priority sector landings, appointment
of special tribunals for speedy recovery of loans and
reorganization of the rural credit structure. The Committee
also proposed structural reorganization of the banking
sector which involves a substantial reduction of public
sector banks through mergers and acquisitions.
The second committee, headed by Mr. M. Narasimham,
on Banking Sector Reforms submitted its report in April
1998 and made large number of recommendations on
various aspects of banking policy. The committee made
its recommendations on capital adequacy norms; asset
quality management; non-performing assets (NPA); direct
credit; assets/liability management; earnings and
profitability of banks; systems and procedures in banks;
restructuring of banks including mergers and
Introduction
amalgamations; reduction in holdings of Government and

RBI to 33% in the public sector banks and devising effective
regulatory norms including review of the banking laws.
A Working Group headed by Shri S.H. Khan on
Harmonizing the Roles and Operations of Development
in banks and Financial Institutions clearly recommended
for movement towards Universal Banks in the year1998.
Thus, financial sector reforms made out most significant
achievement and showed marked improvement in the
financial health of the commercial banks in respect of
capital adequacy norms, profitability and asset quality
management. Further, deregulation has provided
opportunities to increase revenues by diversifying into
investment banking, insurance, credit cards, depository
services, mortgage financing, securitization etc. At the
same time, liberalization has developed larger inter-bank
competition among banks both domestic and foreign and
other services provided by post offices.
1.1.5. The Era of Innovative Banking (Beyond 2002)
The banks were required to carry out their business in
competitive and deregulated environments which
necessitated reforms in the banking sector. The competitive
environment includes amplification of innovations,
specialized markets, international trade in financial services
and capital flow etc. needs to be supported by adequate
information and communication technology.
With increased competition in the banking sector, profits
were declining and the banking was no longer remained
as borrower and lender of funds but was seen as a business
related information on financial transactions. The Modern
banking enlarged the operations of the various public and
private sector banks which started new areas of operations
like merchant banking, leasing, factoring, mutual funds,
portfolio management, venture capital, housing finance,
stock trading, securitization of debts etc.
Customer satisfaction was another area where banks
started emphasizing. Thus, one of the biggest challenges
10
for a service organization like a bank is to meet rising

customer expectations. Therefore, several innovative
information technology based services such as Electronic
Fund Transfer, Anywhere-Anytime Banking, Smart cards,
Net Banking, ATM etc. were adopted by banks to facilitate
customers to choose among various products of their choice.
After passing through the aforesaid phases, today, Indian
Banking Sector has reached a point where it is a great
challenge for a bank to remain competitive as well as
profitable and efficient at the same time. Every day we
see new product development, new technology facilitators,
consolidations, new competitors even from outside the
arena of banking, continuously changing rates etc. In
this scenario, it is quite significant to study how the
Indian Banking Sector is responding to all such
development. It is against this background that the present
study entitled, Performance of Banking Sector in India
since 1991: An Evaluation has been undertaken.
Introduction
11
1.3. Data Collection

The present study is based on the secondary data. The
required data have been collected from various sources
such as Reports on Trends and Progress of Banking in
India, Statistical Tables relating to Banks in India, RBI
Bulletins, IBA Bulletins, other publications of RBI, annual
reports of Banks and capitaline database.
1.4. Data Analysis

1.4.1. To measure the Productivity and Efficiency in
Indian Banking Sector
In the present study, the productivity in Indian Banking
Sector has been measured on two levels i.e. bank group
level and individual bank level. It is important to mention
that, in the present study, the words productivity and
efficiency has been used interchangeably. To measure
the productivity in the Indian Banking Sector, Data
Envelopment Analysis Technique has been used.
1.2 Objectives of the Study

The main objectives of present study are:
1. To measure the bank group wise performance on
the basis of various parameters such as profitability,
liquidity, asset quality, capital adequacy etc.
2. To make inter-bank group comparison of the
performance as per the parameters mentioned
above.
3. To measure the productivity of Indian Banking
Sector in post reform era.
4. To make inter-bank group as well as intra bank
group comparison on the basis of productivity level.
5. To study the reasons behind mergers in Indian
Banking Sector and analyze the impact of post
1991 bank mergers on the financial performance
of acquiring banks.
6. To draw some significant policy implications to
improve the performance of Indian Banking Sector.
1.4.1.1 Data Envelopment Analysis

Data Envelopment Analysis (DEA) is an alternative nonparametric method of measuring efficiency that uses
mathematical programming rather than regression. Here,
one can avoid the problem of specifying an explicit form
of the production function and makes only a minimum
number of assumptions about the underlying technology.
DEA establishes the benchmark efficiency score of unity
that no individual firm can exceed. Consequently, an
efficient firm receives efficiency scores of unity and
inefficient firms receive DEA scores less than unity.
DEA requires aggregation of inputs and outputs through
which average productivity is measured. If prices are
not available we can take shadow prices of inputs and
outputs, (v and u are used as shadow prices for outputs
and inputs respectively).
12
AP
v it y t
u it x t , where AP = Average Productivity,
y = Output, x = Input
The dual of the program is as under:

Min
v xi
s.t.
u yj vxj 0
uyj =1
The mathematical programming constructed from above

is as follows,
Max
s.t.
u ui /v xi
uyj /vxj
u, v 0
This problem can be converted into LPP as follows
Max
s.t.
u yi
uyi-vxj
v xj = 1
u, v 0
This problem can be solved with the simplex method to
get the optimal solution.
Heres several important points require emphasis. First,
the shadow prices of inputs cause the value of the observed
input bundle x of the firm under evaluation to equal
unity. As a result, the value of the output bundle itself
(u, yi) becomes a measure of its average productivity.
Secondly, at prices (v, xi) the observed input-output bundle
of no firm in the sample would result in a positive surplus
of revenue over cost. If one interpreted the input prices
as the imputed values of these scarce resources, then if
the prices chosen are such that the imputed value of any
input bundle is less than the imputed valuation of the
output bundle it produces, clearly the resources are being
under-valued and the imputed input prices should be
revised upwards. Similarly, if the output prices reflect
the cost of the inputs drawn away from other uses to
produce one unit of output, then the total imputed value
of the output bundle exceeding the total imputed cost of
the input bundle used would imply that the output bundle
is overvalued.
13
Introduction
u,v 0
Here the optimal values of primal and dual function are
equal and it represents the efficiency of the firm. The
number of constraints of the primal depends upon the
number of DMU, while the number of constraints of the
dual depends upon the number of inputs and outputs.
The computational efficiency of LP depends upon the
number of constraints rather than the number of variables.
Hence, the dual formulation is computationally more
efficient than the primal. Primal provides optimal weights
to input and outputs; the dual provides weights to DMU.
The constraint states that the dual variable should be
chosen such that the weighted combination of all the
output of all the firms should be at least equal to the
output of the reference firm. If the firm is efficient, the
strict equality holds with no slack in the constraint.
The DEA programs involving weights of inputs and outputs
(u, v) are called multiplier DEA programs. A general
envelopment DEA program corresponding to the output
maximizing multiplier model is written as
min
s.t.. y jn n y jm
in
n mxim;
n 0,m= unrestricted
Those involving weights of firms (,) are called
Envelopment DEA programmes
With input-oriented DEA, the linear programming model
is configured so as to determine how much the input use
of a firm could contract, if used efficiently in order to
achieve the same output level. For the measurement of
14
capacity, the only variables used in the analysis are the

fixed factors of production. As these cannot be reduced
the input-oriented DEA approach is less relevant in the
estimation of capacity utilization. Modifications to the
traditional input-oriented DEA model, however, could be
done such that it would be possible to determine the
reduction in the levels of the variable inputs conditional
on fixed outputs and a desired output level. In contrast,
with output-oriented DEA, the linear program is configured
to determine a firms potential output given its inputs if
it operated efficiently as firms along the best practice
frontier. This is more analogous to the SPF approach
which estimates the potential output for a given set of
inputs and measures capacity utilization as the ratio of
the actual to potential output. Output-oriented models
are very much in the spirit of neo-classical production
functions defined as the maximum achievable output given
the input quantities (Fare, Grosskopf and Lowell, 1994).
The production and intermediation approaches were mainly
used in modeling the banking firm. Under the production
approach, banks are regarded as using labour and capital
to produce deposits and loans, with both inputs and outputs
typically measured as physical magnitudes rather than
in currency. The intermediation approach sees deposits
and other funds being transformed into loans (Sealey
and Lindley, 1977), with its different versions including
the asset approach, which uses funds as inputs and loans
as outputs. The user cost approach, which looks at the
various contributions to the banks net revenue and in
the case of value added approach, inputs and outputs
are identified according to their share of value added
(Berger and Humphrey, 1992). The efficiency of the
commercial banks can be studied by considering the income
and expenditure data or the data about the assets and
liabilities of the banks. We have taken both the data for
our studies.
The CCR model assumes constant returns to scale (CRS),
which is the optimal scale in the long run. In CCR model
15
Introduction
n
the constraint is
i 1
i 1; whereas in BCC model
i 1
can be lesser or greater than one. Hence, in BCC model

the distance from the location of the efficiency of the
DMU and the frontier benchmark can be smaller.
Malmquist Index
The Malmquist productivity index introduced by Caves,
Christensen, and Diewert (CCD) (1982) is a ratio of the
levels of technical efficiency of two firms measured against
a reference technology characterized by constant returns
to scale. DEA-based Malmquist productivity index (MPI)
measures the productivity change over time. This index
can be decomposed into two components: one measures
the technical efficiency change and the other measures
the frontier shift. MPI has been used in several applications
like productivity developments in Swedish hospitals, (Fare
et al, 1994), studying the effect of mergers on bank
efficiency and productivity (Radam et al, 2009) and so
on. Fare et al (1992) measures the total factor productivity
change (TFPCH) of a particular firm in time t + 1 and t
is given as TFPCH (y and x represent outputs and inputs
across time t and t+1)
The above measure is the geometric mean of two Caves

et al (1982) Malmquist Productivity Indices. Relaxing
the Caves et al (1982) assumptions and allowing for
technical efficiency, Fare et al (1992) decomposed MPI of
total factor productivity change(TFPCH) into two
components(Chen and Ali, 2004):
16
(TFPCH)
While the first component
measures the
change in technical efficiency, TEFFCH; the second

component reproduced below (TECHCH) measures the
technological frontier shift between time periods t and
t+1.
According to Fare et al (1992,1994), a value of TECHCH

greater than one indicates a positive shift or technical
progress and a value less than one is indicative of a
negative shift or technical regress and a value of one
indicates no shift in technology frontier.
The Malmquist productivity index of total factor
productivity change (TFPCH) over period t and t+1 is
given as the product of technical efficiency change
(TEFFCH) and technological change (TECHCH) as shown
below:
TFPCH= TEFFCH * TECHCH

In Chapter 4 of our study we have used both CRS and
VRS model to compute and compare the capital efficiency,
revenue efficiency and staff efficiency of individual banks
and bank groups using DEA. The input- output used is
as follows:
17
Introduction
Table 1.1: Inputs- Outputs used to measure

Efficiencies
Capital Efficiency
Revenue Efficiency
Staff Efficiency
Inputs
Capital, reserves
and deposits
Interest paid
and other
expenses
No. of
employees
Outputs
Investment and
loan
Interest income
and non-interest
income
Advances,
deposits and
investment
1.4.2. To measure and compare the Performance of

various Bank Groups
In the present study, the performance of banking sector
with respect to profitability has been compared at group
level. To measure the profitability in the Indian Banking
Sector, CAMEL framework and Regression Analysis has
been used.
1.4.2.1. CAMEL Framework
To fulfill this objective, CAMEL framework has been used
in the present study. It is a multivariate data analysis
technique. CAMEL is an international Bank-Rating System
where banks supervisory authorities rate institutions
according to five factors. CAMEL was originally adopted
by the regulators of North American Commercial Banks
and it covers five areas of performance, namely: Capital
Adequacy, Asset quality, Management quality, Earning
ability and Liquidity. In the early 1970s; federal regulators
of the US developed CAMEL rating system to appraise
the performance of the commercial banks. Later in 1979,
the uniform financial institutions rating system was
adopted to provide federal regulatory agencies with a
framework for rating financial condition and individual
banks (Siems and Barr, 1999). Since then, the application
of CAMEL has spread up dramatically in respect of
examining the financial strengths of one of the basic
constituents of money market i.e. commercial banks. In
India the CAMEL system was adopted in 1995 with the
18
recommendations of Padmanabhan Committee. The

committee recommended that banking supervision should
focus on the parameters of financial soundness, managerial
and operational efficiency and firmness. The committee
recommended five points rating based on CAMEL model.
CAMEL is a ratio-based model to evaluate the performance
of banks. It is an instrument to rate/rank the banks.
Currently, financial ratios are often used to measure
the overall soundness of a bank and the quality of bank
management. Thus, bank regulators may use financial
ratios to help evaluate a banks performance as part of
CAMEL rating system (Piyu, 1992).
Thus in this chapter (chapter no. 3) we have attempted
to use a benchmark using publically available accounting
data by adopting CAMEL model. The different financial
ratios have been used to compare the financial performance
of bank groups with respect of CAMEL parameters.
Larger is the cushion against solvency. Asset Quality is
an evaluation of an asset with respect to the credit risk
associated with it. Two indicators viz., Return on Assets
(ROA) and Net NPAs as % to Net Advances have been
taken to measure the asset quality. Increase in ROA and
reduction in net NPAs indicates quality of assets.
Capital Adequacy is the statutory minimum reserves of
capital which a bank or other financial institution must
have. It is a measure of the financial strength of a bank
or securities firm, usually expressed as a ratio of its
capital to its risk weighted assets. The lesser the risk
assets and larger the net worth, the Management is the
most important function for the successful operation of
the bank. With increased competition in the Indian
Banking Sector, efficiency and effectiveness has become
the rule as banks constantly strive to improve the
profitability and productivity of employees. The profitability
is related to the earning performance of a bank. It is
related to: a) the ability to improve spread and reduce
burden; b) the ability to cover losses and provide capital
and c) quality and composition of net income. Higher
spread and lower burden generally reflect financial strength
19
Introduction
and thus improvement in net profit. The productivity is

related to a) increase the capacity utilization; b) reduce
the intermediation cost and c) improve the business.
Decrease in operating cost as well as establishment cost
and increase in business per staff cost improves the
productivity. Instead of relying on one indicator,
productivity of the bank group is measured by the combined
effect of the three indicators.
Table 1.2: Description of parameters with their
expected effect in the Banks Performance
Parameters
Expected effect on the likelihood

of the improvement in the
Banks performance
Capital Adequacy
1) Capital Adequacy Ratio
Increase
Asset Quality
2) Return on Assets
Increase
3) Net Non-Performing Assets

to Net Advances
Decrease
Profitability
4) Spread to Total Assets
Increase
5) Burden to Total Assets
Decrease
6) Operating Profit to Total Assets
Increase
7) Operating Expenses to Net Income Decrease

8) Net Income to Total Assets
Increase
Productivity
9) Staff Cost to Net Income
Decrease
10) Operating Expenses to Total

Assets
Decrease
11) Business (in Rs.) (Deposits+

Advances) per Staff Cost
Increase
Source: Computed by the researcher.
20
Introduction
21
1.4.2.2. Multiple Regression Analysis
NIMTA= + 1CRR + 2SLR + 3GDPgr + 4MLR +
Regression is a statistical measure that attempts to

determine the strength of the relationship between one
dependent variable and a series of other changing or
independent variables.
Where:
The two basic types of regression are linear regression

and multiple regressions. Linear regression uses one
independent variable to explain and/or predict the outcome
of Y, while multiple regressions use two or more
independent variables to predict the outcome. The general
form of each type of regression is:
Linear Regression: Y = a + bX + u
Multiple Regression: Y = a + b 1X1+b2X2+ B3X3+ ... +
BtXt+
Where:
Y= the variable that we are trying to predict
X= the variable that we are using to predict Y
a= the intercept
b= the slope
= the regression residual.
In multiple regressions, the separate variables are
differentiated by using subscripted numbers.It allows
the explicit control of many factors that have an effect
on independent variable. It is useful for generalizing
functional relationship between variables. It uses data
for several time-periods, any past period performance
affecting future performance, if at all any such effect is
present, will be taken care of and thus the problem will
be reduced.
The study analyzes the profitability of the banks in the
wake of the first and the second set of reforms. For this
purpose, multiple linear regression modeling has been
done. The description of the model is as under:
ROA= + 1CRR + 2SLR + 3GDPgr + 4MLR +
ROE= + 1CRR + 2SLR + 3GDPgr + 4MLR +
ROA (return on assets), ROE (return on equity) and NIMTA

(net interest margin to total assets) are dependent
variables, whereas CRR (cash reserve ratio), SLR (Statutory
liquidity ratio), GDPgr (GDP growth rate), MLR (minimum
lending rate) and e (error term) are independent variables.
Return on Asset is defined as the net profits of the banks
divided by the average total assets. This measure, thus,
summarizes the ability of the management to produce
net earnings from the assets of the banks. Return on
Equity is the amount of profit generated with the money
invested by the shareholders (net profit after tax/ total
equity capital). Net Interest Margin (NIM) is defined as
the difference between interest earned and interest
expended as a proportion of average total assets. NIMTA
measures the efficiency of portfolio management of banks.
CRR and SLR are the compulsory reserves. Minimum
lending rates or the Base Rate is the minimum interest
rate of a bank below which it cannot lend, except in
cases allowed by RBI. The GDP growth rate is the most
important indicator of economic health. GDP (Gross
Domestic Product) is the total dollar amount of all goods
and services produced. The growth rate is the percentage
increase or decrease of GDP from the previous
measurement cycle.
The regression analysis helps in indicating relative
strength of different independent variables affect on a
dependent variable. It helps in making predictions for
the future. For banking sector, regression-based forecasting
can provide insight as to how change in CRR, SLR, GDP
growth rate and minimum lending rates affects
profitability.
22
1.4.3. To measure the Performance of the Acquired

Banks after Merger
1.4.3.1. Paired Sample t-test
A paired sample t-test is used to determine whether there
is a significant difference between the average values of
the same measurement made under two different
conditions. Both measurements are made on each unit
in a sample and the test is based on the paired differences
between these two values. The usual null hypothesis is
that the difference in the mean values is zero. For example,
the yield of two strains of barley is measured in successive
years in twenty different plots of agricultural land (the
units) to investigate whether one crop gives a significantly
greater yield than the other, on average.
The null hypothesis for the paired sample t-test is
23
Introduction
Table 1.3: Financial Ratios

Ratios
Liquidity Ratios
Liquidity current ratio
Current Assets/Current Liabilities
Acid test ratio
Liquid Assets/Current Liabilities
Efficiency Ratios
Assets turnover ratio
Net Sales/Average total Assets
Fixed assets turnover ratio
Net Sales/Average Fixed Assets
Current assets turnover ratio
Net Sales/Average Current Assets
Advances turnover ratio
Total Advances in the beginning of

the year/ Total Advances Paid off
Equity turnover ratio
Net Sales/Average Total Equity
Cash turnover ratio
Sales Rev enue/Average

Balance
H0: d = 1 - 2 = 0
Where d is the mean value of the difference.
Formula
Cash
Profitability ratios
Return on assets
Net Profit/ Average Total Assets
Return on Equity
Net profit after tax/ Total Equity

Capital
H1: d = 0
Advances/deposits ratio
Advances/ Total Deposits
H1: d > 0
Capital structure ratios
H1: d < 0
Equity capital/total assets
Shareholders Fund/ Total Assets
Interest coverage ratio
Earnings before Interest and Tax/

Interest Expenses
This null hypothesis is tested against one of the following

alternative hypotheses, depending on the question posed:
The paired sample t-test is a more powerful alternative

to a two sample procedure, such as the two sample t-test
but can only be used when we have matched samples.
In the present study, the data on financial ratios for
previous three years and post three years after the
acquisition period for each acquiring bank is taken. The
pre-merger and post-merger financial ratios were estimated
and the averages computed for the entire set of sample
banks, which have gone through mergers after the postreform period. Average pre-merger and post-merger
financial performance ratios were compared to see if there
was any statistically significant change in financial
performance due to mergers, using paired two sample ttest at confidence level of 0.05.
To test the above objectives, the following Hypotheses

are formulated.
(1) HL: Liquidity position of the bank has not improved
after the merger.
(2) HE: Efficiency position of the bank has not improved
after the merger.
(3) HP: Profitability position of the bank has not
improved after the merger.
State Bank of Mauritius
Standard Chartered Bank
Oman International Bank
JP Morgan Chase Bank
Deutsche Bank
Citi Bank
Barclays Bank
BNP Paribus
Jammu and Kashmir Bank
Karnataka Bank
Karur Vyasa Bank
Lakshmi Vilas Bank
Nainital Bank
Ratnakar Bank
South Indian Bank
Tamilnad Mercantile Bank
10
11
12
13
Indusind Bank
ICICI Bank
Bank of Ceylon
Bank of America
Abu Dhabi Commercial Bank
Foreign Bank Group (11)
Vijaya Bank
ING Vyasa Bank
19
Federal Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
United Commercial Bank
Union Bank of India
United Bank of India
Hyderabad
Mysore
Patiala
Travancore
of
of
of
of
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Allahabad Bank
Andhra Bank
HDFC Bank
of India
of Bikaner
Dhanlaxmi Bank
State Bank
State Bank
and Jaipur
State Bank
State Bank
State Bank
State Bank
1
2
City Union Bank
Nationalized Bank Group (19)
Catholic Syrian Bank
State Bank Group (6)
S. No.
Table 1.4: List of Public Sector Banks under Study
New Private Sector Banks (5)
The following is the sample selected for the present study.

In all 54 banks have been selected. The left out banks
were those on which the synchronized data was not
available.
Old Private Sector Banks (13)
1.6. Sample of the Study
S.No.
The present study is confined to a period ranges from

1991-92 to 2010-11. The study mainly captures the
performance of Indian Banking Sector since liberalization.
In order to analyze the effect of mergers on the financial
health of the acquiring banks, the time period taken is
2000- 2006.
Table 1.5: List of Private Sector Banks and Foreign Banks under Study
(4) Hc: Capital structure position of the bank has not

improved after the merger.
1.5. Time Period of the Study
25
Introduction
Development Credit Bank
Axis Bank
24
26
Table 1.6: Sample for studying the consolidation

in Indian Banking Sector
Years
Target Bank
Acquirer Bank
2000
Times Bank Ltd.
HDFC Bank Ltd.
2001
Bank of Madura Ltd.
ICICI Bank
2004
South Gujarat Local

Area Bank Ltd.
Bank of Baroda
2004
Global Trust Bank Ltd.
Oriental Bank of Commerce
2006
United Western Bank Ltd.
IDBI Bank Ltd.
2006
Ganesh Bank of Kurudwad
Federal Bank Ltd.
Introduction
27
only those banks in this schedule which satisfy

the criteria laid down vide section 42 (6) (a) of
the Act. Thus, the study does not incorporate
Regional Rural Banks and Co-operative Banks.
Staff Efficiency of NPB is not calculated due to
non availability of data.
1.8. Chapter Scheme
1.7. Limitations of the Study

DEA technique gives the efficiency or the
benchmark but does not specify the reasons for
difference in efficiency and how it can be improved.
Malmquist Productivity Index does not measure
the TFP changes correctly under VRS assumption;
therefore, distance function is calculated according
to CRS assumption only.
Some banks have been excluded from the sample
of M& A as non availability of data. Those banks
are also excluded which have acquired their own
subsidiary branches.
The CAMEL framework is not used to compare
individual bank units as well as to compare Indian
Banks and Foreign Banks in India
The study uses information given by financial
statements of banks that fail to provide information
on non financial issues. The non financial
qualitative variables like quality of services,
goodwill, degree of technological up gradation, etc.
can have important implications on the banks
performance have not been considered in the study.
Only those banks which have been included in
the Second Schedule of Reserve Bank of India
(RBI) Act, 1934 are studied. RBI in turn includes
The study is divided into six chapters in all including

the present chapter which is introductory in nature and
explains the present banking structure. The chapter seeks
to provide objectives and relevance of the study with
specific mention of the sources and nature of data.
Chapter 2: It involves the review of the existing literature
on work done in the field of evaluating the performance
of financial institutions. This chapter provides a broad
understanding of the relevant studies undertaken in India
and abroad with respect to analysis of productivity,
efficiency and profitability of financial institutions.
Chapter 3: analyzes the performance of the Indian
Banking Sector after the initiation of financial
liberalization and also measures the profitability of the
Indian Banking Sector using multivariate regression
analysis. In addition, it analyzes the performance of private
and public banks in India with the help of CAMEL
framework.
Chapte4: The current study analyzes the productivity of
Indian Banks using DEA. The performance is measured
in terms of capital efficiency, revenue efficiency and staff
efficiency of group of banks as well as individual banks.
Malmquist productivity index is also computed for a sample
of 54 Banks: consisting of 25 public sector banks; 18
private sector banks and 11 foreign banks.
Chapter 5: visualizes the impact of merger on the financial
performance of the merging banks. The pre- and postmerger liquidity, efficiency, profitability and capital
structure ratios of acquiring banks for the entire sample
set of mergers shows that quite a few of these ratios do
28
29
Review of Literature
not indicate significant improvement in performance post

merger.
Chapter 6: gives summary, findings and also suggestions
synthesis with the result of other studies in this field. It
also incorporates policy implications.
2
To begin with, the Reserve Bank of India (RBI) and

Government of India has constituted committees to make
banking sector more viable and efficient. Such Committees
include: Luther Committee (1977), Pendekhar Working
Groups (1982-83), Sukhmoy Chakravarty Committee
(1985), Padmanabhan Working Group (1995), Narasimham
Committee (1991,98) and Verma Committee (1999). The
important suggestions given by these committees are:
1. Invite reforms in the banking sector.
2. Lowering of CRR and SLR.
3. Gradually decreasing of interest rates.
4. Introducing prudential norms
5. Adoption of flexible exchange rates in current
account
6. Creation of a competitive environment
internationally in the banks by modification in
policy framework with high financial soundness.
The literature which attempts to measure the performance
of Indian banks can be divided into two parts based on
their methodologies viz., traditional measures and frontier
approaches. The major studies under traditional measures
are: Divitia and Venkatachalam (1978), Angadi (1983),
Karkal (1983), Subramanyam (1985), Subramanyam and
Swamy (1994), Hansda (1995), Das and Sarkar (1997),
and Das (1999). The major findings of these studies are;
30
- The banking functions are more or less uniform,

- Production differences between firms have been
found not only with technological improvement
but also from competence, there are wide disparities
in their measure of performance of bank groups.
The studies conducted under frontier approaches e.g. Data
Envelopment Analysis (DEA) to measure the efficiency
of banks are: Noulas and Katker (1996), Das (2000), Saha
and Ravisankar (2000), Shanmugam et.al (2001),
Mukherjee et.al (2002), Kumar and Verma (2002-03),
Sathye (2003), Mohan and Ray (2004) and Tapan and
Moses (2004). Most of these studies are confined to the
Public Sector Banks (PSBs) and Private Banks (PrBs).
The major findings of the above studies are that even
though PSBs are efficient, but still, many of the PSBs
have inefficient utilization of resources.
The present study attempts to analyze the impact of
liberalization on the efficiency of commercial banks
including public, private and foreign banks operating in
India. In the following paragraphs, some such studies
have been enumerated. These have been divided under
two categories:
International Studies
Studies based on Indian banks
2.1. International Studies

Myuon L. Kwast and John T. Rose (1982) used statistical
cost accounting techniques to examine the relationship
between bank profitability and two aspects of operating
performance pricing and operating efficiency. The
traditional statistical cost accounting model, which relates
a firms income to its asset and liability mix, is expanded
to account for differences in market structure, regional
demand and supply conditions, and macroeconomics factors.
They focuses on large (above $500 million in domestic
deposits) banks, comparing a sample of relatively profitable
banks against a matched group of much less profitable
banks over the period 19701977. After allowing for
31
regional supply and demand factors, the high and lowprofit banks are estimated to earn equal market rates of
return on individual assets and liabilities. There is virtually
no evidence that differential prices are an important
discriminator between the two bank groups. However,
some evidences show that the high-earnings banks
experience lower operating costs on some liabilities, but
the opposite is true in respect to selected asset items.
Overall, there is no compelling evidence that high-profit
banks are characterized by greater operating efficiency
than their low-earnings counterparts.
Allen. N. Berger (1995) investigated profit structure
relationship in the banking sector. For this purpose return
on assets and return on equity are regressed separately
on concentration measure (Herfindahl index), market share
(banks share of deposits), efficiency index, market growth
(growth in deposits). The study examines 30 separate
data sets between 1300 and 2000 observations each in
order to provide a comprehensive treatment of the industry.
The data provided partial support to the fact that efficient
management of resources is associated with higher profit.
It also supported the fact that larger banking firms in
the market are able to exercise market power in pricing
well differentiated products through advertising, location
or other advantages.
Cevdet Denizer (1997) examined several aspects of the
banking market in Turkey to assess the nature of its
structure and the state of competition. The relationship
between market structure and performance of banks was
determined by using the structure conduct- performance
(SCP) paradigm as a framework. The focus was on the
commercial retail banking market since it is primarily
through this channel that resources were mobilized and
allocated .In particular, the impact of new bank entry
and sunk investments in the system that resulted from
pre-1980 interest rate and regulatory policies on
competition was being analyzed. The data covered the
period between 1986 and 1992 and included all deposit
money banks. The sample contained ratios and a number
32
of variables from income statements and balance sheets

with 1302 observations. It was found that market structure
was an important factor in explaining bank profitability
in the Turkish banking market. There was a positive
relationship between concentration and profits. The small
banks got benefitted from concentration. The market
concentration was a determinant of competition in the
retail banking market and was correlated with a low
level of inter firm rivalry. The size of the large banks
exerted negative and significant impact on competition.
However, the new banks would not be a factor of
competition in the retail banking market and hence they
could not be expected to influence the market structure.
The co-efficient of capital asset ratio was positive,
indicating that well capitalized banks remained profitable
even though they earned relatively low returns.
Kunt, Asli Demirguc and Huizinga, Harry (1998) studied
bank level data for 80 countries during the period 19881995 to analyze the differences in interest margins and
banks profitability in the cross country framework by
using linear regression analysis. The important
determinants mentioned were bank characteristics (like
capitalization, banks activity mix, deposit base, loan default
ratios, bank efficiency, bank ownership etc.), macroeconomic
factors like inflation, interest rates, government
regulations(like reserve and liquidity requirements), deposit
insurance regulations, overall financial structure and
several underlying legal and institutional indicators.
Author provided pool regression estimates using time and
country specific dummies to draw conclusions. It was
concluded that FBs have higher margins and profit as
compared to domestic banks in developing countries while
opposite was held in developing countries.
Robert De Young and Karan P. Roland (1999) studied
472 US commercial banks between 1988 and 1995 using
the degree of total leverage framework which can
conceptually link banks earnings volatility in terms of
fluctuations in its revenues, to the fixity of its expenses
and to the product mix. The result indicated that as the
33
average bank tilts its product mix towards fee based

activities and away from traditional lending activities,
the banks revenue volatility, its degree of total leverage
and the level of earning all increase. The study argues
that the degree of total leverage rises with the increase
in non- interest income. As the traditional bank lending
is a relationship business, it is costly for borrowers and
for lenders to walk away from lending relationships because
of switching costs and information costs. So revenue from
lending business is likely to be stable over time. Once
the lending relationship is established and the fixed costs
of credit evaluation have been incurred, the ongoing
production costs are mostly variables (interest) costs, which
reduce operating leverage and thereby reducing the
operating risks.
Abdel Hameed M. Bashir (2001) examined the
determinants of Islamic banks performance across eight
Middle Eastern countries between 1993 and 1998. A variety
of internal and external banks characteristics were used
to predict profitability and efficiency. Controlling for
macroeconomics environment, financial market structure
and taxation, the result indicated that high leverage and
large loans to asset ratios lead to high profitability. The
result also indicated that foreign owned banks were more
profitable than their domestic counterparts. Everything
remains equal, there was evidence that implicit (in the
sense of high revenue requirement) and explicit taxes
affect the banks performance measures negatively,
indicating that the financial repression is distorting the
performance of Islamic banks. Furthermore, favorable
macroeconomic conditions were found to affect performance
measures positively.
David A. Grigorian and Vlad Manhole (2002) used DEA
model to measure bank efficiency by stressing profit
maximization and provision of transaction services as
banks primary objectives. The results suggest that well
capitalized banks are ranked higher in terms of their
ability to collect deposits than their poorly capitalized
counterparts. As far as the deposit-based performance is
34
concerned, larger banks are likely to be viewed as too

big to fail, and therefore enjoy higher credibility as compare
to their smaller counterparts. Tobit analysis suggests
that foreign ownership with controlling power and
enterprise restructuring enhance commercial bank
efficiency, the effects of prudential tightening on the
efficiency of banks vary across different prudential norms,
and consolidation is likely to improve efficiency of banking
operations. The coefficient on GDP per capita indicates
that banks in higher per capita income countries are
more efficient in terms of attracting more deposits and
generating stronger cash flows than banks in low income
countries. Finally, the result indicate that higher securities
market capitalization reduces revenue-based efficiency,
while more developed non-bank financial institutions
hinder deposit taking.
Jan-Egbert Sturm and Barry Williams (2002) compared
the efficiency of foreign-owned banks operating in Australia
with Australian domestic banks after deregulation of the
Australian banking system during the early and mid1980s. This study found that on an average, Australian
banks DEA efficiency is high. The DEA results show
that scale inefficiency dominates technical inefficiency
in the Australian case. The major Australian banks used
size as a barrier to entry via mergers before the entry of
the foreign banks and increased spending upon branch
networks finds that this barrier to entry effect resulted
in lower foreign bank and foreign merchant bank profits.
The Malmquist Index results showed that bank efficiency
has improved. The main source of efficiency gains postderegulation was technological change rather than
technical efficiency.
Kyriaki Kosmidou, Saliash Tanna and Fotios Pasiouras
(2005) analyzed the determinants of profitability of
domestic UK commercial banks to provide panel evidence
from the period 1995-2002. The study investigated the
impact of banks characteristics, macroeconomic conditions
and financial market structure on banks net interest
margin (NIM) and return on average assets (ROAA) in
35
the UK commercial banking industry over the period 19952002. The results showed that the ratio of cost to income
is negative and statistically significant in all cases.
Liquidity is negatively related to NIM but positively related
to ROAA. Capital strength is one of the main determinants
of UK banks performance providing support to the
argument that well capitalized banks face lower cost of
going bankrupt, which reduces their cost of funding.
Finally, the relationship between size and performance
is significant only in the case of NIM indicating the
existence of diseconomies of scale in the UK banking
sector. As far as macroeconomic variables are concerned,
it was observed that both inflation and GDP growth rate
have a positive and significant impact on performance.
Stefan Gerlach, Wenshang Peng, Chang Shu (2005) used
bank level data, to examine the determinants of banks
profitability for all 29 banks in Hong Kong between 19942002, with the focus on the impact of macroeconomic
development on the non interest margin and asset qualitythe two key drivers of profitability. The results indicated
that profitability was related to difficult macro-economic
conditions and increased competition. Performance varied
across banks groups of different sizes with smaller banks
recording larger decline in profits. The empirical analysis
suggests that both the net interest margin and asset
quality are affected by macroeconomic and financial
developments.
Damir osi (2006) evaluated the proposition that foreign
banks in emerging market were more efficient than the
domestic ones by using data from transition economy of
Bosnia and Herzegovina. Efficiency was measured in terms
of banks excess reserve holdings with the central bank.
Two different types of efficiency in reserve management
were evaluated: static and dynamic. The efficiency gained
from foreign ownership were economically substantial. It
had been found out that foreign banks were more efficient
than the domestic ones. On the static measure of efficiency,
foreign banks held 8.8 percent of their deposit base while
domestic banks held 13.7 percent points. Foreign banks
36
demonstrated greater dynamic efficiency as they were

faster in response to changes in prudential and reserve
requirement regulations as well as more aggressive in
exploiting potential loopholes. Foreign-owned banks
generally had lower excess reserves ratios. Foreign
ownership was significant even when controlling for gains
from increasing bank size.
Olena Havrylchyk and Emilia Jurzyl (2006), using data
for 265 banks in Central and Eastern European Countries
(CEECs) for the period of 1995-2003, analyzed the
difference in profitability between domestic and foreign
banks by taking five group of variables: a) individual
banks characteristics, b) host countries macroeconomic
conditions, c) indicators of banks market structure and
development of stock market, d) parent banks performance
indicator, e) home country macroeconomic conditions for
parent banks. The paper highlighted the difference between
modes of foreign banks entry- namely, Greenfield
institutions (that established new institutions); earned
higher profits than domestic banks. However, this effect
was acquired rather than inherited, since FBs which
entered the market through takeover of domestic banks
tended to take over less profitable institutions and so
had lower profits than Greenfield institutions and
comparable profits as that of domestic banks. The analysis
showed that relatively low profitability of takeover banks
might also reflect policy decisions of some countries to
allow foreign banks entry only after crises, which resulted
in foreign banks taking over less profitable institutions.
Nikolay Nenovsky, Petar Chobanov, Darina Koleva and
Gergana Mihaylova (2007) traced the trends in the
development of the Bulgarian banking system focusing
on the dynamics of bank efficiency. Their study covered
period 1999-2006 because of lack of consistent available
data prior 1999. They used standard indicators for bank
efficiency, namely return on assets, and return on capital,
operating profit, net interest income, non-interest
expenditures and exchange rate revaluations. On the
ground of the analysis, they concluded that during the
37
analyzed period foreign banks perform better than domestic

and state-owned banks. Their efficiency was higher than
that of other banks because of the technological
improvements and better managerial knowledge and
experience. Actually, the privatization of the state-owned
banks had a positive impact not only on the privatized
banks efficiency but also on the entire system. In addition
the large banks turned out to be more efficient in
comparison with the small ones.
Anthony N. Rezitis (2008) investigated the effect of merger
and acquisition (M&A) activity on the efficiency and total
factor productivity of Greek banks during the period 19932004. A stochastic output distance function was used to
construct a generalized output Malmquist productivity
index, where capital expenses and labor were taken as
input and value of deposit and value of loan and advances
were taken as output. The results of the present study
indicated that the effects of mergers and acquisition on
technical efficiency and total factor productivity growth
of Greek banks were rather negative. In particular, the
technical efficiency of merger banks decreased in the period
after merging, while that of non-merger banks increased
over the same period. Furthermore the decrease in total
factor productivity for merger banks for the period after
merging could be attributed to an increase in technical
inefficiency and the disappearance of economies of scale,
while technical change remained unchanged compared
to the pre merging level.
Shigeki Ono (2008) measured the efficiency scores of
Russian domestic and foreign banks from 2004 through
2006 and discussed the determinants of the efficiency.
He used DEA for analysis and calculated the scores of
the technical, pure technical, and scale efficiency by
applying the profit approach. Furthermore, the Malmquist
Indices were computed to analyze changes in a banks
productivity. Finally, a Tobit regression was performed,
the results of which were used to determine a banks
efficiency. It was found that foreign banks tended to be
more technically efficient than domestic banks, although
38
the priorities of foreign banks had a tendency to diminish,

which was also indicated in the analysis of Malmquist
Indices. The Tobit regression analysis produced the
following results. First, foreign banks tended to be more
technically efficient than domestic banks. Second, Moscowbased banks were less efficient than non-Moscow-based
banks. Third, banks with more assets had a tendency to
use inputs with less waste, but they were scale-inefficient.
As a result, banks with more assets tende to be less
technically efficient. Fourth, banks with a larger share
of loans among their assets had a tendency to be more
technically efficient.
Mahadzir Ismail and Hasni Abdul Rahim (2009)
determined the impact of mergers on efficiency and
productivity of commercial banks in Malaysia for the period
from 1995 until 2005. The study used a non-parametric
approach, namely DEA, to estimate the efficiency scores
and to construct the Malmquist productivity index. To
enable this estimation, three bank inputs and outputs
were used. The inputs used were labor, total deposit and
fixed assets. The outputs were total loans, other earning
assets and other operating incomes. This study showed
that on an average the commercial banks had improved
in terms of their technical efficiency. Secondly, the foreign
banks had higher efficiency scores than the local banks.
Thirdly, the productivity of all banks increased in both
periods (before and after the merger).
Zuzana Fung ov and Tigran Poghosyan (2011) analysed
bank interest margin determinants in Russia, with
particular emphasis on the bank ownership structure.
Using a unique dataset covering the whole banking sector
in Russia for the 1999-2007 period they found evidence
that bank ownership matters in terms of interest margin
determinants. The impact of some of the commonly used
determinants, including bank risk aversion, credit risk
and size of operations differ across state-controlled,
domestic private and foreign-owned banks. On the other
hand, the influence of market concentration, operational
costs and liquidity was homogeneous across ownership
39
groups. The result showed that bank risk aversion, a

commonly used determinant of interest margins, had
significant explanatory power only for the case of domestic
banks (private and state). This variable did not play a
significant role for foreign-owned banks, which might reflect
the beneficial position of foreign owned banks in Russia
in terms of their trustworthiness. There also existed some
similarities across banks with different ownership
structures. First, the impact of the market concentration
was insignificant. Second, significant and economically
sizable impact of operational costs across groups, justifies
the extension of the basic dealership modelled by Maudos
and Guevara (2004), which included that important
variable. Finally, interest margins set by all banks were
affected by liquidity. The size of the impact was however
unexpectedly negative, suggesting that there might be
some other mechanisms working for the case of Russia.
Thus bank ownership had important implications in terms
of the impact of the theoretically motivated determinants
on bank interest margin.
2.2. Studies Based on Indian Banks

Elavia and Bansal (1993) used profit function approach
to analyze economies of scale in the Indian banking
industry. Authors estimated three profit functions using
Cobb Douglas functional form viz. Conventional Profit
Function, (defined as p= f (Pi, Qj, Zk)); Risk Adjusted
Profit Function (p= f ((Pi, Qj, Zk, RI)); and Risk and
Equity Adjusted Profit Function (p= ((Pi, Qj, Zk, RI, Sm))
Where P= operating profit (current operating revenue
minus variable cost)
Pi= Input Prices (i= 1, 2 n)
Qi= Output Prices (j= 1, 2, n
Zk= Fixed Factors Of Production (k= 1, 2, n)
RI= Risk Factors (I= 1, 2, n)
Sm= Social Banking Factors (M= 1, 2, n)
40
Inputs included deposits, borrowing and labor. Output

was defined in terms of three types of earning assets viz.
investments, loans and advances and amount of bills
purchased or discounted. Fixed factors of production used
in analysis were number of branches, fixed asset per
branch and total deposit per branch. Risk variables were
represented by ratios of borrowed funds to total liabilities
and ratio of total credit to total assets. The ratio of priority
sector advances to total advances and the ratio of rural
branches to total branches had proxy the social banking
factor. The results indicated that there existed economies
of scale in Indian banking system as a whole, as the
sum of coefficient of fixed FOP was greater than one in
all the cases. Among the various groups, SB group had
larger scope to increase in output. Further, the profits
could be improved by better utilization of existing branches.
P.K. Keshari, (1994) studied operational characteristics
and performance of foreign banks vis--vis domestic banks
to identify the profitability factor in Indian context. Various
key parameters in terms of ratios were used to compare
the profitability performance of foreign and domestic banks.
The study concluded that foreign banks differed
significantly due to efficient operational activities. The
higher profitability attained by FBs are the result of
different sets of priorities and distinctive business
strategies(such as bill-discounting, portfolio management
service, investment in securities, foreign exchange dealing,
new financial services etc.) followed by FBs and preferential
treatment given to FBs by the government.
Sanjay K. Hansda (1995) attempted a study to identify
the strategic variables that explained the performance
variability of the PSBs during the period 1991 1994 by
using the method of principal component analysis. The
performance was judged on the basis of productivity,
financial management, profitability and sustainability.
For this purpose, five performance criteria viz. labor
productivity, branch productivity, financial management,
profitability and growth were selected which were
represented by 25 indicators. The study indicated that
41
the performance is predominantly a persistent phenomenon

conditioned by bank specific initial conditions. Further,
the traditional indicators for example deposit mobilization;
branch expansion etc. in context to public sector banks
was declining in their importance in explaining their
performance. The increasing disintermediation, process
necessitated the blending of innovative banking with thrust
on the growth of non-banking business.
Goutam Chatterjee (1997) examined the scale economy
aspect of banking using translog model to cost function.
The data was based on accounting records of 73 banks
for the year 1994- 1995. Scale economies were measured
at different output ranges for the banks in India. The
effect of output expansion from the existing branches as
also through opening of new branches was studied. The
study confirmed the existence of scale economies in the
Indian banking industry for the bank with deposit size
up to Rs 7000 corers provided the expansion of output
was done from the existing branches than the expansion
through new branches keeping the output mix constant.
The study also confirmed that with greater degree of
financial liberalization, the banking industry in India
would have to cope with the increasing pressures of
competition and optimizing the size of the firm which
would be of critical importance.
Sarkar, and Bhaumik (1998) showed that foreign banks
were more profitable than public-sector banks, based on
two indicators (profits divided by average assets and
operating profits divided by average assets). The
profitability of private domestic banks was similar to
that of foreign banks, but private domestic banks spent
more resources on provisions for NPAs. Second, foreign
banks were more efficient than private domestic and publicsector banks, based on two measures (net interest rate
margins and operating cost divided by average assets).
Based on data from the period 1980-1997/98, they had
concluded that foreign banks, despite the superior quality
of services they offered, had not been a competitive threat
42
in Delhi, West Bengal and Maharashtra, where their

presence was greatest.
Abhiman Das (1999) evaluated inter bank variability
of profit among public sector banks during 1992 -1998,
with the use of a sequential decomposition model of
profitability. The profitability was a criterion that
encompasses financial management, liquidity, productivity
and growth of the banks. The profitability was defined
as the ratio of operating profit and working funds i.e.
spread/working funds minus burden/working funds. The
analyses showed that profit is positively related to spreads
and negatively related to burden. The interest income
was positively related to profitability. Except wage bill,
other non- interest expenses were positively related to
profitability. The large interest earning resulted in large
spread, irrespective of large and medium interest expenses.
On the other hand, banks with small interest earnings
and relatively large interest expenses had smaller spreads.
The correlation between return on investment and
profitability was negative whereas between return on
advances and profitability was positive.
Another paper by Sathye (2003) measured the productive
efficiency of Indian Commercial Banks in India using
DEA (Development Envelop Analysis). The first step in
this analysis was the measurement of bank performance.
Performance was associated with technical efficiency
(hereafter referred as efficiency). The technical efficiency
had been calculated using the variable return to scale
(VRS) input oriented model of the DEAmethodology by
taking interest expenses and non-interest expenses as I/
P and net interest income and non-interest income as O/
P (hereafter referred to as Model A). A second DEA analysis
ran with deposit and staff numbers as inputs and net
loans and non-interest income as output (hereafter
referredto as Model B). Thetwo models had been used
to show how efficiency scores differed when inputs and
outputs were changed. The Mean Efficiency of Indian
Banks was 0.83 as per Model A and 0.62 as per Model B
of the study. The efficiency score fitted within the range
43
of the scores found in other overseas studies but was

lower than the world mean efficiency. A mean efficiency
score that was a need for Indian banks to further improve
efficiency so as to achieve world best practice. The result
showed that as a group more Foreign Banks were in the
highest efficiency quartile than the Public and Private
Sector Banks. Their preponderance in Model B was
particularly noteworthy. As a group, the Private Sector
Commercial Banks had displayed lower efficiency levels
in both the models. Foreign Banks as a group appeared
to be more efficient users of inputs quantities to produce
a given output as compare to Public Sector Banks and
Private Sector Banks.
V. Nagarajan Naidu and Manju Nair (2002) evaluated
technical efficiency of scheduled CBs groups during 19801999. The efficiency estimates were calculated for each
year. Further, average technical efficiency in the pre and
post liberalization period was also estimated to evaluate
efficacy of liberalization process in improving efficiency.
The stochastic production function approach was applied.
The Cobb Douglas functional specification assumed to
represent the cost structure of banking system.
Intermediation approach was used to define the output
of banks, which was assumed to be total income (i.e.
total of interest and non- interest income). The inputs
included fixed capital, labor and material (purchased
funds). Estimates of efficiency were obtained for four banks
group viz. SBI and associates, Nationalized Banks, Private
Banks and Foreign Banks using panel data approach
given by Cornwell. The study concluded that technical
efficiency level of public sector bank groups had been
declined after adoption of liberalized policies but it had
recorded an increase for domestic private sector banks
and foreign banks. It was found that the difference in
the efficiency levels among banks groups had been declined
indicating enhanced competition among bank groups.
Bikram (2003) analysed the effects of ownership on bank
performance in this deregulated regime by using Panel
Regression technique. The relative performance of different
44
groups of banks was analyzed in the liberalized

environment of India during the nineties. The performance
was being measured in terms of profitability, efficiency
in portfolio management and operating efficiency. The
performance indicators chosen were Return on Assets,
Net Interest Margin and Operating Cost Ratio to reflect
the profitability as well as the efficiency aspects of
performance. The control variables used in the regressions
reflect the regulatory environment and business operations
of the different ownership groups. The result showed that
with the entire sample of public sector banks, old private
sector banks and new private sector banks, ownership
did not seem to have any effect on the Return on Assets
but, public sector banks do seemed to have higher Net
Interest Margin and Operating Cost Ratio. However, when
the State Bank of India and its seven associates were
dropped from the sample; it was found that new private
sector banks start showing a higher Return on Assets.
The deposits and loans for both classes of banks had
been increased, although the increase in both of them
was higher for private sector banks. With respect to
business per employee, capital adequacy ratio and
profitability private sector banks had always remained
far above public Sector ones. With respect to the other
variables, the average assets of all the three groups had
been increased over the years but public sector banks
dominated the scene.
Petya Kovea (2003) provided new empirical evidence on
the impact of financial liberalization on the performance
of Indian CBs. The analysis focused on examining the
behavior and determinants of banks intermediation costs
and profitability during the liberalization period. The
sample comprised of all CBs in India between 1991- 2001.
The structure of Indian banking sector was characterized
by 5 categories of CBs i.e. state banks, nationalized banks,
old private banks, new private banks and foreign banks.
The main determinants of banks intermediation costs
and profitability were operating cost, priority sector lending,
non-performing loans, investment in government securities
and the composition of deposits. The analysis showed
45
that industry concentration, bank spreads and profitability

in the banking sector had broadly declined during the
period of financial liberalization. The deposit and market
share of new private banks had been increased at the
expense of nationalized banks. New private banks had
higher profitability and lower spreads as compare to old
private banks. Foreign banks were more profitable than
the domestic banks. Banks with high administrative costs
had significantly lower profitability and higher spread.
Higher level of priority sector lending was associated
with higher bank spreads. Banks with larger nonperforming loans had lower profitability. Larger share of
investment in government securities was linked to higher
spreads.
Dr. A. Amarender Reddy (2004) assessed the impact of
liberalization, deregulation measures on the efficiency of
Indian banks in the deregulated period 1996- 2000 using
DEA. For this, the intermediation approach was used,
which considered banks as financial intermediaries. The
inputs considered are fixed assets, interest expended and
wages and outputs were total income, liquid assets and
total advances. The ratio of newly opened bank branches
to closed bank branches was significantly high in urban
sector than rural sector, which showed the direction in
which banks were trying to consolidate their branches in
high density of population areas for increasing business
per bank branch, thereby cutting costs and increase scale
economies. The overall efficiency of banking system had
been improved considerably due to the entry of new foreign
and private banks on the one hand and the interest rate
deregulation on both deposits and landings on the other
hand. Profitability of foreign banks was the highest followed
by private banks and public sector banks. Pure technical
efficiency was lowest among old private banks (about 76
percent), while it was highest among new private banks
(about 96 percent) and foreign banks (90 percent). Scale
efficiency was also highest among new private and foreign
banks and increased from 94 percent to 97 percent and
from 87 percent to 95 percent respectively. Share of priority
sector advanced and asset quality was having positive
46
influence on scale efficiency. Recent consolidation by closing

rural branches and opening more urban branches and
also computerization increased scale economies to a limited
extent. But to increase scale economies one needed to
improve asset quality and priority sector lending, which
might increase scale economies.
Saibal Ghosh and Abhiman Das (2005) examined the
existence of market discipline (i.e. private counterparty
supervision) in the banking sector in India in the nineties.
Such discipline usually took one of two forms: direct
discipline (pressure applied by investors on banks through
the interest rate paid (e.g., through subordinated debt),
which, in turn, reflected each banks risk profile) and
indirect discipline (pressure applied by regulators on the
basis of subordinated debt prices in the secondary market).
Improvements in market discipline called for greater
coordination between banks and regulators. The bank
level data was employed to estimate reduced form
equations, in which the dependent variable (quantity, as
proxies by time deposits; price, as proxies by implicit
interest rate) was modeled as function of bank-specific,
systemic and macroeconomic variables. The result showed
that in case of public sector banks poor asset quality
and inefficient management practices tended to lower
deposit growth, while excessive liquidity tended to exert
a negative effect on deposit growth, however, deposit
growth was driven positively by GDP growth.. However
in case of private banks, deposit growth was mostly driven
positively by capitalization and negatively by nonperforming assets to the exclusion of other bank-specific
variables. The results for foreign banks, demonstrated
that neither of asset quality, capital ratio or earnings
played an influential role in harnessing deposit growth.
Abhiman Das, Ashok Nag and Sub hash C Ray (2005)
estimated and analyzed various efficiency scores of Indian
commercial banks during 1997- 2003 using DEA. The
intermediate approach was used, taking borrowed funds,
number of employees, fixed assets and equity as inputs
as well as investment, performing loan assets and other
47
non-interest fee based income as output. It was observed

that Indian banks were still not much differentiated in
terms of input or output oriented technical efficiency and
cost efficiency. However, they differed sharply in respect
of revenue and profit efficiencies. Bank size, ownership,
being listed on the stock exchange and factor productivity
were some of the factors that had a positive impact on
average profit efficiency and to some extent, revenue
efficiency scores. Finally, the median efficiency scores of
Indian banks, in general, and of bigger banks, in particular,
had been improved during the post reform period.
Varadi, Vijay Kumar, Mavaluri, Pradeep Kumar and
Boppana, Nagarjuna (2006) tried to estimate the efficiency
of commercial banks including public, private and foreign
banks operating in India for the period 1999-2000 to
2002-2003 with four indicators i.e. productivity,
profitability, financial management and asset quality. A
non-parametric approach i.e. Data Envelopment Analysis
for measuring the efficiency of banks in India. The data
was analyzed using the intermediation approach. The
result showed that public sector banks were having high
efficiency in terms of productivity, profitability, financial
management and asset quality, whereas the private banks
were having a very high inefficiency levels during the
sample period in the different indicators but foreign banks
were seemed to be more efficient than the private banks.
Therefore, it was evident to say that public sector banks
had wider scope to produce more and more output. The
public sector banks profitability had been improved and
their NPAs had been declined massively. Public sector
banks were having more high possibility to fulfill corporate
and social responsibilities towards all stakeholders. In
order to improve the efficiency, in both private and foreign
banks one should maintain their financial standards
properly.
Manish Mittal and Aruna Dhade (2007) focused on the
achievement and performance of Public Sector Banks vis-vis Private Sector Banks and Foreign Banks. The
parameters selected for evaluation of performance of
48
various categories of banks were profitability and

productivity. Ratio analysis was used to compare
profitability and productivity of different categories of
banks for the period 1999-00 to 2003-04. The result showed
that the public sector banks were less profitable than
the private banks and foreign banks in terms of overall
profitability (Spread Burden Ratio). Foreign banks topped
the list in terms of the net profitability. Public sector
banks were ranked second after the foreign Banks in
terms of the spread ratio but they had higher Burden
ratios which made them less profitable as compared to
the other categories of banks. The foreign banks had
high Interest earned ratios as compared to the Indian
Banks. The Interest paid ratio was the lowest for the
foreign banks followed by private banks and public banks.
The private and foreign banks had traditionally been
viewed as high cost operators. Non interest income of
private sector banks was higher as compared to public
sector banks. Foreign banks were much ahead of the
public banks in productivity (measured by Deposits per
employee, Advances per employee, Business per employee,
Deposits per branch, and Advances per Branch and
Business per branch). Even the private sector banks
especially the new private sector banks were very
comfortably placed as compared to the public sector banks.
In order to improve the profitability and productivity of
public sector banks it had been suggested to reduce
overstaffing, forge strategic alliance with the rural regional
banks to open up rural branches and increased use of
technology for improved products and services for the
same.
Sahoo, Sengupta, and Mandal (2007) analyzed productivity
performance of banking sector in India for the period
1998-2005, using DEA. They collected the panel data of
81 banks which included (26 nationalized banks, 29 Indian
private banks and 26 foreign banks). Productivity
performance was measured through efficiency and scale
economies. Efficiency included technical efficiency and
cost efficiency. The returns to scale (RTS) /scale elasticity
(SEl) in production were defined as the ratio of the
49
maximum proportional () expansion of outputs to a given

proportional () expansion of inputs. In order to measure
banks efficiency they used intermediate approach where
bank was treated as a producer of intermediation services
- by transforming risk and maturity profile of funds
received from depositors to investment or loan portfolio
of different risk and maturity profile. Banks were
considered to have three outputs: Investments, performing
loan assets and non-interest income and three inputs:
borrowed funds, labor and fixed assets. The analysis
showed that foreign banks were technically more efficient
than the public sector banks and private banks. However,
on comparison of public sector banks with private banks
revealed that the former outperforms the latter. It was
noteworthy that those TE performance trends of both
public sector banks and foreign banks remained above
the grand average whereas private banks remained below
it. The improvement was due to increase competition
and labour intensity. With respect to cost efficiency foreign
banks were seen outperforming over both the nationalized
banks and private banks, and private and foreign banks
as a group outperforming over the nationalized banks.
This was due to the fact that they used fewer no. of
employees implying greater work intensity. As regards
the new cost efficiency comparisons (PSBs was evaluated
with respect to all the banks in the other group), private
banks scoring over the nationalized banks, private and
foreign banks as a group outperforming over the
nationalized banks, and foreign banks scoring over both
nationalized and private banks. In all the models, one
could clearly see that SEI estimates of foreign banks
were higher, followed by those of private and nationalized
banks, respectively, and foreign banks mostly exhibited
IRS/economies of scale whereas nationalized banks
exhibited DRS/ diseconomies of scale as their average
SE scores were mostly above unity and less than unity
respectively. Thus over the given period the productivity
of banking sector had been increased.
C. Pramodh and V. Ravi and T. Nagabhushan (2008)
developed a novel measurement technique Data
50
Envelopment Analysis (DEA) - Fuzzy Multi Attribute

Decision Making Hybrid to measure the productivity levels
of Indian banks and rank them. Here, the evaluation
criterion (financial ratios) was treated as fuzzy sets and
banks as alternatives. The relative efficiency levels output
by DEA in a single-input single-output mode were
considered as membership values of the banks in six
evaluation criteria. The evaluation criteria considered
was: Return on Assets, Return on Equity, Equity multiplier,
Profit margin, Utilization of Assets and finally Ratio of
Operating Expenses to spread and Other Income. The
third author, a banking domain expert, provided the
weights of the criterion. Finally, the rankings obtained
by the hybrid were in tune with the domain experts
expectation. An important result of the present study
was that compensatory and product operator used in
aggregating the six financial ratios while computing final
ranks of the banks, yielded identical rankings for banks.
The managerial implications of the study were immense
in that the size of the bank in terms of number of branches
and employees, reputation and quantity of business, which
would make a bank top performer in the perception of
the public, did not contribute to the ranks. Further, banks
that hold a number of deposits of Government of India,
did not obtain a top rank in the final results.
Gunjan M. Sanjeev (2008) analyzed the efficiency of Indian
public sector banks for the period 2003-2007 using DEA
approach. His findings revealed that the efficiency of these
banks had not increased over the study period.
Sunil Kumar and Ruchita Gulati (2008) evaluated the
extent of technical, pure technical, and scale efficiencies
in Indian public sector banking industry using crosssectional data for 27 banks in the year 2004/05. Besides
this, an attempt had been made to explain the impact of
environmental factors (like market share, asset quality,
exposure to off-balance sheet activities, size, and
profitability) on the overall technical efficiency of the
PSBs. To realize the research objectives, a two-stage DEA
framework had been applied in which the estimates of
51
technical, pure technical, and scale efficiencies for

individual PSBs had been obtained by CCR and BCC
models in the first stage; and logistic regression analysis
had been used to work out the relationship between overall
technical efficiency and environmental factors in the second
stage. The intermediation approach was used to select
input and output variables. The output vector contains
two outputs: i) net-interest income and ii) non-interest
income, while input vector contains three inputs: i) physical
capital, ii) labor, and iii) loanable funds. The results
indicated that the level of overall technical efficiency in
Indian public sector banking industry was around 88.5
percent. The 7 PSBs scored OTE score of unity and, thus,
defined the efficient frontier. The resource utilization
process in these banks was functioning well. The remaining
20 banks had OTE score less than 1 which meant that
they were technically inefficient. The results, thus,
indicated a presence of marked deviations of the banks
from the best practice frontier. These inefficient banks
could improve their efficiency by reducing inputs. On
the basis of frequency count in the reference set of
inefficient banks, State Bank of Bikaner and Jaipur, and
Corporation Bank had been figured out as the global
leaders of Indian public sector banking industry. The
worst performer banks in the sample had been noticed
to be Bank of India. It had been noticed that the observed
technical inefficiency in the Indian public sector banking
industry was due to both poor input utilization (i.e.,
managerial inefficiency) and failure to operate at most
productive scale size (i.e., scale inefficiency). However,
in most of the inefficient banks, overall technical
inefficiency was mainly attributed by pure technical
inefficiency rather than scale inefficiency. Thus, Indian
PSBs were more successful in choosing optimal levels of
output than adopting best practice technology. From the
analysis of returns-to-scale, it had been noticed that 52
percent banks operate in the zone of decreasing returnsto-scale and, thus, needed a downsizing in their operations
to observe an efficiency gains. In the present study, they
also carried out a slacks and targets setting exercise to
52
assess the directions for improvement in the operations

of inefficient banks. The results provided that the inefficient
PSBs should concentrate more on off-balance sheet
activities to garner more revenue. The results of logistic
regression analysis provided that the factors like market
share, profitability, and asset quality did not have any
significant impact on the overall technical efficiency of
Indian public sector banking industry. Also, the efficiency
of PSBs was positively influenced by their exposure to
off-balance sheet activities. The proposition that larger
the bank in terms of assets, the higher is its efficiency
did not seem to be held in the Indian public sector banking
industry. However there was an ample scope for
improvement in the performance of inefficient PSBs by
choosing a correct input-output mix and selecting
appropriate scale size.
Deepak Tandon, Dr Kanhalya Ahuja and Neelam Tandon
(2009) conducted productivity and efficiency analysis of
Public Sector Banks operating in India. He empirically
defined and attempt to analyze technical efficiency of
Public Sector Banks operating in India applying Data
Envelopment Analysis Model .The performance of Banks
was assessed in DEA using the concept of efficiency or
productivity, which was the ratio of total outputs to total
inputs. The performance variance and relative efficiencies
of 19 (nineteen) public sector banks excluding State Bank
Group operating in India during 2003 to 2008 financial
years was being examined by taking interest expense
and operating expense as input and business as output.
Considering one input and one output at a time reveals
two different banks as most efficient banks PNB and
OBC with interest expense and operating expense of
respective inputs but for same level of output. In case of
most efficient bank Punjab National Bank with input
interest expense, had a very high level of input slack of
32.98 percent of surplus operating expenses as compared
to Oriental Bank of Commerce. Corporation Bank had
been emerged as most efficient bank with respect to its
peer group of public sector banks operating in India.
Corporation Bank had achieved higher level of business
53
per employee as well as net NPAs ratio of the bank had

continuously decreased from 1.80 in 2003 to 0.32 in 200708, while the group average in 2007-08 was 0.77.Wages
as percentage to total expenses had also decreased over
the period of 2003 to 2008. The bank which had failed in
terms of both the inputs is Punjab and Sind Bank. Prime
areas, where Punjab and Sind Bank needed to be activated,
are on reducing expenses on wages as percentage to total
expenses, curtailing cost of funds which had continuously
increased over the study period, expansion of operations,
enhancing technological skills and increasing non- interest
income as well as advances to generate higher level of
business at lower cost. Union Bank of India, Canara Bank
and Central Bank of India reflected higher level of input
slack and needed to check their interest expenses to achieve
higher level of efficiency while Syndicate Bank, Indian
Bank and Bank of Baroda needed to decrease their
operating cost to be on a higher level of efficiency. At the
same time increase in operating cost should be
substantiated with increase in business and technological
up gradation of the bank.
Pankaj Sinha, Varundeep Singh Taneja and Vineet Gothi
(2009) analyzed the Indian banks riskiness and the
probability of book-value insolvency under the framework
developed by Hannan and Prager (1988). A risk index,
known as Z score, for Global Trust Bank that became
insolvent in 2004 suggests that the framework developed
by Hannan and Prager (1988) were also relevant in the
Indian context. For a random sample of 15 Indian Banks
(public & private sector), the riskiness/probability of book
value insolvency over the years had been determined
and a relative comparison between public and private
sector banks in India had been carried out. Results
obtained in the study show that the probability of book
value insolvency of Indian Banks had been reduced over
years and the probability of book value insolvency was
lower in case of public sector banks in comparison to
private sector banks.
54
Ray and Das (2010) used non-parametric DEA methodology

to evaluate the cost and profit efficiency gains of the
Indian banking sector during the post-reform period (19972003). Their study indicated the state-owned banks to be
more efficient than their private-sector counter parts.
Moreover, lower efficiencies were found to be associated
with small banks (with assets up to Rs.50 billion) signifying
the existence of scale diseconomies. They also found
considerable variation in efficiency across various
ownership categories of the banks.
2.3. Specific Studies Applying DEA

Many studies had been undertaken to measure the
productivity in banking. DEA had earned the preference
in measuring banking productivity. The idea of allocative
and technical efficiency was first given by Farrell (1957).
It had been used in measuring the efficiency of the service
sector. Charnes, Cooper and Rhode (1978), used DEA,
but it was restricted to constant returns only. It was
further extended to the variable returns to scale by Banker,
Cooper and Charnes (1984).
Piyu Yue (1992) examined the efficiency of Missouri Banks
with the help of DEA. The author explained the concept
of engineering efficiency. It was taken as the relative
performances of entities, i.e. the input processed and the
value added was produced as output. The production of
same level of output with minimum use of input made
the production process efficient to measure the efficiency.
DEA was used because in DEA, the model was related to
multi-objective optimization problem with all output and
inputs. Here output was maximized and inputs were
minimized with technology kept constant. Further, DEA
efficiency scores were independent of units in which input
and outputs were taken as long as the units were same
for all inputs and outputs. (Non-negativity should be
maintained). The author considered intermediation and
value added approach to the working of banks. In the
intermediation approach, with loans as output, and all
costs including interest and operating cost as inputs, the
55
author showed that in technical efficiency the CCR and

BCC model had come up with similar results. The results
in the second approach, where the output was the
combination of loans and the deposits and input was
operating cost, was also similar to the first approach
(i.e. the technical efficient banks need not be scale efficient).
Wheelock and Wilson (1995) examined different techniques
and selected DEA to measure the efficiency of the banks.
They had shown that it is not only the technique but
also the views with which the working of banks was
observed that matters in comparing the efficiency. Further
they also considered both the approaches as CRS and
VRS and concluded that there was a similarity in the
results.
Athonassopolous (1998) used DEA to measure branch
efficiency. Here branch efficiency was affected by market
and cost components modified to capture the bank
management. Multivariate analysis was used first to bring
homogeneity in bank branches and then DEA was used
to compare the branch efficiency. DEA was used by
grouping the branches in the clusters (categories) as per
the scales. The assessment was focused on economies of
scale while the cluster profiles of bank branches were
compared for their market and cost efficiencies.
Alam (2001) examined the efficiency of US large banks
with DEA. Bank as the DMU was a multi-objective,
involved with multi-variables as inputs and outputs. Hence,
the use of the DEA was mainly because this technique
handles such matters.
Igor Jemric and Boris Vujeie (2002) used DEA to measure
the efficiency of banks in Croatia.
Galagedera and Edirisuriya (2003) examined efficiency
performance of Indian commercial banks for the period
of (1995-2002) using total deposits and operating expenses
as input and loans and other earning assets as output in
the DEA analysis. They found no significant growth in
productivity during the sample period. Here, a nonparametric methodology was used to evaluate the relative
56
57
efficiency of production units and to accommodate multiple

inputs and outputs.
efficiency. They also analyzed ROA and total costs to

assets and reached similar conclusions.
Jankee (2003) used DEA to measure efficiency of Banks

in Mauritius in post-reform period. Tripe (2004) compared
efficiency of banks in New Zealand with the banks in
Australia using DEA, the non-parametric method.
Healy, Palepu, and Ruback (1992) studied the postacquisition accounting data for the 50 largest US mergers
between 1979 and mid-1984 and found that the
announcement returns based on stock price changes of
the merging firms were significantly associated with
enhancement in post-merger operating performance,
indicating that anticipated gains drive the share prices
at announcement. They also found significant
improvements in asset productivity for these firms following
the acquisition.
The above-mentioned studies are in fact a few sample

studies. There is ample literature and work done on DEA.
Still there is a possibility that the DEA can be improved
and extended further.
2.4. Studies on Mergers

Various accounting based studies which used information
from financial statements and compare pre-merger and
post-merger performance of companies to evaluate whether
the merger or acquisition had resulted in changes in
reported costs, revenue or profits had been conducted
(Ravencraft and Scherer, 1987; Healy et al, 1992;
Pawaskar, 2001).
Geoffery Meeks (1977) investigated the gains from merger
for a sample of transactions (233 observations) in the
UK between 1964 and 1971. Meeks findings indicated a
decline in Return on Assets (ROA) for acquirers following
the transaction, with performance touching the lowest
point five years thereafter. For nearly two-thirds of
acquirers, performance was below the industry standard
and the mergers in his sample suffered a mild declined
in profitability (Robert F.Bruner, 2004). Ravenscraft and
Scherer (1987) studied 471 acquisitions between the years
1950 and 1977. Their major finding was that profitability
is 1 to 2 percent less for acquirers than for control firms
and these were significant differences from a statistical
stand point.
Berger and Humphrey (1992) examined the mergers
occurring in 1980s involving banks with a minimum asset
size of $1billion. They observed using frontier methodology
that bank mergers led to no significant gains in X-
Srinivasan and Wall (1992) investigated all commercial

and bank holding company mergers that occurred during
the time period from 1982 to 1986.Their finding revealed
that non-interest expenses had not come down in the
post-merger scenario.
Akhavein, Berger and Humphrey (1997) analyzed changes
in profitability using the same data set based on ROA
and ROE measures and found no significant change in
these ratios following consolidation. Khanna (1999) who
studied the impact of financial reforms on industrial sector
in India observed that the banking sector reforms had
failed to achieve their primary goal of making this sector
more efficient.
The Verma committee (2000) which went in depth into
the problems of weak banks, identified and examined
their problems and came out with a strategic plan of
financial, organizational and operational restructuring
for them recommending among other things,
recapitalization.
Pawaskar (2001) observed no significant differences in
the financial characteristics of the merging firms when
pre- and post- merger performance was compared. Singh
(2001) attempted an assessment of the impact of reforms
on the operational performance and efficiency of the
commercial banks in India using ratio analysis. His
findings indicated that total income as a percentage of
58
working funds and /or total assets and spread as a

percentage of total income/working funds/total advances/
total deposits improved in the post reform period as
compared to the pre reform period.
Bhide, Prasad and Ghosh (2002) who conducted a study
on the banking sector reforms in India observed that
there was commendable improvement in the profitability
of the public sector banking system, as indicated by
operating profits and net profits.
Sharma and Ho (2002) investigated the impact of
acquisitions on the operating performance of Australian
firms employing a sample of 36 Australian acquisitions
occurring between 1986 and 1991. The results showed
that corporate acquisitions did not result in significant
improvements in post-acquisition operating performance.
Surjit Kaur (2002) studied the impact of mergers in India
taking a sample of 20 firms and found that the ratios
EBITDA/Sales, ROCE and Asset turnover declined in the
post-merger period, though the decline was not statistically
significant. Beena (2004) investigated the performance
of 84 domestic acquiring firms and 31 foreign-owned
acquiring firms in the manufacturing sector in India during
the period 1995-2000 and could not find any significant
difference in the selected financial ratios of acquiring
firms.
Pramod Mantravadi and A. Vidyadhar Reddy (2007)
studied the impact of mergers on the operating
performance, taking a sample of public limited and traded
companies in India covering the period between 1991
and 2003. Their findings pointed to minor variations in
terms of impact on operating performance following
mergers in different time intervals in India.
Manoj Anand and Jagandeep Singh (2008) analyzed five
mergers (all private sector banks) in the Indian banking
sector to understand the nature of the returns to
shareholders following merger announcements employing
the event study methodology. They observed that the
merger announcements in the Indian banking industry
59
had positive and significant shareholder wealth effect

both for bidder and target banks.
In summary, most studies failed to observe a positive
association between merger activity and gains in either
operating performance or stockholder wealth across a
wide variety of methodologies, samples.
Raj kumar (2009) observed that, on an average, merger
induced changes in industry-adjusted profitability; asset
efficiency and solvency position were statistically
insignificant.
Most of the studies in the Indian Banking Sector which
have evaluated the post merger performance have employed
case method. Further, those studies which have used
event study methodology have chosen small samples which
may not permit broad generalization of conclusions. A
few of the researchers have also adopted Data Envelopment
Analysis (DEA) and Stochastic Frontier Analysis (SFA)
approaches to analysis the post-merger performance of
the Indian banking industry spread over a major portion
of the post-reform period (1994-2009).
Stephen A. Rhoades (1993) in his study on efficiency
effects of horizontal (in-market) bank mergers conducted
tests to determine whether banks involved in horizontal
mergers achieve efficiency improvements relative to other
firms. The analysis covered 898 bank mergers from 1981
to 1986. Efficiency was measured by various expense ratios.
The results based on OLS and logic analysis indicated
that during 1981-1986, horizontal bank mergers did not
result in efficiency gains. Notably, the findings which
were based on the mergers believed to be the ones most
likely to result in efficiency gains, i.e., they were horizontal
mergers, the firms exhibited considerable deposit overlap,
and the acquirers were, on an average, more efficient
than the targets.
Allen and Roy (1996) estimated a global cost function for
international banks to test for both input and output
inefficiencies. Their findings for the time period 19881992 suggested that for banks in 15 countries, the input
60
61
related X-inefficiencies far outweigh the output

inefficiencies measured by economies of scale and scope.
Another notable finding of their investigation was that
while large banks in countries where there was no
functional integration of commercial and investment
banking, had the highest measure of input inefficiency
as high as 27.5% of total costs as well as significant
levels of scale diseconomies, the other banks had Xinefficiency levels in the area of 15% of total costs.
He found that the inefficiency among these banks was

attributable to scale suggesting that these banks were
operating at sub-optimal levels.
Allen N Berger (1998) argued that analysis of profit

efficiency was more apt than the analysis of cost efficiency
to the study of M&As because it included the revenue
effects changes in output that typically occurred after
mergers. He added that profit efficiency was a more general
concept that included cost X-efficiency effects of the merger
plus any revenue and cost effects of changes in output.
In sum, the literature review suggests that bank mergers

have the potential to improve performance of the firm
through increased profitability by enhancing efficiency
levels post-merger. There is however no consistent evidence
about increased efficiency levels post-merger, in the
banking sector across the globe. Most of the studies relate
to bank mergers in US, Europe and Australia and have
found no convincing evidence on the increase in efficiency
gains resulting from bank mergers (Rhoades, 1993; De
Young, 1997). Some studies have found improvements in
profit efficiency after bank merger, no such improvements
have been observed in regard to cost efficiency in the
same studies (Berger et al, 1999; Berger and Mester,
2003).Another interesting finding of a study is that bank
efficiencies (in Australia) rose in the post-deregulation
period and the acquiring bank does not always maintain
its pre-merger efficiency (Avkiran, 1999).
Prager and Hannan (1998) studied the price effects of

U.S. bank mergers that substantially increased local
market concentration. They used the deposit interest rates
offered by banks to their clients as their price measure.
They found that, over the 1991-94 time period, deposit
rates offered by participants in substantial horizontal
mergers and their local market rivals declined by a higher
percentage than those offered by banks not operating in
markets in which such mergers took place. The authors
interpreted the results as evidence to establish that these
mergers led to enhanced market power.
Liu and Tripe (2003) used a relatively small sample of
seven to fourteen banks and explored the efficiency of 6
New Zealand bank mergers during the period between
1989 and 1998.They found that the acquiring banks to
be generally larger than the targets. While the results
indicated that four banks experienced efficiency gains
post-merger, they could not arrive at a conclusion on
possible merger benefits.
Sufian (2004) using a small sample of 10 banks,
investigated the impact of the merger programme on the
domestically incorporated Malaysian commercial banks.
Prakash Singh (2009) studied the impact of mergers in

Indian banking using DEA approach. He analyzed the
profit efficiency and cost efficiency of the acquiring bank
to see whether any gains occur from consolidation. His
conclusion was that the mergers did not seem to impact
the cost and profit efficiency in an adverse manner.
In another efficiency study on European banks, the scale

economies were found to be ranging between 5% and 7%,
while the X-inefficiencies were found to be much higher,
ranging between 20% and 25%. By implication, banks,
regardless of size, could generate greater cost savings by
bringing down managerial and other inefficiencies. The
study also showed that technical progress has also had
similar influence (cost reductions were around 3%) on
European banking markets between 1989 and
1997(Altunbas et al,2001). A notable outcome of the review
of literature is that the acquiring banks are generally
larger than the targets.
62
Yet another study which investigated the effects of bank

mergers on the cost and profit efficiency US banking
industry found that both these efficiencies improved postmerger (Al-Sharkas et al, 2008).
There are other studies which found improvements in
technical efficiency in bank mergers [Al-Sharkas et al
(2008) and Sufian et al (2009)].
The present study is a modest effort to cover the time
gap and attempts an analysis to measure and compare
the productivity of individual banks and bank groups
using DEA. An effort has been made to compare the
profitability of bank groups using Regression Analysis
and CAMEL rating system. A broader analysis by taking
a sample of 6 mergers in the Indian banking sector
employing 13 parameters which reflect the liquidity,
efficiency, profitability, and capital structure of the Indian
banks is done.
Performance Analysis of Indian Banking Sector
63
3
Performance Analysis of Indian
Banking Sector
After liberalization of the Indian economy, many positives

happened for the banking sector. It led to stabilization
of the banking system through which recapitalization of
state owned banks helped to reduce the non- performing
assets and increases amount of existing capital in banks.
To ensure stabilization the government infused Rs. 40
billion in the state owned banks before changing the
policies for the banking sector. In the years from 1993 to
1999, an additional Rs.120 billion was injected in the
nationalized banks (Reserve Bank of India 2001). India
enacted many significant banking reforms in 1991 and
in 1998. Many studies have found that the reforms have
helped in increasing the efficiency and profitability but
other studies find no such significant impact. This chapter
analyzes the impact of the reforms and the performance
of private and public banks in the period before, during
and after the Great Recession using the CAMEL
framework.
3.1. Banking Reforms in India During 1990s

The four major reforms are briefly explained below:
1) Reduction in CRR and SLR: The CRR and SLR
stood at 15.0p.c. of Net Demand and Time Liabilities
(NDTL) and 38.5p.c. of NDTL, respectively in 1991.
64
Together they comprised 53.5p.c.of NDTL. However by

2001 the government slowly reduced the CRR to 8.0p.c.of
NDTL and the SLR to 25.0p.c.of NDTL. Such high reserve
requirements meant lower returns on these investments
that fell below the amount the banks were paying to its
depositors. Table 3.1 outlines the decrease in CRR and
SLR over the years 1974 to 2011.
2) Interest Rate Changes: The Government of India
fixed lending and deposit rates and reduced the interest
margin gradually. In 1977 the ceiling on lending rates
was 6.50p.c.and the floor on lending rates was 12.50p.c.
The deposit rate was fixed at 8.00p.c- 10.00p.c. for varied
term deposits. In 1988 the ceiling on the lending rates
was still fixed at 16.50p.c. and the deposit rates were
increased to 9.0p.c.-10p.c. The real interest rate for loans
was 7.115p.c.and on deposits was 0.385p.c. - 0.615p.c.The
mandatory CRR and SLR deposits made with the
government yielded 5.18p.c.-6.47p.c.for varying periods
in 1971 which increased to 7.03p.c.-9.36p.c.in 1988. The
real interest rate for government deposits in 1988 were
2.35p.c - 0.025p.c. So the banks were making substantially
less than the lending rate or the amount they were paying
to the depositors. In addition to combat inflation the
government of India changes the repo rate or the bank
rate. This changes the lending rates of banks substantially
in a shorter time span. The repo rate is the rate at
which the RBI lends money to the banks. The government
decreased the repo rate after 1992 as well, decreasing
the lending rate of the banks in India. The recent increase
in repo rates has been placed to curb increasing inflation
in India. The historical repo rates are outlined in Table
3.2
65
Table 3.1: CRR and SLR as p.c. of NDTL

Year
CRR (p.c. of NDTL)
SLR (p.c. of NDTL)
1974
1981
1987
1991
4
7.5
10
15
33
35
37.5
38.5
1994
1997
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
15
10
9
8.5
8
4.75
4.5
5
5
5.25
7.5
5.5
5
6
6
31.5
25
25
25
25
25
25
25
25
25
25
24
25
24
24
Source: RBI Annual Reports, various issues
Table 3.2: Repo Rates in India

YEAR
REPO RATE
1974
1981
1987
1991
1992
1997
2001
2007
2009
2011
9
10
10
11
12
9
6.5
7.75
4.75
8.5
66
3) Priority Sector Lending: As per Narasimham Committee

recommendations, the priority sector advances were a key
component of the losses in the state owned banks in India.
The Committee recommended reducing priority sector lending
from 40p.c. to10 p.c. of net bank credit. However this
recommendation was not taken into account and the targets
were not reduced; however the list of industries included in
the priority sectors has been expanded. As of 2011, the priority
sector includes (1) agriculture, (2) small scale industries, (3)
small road and water transport operators, (4) small business,
(5) retail trade, (6) professional and self employed people,
(7) state sponsored organizations for scheduled castes and
scheduled tribes, (8) education, (9) housing, (10) consumption
loans, (11) micro-credit to self help groups and NGOs, (12)
software industry, (13) food and agro processing sector and
(14) venture capital funds (Reserve Bank of India). The limit
for foreign banks is 32p.c. and for domestic banks (private
and public) is 40p.c. of net bank credit (Reserve Bank of
India). The increase in the list of industries included in the
priority sector provides banks the freedom to advance loans
to only credit worthy industries.
4) Introduction of Private and Foreign Banks: Entry
of new foreign and domestic banks started in 1994. Since
then thirty new domestic and foreign banks have entered
the Indian market.
After these set of reforms were enacted, the Narasimham
Committee submitted a second report for another set of
reforms in 1998. These reforms can be categorized into four
main groups: (1) strengthening the banking sector: (2)
improving asset quality, (3) banking regulation and
supervision, (4) structure of banks. Based on the
recommendations from the second report, the government
implemented the following changes.
1) Strengthening the Banking Sector: This entailed
changing or drafting regulations that would help to
improve performance measures for banks. The risk
weights for the capital adequacy ratio were changed.
67
The Government securities which were initially

riskless now held a weight of 2.5p.c. Minimum CRAR
ratio was raised from 8p.c. to 9p.c. This helped in
measuring the performance of banks in a more realistic
setting, providing the markets with a more accurate
value of the banks.
2) Improving Asset Quality: The Government of India
changed the definition of doubtful assets to be
classified as doubtful if it was in the substandard
category for 18 months; and in March 2005 changed
the definition to include assets in the substandard
category for 12 months. For banks with a high NPAs
portfolio the government created the first Asset
Reconstruction Company in June 2002, this company
would issue NPAs swap bonds.
3) Banking Regulation and Supervision: Most banks
have now established an independent loan review
system to identify and curb potential NPAs. The
committee suggested the need to redefine the scope
of external vigilance and investigation agencies
(Major Recommendations by the second Narasimham
Committee on Banking Sector Reforms 2011) with
regard to banking business; however, the government
took no action in this field.
4) Structure of Banks: A developmental financial
institution over a period of time could now convert
itself into a bank. Another main recommendation
taken into consideration was to reduce the
shareholding of the government in public banks to
33p.c. and banks such as Punjab National Bank had
started coming up with IPO and most public banks
today are publicly trading on the stock exchanges of
India.
3.2. Effects of Reforms on the Banking System

Table 3.3 shows that liabilities of all banks are increasing.
Banks have been investing in government securities on their
68
own in excess of their statutory requirement because of the

low credit off-take in the commercial sector and also because
of the safety considerations. Government securities are not
disadvantageous from the point of view of the earnings in
the initial phase of reforms. The domestic banks believed
that interest earnings without risk are the easiest way of
being profitable in the business. The risk free investment is
mainly the investment with the government securities. Unlike
domestic banks, foreign banks have least rate of growth in
the reserves (17.39 percent). These banks are multitalented
in earning the income. They earn the income mainly from
services provided. However, the reserves maintained by the
foreign banks are not increasing at faster rate.
Foreign banks and private sector banks dominate the CAGR
of capital of all banks because of relaxation of some of the
restrictions and they still have the potential to rise. It shows
that they are able to make efficient use of their own funds
as capital and reserves are mainly maintained by ploughing
back of the profits. On the other hand, the behaviour of
assets of the banks is shown in table 3.4. The advances
issued by the banks, investment made by the banks and the
fixed assets of the banks constitute the assets of banks.
Table 3.3: CAGR of Liabilities in Banks in India
(1991-2010)
(Percent)
Group of
Banks
Capital
Reserves
Borrow
Deposits
Total
Liabilities
SB(6)
NBs(19)
FBs (14)
PrBs (13)
All Banks
9.01*
7.90*
39.00*
30.15*
11.61
21.85*
22.36*
17.39*
35.81*
23.40
-3.73
3.36*
19.50
37.34*
13.29
20.21*
13.69*
32.50*
25.31*
16.10
13.80*
13.43*
15.48*
27.39*
15.12
* Significant at 5 percent level.

Sources: Various issues of Statistical tables related to Banks
69
Table 3.4: CAGR of Assets of Different Groups of

Banks in India (1991-2010)
(Percent)
Group of Banks
Advances
Investment
Fixed Asset
SB
12.50*
18.79*
17.18*
NBs
13.82*
14.82*
9.22*
FBs
17.43*
15.41*
12.88*
PrBs
27.72*
30.19*
26.78*
All Banks(Average)
15.15
17.55
13.77
* Significant at 5% level of significance.

As shown in Table 3.4, the assets also have grown over

time. The growth in advances is the maximum for other
commercial banks. Similarly in investment and
accumulation of fixed assets also, the private sector banks
are in the top rank (30.19 percent and 26.78 percent
respectively). This growth is the result of the policy of
liberalization adopted by the Indian government. The
supportive reforms have helped this group of banks to
grow faster. On the other hand, the growth rate of advances
for SB group was lowest during this period at 12.50 percent.
This shows that SB group is not concentrating on advances
for the growth of interest income. The private sector banks
have the higher rate of growth in their liabilities as well
as their assets. The main reason behind this growth is
that the size of asset and liabilities of private banks was
negligible in 1991 and after the new policy reforms of
1991, private sector commercial banks were exposed to
more volume of business.
In case of growth in the investments of different bank
groups, private sector banks are at the top. Here, the
investment taken is restricted to investment in India
only, e.g. investment in government securities, other
approved securities, shares, debentures and bonds,
subsidiaries or joint ventures etc. Foreign banks and
nationalized banks are having almost similar growth at
70
15.4 percent and 14.8 percent, respectively. It shows that

foreign banks are not concentrating on such types of
investments for earning their sources of income. As
mentioned earlier, they are mainly dependent on service
and agency functions for source of income. These banks
fixed assets have shown slight increase. They have their
branches mainly in the urban metropolitan areas. Hence,
the size of their fixed assets has remained almost
unchanged.
The nationalized banks also had a very low rate of growth
in their fixed assets during 1991-2010. It has been observed
that the nationalized banks have already expanded their
branches, offices, furniture used in the offices etc. Hence,
their slow rate of growth in fixed assets in post-reforms
is apparent. The next step to compare the productivity of
the banks is shown with the data indicating earnings
and expenditures changes of the different groups of banks.
Table 3.5 gives the behaviour of the earnings and expenses
of the banking sector.
Table 3.5: CAGR of Earnings and Expenditures of
Different Groups of Banks (1991-2010)
(percent)
Groups
Total Income
Total Expenditure
SB
12.86*
10.48*
NBs
12.94*
9.66*
FBs
14.20*
9.98*
PrBs
26.05*
24.35*
All Banks
14.29
11.32
71
growth. NBs group is having minimum increase in the growth

of interest paid. This is confirmed by the statistics on liabilities,
where, the rate of growth of deposits is lowest for nationalized
banks (13.69 percent). It has been observed that the growth
of total earnings is faster than the rate of growth of
expenditure, indicating the growth in the profitability of all
groups of banks.
As shown in Table 3.6, the absolute data of the banks shows
that the rate of growth in the profits of banks actually
increased after 1996. Before this period, the nationalized
banks were making losses and after 1996 these started
improving slowly as their income started exceeding their
expenditure. The progress of the banks was actually due to
the decreasing rate of losses made by them.
Table 3.6: Profits/Losses of All Banks during
1992-2010
Years
Profits (Rs. L)
Years
Profits (Rs. L)
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
1,1,9683
-4,15,087#
-3,64,633#
2,06,502
-9,23,46#
4,53,392
6,45,060
4,66,245
11,98,400
19,74,600
2002
2003
2004
2005
2006
2007
2008
2009
2010
29,81,800
40,59,200
52,67,300
51,32,000
53,65,809
51,09,120
45,20,300
48,80,640
49,32,980
#Losses
Source: Statistical Tables relating to Banks: RBI Various issues
* Significant at 5% level of significance.

Table 3.5 shows that out of all the groups of banks the
private sector banks have grown in their financial performance
significantly, compared to other groups of banks. Nationalized
banks and foreign banks are successful in controlling the
rate of growth of their total expenditure. SB group is having
a status quo growth in their earnings as well as expenditure
The rate of profit growth from 1997 to 2005 is 41.5 percent.

Till 1996, banks were struggling to cope up with the changing
atmosphere. During the reforms process, competitive
environment has been created. This has improved the
efficiency and productivity of the banks. In the later years,
the profits declined due to recession and global financial
crisis. Table 3.7 depicts profit and loss of groups of banks.
72
The measures like capital adequacy maintenance, asset quality

maintenance, reduction in NPAs has improved the profits of
the banks. Due to commercial sector off-take of the credit
and autonomy offered to the banks, their profitability has
improved i.e. from losses these banks started earning profits
and the rate of earning profits increased faster after 1996.
In the story of the combination of the loss and the profits
only, SB group and private sector banks have profits, even
though the NBs and FBs groups were making losses as
shown in Table 3.7.
As shown in Table 3.7, only SB group and PrBs group are
making profit during 1991-2010, but nationalized banks and
the foreign banks were making losses in the first 5 to 6
years of the reform phase. But after 1996, nationalized banks
have started making profits and their rate of growth in the
profit is fastest. Table 3.8 shows that the rate of growth of
the foreign bank group during 1991-2010 is the lowest (34.27).
Table 3.7: Profits or Losses of Groups of Banks
during 1991-2010 (Rs. Crore)
Years
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
SB
14,992
24,524
28,003
35,605
84,648
80,348
1,66,989
2,41,148
1,46,565
5,84,000
5,73,900
8,72,000
11,22,900
14,36,300
15,25,900
16,56,700
17,09,876
17,24,387
18,89,900
19,42,500
NBs
31,518
60,108
-3,57,313#
-4,70,582#
26,931
-1,13,834#
1,44,519
2,56,728
1,79,244
2,43,700
8,05,400
12,95,700
18,48,600
25,11,300
23,79,300
24,56,000
23,87,652
23,78,905
25,34,600
25,76,340
FBs
14,615
26,866
-92,847#
57,383
54,676
-2,17,705#
77,018
62,993
69,565
1,03,500
3,10,500
3,51,300
3,72,800
4,98,600
4,59,900
4,78,300
4,89,675
3,56,980
4,09,830
4,80,450
Profitability is a revealing indicator of a banks competitive

position in banking markets and of the quality of its
management. Profitability is the key source of capital
generation for a bank. Income statement of the banks
reveals the information of the banks profitability.
Traditionally the major source of banks income has been
the interest but the increasing orientation towards nontraditional business is also reflected in income statement.
Income from trading operations, investments, and feebased income accounts are the main source of earning in
modern banks. This trend implies higher volatility of
earnings and profitability. It also implies a different risk
profile from traditional bank.
Table 3.8: Comparison of the Growth Rates of
Profits Earned by Different Bank Groups
Groups
Profits CAGR
SB(1991-2010)
35.55*
NBs(1991-2010)
55.09*
PrBs
FBs(1991-2010)
34.27*
3,843
8,185
7,070
12,961
40,247
1,58,845
64,866
84,191
70,871
2,67,200
2,84,800
4,62,800
7,14,900
8,21,100
7,66,900
8,01,800
8,34,780
7,90,651
7,40,380
8,23,540
PrBs(1997-2010)
38.2*
All(1991-2010)
41.57
#Losses
73
*At 5 percent significant level

Change in the structure and stability of banks profit

have sometimes been motivated by statutory capital
requirements and monetary policy measures such as
obligatory reserves. The restrictive nature of this statutory
minimum reserve may cause banks to change their
business mix in favour of activities and assets that entail
a lower capital requirement. However, although such assets
carry less risk, they may earn lower returns. Excessive
obligatory reserves and statutory liquidity requirements
damage profits and may encourage disintermediation. They
may also result in undesirable banking practices.
Sometimes in many developing countries a number of
banks contain a large proportion of fixed assets, a trend
that adversely affects their profitability.
74
The income of the banks shows that the traditional sources

of income are declining and the modern source i.e. feebased income or other than interest income is increasing
at a rapid rate.
Table 3.9: Comparison of CAGR of Components of
Income and Operating Costs of Different Groups
of Banks (1991-2010)
Groups
Interest
Earned
Other
income
Interest Paid
Paid
Operating
Expenditure
12.5*
14.82*
12.31*
7.11*
NBs
12.31*
17.07*
10.87*
7.42*
FBs
13.08*
18.68*
11.82*
7.82*
PrBs
24.45*
31.89*
26.27*
20.13*
All Banks
13.58
18.41
12.9
8.42
75
the foreign banks claim second rank at 13.08 percent and

18.68 percent respectively. To compare the expenditure in
terms of the interest paid and the operating expenditure,
all the other groups of banks have closely competitive rates
of growth. There is a vast gap between the PrBs group and
the SB, NBs, FBs groups of banks. In interest income growth
rate they lie between the range of 10 percent to 12 percent
and in operating expenditure they fall in the very close
range of 7.11 percent to 7.82 percent.
*At 5 percent significant level

We can derive a conclusion that during the reform phase,

all the groups of banks have earned more from the other
income than the interest income. Similarly they have tried
to reduce their operating costs by cost cutting procedures
adopted by them after 1991, when the reforms are adopted
in finance and banking sector also. In the reform and
globalization policy the banks are supposed to work as per
the Basel Accord 1988.
Table 3.9 shows that all the groups of banks are competent
in earning income from sources other than interest like feebased and knowledge-based income i.e. income earned from
commission, exchange and brokerage. Besides these sources,
the income can be earned even through the rent or the sale
of investments etc. Sometimes, the income is earned even
from the exchange transactions. The table shows that the
minimum rate of growth in non-interest income is shown in
SB group at 14.82 percent. The NBs group is growing their
non-interest income at a moderate rate 17.07 percent. Amongst
all the groups of banks, PrBs group has shown the fastest
rate of growth in interest as well as non-interest income at
24.45 percent and 31.89 percent respectively.
Next indicator of healthy working of banks is capital adequacy

of a bank. Imposition of minimum capital adequacy ratio
(CAR) promotes prudent management of commercial banks.
There was a phase of widespread concerns about declining
profitability of banks, especially in the eighties, when the
Basel capital adequacy norms were enacted in 1988. The
Basel Committee on Banking Supervision (BCBS) came out
with the new Consultative Paper on Capital Adequacy in
June 1999 and invited suggestions from the policymakers,
academia and other institutes all over the world by March
2000. After taking into consideration the manifold suggestions
of the various organizations, the second Consultative Paper
on Capital Adequacy was released in January 2001. The
new rules took effect from 2005.
SB
It is also seen that the PrBs group is having highest rate of

growth in spending, in terms of interest spending, at 26.27
percent and in terms of operating expenditure, at 20.13
percent. The reason for having highest rate in earning and
expenditure of PrBs group is due to the Base effect. In the
race of earnings through interest and other incomes growth,
76
Table 3.10: Capital Adequacy Ratio (CAR) of

Different Groups of Banks (1995-2010)
(Percent)
Bank Groups
SB
NBs
FBs
PrBs
All Bank
Average Capital
Adequacy Ratio
(CAR)
Average growth
of Capital Adequacy
Ratio
12.16
10.74
25.62
12.80
14.62
3.22
7.09
6.21
-3.61
0.91
Source: Statistical Tables relating to Banks: RBI Various issues.
Table 3.10 shows that the foreign banks are maintaining

highest capital adequacy ratio at 25.62 percent. The PrBs
group is at second position in terms of the average rate
of growth of CAR at 12.8 percent but the rate of growth
shows that private sector banks have a negative rate at
-3.61 percent. It indicates that CAR is falling for PrBs.
The nationalized banks are highest in the rate of growth
of CAR (7.09 percent) amongst all banks, but their average
CAR is the minimum (10.74 percent) amongst others.
An adequate capital base serves as a safety net for a
variety of risks to which an institution is exposed in the
course of its business. The capital serves as a permanent
pillar to the bank and it must not impose mandatory
fixed charges against earnings. It allows for legal
subordination to the rights of depositors and other
creditors.
The capital adequacy aims to provide a comprehensive
approach to measure banking risks with the fundamental
objective like maintaining safety and soundness of banking
system and to enhance competitive equality of the banks.
The tier-one capital includes equity shares, retained
earnings and non-redeemable, non-cumulative preference
shares. This type of core capital is common in all banking
systems and is always completely visible in published
accounts. Tier-2 capital includes other components of the
77
balance sheet like capital obligation that must be redeemed

or that contains a mandatory charge against future income,
whether or not the earnings will be available. Such capital
consist of instruments that have the same characteristics
as both equity and debt, including asset revaluation
reserves, general provision and general loss reserves, hybrid
capital instruments such as redeemable cumulative
preference share and subordinated term debt. Tier-3 capital
is only permitted to cover market risk, including those
that derive from foreign exchange and commodities.
In order for capital to be recognized, the sum of tier-2
and tier-3 capital i.e. the part of banks total capital
must be lower than tier-1 capital. For capital adequacy
purpose, tier-3 capital is limited to a maximum of 250
percent of tier 1 capital. Tier-2 capitals may be substituted
for tier-3 capital up to the same limit of 250 percent.
The balance sheet structure of data of the SB and NBs
shows stronger position compared to other banks but
when profitability of the different groups is taken, the
FBs group and PrBs group are consistent from 1991.
The SB group and NBs group were making losses in the
early phase of reforms and in the second phase of reforms
they could cope up.
An important question that emerges from the reforms is
whether or not they were helpful for the Indian Banking
System, and there exists a vast amount of literature that
states that these reforms were helpful in improving the
efficiency of the Indian banks. Bhattacharya et al (1997)
conducted a study using 23 years of data from 19701992 and found that total factor productivity was increasing
at a rate of 2p.c., but during the deregulation period the
growth rate for total factor productivity was 7p.c.,
indicating that the reforms were effective in the early
stages.
Ram Mohan and Ray (2004) conducted a study where
they used 8 years of data from 1992 2000 and concluded
that there was a convergence in performance between
public and private banks in the post reform era and that
public sector banks performed significantly better than
78
private sector banks in terms of revenue maximization

efficiency. They allocate the superior performance of the
public banks to higher technical efficiency. A study done
by the Reserve Bank of India (2008) states that efficiency
has improved across all bank groups over the period 19912007. The report performs a comprehensive study on
resource mobilization, management of risk and capital
and lending and investment operation of banks to come
to this conclusion.
3.3. Profit Analysis of Banks

The period from 1990 2010 is interesting because two
sets of reforms were introduced in the span of this 20
year period. This period ensures enough time for the
implementation and for the effects for these reforms to
take place. The positive effect of these reforms on loans,
savings, and other balance sheet items has been studied
by many notable economists in India and worldwide. As
mentioned above, economists have found positive effects
from the reforms; however, very few studies have focused
on profitability of the banking sector.
This chapter analyzes the profitability of banks in the
wake of the first and the second set of reforms using
yearly data from 1991-2011.For this purpose, multiple
linear regression modeling has been done. The description
of the model is as under:
ROA
= + 1CRR + 2SLR + 3GDPgr + 4MLR +
ROE
= + 1CRR + 2SLR + 3GDPgr + 4MLR +
NIMTA = + 1CRR + 2SLR + 3GDPgr + 4MLR +

Table 3.11, 3.12 and 3.13 display the regression results
for the profitability indicators on the public sector banks,
private sector banks and foreign banks respectively. The
tables suggest that CRR has a negative relationship with
return on assets (ROA) and is statistically significant.
CRR affects foreign banks more than the private banks
and public banks. A one percentage point increase in
CRR will lead to a 1.21 percentage point decrease in
ROA for foreign banks, 1.03 percentage point decrease
79
in ROA for private banks holding everything else constant;

however a one percentage point increase in CRR will
decrease the ROA of public banks by only 0.32 percentage
points, holding everything else constant.
Table 3.11: Regression Results for Public Banks
Dependent
Variable
ROA
ROE
Net Interest
Margin to Assets
-0.35**(0.09)
0.00(0.00)
-0.032(0.09)
0.29(0.15)
0.07(0.08)
-0.07(0.08)
0.02(0.08)
-0.05(0.14)
-22.86(51.07)
21
.51
4.96***(1.38)
21
-0.04
Independent
Variable
CRR
-0.32**(0.10)
SLR
-0.07(0.08)
GDP GROWTH
-0.032(0.09)
Minimum Lending 0.35*(0.17)
Rate
Constant
-0.93(1.89)
N
21
Adj.R-squared
.52
Source: Computed from the data collected by the researcher

Note: Standard errors in parentheses *** p<0.001, ** p<0.01, * p<0.05
Table 3.12: Regression Results for Private Banks

(including old and new private sector banks)
Dependent
Variable
ROA
ROE
Net Interest
Margin to Assets
CRR
-1.03**(0.34)
-0.09**(0.05)
-0.18(0.08)
SLR
-0.18(0.24)
-0.03(0.02)
-0.04(0.07)
GDP Growth
-0.65*(0.29)
-0.07(0.04)
0.16(0.08)
0.9(0.46)
0.09(0.05)
0.22(0.14)
0.16(1.38)
Independent
Variable
Minimum Lending
Rate
Constant
4.93(4.89)
0.23(0.58)
21
21
21
Adj.R-Squared
.52
.51
-0.04

80
Table 3.13: Regression Results for Foreign Banks

Dependent
Variable
ROA
Independent
Variable
CRR
-1.21**(0.44)
SLR
-0.2(0.29)
GDP Growth
-0.75*(0.42)
Minimum Lending
0.7(0.26)
Rate
Constant
7.93(4.19)
N
21
Adj.R-squared
.51
ROE
Net Interest
Margin to Assets
-0.19**(0.05)
-0.05(0.04)
-0.06(0.04)
0.06(0.05)
-0.15(0.09)
-0.04(0.07)
0.19(0.05)
0.12(0.10)
0.43(0.78)
21
.54
0.26(1.60)
21
-0.03

Table 3.11, 3.12 and 3.13 outline the relationship between

ROE and CRR. Since the equity multiplier of the public
banks is so high, the effect of CRR on ROE is greater on
public banks than on private banks and foreign banks.
ROE and CRR have a strong negative relationship,
statistically significant as well. If CRR decreases by one
percentage point the ROE of public banks should increase
by 0.35 percentage points, and the ROE of private banks
and foreign banks should increase by 0.09 and 0.19
percentage points respectively holding everything else
constant.
The ROA of public banks have a positive relationship
with the minimum lending rate, statistically significant
at the 90% level. If the minimum lending rate increases
that will increase interest income for the banks and lead
to a higher net income which would lead to a higher
return on assets. The above three tables suggest that a
one percentage point increase in the minimum lending
rate should increase the ROA of public banks by 0.35
percentage points, private sector banks by 0.9 and foreign
banks by 0.7 holding everything else constant.
Net Interest Margin to Assets has a negative relationship
with CRR statistically significant at the 5% level, as stated
by table 3.12 and 3.13. For a one percentage point increase
81
in CRR the net interest margin to assets ratio will decrease

by 0.18 percentage points and 0.15 percentage points
respectively holding everything else constant.
The reforms in 1991 that helped decrease the CRR and
the SLR were definitely profitable for the groups of banks,
as they helped in increasing the profitability of the banking
industry of India.
3.4. Comparison of Private and Public Banks

using the CAMEL Framework
This section analyzes the comparison of the private and
public sector banks based on performance indicators. The
CAMEL Framework helps to measure banks performance
through five different categories. The CAMEL Framework
is distributed as (1) capital adequacy ratio, (2) asset quality,
(3) management quality, (4) earnings performance, and
(5) assessing liquidity.
The capital adequacy ratio measures the financial strength
of a financial institutions. Section 17 of Indian Banking
Regulation Act 1949 states that every banking company
in India is required to create a reserve fund and it should
hold at least 20% of the firms disclosed profits in the
fund. However prior to the reforms in 1991 there existed
no measure of measuring the financial strength of banks
in India. One of the many suggestions of the Narasimham
Committee was to initiate a capital to risk asset system.
The Basel Committee released guidelines on capital
measures and standards in July 1988. These guidelines
were implemented in India in 1992 (RBI, 2000). Starting
from March 2000 Indian banks were required to maintain
CAR at 9% and it is 10% for new private banks and
banks undertaking.
Figure 3.1 below displays the capital adequacy ratio of
private and public banks in India. It shows that the
public and private sector banks were closely following
each other at an average of approximately 12% and during
the recession there is a sharp discrepancy in the ratio
between public and private banks. The CAR increases if
82
riskless assets such as cash and investments in government

securities increase or if capital increases. The capital
adequacy ratio for private banks could have increased as
cash in hand and balances with RBI increased by 73% in
2007; however the increase was only 19% for public banks.
A higher CAR displays greater financial strength for an
institution. After the crisis the private banks seem to be
performing better if measured in terms of financial
strength.
The asset quality of a bank can be assessed by concentration
of loans to different industries, the number of non-performing
assets and loans and loan loss provision ratio. The ratio of
priority sector advances is monitored by the government
and has a floor of 40% of net bank credit for private and
public banks in India and 32% for foreign banks operating
in India. As can be seen in the figure 3.2 the priority sector
lending of both the sectors is same after 2008. However,
there is a wide difference between the two before that,
especially in the year 2002.
Figure 3.3 graphs non-performing assets as a percentage of
total assets. However, upon closer examination of these
advances in 2010, the percentage of NPAs to total assets
increases by 13.81% for public banks whereas it decreases
by 6.93% for private banks. The private and public banks
closely follow each other till 2009 and start diverging after
that.
Assessing management quality can be a very challenging
task, so the metrics used in the CAMEL framework to assess
it is: operating costs and operating profits. Figure 3.4 below
displays percentage of operating profits to total assets. It is
evident that public banks had higher operating profits as
compared to the private sector banks. However, private banks
show an upward trend before and after the crisis and the
public banks show a downward trend before and after the
crisis. So based on this metric the management of public
firms by the Government of India, is not really healthy for
the banks. In figure 3.5 the ratio of wage bills to total income
suggests that the public sector banks are making their
83
operations more efficient with time, and are coming closer

to the ratio exhibited by private banks.
Although in figure 3.6 operating expenses as a percentage
of total expenses show a downward trend from 2006 -2009,
an upward trend develops after 2009, this may reflect the
effects of the financial crisis. Further, breakdown of operating
expenses in the years 2007-2009 reveals that payments to
and provisions for employees in private banks increases on
average by 28% whereas in public banks the average increase
is only 10%. The biggest increase in operating expenses is
the law charges for private banks which increase by 46% on
average in 2007-2009. For public banks the largest increase
on average is 25% in advertisement and publicity. In addition
the total contribution of employee payments and provisions
declines in private banks from 66.65% to 39.15% and in
public banks the decline is only 6.17%.
All the categories of the CAMEL framework are closely linked
and effectively measure the banks performance. To assess
the earning performance of a bank, it will be helpful to look
at variety of ratios and measures; these include: (1) return
on equity (ROE), (2) return on assets (ROA) and (3) net
interest margin to total assets (NIMTA).
Return on equity helps measure the firms profitability by
measuring the amount of profit a firm generates with the
money invested by shareholders. Fig. 3.7 graphs the return
on equity of private and public banks. Return on equity is
increasing for both private and public banks till 2006, however
after 2006 they start diverging, and private banks display a
downward trend and public banks display an upward trend.
Fig. 3.8 displays that nationalized banks have a better ROA
as compared to private banks pre crisis. Post 2007 the ROA
of public sector banks declines and private sector banks see
a sharp increase in their ROA, which they maintain through
the crisis and appear above the public sector banks. Net
interest margin to total assets measure the profitability of
the banks lending and borrowing activities. Once again as
displayed by fig. 3.9 public banks outperform the private
banks earlier on. As soon as the crisis hits, however, we see
a sharp decline in the net interest margin ratio of public
84
banks whereas, private banks are still able to maintain their

growth and continue their rise through the crisis.
40
The last element measured by the CAMEL framework is

liquidity. A financial institution must be liquid to meet the
demand of creditors and depositors. Liquidity directly arises
from the four factors of CAMEL mentioned above. Liquidity
has an inverse relationship with profitability; therefore a
financial institution must strike a balance between the two
elements.
30
20
V alu e
Liquidity is usually measured by the current ratio or the

quick ratio. Liquidity is directly related to holdings of cash
and other assets that can be converted into cash within a
year. Upon analysis of the Loan to Deposit Ratio it is displayed
in figure 3.10 that private banks loan Rs.0.55 and public
sector banks loan Rs.0.40 for every rupee of deposit. The
private and public sector banks start out at 20% in 1999;
private banks are issuing more loans per rupee of deposit
compared to public banks. The CAMEL framework provides
a holistic view on the performance of the banks.
85
P R T YPUB
10
P R T YPVT
1
1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2
9 9 99 99 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 01
2. 3 . 4 . 5 . 6 . 7 . 8. 9. 0 . 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 0. 1 .
0 0 00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00
Y EAR
Figure 3.2: Priority Sector Lending of Public and Private

Sector Banks
2.2
2.0
1.8
17
1.6
16
1.4
1.2
15
1.0
Value
Value
14
13
NPATAPUB
.8
.6
NPATAPVT
19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
.0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0 .0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
12
CADQPUB
YEAR
11
CADQPVT
10
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
YEAR
Figure: 3.1 Capital Adequacy Ratio of Public and Private Sector Banks
Figure 3.1: Capital Adequacy Ratio of Public and Private

Sector Banks
Figure 3.3: Non Performing assets to Total Assets of Public

and Private Sector Banks
86
87
4.0
40
3.5
3.0
30
2.5
2.0
1.5
20
O PT APUB
.5
0.0
Value
V a lu e
1.0
O PT APVT
19 1 9 1 1 1 9 19 1 1 20 20 20 20 20 20 20 20 20 2 20 20
92 9 3 9 94 9 95 9 6 9 7 9 98 9 99 0 0 0 1 02 03 0 4 05 06 07 0 8 0 09 1 0 1 1
. 0 .0 .0 .0 . 0 .0 . 0 . 0 . 0 .0 . 0 . 0 . 0 .0 . 0 . 0 . 0 .0 . 0 . 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
O ET EPUB
10
O ET EPVT
1 9 1 9 1 9 1 9 1 9 1 9 1 9 19 2 0 20 2 0 20 2 0 20 2 0 20 20 2 0 20 2 0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
. 0 .0 . 0 .0 . 0 .0 . 0 .0 .0 .0 .0 .0 .0 . 0 .0 . 0 .0 .0 . 0 .0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Y E AR
YEAR
Figure 3.4: Operating Profits to Total Assets of Public and

Private Sector Banks
Figure 3.6: Operating Expenses to Total Expenses of

Public and Private Sector Banks
30
30
20
20
10
WBT IPUB
0
WBT IPVT
19 1 9 1 9 1 9 1 9 19 1 9 1 9 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0
92 93 94 95 96 9 7 98 99 0 0 01 0 2 03 04 0 5 06 07 08 09 10 11
. 0 .0 .0 .0 .0 . 0 .0 .0 . 0 .0 . 0 . 0 .0 . 0 .0 . 0 . 0 .0 .0 . 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
YEAR
Figure 3.5: Ratio of Wage Bill to Total Income of

V alue
Va lue
10
ROEPUB
0
ROEPVT
1 9 1 9 19 1 9 1 9 1 9 19 19 2 0 2 0 2 0 2 0 2 0 2 0 20 20 2 0 2 0 2 0 20
92 93 94 9 5 9 6 97 98 99 00 01 02 03 04 05 06 07 0 8 09 10 11
.0 .0 .0 . 0 . 0 .0 .0 .0 . 0 . 0 .0 . 0 .0 . 0 .0 .0 . 0 . 0 .0 .0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
YEAR
Figure 3.7: Return on Equity of Public and

88
1 .6
89
70
1 .4
60
1 .2
50
1 .0
40
.8
30
.6
20
0 .0
RO APV T
1 9 1 9 1 9 1 9 1 9 1 9 1 9 19 2 0 2 0 20 2 0 20 2 0 2 0 2 0 2 0 2 0 2 0 2 0
92 93 94 95 9 6 97 98 99 00 01 02 03 04 05 06 0 7 08 0 9 10 1 1
.0 . 0 .0 .0 . 0 .0 . 0 .0 .0 .0 . 0 .0 . 0 .0 .0 . 0 .0 . 0 .0 . 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
V alue
RO APUB
.2
10
LNDE PPUB
LNDE PPVT
19 1 9 1 9 19 19 19 1 9 1 9 20 20 2 0 2 0 2 0 20 20 2 0 20 20 20 2 0
92 93 9 4 95 96 97 9 8 99 00 01 02 03 04 05 06 0 7 08 09 10 11
. 0 . 0 .0 .0 . 0 .0 .0 . 0 .0 . 0 . 0 . 0 .0 . 0 .0 .0 .0 . 0 .0 . 0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
YE AR
YE AR
Figure 3.10: Loan to Deposit Ratio of

Figure 3.8: Return on Assets of Public and

3.5. Group wise Comparison of Banks

Productivity (Under CAMEL Framework)
3 .5
3.5.1. Capital Adequacy
3 .0
The data of Capital Adequacy ratio was available from 199596 onwards. Capital Adequacy Ratio of the new private sector
banks was high at the beginning of the inception of these
banks. Over the years, it declined due to increase of their
business portfolio in risk based assets.
2 .5
2 .0
1 .5
V a lu e
Value
.4
NIMT APU B
1 .0
NIMT APV T
1
1 19 1 1 19 1 1 20 20 2 20 20 2 2 2 2 2 2 2
9
9
9
0
0 0 0 0 0 0 0
92 93 94 95 99 6 9 7 9 98 99 00 01 02 03 04 05 06 07 08 0 9 10 11
.0 . 0 . 0 .0 . 0 . 0 .0 .0 . 0 .0 .0 .0 .0 .0 . 0 .0 .0 . 0 .0 .0
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Y E AR
Figure 3.9: Net Interest Margin Ratio of

During 1996-97, among the bank group, the capital adequacy

ratio of the State Bank group was the highest, followed by
nationalized banks, old private sector bank group and new
private sector banks. For the foreign banks, it was the lowest.
During 2000-01, the capital adequacy ratio of SB was the
highest and that of FBs was the lowest. The nationalized
banks were allowed to raise capital through public issue.
During the first decade, all nationalized banks have raised
their capital through public issue. Even some banks further
increased their capital through follow-on public issue with
premium. Again, the fresh capital infused by the Government
has helped the banks to maintain high capital adequacy
90
ratio. During 2005-06, the capital adequacy ratio of SB was

the highest and that of FBs was the lowest. During 201011, capital adequacy ratio of banks all the bank groups was
more than 13% and it was highest for new private sector
and lowest for foreign banks. The details are presented in
Table 3.14.
Table 3.14: Performance of Bank Group in
Capital Adequacy Ratio
Rank
YEAR
1996-97
2000-01
2005-06
2010-11
State Bank
Group
State Bank
Group
State Bank
Group
State Bank
Group
Nationalized
Banks
Nationalized
Banks
Nationalized
Banks
State Bank of
India
Old Private
Sector Banks
Old Private
Sector Banks
New Private
Sector Banks
Nationalized
Banks
New Private
Sector Banks
New Private
Sector Banks
Old Private
Sector Banks
Old Private
Sector Banks
Foreign Banks
Foreign Banks
Foreign Banks Foreign Banks
3.5.2. Asset Quality

Return on Assets (ROA) is measured by Net Profit to
Total Assets. Due to introduction of income recognition
and provisioning of non-performing assets, Indian Banks
had made the net losses in the early 1990s. Among the
bank groups, nationalized banks were affected badly. They
had booked net losses during 1992-93, 1993-94 and 199596. Foreign banks had also posted net losses during 199293. For all the bank groups, it declined during 2000-01
as compared to the earlier years. Return on assets
increased for all the bank groups up to 2003-04 and then
it declined mainly due to introduction of new capital
adequacy norms and higher provisioning. Again it improved
during 2008-09 for all bank groups. ROA has declined
during 2010-11 mainly due to increase in NPAs ratio.
91
Non-Performing Assets as % to Net Advances, of SB group,

and foreign banks, declined during 2000-01 as compared
to the previous year, whereas it increased for new as
well as old private sector banks. During 2010-11, nonperforming assets as % to net advances declined for
nationalized banks, old private sector banks, new private
sector banks and foreign banks as compared to the year
2006-07 and for SB group, it has increased during this
period. Data for all bank groups are available from 199697 onwards. Performance of the bank group under asset
quality group has been evaluated by combining these
two indicators with the help of factor analysis technique.
The combined performances during 1996-97, 2000-01, 200506 and 2010-11are presented in Table 3.15
Asset Quality
Rank
YEAR
1996-97
2000-01
2005-06
2010-11
State Bank
Group
State Bank
Group
State Bank
Group
Foreign Banks
Foreign Banks
Banks
Nationalized
Banks
Nationalized
Banks
Nationalized
Banks
New Private
New Private
New Private
New Private
Sector Banks
Sector Banks
Sector Banks
Sector Banks
Nationalized
Banks
Foreign Banks Foreign Banks State Bank

Group
Old Private
Sector Banks
Old Private
Sector Banks
Old Private
Sector Banks
Old Private
Sector Banks
Source: Computed by the researcher
3.5.3. Profitability
In this present deregulated environment, banks are under
pressure to reduce the interest rate both on deposits and
advances. To increase the profitability, banks have not
only to increase the spread, but also to reduce the burden.
Public Sector Banks have improved their performance in
terms of Spread as % to Total Assets as compared to
92
private banks. The performance of SB group was above

the all bank groups during 1991-92 to 2010- 11.
Profitability of a bank not only depends on interest spread,
but it also includes the services provided by the bank.
Based on value added approach, we have considered Net
Income, which include spread and other Income i.e., earning
both from the net interest income and the services provided
by the bank. Net Income to Total Assets of public sector
banks was more than private banks and foreign banks.
Spread to Total Assets of foreign banks was higher than
all other bank groups. From the year 2006-07, spread to
total assets of private banks was more than public sector
banks. But the operating expense to net income was higher
for public sector banks as compared to other bank groups.
The result of combined performance of these five
parameters based on factor analysis is presented in Table
3.16.
State Bank Group and NBs remained at top. Foreign
Banks remained at the bottom.
Profitability
Rank
YEAR
1996-97
2000-01
2005-06
2010-11
State Bank
Group
State Bank
Group
State Bank
Group
State Bank
Group
Nationalized
Banks
Nationalized
Banks
New Private
Sector Banks
New Private
Sector Banks
New Private
Sector Banks
Old Private
Sector Banks
Nationalized
Banks
Nationalized
Banks
Old Private
Sector Banks
New Private
Sector Banks
Old Private
Sector Banks
Old Private
Sector Banks
Foreign Banks
Foreign Banks
Foreign Banks Foreign Banks
3.5.4. Productivity
Staff Cost to Net Income was significantly high for public
sector banks due to huge branch network in rural and
93
semi-urban areas and resistance for computerization of

branches from trade union level. Staff Cost to Net Income
of all bank groups declined during 2000-01 to 2010-11
except state bank group and nationalized banks.
During 2010-11, the staff cost to net income of old private
sector banks (29.78%) was marginally higher than that
of nationalized banks (29.52%) and foreign banks (29.56%).
For new private sector banks it was low at 18.21% and
SB group it was 18.71%. The total intermediation cost
i.e. operating expenses to total assets of all bank groups
declined during 2000-01 to 2010-11 except new private
banks. For nationalized banks it declined from 2.76%
during 2000-01 to 1.46% during 2010-11. For SB group,
it declined from 2.66% to 1.82%, for old private sector
banks it declined from 1.98% to 1.81% and for foreign
banks it declined from 3.05% to 2.55% during this period.
For new private banks, it increased from 1.75% during
2000-01 to 2.02% during 2010-11. Foreign Bank was
highest at 2.55% during 2010- 11, followed by nationalized
banks (2.76%), new private banks (2.02%), SB group
(1.82%), old private sector banks (1.81%) and nationalized
banks (1.46%). Business (Deposits + Advances) per staff
cost for SB group increased from Rs.59.40 as on 31.3.01
to Rs.121.24 during 31.3.11, for nationalized banks, it
increased from rs.61.74 to rs.152.10 and for old private
sector banks it increased from rs.107.68 to rs.107.68 to
rs.131.50 during this period, whereas for new private
sector banks it declined from rs.373.74 to rs.151.82 and
for foreign banks it also declined from rs.103.22 to rs.80.74
during this period.
During 2010-11, the business (Deposits + Advances) (in
Rs.) per staff cost was highest for State Bank group
followed by nationalized banks, old private banks and
new private sector banks. The business per staff cost for
foreign banks was the lowest. The result of the combined
performance of the three parameters is presented in Table
5.2.5.
94

Productivity
Rank
YEAR
1996-97
2000-01
2005-06
2010-11
State Bank
Group
State Bank
Group
State Bank
Group
New Private
Sector Banks
Nationalized
Banks
Nationalized
Banks
Nationalized
Banks
State Bank
Group
New Private
Sector Banks
New Private
Sector Banks
New Private
Sector Banks
Nationalized
Banks
Old Private
Sector Banks
Old Private
Sector Banks
Old Private
Sector Banks
Foreign Banks
Foreign Banks
Foreign Banks
Foreign Banks Old Private

Sector Banks
3.6. Conclusion
By taking ROA, ROE and Net Interest Margin to Assets
as dependent variable and CRR, SLR, minimum lending
rates and GDP growth rate as independent variable in
regression analysis, it has been observed that in all groups
of banks except public sector banks there is negative
relation between CRR and ROA, ROE as well as NIM.
However, SLR is negatively related to ROA, ROE and
NIM. This shows higher the reserve requirements lesser
will be the profitability. The minimum lending rate is
positively related to ROA, ROE and net interest margin
to assets. However, the PSBs show negative relation
between minimum lending rates and net interest margin
to assets. As far as GDP growth rate is concerned it is
inversely related to ROA and ROE and positively related
to net interest margin.
The ROA and net interest margin of public sector banks
was higher than the private sector banks before the crisis.
But the situation got reversed in the post crisis period.
On the other hand, ROE of both the sector is increasing
before 2006, but after that private sector bank showed
95
the downward trend and public sector banks showed the

upward trend.
The comparison of the performance of PSBs and PrBs on
the basis of CAMEL framework reveals that the public
banks have performed very well according to the CAMEL
Framework and have performed better than private banks
in some instances. However, after the crisis private banks
performed better than the public banks on all measures
of the CAMEL Framework.
The productivity of the different bank groups has been
compared under CAMEL framework. The productivity is
compared over the period of time on three grounds: Capital
Adequacy, Asset Quality and Profitability. The bank groups
have been ranked according to their performance.
The result shows that in capital adequacy, SB group and
NBs stand first and second respectively in all the periods
of comparison except in the year 2010-2011 respectively.
New Private Sector Banks ranked fourth, third and first
in the year 1996-01, 2005-06 and 2010-11 respectively.
Old Private Sector Banks occupied the third before 20002001 and fourth place after that. However, Foreign Banks
remained on fifth position in all the years of comparison.
The result varies in case of asset quality. SB group rank
first followed by NBs in all the periods except in the
year 2010-2011 and 1996-97 respectively. Old Private
Sector Banks occupied the fifth and NPB stand third in
all the years under consideration. The asset quality of
NBs has increased over the year. They have shifted from
fourth place in 1996-97 to second place in 2000-2001 and
remained there.
Profits are the motivating force behind the growth of the
banks. The result shows that with respect to profitability
SB group ranked first and foreign banks ranked last in
all the years. Nationalized Banks moved down from second
place in 1996-01 to third place in 2005-11, showing decline
in their profits over the year. New Private Sector Banks
and OPB ranked third and fourth respectively in the
years 1996-97 and the places were reversed in 2000-01.
96
However, after that the relative performance of NPB has

improved and that of OPB has worsened. New Private
Sector Banks were placed on second position and OPB
were placed on fourth in 2005-11.
On the basis of these three parameters the productivity
is being compared. SB group ranked first over all the
years except in the year 2010-11. The second, third, fourth
and fifth place is taken by NBs, NPB, OPB and FBs
respectively till 2005-06. However, the productivity of
nationalized banks and old private sector banks declined
after that and that of foreign banks and new private
sector banks increased. There is small change in ranking.
The first place is taken by new private sector banks
followed by state bank group, nationalized banks, foreign
banks and old private sector banks in 2010-2011.
In comparison to private sector & foreign sector banks
the net interest margin is higher in public sector banks
as they have greater reach, network and access to low
cost funds apart from charging higher rate of interest on
loans given to SMEs.
It has been observed that in CAMEL framework the
performance of public sector banks in comparison to private
sector banks has decreased, after the reforms. This is
perhaps due to inefficient management andlack of product
diversification in addition to high NPAs, higher rates of
FDI and slow economy. Another major reason is that
private sector banks start up capital is 10% whereas for
public sector banks it is 9%. Thus, public sector banks
are financially weak and unsecuredin relation to private
sector banks.
To conclude, we can say that Indian banks have grown
since 1991 and recovered from the crisis and most of the
public and private banks are displaying an upward trend
in terms of productivity and profitability.
Productivity Analysis of Banking Sector
97
4
Productivity Analysis of
Banking Sector
The economic environment has changed due to the changes

in the financial structure. Rapid innovation in the financial
markets and the intermediation of financial flows has
changed the face of banking institutions in India. The
functioning of banking sector has changed upside down.
Reforms in India have brought many changes to Indian
Economy. Financial Sector Reform is a part of the reforms
with huge impact on the working of the entire economy.
Indian financial services industry is dominated by the
banking sector that contributes significantly to the level
of economic activity. The banking industry is going with
increased professionalism due to the emergence of the
new private banks and the increased participation of the
foreign players. The public sector banks of India were
performing poorly before the advent of private and foreign
banks.
With increased competition, declining margins on current
business operations, higher costs and greater risks; banking
industry, in general, had to face a two pronged challenge.
They had, on the one hand, to enhance their productivity
and on the other hand to increase their ability to serve
the nation in new ways with greater efficiency and
effectiveness. In such a scenario, banking industry had
98
to sustain itself by increased reliance on cost minimization

and by ensuring greater efficiency. These reforms were
broadly aimed to improve the performance of banks despite
of the unexpected global recession and internal
disturbances. As the banking industry is an important
financial sector of the Indian economy, it is very important
for senior managers, regulators and investors to identify
the major drivers of a banks efficiency. Productivity and
profitability are the major performance indicators besides
many measures (financial ratios) on which we can depend
on in order to analyze the efficiency of banks.
In the present study, a comparison of banking productivity
for individual and group banks in India has been done
with the help of DEA. Three kinds of efficiency have
been analyzed using DEA approach:
1. Capital Efficiency
2. Revenue Efficiency
3. Staff Efficiency
4.1. Capital Efficiency
4.1.1. Analyzing the Capital Efficiency of different Bank
Groups under CRS Model
The data of total 54 banks (including NPB) is collected
to compare the group efficiency of the banks. Investments
and loans are taken as the output of the banks. The
outputs are produced with the help of the capital ploughed
and reserves maintained. Hence, capital and reserves
are taken as inputs of the banks. The deposits collected
are also taken as the inputs of the banks. Here, it is
necessary to mention that the foreign banks were not
allowed to bring their capital till 1992 (nil capital makes
the objective function unbounded). Hence, the inputs for
the foreign banks were taken as reserves and the deposits
only. The foreign banks are selected on the basis of their
existence in the business and their volume of the business
in India. The working of the foreign banks was under
the restrictions imposed by the RBI. (E.g. they were not
allowed to give loans as working capital to the corporate
99
sectors; the physical expansion through branches was

also not permitted and so on). This has affected their
efficiency, as shown in Table 4.1.
Table 4.1: Capital Efficiency of Different Group of
Banks (Under CRS)
Years
NBs (19)
SB(6)
OPB (13)
FBs(11)
NPB (5)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Avg.
0.976
0.980
0.969
0.974
0.950
0.970
0.967
0.975
0.978
0.977
0.976
0.933
0.991
0.988
0.992
0.935
0.957
0.910
0.937
0.977
0.9656
0.961
0.968
0.959
0.963
0.964
0.999
0.972
0.964
0.975
0.985
0.990
0.966
0.966
0.980
0.991
0.996
0.988
0.934
0.966
0.985
0.9736
0.661
0.689
0.634
0.622
0.602
0.601
0.964
0.98
0.973
0.974
0.956
0.979
0.981
0.923
0.912
0.922
0.908
0.902
0.933
0.945
0.85305
0.838
0.753
0.773
0.814
0.722
0.711
0.591
0.693
0.739
0.794
0.778
0.719
0.661
0.689
0.634
0.622
0.602
0.601
0.642
0.649
0.70125
0.946
0.823
0.928
0.880
0.856
0.870
0.930
0.949
0.926
0.930
0.918
0.902
0.953
0.989
0.914286
Source: computed using DEA program developed by Coille

Figures in the bracket shows the numbers of Banks selected from each
group.
Firstly, the efficiency of groups of banks is measured

with the balance sheet data of the banks. Table 4.1 gives
the DEA scores with respect to capital efficiency of banks
using inputs and output selected from balance sheet
structure of data in CRS model.
The New Private Sector Banks (NPB) are those banks
which started after the year 1995. In the above comparison,
OPB group shows old private sector banks. They are in
the business on the similar standards with the other
groups of banks.
100
The table shows that the public sector banks i.e. SB

group and NBs have impressive efficiency when compared
with the private sector banks. Due to non-availability of
data for 1995-96, the efficiency of NPB has been measured
after 1997. The average efficiency shows that the SB
group is ranked first followed by the NBs group, the
NPB group, OPB group and FBs group. The efficiency of
the FBs is adamantly low. The average efficiency of NPB
is less than that of OPB.
Table 4.2 shows the number of efficient banks during
the study period. The year 1996, 1997 and the year 2003
proved to be better years for the NBs group and the
OPB group. In case of the FBs group, the efficiency was
not measured in the first year because in that year they
were not permitted to bring their capital.
Table 4.2: Number of Efficient Units showing
Capital Efficiency in CRS Model during 1991-2010
Years
NBs (19)
SB(6)
OPB (13)
FBs(11)
NPB (5)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
12
10
8
7
10
10
11
11
10
9
9
12
12
11
12
14
11
10
9
10
4
6
2
5
5
5
6
6
6
6
5
5
6
5
5
5
6
4
5
6
10
7
8
8
6
9
9
7
8
9
7
8
10
7
6
6
6
9
10
10
4
3
6
4
8
7
5
7
9
7
6
8
8
7
8
9
7
6
7
5
4
5
2
3
5
5
4
3
3
4
4
4
4
Source: Computed By the researcher
101
4.1.2. Capital Efficiency Status of Individual Banks

under CRS Model
The analysis also compare the efficiency of individual
banks in the groups facing same external environment,
but still fallout differently in efficiency boundaries Table
4.3 shows that in the NBs group, Punjab National Bank
is the one, which has shown the highest efficiency.
Allahabad Bank was the least efficient bank in the sample
period (Only efficient in 1998).
Table 4.4 shows that in SB group, State Bank of India
and State Bank of Hyderabad are efficient with 20 years
and 19 years of efficiency in 20 years. Moreover, State
Bank of India is on the frontier throughout the period.
State Bank of Mysore, and State Bank of Bikaner and
Jaipur are on the second position with the good efficiency
score for 18 years. In SB group, State Bank of Patiala is
the least efficient.
In OPB group (table 4.5), City Union Bank is on the
frontier for almost 7 years. However, Tamilnad Mercantile
Bank is never on the frontier in the entire span, indicating
poor performance.
In FBs group (table 4.6), BNP Paribas Bank and Bank of
Ceylon are well performing banks compared to other banks
in the group. They are efficient for 14 and 13 years
respectively. State Bank of Mauritius was efficient only
for 6 years and is never on the frontier.
Table 4.7 shows that in NPB group, Axis Bank and
Development Credit Bank are on the front for 14 and 7
years respectively out of the span of 14 years of existence
in the business. ICICI Bank and Indusind Bank are on
the front only four and two years respectively in the
time span selected, indicating least number of time
efficiency and comparatively poor performance.
4.1.3. Analyzing the Capital Efficiency of different
Bank Groups under VRS Model
Table 4.8 shows that the efficiency scores of the SB group
is one for three times in the period 1991-2010 (in 1994,
I
L
L
L
L
E
E
L
L
I
L
L
I
E
L
I
I
I
I
ABD BANK
AND BANK
BOB
BOI
BOMa
CB
CBI
COR BANK
DENA BANK
IB
IOB
OBC
PSIND BANK
PNB
SYNBANK
UCO BANK
UBI
UNIBI
VB
I
I
L
L
L
E
I
L
L
I
L
I
I
E
I
I
E
I
L
92
I
I
L
L
I
E
I
L
L
I
L
I
L
E
I
I
I
I
I
93
I
I
L
L
I
I
I
I
L
I
I
L
I
E
I
L
L
I
I
94
I
E
L
L
I
E
L
L
I
L
L
I
I
E
L
I
I
I
I
95
I
E
L
L
I
I
L
I
L
L
I
L
I
E
I
I
I
E
E
96
I
E
L
L
I
I
L
L
I
I
I
E
I
E
L
I
L
E
E
97
E
I
I
I
I
I
I
I
I
L
L
E
L
E
L
L
L
L
L
98
I
E
L
L
E
E
L
E
L
L
L
I
I
I
I
I
I
I
I
I
I
L
I
E
L
E
E
I
I
E
E
I
E
E
I
I
I
I
I
I
I
L
E
L
E
L
I
I
E
L
I
E
E
E
I
L
L
02
I
L
E
I
L
I
L
L
E
L
L
I
I
E
I
E
I
L
L
03
I
E
E
I
L
I
L
I
E
L
I
I
E
E
L
L
I
L
I
04
I
E
E
E
E
I
I
I
E
E
L
L
E
E
L
L
I
I
I
05
I
E
E
E
E
E
L
L
L
E
E
I
E
E
E
I
E
I
I
06
I
L
E
E
E
E
L
E
L
E
E
I
I
E
I
I
I
I
I
07
L
L
E
L
E
I
I
E
L
L
E
I
I
E
I
I
I
I
I
E
I
I
L
L
E
SBI
SBBJ
SBH
SBM
SBOP
SBT
92
93
94
95
96
97
E stands for efficient unit DEA score = 1
99 2000 01
L stands for less efficient unit i.e. DEA score range is 0.5- 1
I stands for inefficient unit i.e. DEA score < 0.5
98
Source: computed from individual Bank DEA scores
91
Bank
02
03
04
05
06
07
08 09
I
E
I
I
L
L
E
E
L
I
I
L
E
E
I
I
I
I
I
08 09
10
I
I
I
I
I
I
E
E
E
E
E
E
E
E
E
E
I
I
I
10
Table 4.4: Capital Efficiency Status of Individual Banks (SB Group)

(Under CRS Conditions)
I
I
I
I
I
I
I
E
L
L
E
E
I
E
I
I
E
L
L
99 2000 01

91
Bank
Table 4.3: Capital Efficiency Status of Individual Banks (NBs Group) (Under CRS Conditions)
102
103
I
L
KVB
LVB
92
93
94
95
96
97
98
02
03
04
05
06
07
L
L
I
I
I
I
I
BNPPARI
CITIBNK
DEUTBNK
JPMCBNK
OMANIBNK
SCHBNK
SBMRITUS
93
94
95
96
97
98
99
2000
I
L
BOA
BCLYBNK
ADCB
BOC
92
Bank
01
02
03
04
05
06
07
10
08 09 10
08 09
Table 4.6: Capital Efficiency Status of Individual Banks (FBs Group)

99 2000 01
KB
JKB
TMB
INGVB
SIB
FB
DB
CUB
RB
CSB
NB
91
Bank
Table 4.5: Capital Efficiency Status of Individual Banks (OPB Group)

104
105
L
I
107
Table 4.8: Capital Efficiency of Different Group of

Banks (Under VRS)
I
I
L
E
I
I
L
I
L
INDUSBNK
1996 and 2001). Similarly, foreign banks are efficient in

the year 2000. The ranking as per the average efficiency
remains roughly same as CRS. SB group is at the first
position with 0.9927; NBs group stands second with 0.9881
followed by OPB, NPB and FBs.
L
L
E
E
I
I
E
E
L
E
E
L
E
I
L
L
ICICIBNK
L
HDFCBNK
E
E
E
E
L
E
E
E
E
E
L
E
E
L
L
E
E
L
E
DEVCDBNK
E
AXISBNK
10
08
2000
97
Bank
98
99
01
02
03
04
05
06
07
09
Table 4.7: Capital Efficiency Status of Individual Banks (NPB Group)

106
Years
NBs (19)
SB (6)
OPB (13)
FBs (11)
NPB (5)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
9004
2005
2006
2007
2008
2009
2010
Avg.
0.986
0.994
0.99
0.99
0.972
0.989
0.991
0.982
0.995
0.99
0.985
0.976
0.995
0.998
0.978
0.965
0.967
0.928
0.957
0.989
0.9881
0.982
0.996
0.992
1
0.986
1
0.998
0.977
0.994
0.997
1
0.989
0.991
0.996
0.981
0.991
0.985
0.997
0.969
0.980
0.9927
0.999
0.993
0.984
0.97
0.974
0.97
0.969
0.986
0.981
0.985
0.978
0.989
0.993
0.978
0.972
0.918
0.906
0.912
0.919
0.925
0.9821
0.864
0.878
0.865
0.904
0.854
0.946
0.945
0.979
0.994
1
0.956
0.972
0.948
0.989
0.985
0.908
0.902
0.927
0.942
0.949
0.9353
0.996
0.950
0.965
0.994
0.938
0.987
0.993
0.994
0.976
0.939
0.998
0.976
0.903
0.969
0.977

Figures in the Bracket shows the numbers of the sample Banks selected
in the group.
108

Capital Efficiency in VRS Model during 1991-2010
Years
NBs (19)
SB (6)
OPB (13)
FBs (11)
NPB (5)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
15
12
13
10
14
14
12
17
13
12
13
15
15
14
13
14
13
12
14
14
5
6
6
6
6
5
6
4
5
6
6
6
6
6
5
6
6
5
6
6
13
11
8
9
8
10
10
8
9
11
11
12
11
11
10
9
10
9
9
10
7
5
5
6
8
8
9
10
10
9
9
9
10
9
8
8
7
9
9
5
4
5
5
5
5
5
5
5
5
5
5
5
5
Source: computed by the researcher
NPB group shows efficiency which is less than OPB but

higher than FBs. In table 4.9, the efficient units from
different groups of banks under VRS model are shown.
Here, the proportionately maximum efficient units are
from SB group and NPB amongst the different groups of
banks. In the year 1998, NBs group shows that maximum
numbers of banks are efficient (17 banks).
4.1.4. Capital Efficiency Status of Individual Banks
under VRS Model
The VRS model also supports the result of CRS model to
show that Allahabad Bank is not doing good business to
prove efficient (table 4.10). This bank appears on the
109
frontier only for three times out of 20 years and that is

before 1997 (one year in CRS model). However, the least
performed bank is Vijaya Bank, be on the frontier for
only two times. On the other hand, Punjab National Bank
is efficient for all 20 years, followed by Corporation Bank,
Central Bank of India and Canara Bank with good
performance for 17 years. In VRS model the efficiency of
Syndicate Bank differs from CRS model. In CRS model,
it is efficient only for 10 years but in VRS model it is
efficient for 16 years.
SB group (table 4.11) has also shown the maximum
numbers of time that their member banks are efficient.
State Bank of India, State Bank of Bikaner and Jaipur
and State Bank of Patiala are the banks in SB group
showing the efficiency in all 20 years; followed by State
Bank of Mysore (19 years). Except few years, all the
banks in the SB group are shown as the efficient banks.
The result of State Bank of Patiala is quite surprising
under VRS model as compared to CRS model.
In the OPB group, Karur Vysya Bank as well as Catholic
Syrian Bank, City Union Bank, Dhanlakshmi Bank and
ING Vysya Bank are efficient banks for 18 and 17 years
respectively of the sample time span (table 4.12). Federal
Bank and Tamilnad Mercantile Bank followed these banks
with the efficiency shown in 16 years. It is important to
mention that the efficiency is proved in the latest years.
Especially in the year 2010, all these banks are efficient
except Karnataka Bank, Lakshmi Vilas Bank and Nainital
Bank. On the other hand, South Indian Bank is efficient
only for 10 years.
In case of foreign banks in table 4.13 the numbers of efficient
foreign banks have increased till 1996 and then more or
less remained constant. In fact, in the year 1999, 2002 and
2004, 10 banks out of 11 are efficient. To name the efficient
banks in terms of their balance sheet structure, we see the
banks like Bank of America and Oman International Bank
with the efficient score for almost all years after 1995. To
name the comparative least efficient bank is State Bank of
Mauritius with 12 years of efficiency, Bank of Ceylon, Citi
I
L
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E
E
L
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I
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L
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E
L
L
L
I
I
ABD BANK
AND BANK
BOB
BOI
BOMa
CB
CBI
COR BANK
DENA BANK
IB
IOB
OBC
PSIND BANK
PNB
SYN BANK
UCO BANK
UBI
UNIBI
VB
I
I
I
I
L
E
I
L
E
L
L
I
L
E
L
L
E
I
L
92
E
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E
E
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I
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E
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I
93
E
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94
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95
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E
E
E
I
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E
E
96
E
E
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L
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I
97
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E
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I
98
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02
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03
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04
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05
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06
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07
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E
SBI
SBBJ
SBH
SBM
SBOP
SBT
92
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95
96
97
98
99 2000 01
91
Bank
02
03
04
05
06
07
I
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E
E
E
E
E
E
E
E
E
E
E
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E
I
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10
08 09 10
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08 09
Table 4.11: Capital Efficiency Status of Individual Banks (SB Group)

(Under VRS Conditions)
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99 2000 01

91
Bank
Table 4.10: Capital Efficiency Status of Individual Banks (NBs Group)

110
111
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L
L
L
L
CSB
CUB
DB
FB
INGVB
JKB
KB
KVB
LVB
NB
RB
SIB
TMB
92
93
94
95
96
97
98
02
03
04
05
06
07
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E
E
E
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I
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ADCB
BOA
BOC
BCLY BNK
BNPPARI
CITI BNK
DEUT BNK
JPMC BNK
OMANI BNK
SCH BNK
SBMRITUS
93
94
95
96
97
98
99
2000
92
Bank
01
02
03
04
05
06
07
08 09
08 09
10
10
Table 4.13: Capital Efficiency Status of Individual Banks (FBs Group)

99 2000 01
91
Bank
Table 4.12: Capital Efficiency Status of Individual Banks (OPB Group)

112
113
In NPB group (table 4.14), almost all banks are performing

well. Axis Bank is on the frontier for all 14 years. HDFC
Bank follows with 10 years on the frontier. Indusind Bank
and Development Credit Bank are on the frontier for only 8
years and that too after 2003.
E
E
E
4.1.5. Malmquist Index for Capital Efficiency

In Table 4.15, the firms summary means are compared
with each other. The NBs group and SB group and OPB
groups have shown that they are better off in efficiency
change and scale efficiency change (excluding comparison
with NPB because they are in the business only recently).
The FBs group has shown that they are better than others
in productive efficiency at 1.01. SB group is better in technical
efficiency change than other groups of Banks. NPB group
has shown poor competence in the technology absorption
(TECHCH) when compared with the other group of Banks.
Table 4.15: Malmquist Index Summary of Firm
Means with Assets and Liabilities Data
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INDUSBNK
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E
E
E
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E
E
L
ICICIBNK
115
Bank and Standard Chartered Bank with 13 years of efficiency

whereas from 1999, Deutsche Bank is efficient for all the
years (except 2007) showing that it is becoming efficient in
the recent years even though the total score of efficient
years is not very promising.
L
E
E
L
L
L
L
E
L
HDFCBNK
DEVCDBNK
E
E
E
E
E
E
E
E
AXISBNK
10
07
02
01
98
97
Bank
99
2000
03
04
05
06
08
09
Table 4.14: Capital Efficiency Status of Individual Banks (NPB Group)

114
EFFCH
TECHCH
PECH
SECH
TFPCH
NBs
SB
OPB
FBs
NPB
1
0.98
1
1
0.995
1
0.99
1
1
0.9975
1
0.85
0.95
1
0.95
0.88
0.98
1.01
0.89
0.94
1.001
0.83
1
1.001
0.958
Source : Computed by the researcher

EFFCH: Efficiency Change
TECHCH: Technology Change (Absorption)
PECH: Productive Efficiency Change
SECH: Scale Efficiency Change
TFPCH: Total Factor Productivity Change
116
4.2. Revenue Efficiency

To compare the revenue performance of the banks, the
variables selected are income earned from interest and
non-interest sources as output and the expenditure made
for interest spending and other expenditure as the inputs.
4.2.1. Analyzing the Revenue Efficiency of different
Bank Groups under CRS Model
Table 4.16: Revenue Efficiency of Different Group
of Banks (Under CRS)
117
As observed from Table 4.16, SB group is consistently showing

the comparative better efficiency (above 0.9 except year 2003).
On an average also, SB group shows highest efficiency. The
NBs group is at the second position in financial performance
shown in the above table with average efficiency at 0.933;
followed by the FBs group, at the next best average efficiency
of 0.923. The efficiency of OPB is lowest. Year 2002 is the
only year in which all the groups of banks have shown
efficiency higher than 0.9.
Table 4.17: Number of Efficient Units Showing
Revenue Efficiency in CRS Model during 1991-2010
Years
NBs (19)
SB (6)
OPB (13)
FBs(11)
NPB (5)
1991
0.971
0.993
0.799
0.873
1992
0.896
0.922
0.853
0.829
1993
0.891
0.966
0.926
0.902
1994
0.894
0.982
0.920
0.931
1995
0.874
0.981
0.872
0.928
1996
0.895
0.994
0.880
0.941
1997
0.906
0.999
0.905
0.948
0.942
1998
0.922
0.994
0.894
0.925
0.952
1999
0.905
0.977
0.898
0.941
0.948
2000
0.958
0.957
0.888
0.955
0.936
2001
0.946
0.951
0.890
0.926
0.942
2002
0.964
0.952
0.922
0.953
0.952
2003
0.912
0.766
0.890
0.819
0.910
2004
0.944
0.965
0.844
0.958
0.860
2005
0.967
0.948
0.830
0.912
0.875
2006
0.923
0.971
0.839
0.841
0.868
2007
0.983
0.980
0.853
0.953
0.837
2008
0.992
0.972
0.857
0.966
0.901
2009
0.988
0.944
0.875
0.938
0.920
2010
0.956
0.911
0.896
0.973
0.923
Average
0.933
0.958
0.880
0.923
0.911
Table 4.17 shows that in SB group, proportionately

maximum numbers of banks are efficient banks. Especially
in the year 1996 and 1997; 75 percent of the members
banks are efficient (6 out of 8 banks). These years have
proved worst for NBs as only 2 banks out of 19 Banks
are efficient.

Figures in the bracket the numbers of Banks selected in the respective
group.
Years
NBs (19)
SB(6)
OPB (13)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
8
6
6
3
3
2
2
3
5
5
3
6
5
5
6
5
3
6
5
5
4
3
3
4
5
6
6
5
4
3
3
3
1
3
3
2
3
2
4
5
2
3
5
6
4
6
6
6
5
6
8
5
3
8
7
6
6
3
7
6
FBs (11) NPB (5)

_4
3
6
3
4
5
2
3
3
4
4
3
3
2
3
6
2
4
4
_____5
4
4
3
4
3
3
2
2
2
2
3
2
3
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119

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08 09
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99 2000 01
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In the case of FBs group (table 4.21), ABU Dhabi

Commercial Bank is efficient for maximum numbers of
years followed by Bank of Ceylon and Oman International
ABD BANK
AND BANK
BOB
BOI
BOMa
CB
CBI
COR BANK
DENA BANK
IB
IOB
OBC
PSIND BANK
PNB
SYNBANK
UCO BANK
UBI
UNIBI
VB
Dhanalakshmi Bank and Lakshmi Vilas Bank in table

4.20 are old private sector banks showing efficiency for
almost twelve years out of twenty years. Hence, these
banks are on the frontier for maximum years. Catholic
Syrian Bank, ING Vysya Bank, Karnataka Bank and
Karur Vysya Bank followed these banks with the proven
efficiency of ten years. Tamilnad Mercantile Bank is never
on the frontier. It is the least efficient bank.
94
Table 4.19 shows that SB group is efficient among the

other groups in the financial performance. SBI is the
most efficient bank followed by Bank of Bikaner and
Jaipur which is efficient for 17 years. State Bank of
Hyderabad, State Bank of Mysore and State Bank of
Travancore are efficient for 11, 10 and 9 years respectively.
State Bank of Patiala is proved to be inefficient in all
the years. It has the lowest rank.
93
As far as CRS model is considered, in NBs group (Table

4.18), Punjab National Bank is the most efficient bank.
It is efficient for all 20 years of selected sample span.
There is a wide gap between this bank and the next
efficient banks. Dena Bank follows this bank with proven
efficiency of 11 years out of 20 years. Bank of Maharashtra
and Corporation Bank are the next efficient banks with
better efficiency shown for 8 and 7 years respectively.
On the other hand, Vijaya Bank, UCO Bank and United
Bank of India are the banks with least efficiency. They
have not been able to show efficient financial performance
in any of the year in the post reform period.
92
4.2.2. Revenue Efficiency Status of Individual Banks

under CRS Model
91
For the FBs group, the year 1994 and 2007 is better, as
the maximum banks are efficient in this year. For the
OPB group, year 2001 and 2004 are the efficient year as
in this year 8 banks from this group are efficient banks.
For NPB initial years were good as most of the banks
are efficient.
Bank
Table 4.18: Revenue Efficiency Status of Individual Banks (NBs Group)

118
91
E
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L
E
Bank
SBI
SBBJ
SBH
SBM
SBOP
SBT
92
92
93
93
94
94
95
95
96
96
97
97
98
98
02
02
03
03
04
04
05
05
06
06
07
07
I
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JKB
KB
KVB
LVB
NB
RB
SIB
TMB
92
93
94
95
96
97
98
02
03
04
05
06
07
08 09
10
10
10
99 2000 01
DB
CUB
INGVB
CSB
FB
91
Bank
08 09
08 09
Table 4.20: Revenue Efficiency Status of Individual Banks (OPB Group)

99 2000 01
99 2000 01
91
Bank
Table 4.19: Revenue Efficiency Status of Individual Banks (SB Group) (Under CRS
Conditions)
120
121
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BCLY BNK
BNPPARI
CITI BNK
DEUT BNK
JPMC BNK
OMANI BNK
SCH BNK
SBMRITUS
93
94
95
96
97
98
99
01
02
03
04
05
06
07
E
E
L
L
L
AXISBNK
DEVCDBNK
HDFCBNK
ICICIBNK
INDUSBNK
98
99
2000
01
02
97
Bank
03
04
05
06
07
08
09
08 09
10
10
Table 4.22: Revenue Efficiency Status of Individual Banks (NPB Group)

2000
I
L
BOC
ADCB
BOA
92
Bank
Table 4.21: Revenue Efficiency Status of Individual Banks (FBs Group)

122
123
124
Bank. These banks are on the frontier for nine years.

The least efficient bank in foreign group is State Bank
of Mauritius.
Axis Bank & Development Credit Bank from NPB group
is efficient for ten years out of fourteen years selected in
their financial performance in CRS model as seen from
table 4.22. It is followed by ICICI. Contrary to the capital
efficiency, Indusind Bank is not on the frontier at all in
the revenue efficiency.
4.2.3. Analyzing the Revenue Efficiency of different
Bank Groups under VRS Model
Table 4.23: Revenue Efficiency of Different Group
of Banks (Under VRS)
Years
NBs (19)
SB (6)
OPB (13)
FBs(11)
NPB (5)
Years
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Average
NBs(19)
0.986
0.904
0.903
0.909
0.896
0.912
0.947
0.959
0.951
0.969
0.958
0.979
0.934
0.968
0.934
0.902
0.988
0.933
0.927
0.924
0.944
SB(6)
0.996
0.956
0.986
0.992
0.986
0.998
1
1
0.988
0.989
0.981
0.981
0.914
0.99
0.989
0.972
0.965
0.982
0.974
0.981
0.9837
OPB(13)
0.942
0.915
0.958
0.962
0.919
0.951
0.94
0.938
0.943
0,904
0.903
0.942
0.923
0.938
0.927
0.943
0.974
0.938
0.954
0.938
0.936
FBs(11)
0.968
0.894
0.934
0.96
0.937
0.956
0.961
0.943
0.964
0.972
0.975
0.983
0.907
0.986
0.978
0.974
0.989
0.958
0.974
0.997
0.9551
NPB(5)
0.971
0.982
0.968
0.961
0.964
0.962
0.937
0.924
0.923
0.935
0.918
0.917
0.910
0.912
0.959
Source: Computed using DEA program developed by Coille

Figures in the bracket the numbers of Banks selected in the respective group
125
As shown in CRS, even in VRS the ranking of the efficiency

of financial performance remains more or less same with
SB on top followed by NPB group and then by FBs group.
NBs group is at the fourth place and the OPB group has
the lowest rank.
To show the performance of individual banks in VRS
model, the result varies as shown in the Table 4.24.
Revenue Efficiency in VRS Model during 1991-2010
Years
NBs (19)
SB (6)
OPB (13)
FBs(11)
NPB (5)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
12
6
7
4
5
4
4
8
9
9
8
9
9
11
10
12
11
12
11
11
5
4
5
6
6
6
6
6
5
6
5
6
4
6
6
6
6
6
6
5
7
5
6
7
5
7
7
7
10
8
9
8
6
9
8
9
8
9
8
8
5
7
7
5
5
8
6
7
4
7
6
7
7
7
6
6
6
8
7
5
5
5
4
4
4
3
5
4
3
5
4
5
5
Table 4.24 shows the number of efficient banks from

each group in every year. From the year 1994 to 1998
and 2004 to 2008, all member banks of SB group are on
the front. On the other hand, in the year 1992, only four
banks are efficient which is repeated in the year 2003.
The NBs group shows that, after 2001, the number of its
126
member banks being efficient have increased up to 2004.

Similarly in case of FBs the number of banks increased
in 2003 and remains the same till 2005. On an average,
the FBs group shows that more number of times its
member banks are on the frontier than NBs. More than
fifty percent of NPB remain on the frontier during the
span of fourteen years.
4.2.4. Revenue Efficiency Status of Individual Banks
under VRS Model
The results of VRS model supports CRS results to show
the efficiency order of NBs group (table 4.25). Here also,
Punjab National Bank is on the efficiency frontier for all
twenty years followed by Indian Overseas Bank with
thirteen years and Corporation Bank and Dena Bank
with twelve years. Allahabad Bank was on the frontier
only once i.e. in the year 1994. United Bank of India
was on the frontier only twice in the post-reform phase.
The contradictory result was shown in the case of Bank
of India, UCO Bank and Union Bank of India. These
banks were not on the efficiency frontier even once in
the CRS model, but in VRS model it was shown that
after 2000 these banks were on the efficiency frontier.
Even though they are on frontier for less number of times,
they seem to be doing good business now. The banks on
the frontier in the year 2010 are Bank of Baroda, Bank
of India, Bank of Maharashtra, Canara Bank, Central
Bank of India, Dena Bank, Indian Bank, Indian Overseas
Bank, Punjab National Bank, Corporation Bank, Dena
Bank and Oriental Bank of Commerce.
The VRS model gives same results for State Bank group
in table 4.26 as in CRS. In VRS model also, SBI is on
efficiency frontier for all the years in the selected span.
State Bank of Patiala, which was on the frontier for the
lowest numbers of years in CRS model, now is on the
second number with twelve times on the frontier. On the
Other hand, State Bank of Travancore appeared least
number of times on the frontier.
127
The VRS model efficiency appears to be always higher

than CRS model efficiency. In the case of OPB group in
table 4.27, the results in VRS models differ from CRS
model results. In VRS model, ING Vysya Bank is efficient
for 16 years (in CRS model it was Dhanlakshmi Bank
and Lakshmi Vilas Bank). Karur Vyya Bank follows with
the efficiency proven for 15 years. Dhanalakshmi Bank
is at the third number with proven efficiency for 13 years.
Tamilnad Mercantile Bank is on efficient frontier for three
years (in CRS model it was not on the frontier even
once). The banks that are efficient in the year 2010 are
Federal Bank, Karur Vysya Bank, South Indian Bank,
ING Vysya Bank, Jammu Kashmir Bank, Dhanalakshmi,
Ratnakar Bank and Tamilnad Mercantile Bank.
Oman International Bank in table 4.28 is efficient for 13
years out of 19 years in VRS model (Abu Dhabi Commercial
Bank in CRS model). However, BNP Paribus is on the
frontier for maximum number of times. Here, Abu Dhabi
Commercial Bank is efficient for eleven years accompanied
by Barclays Bank. Deutsche Bank is on the frontier for
the least numbers of years (i.e. 2 years out of 19 years).
The banks that were on the efficiency frontier in 2010,
from the FBs group, are Barclays Bank, Bank of Ceylon,
Citi Bank, Deutsche Bank, Oman International Bank and
State Bank of Mauritius.
ICICI Bank in table 4.29 is efficient for all years in VRS
model whereas HDFC Bank is efficient for 19 years and
Indusind Bank, Development Credit Bank and Axis Bank
are efficient for 18 years, indicating good performance in
selected span of time. Moreover, Axis Banks is on the
frontier for maximum number of times.
4.2.5: Malmquist Index for Revenue Efficiency
Table 4.30 shows that SB group is the most technical
efficient group. OPB group compared to other groups is
the least technical efficient with the lowest score at 0.923.
But they are good in efficiency changes and scale efficiency
changes than any other group. SB group shows better
results even in total factor productivity change, followed
L
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E
E
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E
I
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ABD BANK
AND BANK
BOB
BOI
BOMa
CB
CBI
COR BANK
DENA BANK
IB
IOB
OBC
PSIND BANK
PNB
SYNBANK
UCO BANK
UBI
UNIBI
VB
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E
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02
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03
L
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04
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05
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E
E
L
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06
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E
E
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L
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L
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07
I
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E
E
E
L
E
E
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I
E
E
E
L
E
L
E
L
I
L
L
E
SBI
SBBJ
SBH
SBM
SBOP
SBT
92
93
94
95
96
97
98
99 2000 01

91
Bank
02
03
04
05
06
07
08 09
I
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L
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E
E
L
L
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E
E
E
L
E
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08 09
10
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E
E
E
E
E
E
E
E
E
E
I
E
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I
10
Table 4.26: Revenue Efficiency Status of Individual Banks (SB Group)

L
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E
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I
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E
E
I
E
I
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I
99 2000 01

91
Bank
Table 4.25: Revenue Efficiency Status of Individual Banks (NBs Group) (Under
VRS Conditions)
128
129
L
L
KVB
LVB
92
93
94
95
96
97
98
02
03
04
05
06
07
L
E
E
I
I
L
I
E
I
I
I
ADCB
BOA
BOC
BCLYBNK
BNPPARI
CITIBNK
DEUTBNK
JPMCBNK
OMANIBNK
SCHBNK
SBMRITUS
93
94
95
96
97
98
2000
99
92
Bank
01
02
03
04
05
06
07
08 09
08 09
10
10
Table 4.28: Revenue Efficiency Status of Individual Banks (FBs Group)

99 2000 01

KB
TMB
JKB
INGVB
SIB
FB
DB
CUB
RB
CSB
NB
91
Bank
Table 4.27: Revenue Efficiency Status of Individual Banks (OPB Group)

130
131
by NBs group. NPB groups all efficiencies are lower

compared to other groups.
Means with Earnings and Expenditure Data
Showing Revenue Performance
EFFCH
TECHCH
PECH
SECH
TFPCH
NBs
SB
OPB
FBs
NPB
0.998
1.031
0.999
0.999
1.00675
0.998
1.037
0.999
0.998
1.008
1.008
0.923
0.998
1.01
0.98475
1.008
0.99
1
1.008
1.0015
0.985
0.986
0.992
0.993
0.989
L
L
E
E
E
I
E
E
E
E
I
09
07
4.3.1. Analyzing the Staff Efficiency of different Bank

Groups under CRS Model
The efficiency of the individual banks with reference to
the staff employed by them gives staff efficiency of the
banks. To measure this efficiency, staff employed is taken
as an input and advances, deposits and investment are
taken as outputs.
E
L
INDUSBNK
E
L
E
ICICIBNK
E
I
L
L
E
I
L
E
L
HDFCBNK
DEVCDBNK
E
I
E
E
E
AXISBNK
02
2000
99
98
97
Bank
133
4.3. Staff Efficiency
01
03
04
05
06
08
10
Table 4.29: Revenue Efficiency Status of Individual Banks (NPB Group) (Under
VRS Conditions)
132
As shown in Table 4.31, the average efficiency of the

staff in SB group is highest among other groups of banks
(avg. 0.862). In the second place, there is NBs group
(0.723) followed by OPB group (0.706) and the last is
FBs group (0.679). The above table shows that there was
a slight increase in the staff efficiency of FBs group. The
staff efficiency in all other groups of banks remained
almost same with trivial variation in the data.
The maximum staff efficiency in NBs group is experienced
in 1990 i.e. before the actual implementation of the reform
policy. In the year 2000, it has been experienced that
the lowest staff efficiency was 0.549. After the year 2001,
it shows a discrepancy.
134
Table 4.31: Staff Efficiency of Different Group of

Banks (Under CRS)
Years
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Average
NBs(19)
SB(6)
FBs(14)
OPB(13)
0.78
0.825
0.762
0.713
0.727
0.738
0.755
0.717
0.638
0.549
0.82
0.69
0.714
0.692
0.723
0.813
0.678
0.649
0.703
0.792
0.723
0.845
0.799
0.846
0.872
0.885
0.906
0.901
0.895
0.883
0.903
0.907
0.868
0.857
0.823
0.854
0.869
0.820
0.831
0.862
0.827
0.862
0.413
0.591
0.624
0.538
0.479
0.607
0.695
0.73
0.741
0.683
0.656
0.613
0.649
0.874
0.810
0.724
0.792
0.803
0.784
0.723
0.674
0.674
0.719
0.572
0.561
0.539
0.694
0.729
0.742
0.761
0.792
.0.799
0.737
0.786
0.743
0.738.
0.727
0.767
0.709
0.729
0.731
0.706

Figures in the bracket shows the numbers of Banks selected from
each group.
SB group has staff efficiency consistently more than 0.8

(except in the year 1992). The maximum staff efficiency
was enjoyed in the year 2001 at 0.907. In the year 1992,
it had a minimum efficiency of labour at 0.799.
The FBs group shows a very poor efficiency in the year
1990 i.e. before the period of reforms began. Their labour
efficiency was at lowest in the year 1990 at 0.304. Their
average efficiency was also lowest among others but they
have shown improvement in their staff efficiency by 2004.
135
They performed their highest efficiency in the year 2004

at 0.874, which is the highest among others.
The OPB group shows poor staff efficiency up to the year
1995 and then the group experienced little increase in
their staff efficiency. The highest efficiency experienced
by them is 0.799 in the year 2001. The lowest efficiency
was experienced in the year 1995 at 0.539.
Table 4.32 describes the number of efficient units showing
the staff performance in the reform phase. In the year
1991, only 7 banks were efficient out of 54 banks. Over
the span of 15 years, very few banks have placed on the
frontier. After 2000, more banks are on the efficiency
frontier.
Table 4.32: Number of Staff Efficient Units under
CRS Model during 1991-2010
Years
NBs(19)
SB(6)
FBs(14)
OPB(13)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
3
2
3
2
3
1
3
1
1
1
2
2
1
3
4
3
3
2
3
2
2
1
1
2
3
3
2
1
2
3
3
4
2
2
2
2
2
3
2
3
1
2
1
0
1
3
2
3
1
3
3
2
3
3
3
2
1
2
2
2
2
2
1
1
1
2
2
2
3
3
2
4
1
2
2
2
4
3
4
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08 09
07
06
05
04
03
02
99 2000 01
98
97
96
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L
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I
The staff efficiency of new private sector banks is not

shown here because of non availability of data. The data
was available only for six DMU but not in balanced format.
With such data, the DEA results would be misguiding.
ABD BANK
AND BANK
BOB
BOI
BOMa
CB
CBI
COR BANK
DENA BANK
IB
IOB
OBC
PSIND BANK
PNB
SYNBANK
UCO BANK
UBI
UNIBI
VB
As mentioned earlier, the VRS model gives different results

than the CRS model. As shown in Table 4.37, though the
trend of ranking remains same yet the indicators of staff
efficiency standards are higher in VRS model than the
CRS model results.
95
4.3.3. Analyzing the Staff Efficiency of different Bank

Groups under VRS Model
94
In FBs group (table 4.36), BNP Paribas and Deutsche

Bank are on the frontier for 6 years, followed by the
Oman International Bank and Bank of Ceylon which are
on the frontier for 5 years. State Bank of Mauritius is
not on the frontier even once in CRS model.
93
In OPB group (table 4.35), Lakshmi Vilas Bank is efficient

for the maximum times (8 years), followed by ING Vysya
Bank is efficient for six years. The efficient banks in the
year 2010 are Dhanlakshmi Bank, Federal Bank,
Karnataka Bank and Karur Vysya Bank. Majority of the
banks are showing overall poor staff efficiency.
92
SB group (table 4.34) shows that State Bank of India is

on the staff efficiency frontier for highest numbers of
years i.e. 20 years followed by State Bank of Bikaner
and Jaipur (6 years). The other member banks were
nowhere near to these banks.
Table 4.33: Staff Efficiency Status of Individual Banks (NBs Group)

Table 4.33 shows that in NBs group, Punjab National

Bank is on the frontier for all the years in the selected
span followed by Corporation Bank and Dena Bank which
are efficient for 4 years only. In 2010, the banks on the
efficiency frontier are Punjab and Sind Bank and Punjab
National Bank.
10
4.3.2. Staff Efficiency Status of Individual Banks

under CRS Model
137
I
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E
E
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91
Bank
136
E
I
I
L
I
I
SBI
SBBJ
SBH
SBM
SBOP
SBT
92
93
94
95
96
97
98
02
03
04
05
06
07
I
I
I
L
I
I
I
I
JKB
KB
KVB
LVB
NB
RB
SIB
TMB
92
93
94
95
96
97
98
02
03
04
05
06
07
08 09
10
10
99 2000 01
DB
CUB
INGVB
CSB
FB
91
Bank
08 09
Table 4.35: Staff Efficiency Status of Individual Banks (OPB Group)

99 2000 01
91
Bank
Table 4.34: Staff Efficiency Status of Individual Banks (SB Group)

(Under CRS conditions)
138
139
I
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I
10
Table 4.37: Staff Efficiency of Different Group of

Banks (Under VRS)
NBs(19)
SB(6)
FBs(14)
OPB(13)
0.862
0.844
0.812
0.808
0.843
0.847
0.878
0.839
0.83
0.728
0.879
0.807
0.862
0.864
0.870
0.837
0.861
0.832
0.842
0.871
0.836
0.882
0.919
0.912
0.937
0.941
0.94
0.94
0.934
0.92
0.918
0.916
0.871
0.879
0.879
0.814
0.828
0.839
0.892
0.879
0.857
0.913
0.693
0.688
0.725
0.76
0.795
0.901
0.921
0.936
0.929
0.921
0.805
0.823
0.79
0.874
0.883
0.872
0.891
0.890
0.853
0.872
0.826
0.728
0.802
0.646
0.642
0.632
0.778
0.797
0.865
0.873
0.863
0.865
0.807
0.864
0.436
0.549
0.578
0.782
0.856
0.830
0.829
0.743
I
I
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Average

I
I
SBMRITUS
I
I
I
I
L
I
L
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I
L
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I
L
I
I
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I
I
I
I
SCHBNK
OMANIBNK
I
I
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I
L
I
L
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I
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I
L
JPMCBNK
I
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I
I
I
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I
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I
L
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E
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L
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I
DEUTBNK
CITIBNK
I
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L
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L
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L
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E
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L
L
I
BNPPARI
BCLYBNK
I
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E
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BOA
BOC
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ADCB
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99
97
96
95
93
92
94
141
Years
98
2000
01
02
03
04
05
06
07
08 09
Bank
Table 4.36: Staff Efficiency Status of Individual Banks (FBs Group)

140
Note: Figures in the bracket shows the numbers of Banks selected from
each group
In VRS model also, SB group is at the highest with

efficiency score of 0.913. Here, the score is higher than
the CRS model but the ranking trend remains same.
NBs group is at second position with the average efficiency
score of 0.836. FBs group is at the third position with
the score 0.826 and the OPB group at the last position
with score 0.743.
In the year 1995, SB group enjoys the highest staff
efficiency at 0.941 and the lowest efficiency (0.814) is
seen in the year 2005. On an average, the efficiency is
almost constant for SB group.
142
143
Table 4.38: Number of Staff Efficient Units under

VRS Model during 1991-2010
The VRS model shows that in the year 2006, the maximum
number of banks is staff efficient.
Years
NBs(19)
SB(6)
OPB(13)
FBs(11)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
6
7
6
4
4
4
7
5
6
4
6
7
7
7
9
8
8
8
7
6
3
4
3
4
5
5
5
4
4
4
4
4
4
4
4
6
5
6
6
6
3
4
3
4
5
5
5
4
4
4
4
4
4
4
4
5
5
5
5
7
2
2
4
4
5
5
5
6
4
4
5
4
6
7
6
4
5
5
6
4.3.4. Staff Efficiency Status of Individual Banks

under VRS Model
Source : Computed by the researcher
Punjab National Bank in table 4.39 is on the efficiency

frontier for all the years. Corporation Bank is on the
second position with good efficiency for eleven years. Dena
Bank and Indian Overseas Bank are on the third position
with the better staff efficiency for ten years. There are
seven banks on the frontier in the year 2005. They are:
Bank of Maharashtra, Dena Bank, Indian Bank, Punjab
National Bank, Punjab & Sind Bank, Syndicate Bank
and Union Bank of India. United Bank of India and
Allahabad Bank are on the frontier only for once. Vijaya
Bank is the only bank, which has not been successful for
even once to be on the staff efficiency frontier (in CRS
model also).
SB group (table 4.40) shows that compared to other groups,
proportionately more members from SB group are staff
efficient. Especially after year 2000, more than 50 percent
of their members are staff efficient. State Bank of India
is on the staff efficiency frontier for all twenty years
followed by Bank of Hyderabad.
For FBs group, the highest staff efficiency is 0.936 in

the year 1998. The lowest efficiency was shown in 1992
at 0.688. Except in 2003, FBs group shows better efficiency
after 2000.
In the OPB group in table 4.41, the ING Vysya Bank is

efficient for twelve years (in CRS model it is on the frontier
for six years). Karur Vysya Bank and Federal Bank are
efficient for ten years and held second position in the
span selected. In the year 2010, seven banks from this
group are efficient i.e. Federal Bank, ING Vysya Bank,
Jammu and Kashmir Bank, Karur Vyasa Bank, Ratnakar
Bank, South Indian Bank and Tamilnad Mercantile Bank.
However, only two of these Banks (Federal Bank and
Karur Vyasa Bank) are on the frontier in CRS model.
OPB group shows very poor staff efficiency in the year

2004 i.e. 0.436. It is the poorest efficiency in all groups
and over the entire time span selected. Highest efficiency
for OPB group is experienced in the year 1999 at 0.873.
In FBs group, Oman International Bank and Deutsche

Bank are on the frontier for 13 years and 12 years
respectively (table 4.42). State Bank of Mauritius, which
was not on the frontier even once in CRS model, is one
Table 4.38 shows that for NBs group, the highest efficiency
was before the beginning of reforms i.e. in 1990. The
lowest efficiency was in the year 2000 at 0.728. In the
year 2004, it shows the upward trend in the staff efficiency.
I
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L
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E
I
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L
I
L
ABD BANK
AND BANK
BOB
BOI
BOMa
CB
CBI
COR BANK
DENA BANK
IB
IOB
OBC
PSIND BANK
PNB
SYNBANK
UCO BANK
UBI
UNIBI
VB
L
I
I
I
L
E
I
L
E
I
L
I
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E
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92
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L
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93
E
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94
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L
95
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L
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96
I
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E
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97
L
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98
I
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L
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02
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03
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04
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05
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06
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07
I
I
SBOP
SBT
92
93
94
95
96
97
98
99 2000 01
I
L
SBBJ
SBM
SBI
SBH
91
Bank
02
03
04
05
06
07
I
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E
E
L
L
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08 09
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08 09
10
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10
Table 4.40: Staff Efficiency Status of Individual Banks (SB Group)

L
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99 2000 01

91
Bank
Table 4.39: Staff Efficiency Status of Individual Banks (NBs Group)

144
145
I
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L
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I
CUB
DB
FB
INGVB
JKB
KB
KVB
LVB
NB
RB
SIB
TMB
92
93
94
95
96
97
98
02
03
04
05
06
07
I
I
I
I
I
L
I
E
I
I
I
ADCB
BOA
BOC
BCLYBNK
BNPPARI
CITIBNK
DEUTBNK
JPMCBNK
OMANIBNK
SCHBNK
SBMRITUS
93
94
95
96
97
98
99
2000
92
Bank
01
02
03
04
05
06
07
08 09
10
08 09 10
Table 4.42: Staff Efficiency Status of Individual Banks (FBs Group)

99 2000 01

I
L
CSB
91
Bank
Table 4.41: Staff Efficiency Status of Individual Banks (OPB Group)

146
147
148
time on the frontier in VRS model and efficient for seven

years.
4.3.5. Malmquist Index for Staff Efficiency
Table 4.43 shows that NBs group is the most technical
efficient group. OPB group compared to other groups is
the least technical efficient with the lowest score at 0.91.
But they are good in productive efficiency change. SB
group shows better results even in total factor productivity
change, followed by NBs group, OPB and FBs.
Means showing Staff Efficiency
NBs
SB
OPB
FBs
EFFCH
0.99
1.08
0.98
0.98
TECHCH
1.07
0.96
0.91
1.01
PECH
0.99
0.98
0.99
SECH
1.1
1.08
0.98
1.0125
1.03
0.9925
0.99
TFPCH
4.4. Conclusion
In the present study capital efficiency, revenue efficiency
and staff efficiency of individual and group banks is
compared by using different inputs and outputs. In order
to measure capital efficiency; capital, reserves and deposits
are taken as inputs and investment and loans are as
outputs. Similarly, revenue efficiency is measures by taking
interest paid and other expenses as inputs and interest
income and non- interest income as output. Number of
employees is taken as input to compute staff efficiency
and advances, deposit and investment are outputs.
The efficiencies are compared at constant returns to scale
as well as variable return to scale. While comparing the
capital efficiency of different groups of banks, SB group
stand first; nationalized banks, new private sector banks,
old private sector banks held second, third and fourth
149
position respectively. Foreign Banks stand last. The result

is slightly different under VRS; the first, second and last
position members are same. However, NPB and OPB
exchanged their positions. As far as individual banks
comparison under CRS is concerned, the best performed
banks under each group are: Punjab National Bank, State
Bank of India, City Union Bank, BNP Paribus as well as
Axis Bank. On the other hand worst performed banks
are: Allahabad Bank, State Bank of Patiala, Tamilnad
Mercantile, State Bank of Mauritius and Indusind Bank.
The top ranked banks under VRS are same for all groups
except old private sector banks. Now the first place is
occupied by Karur Vysya Bank. The least performed banks
under VRS are: Vijaya Bank, State Bank of Travancore,
South Indian Bank, State Bank of Mauritius as well as
ICICI. Malmquist Index Summary of firm means with
assets and liabilities data of banks groups is compared
and the result is same. The first place is occupied by SB
group, followed by NBs, NPB, OPB and FBs.
The result of revenue efficiency comparison is not similar
to that of capital efficiency. Inter- bank group comparison
has approximately same result under CRS as well as
VRS. The first, third and fifth rank is held by SBI group,
FBs and OPB respectively. As far as second and fourth
rank is concerned, NBs occupied the second rank under
CRS and fourth under VRS. However, the result is opposite
in case of NPB. As far as individual banks performance
within the group is concerned, the best performed banks
are same for NBs, SB group and NPB under CRS and
VRS. The top ranked banks are Punjab National Bank,
State Bank of India and Axis Bank. However, the best
performed banks under CRS among other groups are City
Union Bank and ABU Dhabi Commercial Bank and under
VRS are Karur Vysya and BNP Paribus Bank. The least
performed banks under CRS are UCO Bank, Union Bank
of India, Vijaya Bank, State Bank of Patiala, South Indian
Bank, Tamilnad Mercantile Bank, State Bank of Mauritius
and Indusind Bank. Under VRS, the least performed banks
are Vijaya Bank, State Bank of Travancore, South Indian
Bank, Standard Chartered Bank and Indusind Bank.
150
Malmquist Index Summary of firm means with earnings

and expenditure is calculated and inter group comparison
is done. The findings show that SB group is on the highest
position followed by nationalized banks, foreign banks,
new private banks and old private sector banks.
The staff efficiency of different bank groups is compared
except for NPB. This is due to non availability of data.
SBI and NBs occupied the first and second place
respectively under both CRS as well as VRS. OPB and
FBs occupied third place and fourth place respectively
under CRS. But, they occupied the opposite places under
VRS. The best performed banks under CRS are Punjab
National Bank, State Bank of India, Lakshmi Vilas Bank,
Deutsche Bank and BNP Paribus Bank. The top ranked
banks under VRS are Punjab National Bank, State Bank
of India, Karur Vysya Bank and Oman International Bank.
The list of worst performed Bank under staff efficiency
includes Allahabad Bank, Bank of India, Oriental Bank
of Commerce, UCO Bank, Union Bank of India, United
Bank of India, Vijaya Bank, State Bank of Travancore,
South Indian Bank, Tamilnad Mercantile Bank, State
Bank of Mauritius under CRS and United Bank of India,
Vijaya Bank, State Bank of Travancore, Tamilnad
Mercantile Bank and ABU Dhabi Commercial Bank under
VRS. Malmquist Index Summary of firm means showing
staff efficiency is calculated and inter group comparison
is done. The findings show that SB group rank first followed
by nationalized banks, old private sector banks and foreign
banks.
The Malmquist result shows that if a bank is scale efficient
it may not be technically efficient. If a DMU is productive
efficient then it needs not be scale efficient. There is a
definite and positive effect of reforms experienced by the
banks. Of course the degree and intensity of the effect is
different for different groups as well as for an individual
bank e.g. the SB group and NBs group are better than
the OPB and NPB group in all efficiencies. FBs group is
very conscious about their asset quality and a major shift
in the share of foreign banks may result in neglect of
151
the credit requirements of small and medium-sized

businesses, whose development is crucial for emerging
markets, which are perceived as carrying relatively higher
risks. In all the efficiencies, SB group and NBs occupied
the top two positions respectively. NPB are better than
OPB in both capital efficiency and revenue efficiency.
On the other hand OPB are better than FBs in capital
efficiency and staff efficiency. As far as revenue efficiency
is concerned, FBs proved to be better than both NPB
and OPB.
The result shows that the efficiency of different factor
input differ for different individual banks as well as groups
of banks. In the same group, member banks show different
efficiency at the different time period. Each bank has its
own strength and weakness. It is noted that if a bank is
showing better capital efficiency, it may have poor revenue
efficiency or if it is good in revenue efficiency, it may
lack in staff efficiency or capital efficiency or both together.
It is observed that overall performance of capital is higher
than labour performance. This could be possible due to
adoption of new policies by the banks after the reforms.
152
Mergers and Acquisitions in Indian Banking Sector
153
main objective is to protect the interest of depositors of

the weak bank.
Table 5.1: Bank Merger in India
5
Mergers and Acquisitions in
Indian Banking Sector
Indian Banking Sector is no stranger to the phenomenon

of merger and acquisition across the banks. Since the
beginning of modern banking in India, the most significant
merger in the pre-independence era was that of three
presidency banks in 1935 to form the Imperial Bank of
India (renamed as State Bank of India in 1955). Since
1961 till date, there have been as many as 83 bank mergers
in the Indian banking system, of which 46 took place
before nationalization of banks in 1969 while the remaining
31 occurred in the post-nationalization era. Of the 37
mergers, in 25 cases, the private sector banks were merged
with a public sector banks while in the remaining six
cases both the banks were private sector banks.
5.1. Merger in India

Since the onset of reforms in 1991, there have been 24
bank mergers. It has been observed that prior to 1999;
the mergers of banks were primarily triggered by the
weak financials of the bank being merged, whereas in
the post-1999 period, there have also been mergers between
healthy banks driven by the business and commercial
considerations.
Indian banking sector has witnessed two types of mergers
i.e. forced and voluntary mergers. In forced mergers, the
Period
Number of Mergers
Pre-Nationalization of Banks (1961-1968)
46
Nationalization Period (1969-1992)
13
Post Reform Period (1993-2006)

(i) Forced Mergers
13
(ii) Voluntary Mergers
(iii) Convergence of financial Institutions

into Banks
(iv) Other Regulatory Compulsions
Total Number of Mergers
24
83
Source: Compiled from various publications of RBI
When a bank has shown symptoms of sickness such as

huge NPAs and substantial erosion of net worth, RBI
intervenes and merges the weak bank with a strong bank.
The voluntary mergers are guided by the motivation of
market dynamics such as increasing size, diversification
of portfolio, and exposure to new geographical markets.
In these cases acquirer banks gained the advantage of
branch network and customer clientele of the acquired
banks.
Table 5.2 presents the list of mergers in Indian banking
sector. In 1993, Punjab National Bank acquired New Bank
of India and BCCI (Mumbai) was also acquired by State
Bank of India in the same year. In 1994, Bank of Karad
Ltd. was merged in Bank of India. State Bank of India
also acquired Kashinath Seth Bank in 1996. In 1997,
Bari Doab Bank Ltd. and Punjab Co-operative Bank Ltd.
were acquired by Oriental Bank of Commerce. In 1999,
Bank of Baroda acquired Bareilly Corporation Bank Ltd.
and, Sikkim Bank Ltd. was also merged in Union Bank
of India. One of the noted mergers happened when HDFC
Bank Ltd. acquired Times Bank Ltd. in the year 2000.
154
Table 5.2: Bank Mergers in the Post-Reform Period

Year
Target Bank
Acquirer Bank
1993
1993
1994
1996
1997
1997
1999
1999
2000
2001
2001
2001
2002
2002
2003
2004
New Bank of India

BCCI (Mumbai)
Bank of Karad Ltd.
Kashinath Seth Bank
Bari Doab Bank Ltd.
Punjab Co-operative Bank Ltd.
Bareilly Corporation Bank Ltd.
Sikkim Bank Ltd.
Times Bank Ltd.
Bank of Madura Ltd.
Sakura Bank
Morgan Guarantee Trust Bank
ICICI Ltd.
Banaras State Bank Ltd.
Nedungadi Bank Ltd.
South Gujarat Local Area
Bank Ltd.
Global Trust Bank Ltd.
Bank of Punjab Ltd.
IDBI Bank Ltd.
Ganesh Bank of Kurundwad
United Western Bank Ltd.
Sangli Bank Ltd.
Lord Krishna Bank Ltd.
Bharat Overseas Bank
Centurian Bank of Punjab
State Bank of Saurashtra
Bank of Rajasthan
State Bank of Indore

State Bank of India
Bank of India
State Bank of India
OBC Bank
OBC Bank
Bank of Baroda
Union Bank of India
HDFC Bank Ltd.
ICICI Bank
Sumitomo Bank
Chase Manhaltan Bank
ICICI Bank
Bank of Baroda
Bank of Baroda
2004
2005
2005
2006
2006
2007
2007
2007
2008
2008
2010
2010
OBC Bank
Centurian Bank
IDBI Bank
Federal Bank
IDBI Ltd.
ICICI Bank
Centurian Bank of Punjab Ltd.
Indian Overseas Bank
HDFC Bank
State Bank of India
ICICI Bank
State Bank of India
Source: Compiled from various publications of RBI.
In 2001, the main acquisition was made by ICICI Bank

by acquiring Bank of Madura Ltd. In the year 2002,
ICICI Ltd. was merged in ICICI Bank and Banaras State
Bank Ltd. was acquired by Bank of Baroda. In 2003
Nedungadi Bank Ltd. was merged in Punjab National
155
Bank. In 2004, South Gujarat Local Area Bank Ltd. was

merged in Bank of Baroda and Oriental Bank of Commerce
acquired the Global Trust Bank Ltd. Further in the year
2005, Centurion Bank acquired Bank of Punjab Ltd. and
IDBI Ltd. was merged in IDBI Bank. In the year 2006
acquisition was made by merging the Ganesh Bank of
Kurundwad into the Federal Bank and United Western
Bank Ltd. into the IDBI Ltd.
In 2007, Sangli Bank Ltd., Lord Krishna Bank Ltd. and
Bharat Overseas Bank were acquired by ICICI, Centurian
Bank of Punjab Ltd., Indian Overseas Bank respectively.
In 2008 HDFC acquired Centurian Bank of Punjab and
State Bank of India acquired its own subsidiary State
Bank of Saurashtra as well as State Bank of Indore in
2010. Bank of Rajasthan merged with ICICI in 2010.
5.2. Analysis of Mergers in Indian Banking

Sector
The present study has attempted to examine the
performance of banks that have gone through mergers
in India, in the post-reforms period, and analyses if mergers
had a significant impact on financial performance of
merging banks.
5.2.1. Housing Development Finance Corporation
Bank (HDFC)
Liquidity Ratios
The comparison of the pre and post merger period liquidity
ratios for HDFC Bank showed that there was marginal
decline in the mean current ratio (1.183% to 0.590%),
during the pre and post-merger period, however, the decline
was not statistically significant (t-statistic value of 1.547).
In contrast, the mean acid test ratio had increased
marginally from pre- to post-merger period (-3.197% to 2.540%), but the increase was not statistically significant
(low t-statistic value of -0.932).
156
Table 5.3: Mean Pre-and Post-Merger Period

Ratios of HDFC
Pre-merger Pre-merger Pre-merger Pre-merger
(3-Years
(3-Years
(0.05
(one tail)
average)
average)
significance)
Liquidity Ratios
157
0.087%) and the decline was statistically validated with

a t value of 7.150. There was a marginal increase in
fixed assets turnover ratio (2.693% to 5.065%) and the
increase was statistically validated (t-value of -4.565).
Likewise, mean current assets turnover ratio had increased
marginally (1.345% to 1.448%) but increase was not
statistically significant (-0.476). The mean advances
turnover ratio showed a decline during the post-merger
period (0.338% to 0.274%), but the decline was not
statistically significant (t-value of 2.70). There was a rise
in mean equity turnover ratio (1.005% to 1.248%), but
the increase was not statistically significant (t-value of 0.636). The mean cash turnover ratio had declined during
the post-merger period (0.706% to 0.641%) and the decline
was not statistically validated (t-value of 1.031).
1.183
0.590
1.547
2.920
Acid test ratio
-3.197
-2.540
-0.932
-do-
0.105
0.087
7.150
-do-
Fixed assets turnover

ratio
2.693
5.065
-4.565
-do-
Current assets turnover

ratio
1.345
1.448
-0.476
-do-
0.338
0.274
2.70
-do-
1.055
1.248
-0.636
-do-
Cash turnover ratio
0.706
0.641
1.031
-do-
Return on assets
8.403
6.307
6.786
-do-
Profitability Ratios
Return on equity
21.02
18.524
0.560
-do-
Advances/deposit ratio
0.438
0.436
0.06
-do-
Equity capital/total
assets
0.076
0.012
3.794
-do-
0.671
0.431
2.281
-do-
The results showed that the mean return on assets had

marginally declined during the post-merger period (8.403%
to 6.307%) and the decline was statistically significant,
the t-value being 6.786. Likewise, the mean return on
equity (21.02% to 18.524%) and mean advances/deposits
ratio (0.438% to 0.436%) had also declined during the
post-merger period; the declines were not statistically
significant (t-values of 0.560 and 0.060 respectively).
Efficiency Test Ratio
The above findings suggest that for HDFC Bank merger

had caused a marginal but statistically insignificant decline
in efficiency ratios in terms of advances turnover ratio
and cash turnover ratio. Based on the results, the
hypotheses, H E being accepted.
Capital Structure
Ratios
Source: Computed from the data collected by the researcher.
The above findings suggest that for the HDFC Bank,

merger had not resulted in any improvement in liquidity
ratios. We accepted the hypotheses H L.
Efficiency Ratios
The results showed that the mean assets turnover ratio
had declined during the post-merger period (0.105% to
The above results suggest that for the HDFC Bank, merger
in profitability performance in terms of return on equity
and advances/deposits ratio. Based on the results, the
hypotheses H P has being accepted.
Capital Structure Ratios
The mean equity capital/total assets ratio had marginally
declined during post-merger period (0.076% to 0.012%)
158
and the decline was statistically significant, the t-value

being 3.794. However, the mean interest coverage ratio
showed a significant decline during the post merger period
(0.671% to 0.431%) but the decline was not statistically
validated with a t value of 2.281. The above findings
suggested that, merger had not yielded any improvement
in capital structure performance. Therefore, hypotheses
Hc is accepted.
159

Ratios of ICICI
Pre-merger Pre-merger t-statistic
t-critical
(3-Years
(3-Years
(0.05
(one tail)
average)
average) significance)
Liquidity Ratios
2.002
0.232
10.380
2.920
1.28
-2.900
24.879
-do-
0.133
0.079
2.051
-do-

ratio
1.854
2.225
-0.482
-do-

ratio
1.130
2.104
-2.510
-do-
3.253
0.867
2.454
-do-
0.695
1.264
-26.421
-do-
Cash turnover ratio
0.362
1.191
-1.597
-do-
Return on assets
3.749
5.641
-0.941
-do-
Liquidity Ratios
Return on Equity
16.177
13.352
0.385
-do-
The comparison of the mean pre- and post- merger period

liquidity ratios showed that there was a decrease in the
mean liquidity current ratio (2.002% to 0.232%) and the
mean acid test ratio (1.28% to -2.90%) during the post
merger period and the declines were statistically significant
(t-values of 10.380, 24.879 respectively).
0.382
1.164
-5.597
-do-
assets
0.032
0.009
7.530
-do-
0.227
0.185
0.720
-do-
From the above results, we conclude that after the merger,

the performance of HDFC Bank has not improved. Thus,
merger has not improved the liquidity, efficiency and
profitability position for HDFC Bank. The main reasons
for the declining the performances of banks were the
non satisfaction of shareholders and differences in culture.
5.2.2. Industrial Credit and Investment Corporation
of India (ICICI Bank)
Comparative average pre-and post-merger period
performance ratios and results from tests for statistical
significance for ICICI Bank merger have been summarized
in Table 5.4.
From above results, merger had caused a marginal but

statistically significant decline in liquidity position, in
terms of liquidity current ratio and acid test ratio. Based
on this hypothesis H L is accepted.
Efficiency Test Ratios
The results showed that the mean assets turnover ratio
had marginally declined during post-merger period (0.133%
to 0.079%), but the decline was not statistically significant,
confirmed by the t- value of 2.051.

Acid test ratio
Efficiency Ratios
Profitability ratios
Capital structure
ratios
In contrast, the mean fixed assets turnover ratio (1.854%

to 2.225%) and mean current assets turnover ratio (1.13%
to 2.104%) had increased during the post-merger period
but the increases were not statistically significant (tvalues of -0.482, -2.510 respectively)
The mean advances turnover ratio had marginally declined
during post merger period (3.253% to 0.867%) but the tvalue of 2.454 suggested that the difference was not
160
statistically significant. The mean equity turnover ratio

showed an increase during the post-merger period (0.695%
to 1.264%) and the increase was statistically validated
(t-value of -26.421). However, the mean cash turnover
ratio had also increased (0.362% to 1.191%) during the
post-merger period, but the increase was not statistically
significant confirmed by the t- value of -1.597.
The above results suggested that merger has caused an
increase in fixed assets turnover ratio, current assets
turnover ratio and cash turnover ratio, but the increase
was statistically insignificant. Based on the results, the
hypothesis H E is being accepted.
The comparison of average pre and post merger period
profitability ratios for ICICI Bank showed that there was
marginal increase in the mean return on assets (3.749%
to 5.641%), but the rise was not statistically significant
(t- value of -0.941).
In contrast, the mean return on equity had declined
marginally (16.177% to 13.352%) in the post-merger period,
but the decline was not statistically significant (t-value
of 0.385). The mean advances/deposits ratio showed a
significant rise after the merger (0.382% to 1.164%), as
suggested by the t value of -5.597.
The above results suggest that for the ICICI Bank, merger
in profitability performance in terms of return on asset
and return on equity. Based on the results, the hypotheses
HP has being accepted
161
The results indicated that capital structure position of

the bank has not improved after the merger.
After the comparison of mean pre- and post-merger period
ratios we have reached at the conclusion that most of
the ratios had been increased during the post merger
period but the increases were not statistically significant.
ICICI Bank increased its size by acquiring Bank of Madura
(BOM) and reached the position of a large size bank
among the private sector banks way back in 1999. The
announcement of this merger led to significant rise in
abnormal returns leading to increase in value for
shareholders of BOM, but the shareholders of ICICI Bank
did not achieve any gains. This is not surprising because
shareholders of a troubled bank start to gain from a
merger with a strong bank where as the same may not
be good news from the perspective of the strong acquiring
bank. Since BOM had comparatively more NPAs than
ICICI Bank, the capital adequacy ratio of the merged
entity was lower (from 19% to about 17%). The two banks
also had a cultural misfit, with BOM having a trade
union system and ICICI Banks workers being young and
upwardly mobile unlike those for Bank of Madura. There
were technological issues as ICICI Bank used 2000
software, which were very different from BOMs ISBS
software. With the manual interpretations and procedure
and the lack of awareness of the technology utilization
in BOM, there were hindrances in the merged entity.
Due to these reasons, the performance of the ICICI Bank
has not been improved after the merger.
5.2.3. Bank of Baroda (BOB)
Liquidity Ratios
The results showed that mean equity capital/total assets

ratio had marginally declined during the post-merger period
(0.032% to 0.009%) and the decline was statistically
validated (t-value of 7.530). The mean interest coverage
ratio showed an insignificant decline after the merger
(0.227% to 0.185%), as suggested by the t value of 0.720.
As would be seen from Table 5.5, the comparison of the

pre-merger and post-merger liquidity ratios for the Bank
of Baroda showed that there was a decline in the mean
liquidity current ratio (0.709% to 0.559%), but the decline
was not statistically significant (t-statistic value of 1.045).
162
On the other hand, there was a decline in the mean acid

test ratio (-5.921% to -7.950%), but here decline was
statistically significant (t-statistic value 4.570)
The results suggested that liquidity position of Bank of
Baroda had declined insignificantly in terms of current
ratio and significantly in terms of acid test ratio.
Ratios of Bank of Baroda
Pre-merger Pre-merger t-statistic
t-critical
(3-Years
(3-Years
(0.05
(one tail)
average)
Liquidity Ratios
163
ratios showed that there was a marginal decline in the

mean assets turnover ratio (0.099% to 0.076%) and mean
fixed assets turnover ratio (10.250% to 9.264%) during
the pre and post- merger period. However, the declines
are statistically significant (t-statistic values of 15.033
and 37.95).
In contrast, there was an increase in the mean current
assets turnover ratio before and after the merger (2.112%
to 2.343%) but the increase was not statistically significant
(t-value of -0.394).
The mean advances turnover ratio (0.218% to 0.148%)
and mean equity turnover ratio (1.816% to 1.222%) showed
a significant decline, and the decline was statistically
significant, as confirmed by the t-values of 8.562 and
6.951. However, the mean cash turnover ratio had declined
(0.797% to 0.680%) in the post- merger period, but the
decline was not statistically significant (t-value of 0.485).
After the comparison of the mean pre- and post- merger
ratios for Bank of Baroda, we conclude that most of the
ratios had declined after the merger and the decline was
statistically significant. Based on the results, the efficiency
position of the bank has not improved after the merger.
Liquidity Current ratio
0.709
0.559
1.045
2.920
Acid test ratio
-5.921
-7.950
4.570
-do-
0.099
0.076
15.033
-do-

ratio
10.25
9.264
37.950
-do-

ratio
2.112
2.343
-0.394
-do-
0.218
0.148
8.562
-do-
1.816
1.222
6.951
-do-
Cash turnover ratio
0.797
0.680
0.485
-do-
6.797
13.353
0.528
4.57
11.48
0.614
8.069
0.641
-1.114
-do-do-do-
0.004
0.003
3.311
-do-
Comparison of the pre and post merger period profitability

ratios for Bank of Baroda showed that there was a decline
in the mean return on assets (6.797% to 4.57%) during
the post merger period and the decline was statistically
significant (t-value of 8.069). There was marginal decline
in the return on equity ratio (13.353% to 11.480%) during
the post-merger period but the decline was not statistically
significant (t-value of 0.641).
0.203
0.785
-1.634
-do-
Efficiency Ratios
Return on assets
Return on Equity
Capital Structure
Ratios
assets

The comparison of the pre- and post-merger efficiency
In contrast, mean advances/deposits ratio showed a

marginal rise (0.528% to 0.614%) during the post-merger
period, but the increase was statistically insignificant
confirmed by the t-value of -1.114.
The above results suggested that merger had caused
insignificant decline in return on equity and statistically
164
insignificant rise in advances/deposits ratio. Therefore,

merger had not yielded any improvement in profitability
ratios.
Comparison of pre-and post-merger capital structure ratios
for Bank of Baroda showed that there was marginal decline
in the mean equity capital/total assets ratio (0.004%to
0.003%), during the pre- and post- merger period and
the decline was statistically significant, as confirmed by
the t-value of 3.311. Mean interest coverage ratio (0.203%
to 0.785%) had increased in the post-merger period but
the increase was not statistically significant (t-value of 1.634).
165
5.2.4 Oriental Bank of Commerce (OBC)

Comparative mean pre- and post-merger ratios and results
from tests for statistical significance for OBC merger
have been summarized in table 5.6.
Ratios of Oriental Bank of Commerce
Pre-merger Post-merger t-statistic
t-critical
(3-Years
(3-Years
(0.05
(one tail)
average)
Liquidity Ratios
Liquidity current ratios
Acid test ratio
The results indicated that merger has caused a decline

in equity capital/total assets and decline was statistically
significant. In another case, merger has caused an increase
in interest coverage ratio, but increase was statistically
insignificant. Therefore we accept that the capital structure
position has not improved after the merger.
From the above results, we conclude that after the merger

the performance of Bank of Baroda has not improved;
even merger has not improved the liquidity, efficiency
and profitability position for Bank of Baroda. This type
of merger may be classified as forced merger which was
taken for restructuring of weak bank (South Gujarat Local
Area Bank Ltd.).
This forced merger may be helpful in protecting the interest
of depositors, but shareholders of both bidder and target
banks do not perceive the benefits of merger. Both bidder
and target banks market value of equity has been reduced
on the immediate announcement of merger. In case of
this forced merger, the share prices of the acquired bank
(BOB) have not shown any significant increase even after
a substantial time gap from the merger. Because of these
reasons, BOB has not shown any significant improvement
in any single ratio.
Capital Structure
Ratio
2.097
1.940
2.029
2.920
-10.997
-9.817
-0.454
-do-
0.113
0.079
14.078
-do-

ratio
25.074
12.921
21.739
-do-
Current turnover ratio
1.691
0.957
4.315
-do-
0.259
0.146
46.421
-do-
2.005
1.073
5.496
-do-
Cash turnover ratio
1.255
0.733
3.229
-do-
Return on assets
8.267
5.37
11.022
-do-
Return on equity
18.183
14.323
10.954
-do-
0.491
0.629
-4.815
-do-
assets
0.006
0.004
7.407
-do-
0.257
0.268
-0.153
-do-
Liquidity Ratios
The comparison of the pre- and post merger liquidity
ratios for the OBC Bank showed that there was a marginal
decline in the mean liquidity current ratio (2.097% to
166
1.940%), during the pre- and post-merger period. However,

the decline was not statistically significant (t-value of
2.029). There was an increase in the mean acid test ratio
before and after the merger (-10.997% to -9.817%) during
the post-merger but the increase was not statistically
significant (t-value of -0.454).
The above results suggested that merger of Global Trust
Bank Ltd. with OBC have caused a decline in liquidity
performance of the merging bank. Based on the results,
the hypotheses H L has been accepted.
Comparison of the pre- and post-merger efficiency ratios
for the OBC showed that there was a marginal decrease
in the mean assets turnover ratio (0.113% to 0.079%),
mean fixed assets turnover ratio (25.074% to 12.921%)
and mean current assets turnover ratio (1.691% to 0.957%)
during the pre- and post-merger period and the declines
were statistically significant (t-values of 14.078, 21.739
and 4.315 respectively).
Similarly, the mean advances turnover ratio (0.259% to
0.146%), mean equity turnover ratio (2.005% to 1.073%)
and mean cash turnover ratio (1.255% to 0.733%) had
also declined during the post merger period and the
declines were statistically validated as confirmed by tvalue of 46.421, 5.496 and 3.229 respectively. The results
suggested that merger had caused significant decline in
efficiency performance for OBC.
The results showed that mean return on assets had
declined marginally (8.267% to 5.37%) during the postmerger period and the decline was statistically validated
(t-value of 11.022). Similarly, the mean return on equity
had declined (18.183% to 14.323%) from pre to post merger
period and decline was statistically significant, as confirmed
by t-value of 10.954.
167
There was an increase in mean advances/deposits ratio

(0.491% to 0.629%) and the increase was statistically
significant (t-value of -4.815).
From the above results the merger had caused significant
decline in profitability performance for OBC in terms of
return on assets and return on equity.
Comparison of the pre- and post-merger capital structure
ratios for the OBC, which acquired the Global Trust Bank
Ltd. showed that mean equity capital/total assets ratio
had declined following merger (0.006% to 0.004%) and
the decline was statistically significant (t-value of 7.407).
In contrast, the interest coverage ratio increased (0.257%
to 0.268%) during the post-merger period and the increase
was not statistically significant, as confirmed by the tvalue of -0.153.
Based on the results, merger had caused a marginal but
significant decline in equity capital/total assets and
insignificant increase in interest coverage ratio. Therefore,
the capital structure position of the OBC has not improved
after the merger.
From the above results we have concluded that
consolidation may be seen as scope and product-mix
efficiency. Banks may merge in order to produce a broader
set of outputs than what each bank produces individually
or to jointly achieve a product- mix at lower cost than
before. But in case of merger of the Global Trust Bank
Ltd. with Oriental Bank of Commerce this was not true.
Here the most of the ratios had showed significant decline
after the merger and this merger was the forced merger
which has taken for restructuring of the weak Global
Trust Bank Ltd.
The shareholders wealth of the bidder bank has declined
from 18.34% to 16.77% in the window period following
the merger; neither OBC nor the GTB has gained on the
announced merger. Further, the shareholder of OBC has
lost their wealth as the merger announcement is perceived
168
as a negative signal. The share prices of the acquired

bank has not shown any increase even after a substantial
time gap from merger, because of the news of
amalgamation with an another troubled bank may not
have been welcomed by the stock markets. Therefore,
merger had not yielded any improvement in the
performance for OBC.
5.2.5. Industrial Development Bank of India (IDBI)
Comparative mean pre- and post merger period ratios
and results from tests for statistical significance for IDBI
have been summarized in table 5.7:
Ratios of IDBI
t-critical
(3-Years
(3-Years
(0.05
(one tail)
average)
Liquidity Ratios
0.774
1.091
-0.604
2.920
Acid test ratio
-6.455
-12.057
1.483
-do-
0.07
4.875
0.074
3.581
-0.209
1.912
2.920
-do-
1.304
1.439
-4.251
-do-
0.126
1.421
2.508
0.120
1.120
1.119
0.165
1.056
0.906
-do-do-do-
8.173
6.3
7.395
6.313
8.323
1.162
0.714
-1.923
2.911
-do-do-do-
0.014
0.089
0.006
0.109
4.861
-1.005
-do-do-

ratio
ratio
Cash turnover ratio
Return on assets
Return on equity
169
Liquidity Ratios
The results showed that there was an increase in mean
liquidity current ratio (0.774% to 1.091%) during the post
merger period but the increase was not statistically
significant (t-value of -0.604). In contrast, the mean acid
test ratio showed a decline during the post-merger period
(-6.455% to -12.057%) but the decline was not statistically
validated (t-value of 1.483).
The above finding suggested that merger had caused no
improvement in liquidity position. Based on the results,
the hypotheses H L has being accepted.
The comparison between the mean pre- and post-merger
efficiency ratios for IDBI Bank showed that mean assets
turnover ratio had increased (0.07% to 0.074%) but increase
was not statistically validated (t-value of -0.209). There
was decline in mean fixed assets turnover ratio (4.875%
to 3.581%) during the post-merger period, but the decrease
was statistically insignificant (t-value of 1.912). There
was a rise in mean current assets turnover ratio (1.304%
to 1.439%) and the t-value of -4.251 suggested that the
difference was statistically significant.
The mean advances turnover ratio had declined marginally
(0.126% to 0.120%) from pre- to post-merger period, and
the decline was not statistically validated (t-value of 0.165).
Likewise, the mean equity turnover ratio (1.421% to
1.120%) and the mean cash turnover ratio (2.508% to
1.119%) had declined during the post merger period and
again the declines were not statistically significant (tvalues of 1.056 and 0.906 respectively).
The results suggested that merger had not yielded any
improvement in efficiency performance for IDBI. Based
on the results, the hypotheses H E is being accepted.
As would be seen from table, there was a decline in the
mean return on assets (8.173% to 6.313%), during the
170
pre- and post-merger period. However, the decline was

not statistically significant (t-statistic value of 0.714).
The mean return on equity had increased marginally
(6.30% to 8.323%) but the increase was not statistically
significant (t-value of -1.923). There was a fall in mean
advances/deposits ratio (7.395% to 1.162%) and the decline
was statistically insignificant (t- value of 2.911).
Based on the results, the hypotheses Hp has been accepted.
5.2.6. Federal Bank Ltd

Comparative difference in mean pre- and post-merger
ratios for Federal Bank Ltd. and results from tests for
statistical significance have been summarized in table
5.8:Table 5.8: Mean Pre-and Post-Merger Period
Ratios of Federal Bank
t-critical
(3-Years
(3-Years
(0.05
(one tail)
average)

As would be seen from the table, that mean equity capital/
total assets had marginally declined after merger (0.014%
to 0.006) and the change was statistically significant (t
value of 4.801). In contrast, the mean interest coverage
ratio had marginally increased after merger (0.089% to
0.109%), but this was not statistically significant, as
indicated by the t-value of -1.005. The results suggested
that merger has not improved the capital structure position
of the bank after the merger.
171
Liquidity Ratios
0.902
1.143
-2.168
2.920
Acid test ratio
-9.249
-10.563
3.152
-do-

0.098
0.090
0.647
-do-

ratio
8.151
12.483
-4.803
-do-
After the analysis of mean pre- and post-merger ratios

for IDBI Bank, the results showed that most of the ratios
had declined but decline was statistically insignificant
and performance of IDBI Bank has not improved after
the merger.

ratio
2.109
1.558
3.840
-do-
0.191
0.155
1.385
-do-
2.270
1.009
8.298
-do-
Cash turnover ratio
1.185
1.028
0.679
-do-
The shareholders of the United Western Bank Ltd. have

gained on the second day of merger announcement but
thereafter no abnormal returns were found. The
shareholders of bidder bank have also lost their market
value of equity. We argue that merger of weak United
Western Bank with strong IDBI essential for restructuring
of banking system and a desirable step in consolidation
of financial sector. However, in this forced merger the
United Western Bank was identified for merger almost
at the collapse of the bank. Non satisfaction of the
shareholders was the main reason for declining
performance of IDBI after the merger.
Return on assets
6.344
6.548
-0.166
-do-
Return on equity
17.763
13.480
1.165
-do-
0.573
0.705
-10.439
-do-
0.002
0.004
-1.443
-do-
0.224
0.356
-2.286
-do-
Capital Structure
Ratios
Liquidity Ratios
The comparison of the differences in mean pre- and postmerger liquidity ratios showed that there was increase
172
173
in mean liquidity current ratio (0.902% to 1.143%) during

the pre- and post-merger. However, the increase was not
statistically significant (t-value of -2.168). However, the
mean acid test ratio showed a significant decline (-9.249%
to -10.563%), and the decline was statistically significant
as confirmed by the t-value of 3.152.
(0.573% to 0.705%) showed a significant increase during

the post merger period, and increase was statistically
significant (t-value of 10.439).
The comparison of the pre- and post-merger efficiency

ratios for the Federal Bank Ltd. showed that there was
marginal decrease in mean assets turnover ratio (0.098%
to 0.09%) during the pre-and post-merger, but the decline
was not statistically significant (t-value of 0.647). In
contrast, mean fixed assets turnover ratio showed an
increase (8.151% to 12.483%) during the post-merger period
and the increase was statistically significant (t-value of
-4.803). The mean current assets turnover ratio (2.109%
to 1.558%) showed a decline during the post-merger period
and the decline was statistically significant (t-value of
3.840). Likewise, the mean advances turnover ratio (0.191%
to 0.155%) and mean cash turnover ratio (1.185 % to
1.028%) had declined during the post merger period but
the declines were not statistically significant as confirmed
by t-value of 1.385 and 0.679 respectively. The mean
equity turnover ratio had declined (2.270% to 1.009%)
after the merger but decline was statistically significant
(t- value of 8.298)
In the end, we analyze the capital structure position of

Federal Bank Ltd. through the comparison of the preand post-merger capital structure ratios which showed
that there was marginal rise in the mean equity capital/
total assets (0.002% to 0.004%) and mean interest coverage
ratio (0.224% to 0.356%) during the post merger period.
However, the rises were not statistically significant (tvalues of -1.443 and -2.286 respectively). The above results
indicated that merger also had not improved the capital
structure position for the Federal Bank Ltd. Therefore
we accept the hypotheses H c. In general, merger has not
improved the performance of Federal Bank Ltd.
From above results, it appears that merger had not

improved the efficiency position therefore, we accepted
the hypotheses H E .
The comparison of pre- and post-merger profitability ratios
for Federal Bank Ltd. showed that there was statistically
insignificant increase in the mean return on assets (6.344%
to 6.548%), confirmed by the t-value of -0.166. There was
marginal decline in mean return on equity ratio (17.763%
to 13.480%) but the decline was not statistically significant
(t-value of 1.165). Similarly, mean advances/deposits ratio
The results indicated that merger had not improved the

profitability performances of merging bank. Therefore,
we accept the hypotheses H p.
After the analysis of mean pre- and post-merger ratios

for Federal Bank Ltd., the results showed that most of
the ratios had declined but decline was statistically
insignificant and performance of Federal Bank Ltd. has
not improved after the merger. Non satisfaction of the
shareholders and difference in culture of banks were the
main reason for declining the performance of Federal
Bank Ltd. after the merger.
5.3. Data Envelopment Analysis

The following tables constitute the results derived from
DEA, measuring capital, revenue and staff efficiency of
various mergers taken in the study.
1.000
1.000
Staff Efficiency
1.000
1.000
0.645
1998
Pre-merger
1.000
1.000
0.668
1999
1.000
1.000
0.643
2000
Merger
Year
.995
.998
0.508
2002
Post-merger
1.000
.993
0.556
2003
1.000
1.000
0.671
Mean
Pre-merger
Efficiency
0.997
0.994
0.573
Mean
Post-merger
Efficiency
1.000
1.000
Revenue Efficiency
Staff Efficiency
1.000
1.000
1.000
1999
Pre-merger
1.000
1.000
1.000
2000
1.000
1.000
1.000
2001
Merger
Year
.990
.992
0.971
2003
Post-merger
.978
.99
1.000
2004
1.000
1.000
1.000
Mean
Pre-merger
Efficiency
0.977
0.962
Revenue Efficiency
Staff Efficiency
0.990
1.000
0.938
2002
Pre-merger
0.999
1.000
0.951
2003
0.950
0.958
0.964
2004
Merger
Year
1.000
1.000
0.915
2005
0.899
0.913
0.917
2006
Post-merger
0.873
0.934
0.933
2007
0.984
0.992
0.953
Mean
Pre-merger
Efficiency
0.924
0.949
0.922
Mean
Post-merger
Efficiency
0.985
0.978
Revenue Efficiency
Staff Efficiency
0.980
0.976
0.975
2002
Pre-merger
1.000
0.968
1.000
2003
1.000
0.881
0.995
2004
Merger
Year
0.994
0.984
0.744
2005
0.912
0.952
0.804
2006
Post-merger
0.867
0.855
0.915
2007
0.986
0.976
0.987
Mean
Pre-merger
Efficiency
0.924
0.930
0.821
Mean
Post-merger
Efficiency
0.987
2001
Capital Efficiency
Efficiency
Table 5.12: Mean Pre and Post Merger Period Efficiency of Oriental Bank of
Commerce - Global Trust Bank Ltd.
0.969
2001
Capital Efficiency
Efficiency
0.992
0.987
0.990
Mean
Post-merger
Efficiency
Table 5.11: Mean Pre and Post Merger Period Efficiency of Bank of BarodaSouth Gujarat Local Area Bank Ltd.
.998
.980
0.998
2002
1.000
1998
Capital Efficiency
Efficiency
Table 5.10: Mean Pre and Post Merger Period Efficiency of ICICI Bank- Bank of
Madura Ltd.
.997
.99
0.654
2001
0.700
Revenue Efficiency
1997
Capital Efficiency
Efficiency
Table 5.9: Mean Pre and Post Merger Period Efficiency of HDFC Bank Ltd. Times Bank Ltd.
174
175
0.988
0.978
Staff Efficiency
0.973
0.987
1.000
2004
Pre-merger
0.948
0.959
1.000
2005
0.925
0.931
0.958
2006
Merger
Year
0.967
0.973
0.953
2007
0.967
0.975
0.596
2008
Post-merger
0.962
0.970
0.775
2009
0.966
0.978
0.942
Mean
Pre-merger
Efficiency
0.965
0.973
0.775
Mean
Post-merger
Efficiency
1.000
0.990
Staff Efficiency
0.999
1.000
0.938
2004
Pre-merger
0.950
0.958
0.951
2005
0.962
0.977
0.93
2006
Merger
Year
0.945
0.945
0.824
2007
0.935
0.974
0.882
2008
Post-merger
0.948
0.967
0.939
2009
0.980
0.986
0.953
Mean
Pre-merger
Efficiency
1.060
1.008
1.041
1.003
1.000
BOB- (SGLAB)
OBC-(GTB)
IDBI (UWB)
FB-(GBK)
0.992
0.986
0.978
0.987
0.953
0.967
TECHCH
0.992
0.989
1.018
0.995
1.01
1.059
TFPCH
1.096
ICICI (BoM)
TEFFCH
Mean pre-merger efficiency change
HDFC.- (Times Bank)
Merged banks (Acquiring

bank in brackets)
1.000
0.976
1.013
0.970
1.008
0.996
TEFFCH
0.980
1.003
0.985
0.999
0.987
0.983
TECHCH
0.980
.978
0.997
0.969
0.995
0.979
TFPCH
Mean post-merger efficiency change
0.943
0.962
0.882
Mean
Post-merger
Efficiency
Table 5.15: DEA Malmquist Productivity Index (TFPCH)
0.969
Revenue Efficiency
2003
Capital Efficiency
Efficiency
Table 5.14: Mean Pre and Post Merger Period Efficiency of Federal Bank Ltd. Ganesh Bank of Kurundwad
0.977
Revenue Efficiency
2003
Capital Efficiency
Efficiency
Table 5.13: Mean Pre and Post Merger Period Efficiency of IDBI Bank Ltd. United Western Bank Ltd.
176
177
178
It is observed from the table that the Malmquist

Productivity Index (MPI) of the acquiring bank post-merger
has decreased substantially in respect of all the bank
mergers considered in the study. On further examination
by decomposing the MPI into its components, Technical
Efficiency Change (TEFFCH) and Technological Change
(TECHCH) (also known as Frontier Shift), it follows that
the technical efficiency change has declined post-merger
in five out of six banks and in one of the bank it remained
constant. However, the rate of technological change has
increased in five out of six cases. Fare et al. (1992) define
that MPI>1 indicates productivity gain; MPI<1 indicates
productivity loss; and MPI=1 means no change in
productivity from time t to t+1. They also state that a
value of TECHCH greater than one indicates a positive
shift or technical progress where as a value of TECHCH
less than one indicates a negative shift or technical regress,
and a value of TECHCH which equals is indicative of no
shift in technology frontier. From this perspective, it may
be inferred that the total factor productivity index (TFPCH)
has declined post merger period. Hence, on an average,
it is found that there has been decrease in MPI postmerger prompted more by technical efficiency change.
5.4. Conclusion
Merger means combining two commercial companies into
one. Bank merger is a result of consolidation of previously
distinct banks into one institution. Following the
recommendations of Narasimham Committee, banks
mergers speed up in 1990 onwards. The idea is to have
few big banks instead of large number of small banks.
In order to fulfil the dreams and to see the after effects
of it the performance of the acquired banks has been
analysed. It is clear from the analysis that the only
hypothesis set for the validation is accepted and the
acquiring banks have not created difference from the
merger in terms of profitability, liquidity, efficiency and
capital structure. For comparing the performance of the
bank before and after merger period financial ratios for
179
up to three years prior and three years after the acquisition

period for each acquiring bank in the sample were extracted
and t- test at confidence level 0.05 level is applied. The
result concluded that most of the ratios had declined
and some ratios have increased but the increase was
statistically insignificant and performance of the selected
banks has not improved after the merger e.g. in case of
HDFC only fixed asset turnover ratio has shown the
significant improvement after the merger. Similarly, in
case of ICICI, Oriental Bank of Commerce and IDBI,
equity turnover ratio, advance-deposit ratio and current
asset turnover ratio show noteworthy increase in post
merger period. In fact, in case of Bank of Baroda, none
of the ratio has improved. While as far as Federal Bank
is concerned two ratios- advance- deposit ratio and asset
turnover ratio show major progress after the merger.
But overall performance of acquired banks has either
remained the same or decreased after the merger.
Efficiency Mean of the banks is compared in pre and
post merger period. It has been noted that efficiency has
declined for all the banks in the post merger period. The
Malmquist Productivity Index also says that total factor
productivity index has declined in post merger period.
Thus, it is concluded that due to technical efficiency change,
there has been a fall in MPI.
The reasons for non improvement are non- satisfaction
of shareholders, loss of customers, technological problems,
difference in culture and human resource management.
However, merger and acquisition does help in the survival
of weak banks but there is no guarantee that it will
enhance the profitability, liquidity, efficiency and capital
base of banks.
Thus, decline in the performance of merging firms cannot
be attributed to merger alone; it depends upon the economic
conditions also. The banks are reeling under pressure
because of their exposure to the aviation, powergeneration,
infrastructure, mining and agriculture sector. The banking
sector is pulse of the economy and decisions should be
taken by keeping the long term implications in view.
180
6
Summary
Banking Sector, considered as the prime driver of economic

growth, has brought tectonic swings in the economic
landscape of the nation. It has transformed Indian economy
to be more opened, liberalized and one of the fastest
growing economies of the world, where profitability and
productivity growth have been considered as the kingpin
for survival. Therefore, the banking institutions of various
countries are under pressure to improve their efficiency.
In the light of this, profitability and productivity growth
measurement remain very high on the agenda of policy
makers and researchers. Moreover, the growth of the
banking sector is considered as a proxy for the economy
as a whole, due to banks wide spectrum of exposure
across industries. Thus, in the absence of sound banking
sector, any nation cannot be prosperous.
In the light of this, many changes have been brought in
Indias financial sector to accelerate economic growth.
Consequently, the sector which was initially following
strict controls on interest rates, as well as stringent
regulations relating to branch licensing, directed credit
programs and mergers underwent a sea of changes through
its liberalization policy in early 1990s with implementation
of a series of reforms. The objective is to make the banking
sector more productive and efficient by limiting the state
intervention and enhancing the role of market forces.
Summary
181
The RBI implemented the banking sector reforms in two

phases as a part of overall economic reforms. These reforms
witnessed the most effective and impressive changes
showing significant improvements within a short span.
The distinctive features of the reform process may be
summarized as under:
(i) The process of reforms was pre-designed with a
long term vision. The two Committees on financial
sector reforms (Narasimham Committee-I and II)
outlined a clear long-term plan for the banking
sector specially in terms of ownership of Public
Sector Banks and level of competition, etc.
(ii) Reform in banking sector covered almost all problem
areas. In fact, all areas of concern in the banking
sector were taken care of by a Committee or a
group.
(iii) All reform measures passed through a process of
extensive consultation and discussion with the
concerned parties before finalization or
implementation.
(iv) Most of the reform undertaken targeted and
achieved international best practices and standards
in a systematic and phased manner.
(v) All the reform measures and changes were found
in the annual reports as well as in the publications
of RBI on Trend and Progress of Banking in India.
The banking sector, which was over-regulated and overadministered, was freed from all restrictions and entered
into an era of competition since 1992. The entry of private
banks and foreign banks amplified the competition.
Deregulation of interest rates had further intensified
competition among banks. Prudential norms relating to
income recognition, asset classification, provisioning and
capital adequacy have led to the improvement of financial
health of banks. Besides, most visible structural change
has been improvement in the quality of assets. As a result,
there has been considerable improvement in the
profitability of banks. The net profits of Scheduled
182
Commercial Banks, which was negative in 1992-93, become

positive in 1994-95 and thereafter rose to manifold by
March 2003. The profitability of the Indian Banking System
was satisfactory in comparison with International market.
It may be pointed out experience of restructuring banking
sector has been reasonably a successful one. These banking
sector reforms cannot be one-time affair. It has evolutionary
elements and follows a progression of being and becoming.
The reform measures were implemented successfully since
1992 and there was no major banking crisis. The
Government took care that the reforms should not affect
the social banking. The banks directed to lend a minimum
of 18 per cent of total banks credit to agriculture sector.
These reforms were broadly aimed to improve the
performance of banks on all parameters despite of the
unexpected global recession and internal disturbances.
The challenges of free convertibility, Basel-II and Basel
III requirement, widening of financial services activity
and need for large banks, are the prime drivers of future
consolidation. In fact, mergers of banking institutions
emerged as an important strategy for growing the size of
banks. Mergers help in the diversifications of the products,
which help to reduce risk, increase financial strength,
help in avoiding the complex restructuring process, the
weaker bank would have had to undergo to foster financial
stability and opened the doors for actively promoting
universal banking.
However, the turmoil in the international financial markets
of advanced economies in 2008 has affected Indian financial
market, since India is far more exposed to international
markets after macro-economic reforms of 1991. The RBIs
policy response aimed at containing the contagion from
the outside in order to keep the domestic money and
credit markets functioning normally and see that the
liquidity stress does not trigger solvency cascades
(Subbarao, 2009).
Enticed by the reform of Indian Banking Sector in the
early 1990s and further slowdown in the economy as a
result of global financial crisis in late 2008, the current
Summary
183
study analyses the performance of banking sector in India

since 1991 to 2011. The performance is evaluated with
respect to profitability and productivity. In the following
sections the findings of the study, suggestions and policy
implications have been cited.
6.1. Findings
1. The profitability of different bank groups has been
analysed using the multiple regression analysis.
CRR, SLR, GDPgr and MLR, the independent
variables affecting the three profitability
parameters i.e. ROA, ROE and NIMTA.
It has been examined that CRR is inversely related
to ROA. CRR is a percentage of the total bank
deposits kept in the current account with RBI.
These forced reserves affect foreign banks more
than the domestic banks. This can be seen from
the result. One percent increase in CRR leads to
0.32 percent, 1.03 percent and 1.21 percent decrease
in the ROA of public sector banks, private sector
banks and foreign banks respectively.
2. SLR is percentage of the total bank deposits that
banks are required to invest in certain specified
securities predominantly in central government
and state government securities. It is again the
compulsory investment, however, it do earn some
rate of return as compare to CRR. But still, it
leads to decline in the profitability of banks. One
percent increase in SLR leads to 0.07 percent
decrease in ROA of public sector banks, 0.18 percent
in case of private sector banks and 0.2 percent in
case of foreign banks.
3. The third variable that affects ROA is MLR or
the Base Rate. This is the rate at which RBIlends
money to other banks or financial institutions.
There is a positive relation between MLR and
ROA. It indicates that, if the bank rate goes up
i.e. banks will hike their own lending rates to
ensure that they continue to make profit. This is
184
confirmed from our result. One percent increase

in MLR leads to 0.35 percent, 0.9 percent and 0.7
percent increase in ROA in all the three sector of
banks respectively.
4. There is negative relation between CRR and ROE
also. Since the equity multiplier of PSBs is very
high, the effect of former on latter is greater as
compare to other two sectors. The one percent
fall in SLR leads to 0.35 percent, 0.09 percent
and 0.19 percent rise in ROE of PSBs, PrBs and
FBs respectively.
5. It is surprising to note that the changes in SLR
will not have any affect on ROE of public sector
banks. One of the reasons could be that without
compulsions also PSBs do invest a sizable amount
of deposits in government securities. This is because
they are considered to be safe investment
opportunities. However an increase in SLR by one
percent leads to 0.03 percent decline in ROE of
private sector banks and 0.05 percent decline in
case of foreign banks. It indicates the inverse
relation between the two.
6. There is a direct relation between MLR and ROE.
The higher the interest rate bank will charge,
higher will be the amount of profit. Thus, one
percent rise in MLR leads to 0.29 percent, 0.09
percent and 0.06 percent rise in ROE of respective
banks.
7. NIMTA calculates the ratio of interest earned less
interest paid to total assets. NIMTA is negatively
related to CRR in case of PrBs and FBs, whereas
it is positively related to CRR in case of PSBs. It
means one percent increase in CRR leads to
increase in NIMTA of PSBs by 0.07 percent, but
that of other two sectors decrease by 0.18 percent
and 0.15 percent respectively. This indicates decline
in profitability.
Summary
185
8. There is negative relation between SLR and

NIMTA. This is because the returns on government
securities are comparatively low. Thus, if we
augment SLR by one percent, it will lead to fall
in NIMTA of PSBs, PrBs and FBs by 0.07 percent,
0.04 percent and 0.04 percent respectively.
9. However, MLR is indirectly related to NIMTA in
case of PSBs and directly related in case of PrBs
and FBs. This shows that former groups of banks
are not making optimal decision as interest
expenses were greater than the amount of returns
generated by investments. When MLR increases
by one percent NIMTA decreases by 0.05 percent
for PSBs and increase by 0.22 and 0.12 percent
for PrBs and FBs respectively.
10. One of the surprising results is that of GDPgr
rate and profitability parameters, ROA and ROE.
There is a negative relation between the two,
showing that one percent rise in GDPgr leads to
0.032, 0.65 and 0.75 percent fall in ROA. It will
also lead to 0.032, 0.07 and 0.06 percent fall in
ROE of PSBs, PrBs and FBs respectively. Economic
growth occurs from high personal savings rates
and increased labour force participation and from
technological change. If increase in capital and
labour inputs goes into new corporations, these
do not boost the present value of dividends on
existing corporations. Technological change does
not increase profits unless firms have lasting
monopolies, a condition that rarely occurs. This
can be because unequal distribution of income,
technological knowledge and also due to regulatory
controls.
11. On the other hand GDPgr rate is directly related
to NIMTA. Higher the growth of the economy,
higher will be the return on investments. NIMTA
increases by 0.02, 0.16 and 0.19 percent, with the
increase in GDPgr by one percent.
186
Summary
187
12. Public sector banks and private sector banks have

compared using five parameters of CAMEL. These
five parameters are capital adequacy, asset quality,
management quality, earning performance and
liquidity. The comparison is being shown with the
help of diagrams.
improvement in the management efficiency of PrBs.
The Capital Adequacy Ratio of PSBs is quite higher

than PrBs before 2007. This indicates higher
financial strength of PSBs as compare to PrBs.
However, after the recession, PrBs took a lead
and their CAR is very high as compare to PSBs.
One of the reasons is that minimum CAR for PrBs
is 10% and 9% for PSBs. Secondly; Basel II norms
(regarding Tire I and Tier II capital) affect PSBs
more than PrBs.
Operating expense to total expense ratio shows

the downward trend for both the sectors of banks
from 2006-09 and upward trend after that. One
of the reasons is financial crises of 2009. Other
reasons include increase in payments to and
provisions to employees, advertisement cost and
law charges etc. However, the ratio is low for PrBs
as compare to PSBs before 2005 and after that
the ratio increases for PrBs.
13. In order to measure the Asset Quality, NPAs to

total assets ratio as well as priority sector lending
have been compared. Firstly, NPAs to total asset
ratio shows that both the sectors follow each other
till 2009 and after that there is a divergence
between them. In PSBs the NPAs ratio has
increased, while in PrBs it has decreased.
15. The earning capability is measured through ROA,

ROE and NIMTA. ROA of PrBs is much less than
PSBs before the crisis. However, after 2005, PSBs
show downward trend and PrBs show upward trend.
After the financial crises of 2007, the ROA of PrBs
is higher than PSBs indicating increase in
profitability.
Domestic banks are required to give minimum 40

percent of net bank credit to priority sectors. It
has been observed that priority sector lending is
too high for PSBs as compare to PrBs before 2008.
This is one of the reasons of poor asset quality of
PSBs as in this sector defaulters are more. However,
with constant and strict supervision of RBI, priority
sector lending of both the sectors became same
after 2008.
The ROE of PSBs is much higher than that of

PrBs over the period of time. This is because of
high equity multiplier of PSBs.
14. The Management Quality is measured with respect

to three ratios: operating profit to total assets,
wage bill to total income and operating expenses
to total expenses. The operating profits to total
assets of PSBs are higher than PrBs. However,
the closer investigation shows that the ratio is
decreasing for PSBs before and after the crises.
However, it is increasing for PrBs. This indicates
The ratio of wage bill to total income of PSBs has

shown the downward trend over the period of time.
In fact, it remains more or less same for PrBs.
This is also the indicator of improving efficiency
of PSBs with respect to cost.
NIMTA of PSBs is above the PrBs before 2007

and after that PrBs took the lead. This is because
of increasing NPAs of PSBs.
16. The last indicator of CAMEL is liquidity. It is
measured through loan to deposit ratio. Liquidity
and profitability is inversely related. PSBs are
less profitable as compared to PrBs. Thus, we can
say their liquidity position is much stronger. This
is clear from the figure also as ratio is high for
PSBs and remains high as compared to PrBs.
It has been observed that over the years all the
parameters have improved but before the recession,
PSBs were performing better than private sector
188
banks and after the recession private sector banks

took the lead.
17. The productivity of different bank groups has been
compared under CAMEL framework. The
productivity is compared over the period of time
on three grounds: Capital Adequacy, Asset Quality
and Profitability. The bank groups have been
ranked according to their performance.
The result shows that in capital adequacy, SB
group rank first and nationalized banks stand
second in all the periods of comparison except in
the year 2010-2011 respectively. New private sector
banks stood fourth, third and first in the year
1996-01, 2005-06 and 2010-11 respectively. Old
private sector banks occupied the third place before
2001 and fourth place after that. However, foreign
banks maintained its fifth position in all the years
of comparison.
18. The result is quite different with respect to asset
quality. SB group rank first and NBs stand second
in all the periods of comparison except in the year
2010-2011 and 1996-97 respectively. NPB stand
third and OPB occupied the fifth position in all
the years of comparison. The asset quality of NBs
improved over the year. As a result of which it
moved from fourth place in 1996-97 to second place
in 2000-2001 and remained there.
19. Profits are the driving force behind the growth of
banks. The result shows that with respect to
profitability SB captures the first place and foreign
banks capture the last place in all the years. The
profits of nationalized banks fall over the years
as it moved down from second place in 1996-2001
to third place in 2005-11. NPB and OPB remained
on third and fourth place respectively in the years
1996-97 and the places were reversed in 2000-01.
However, after that the comparative performance
of new private sector banks increased and that of
old private sector decreased. New Private Sector
Summary
189
Banks were placed on second position and old

private sector banks were placed on fourth in 200511.
20. On the basis of these three parameters, the
productivity is being compared. SB group ranked
first over all the years except in the year 201011. Nationalized Banks, new private sector banks,
old private sector banks and foreign banks were
placed on second, third, fourth and fifth place
respectively till 2005-06. However, the productivity
of nationalized banks and old private sector banks
declined after that and that of foreign banks and
new private sector banks increased. State Bank
Group, nationalized banks, foreign banks and old
private sector banks were placed on second, third,
fourth and fifth place respectively in 2010-2011.
21. To compare the productivity of individual banks
as well as different groups of banks, capital
efficiency, revenue efficiency and staff efficiency
has been considered at CRS as well as VRS. The
CRS result shows that SB group ranked at the
highest in all the efficiency measures followed by
NBs group. NPB stand third in capital efficiency
and fourth in revenue efficiency. OPB have been
placed on third position in staff efficiency, fourth
position in capital efficiency and fifth one in revenue
efficiency. As far as FBs are considered, they
occupied third place in revenue efficiency and last
place in other two. Staff efficiency of NPB is not
calculated due to non availability of data.
22. However, under the VRS model, the figures show
that efficiencies are higher but the ranking remains
more or less same. VRS result also show that in
all efficiency of SB group is highest as compared
to other groups. In capital and staff efficiency,
second place is taken by NBs whereas it is on
fourth place in revenue efficiency. FBs hold the
third place in revenue and staff efficiencies. In
capital efficiency, this place is taken by OPB.
190
Moreover, NPB are ranked fourth in capital

efficiency and second in revenue efficiency. OPB
are least among all the groups in revenue efficiency
and staff efficiency. In capital efficiency, FBs group
is on the last position.
23. The analysis also compare the efficiency of
individual banks in the groups facing same external
environment, but still fallout differently in efficiency
boundaries. The result shows that under CRS model
Punjab National Bank in NBs and SBI in SB group
stands at the top in all the efficiencies. PNB is on
the frontier for 19 years in capital efficiency and
20 years for revenue and staff efficiency.
Corporation Bank occupied the second place in
capital and staff efficiencies. However, Dena Bank
stands second in revenue efficiency. Indian Overseas
Bank also occupied the second place in capital
efficiency but far away in other two efficiencies.
24. SBI has been ranked first in all efficiencies. It
has been on the frontier for all the years under
consideration. Moreover, in SB group the second
and third place is kept on rotating between State
Bank of Hyderabad and State Bank of Bikaner
and Jaipur for all the efficiencies.
25. In case of OPB, City Union Bank and Dhanlakshmi
Bank have been placed in first and second place
respectively in capital and revenue efficiencies.
However, the efficiency of these banks decreased
in case of staff efficiency, as the first being taken
by Laxmi Vilas Bank (third in other two efficiencies)
and second place is taken by ING Vysya Bank.
26. BNP Paribus is on top in FBs group in capital
and staff efficiencies, whereas Abu Dhabi
Commercial Bank occupied the first place in
revenue efficiency and second place in capital
efficiency. BNP Paribus and Deutsch Bank occupied
second place in revenue efficiency. Deutsch Bank
also occupied first place under staff efficiency.
Summary
191
27. In NPB group, Axis bank and Development Credit

Bank have taken first and second place respectively
in capital and revenue efficiencies. They are on
the frontier for 14 and 7 years respectively in
capital efficiency and 9 and 5 years in revenue
efficiency.
28. The banks which are never on the frontier under
CRS in revenue and staff efficiencies are Allahabad
Bank, Bank of India, UCO Bank,Union Bank of
India, Bank of Ceylon, Barclays Bank and Citi
Bank.
29. Apart from these, State Bank of Patiala and
Indusind Bank are also never on the revenue
efficiency frontier. Similarly, Oriental Bank of
Commerce, United Bank of India, State Bank of
Travancore, South Indian Bank, Oman
International Bank and Standard Chartered Bank
are not on the staff efficiency frontier even once.
30. The individual bank result is quite different under
VRS as compare to CRS. As far as top rank is
considered, this place is occupied by Punjab
National Bank, State Bank of India, Karur Vysya
Bank in capital and revenue efficiencies. These
banks are on the frontier for the maximum number
of times. Moreover, , BNP Paribus and Axis Bank
occupied the first place in capital and revenue
efficiency but Oman International Bank has taken
this place in staff efficiency. In fact, PNB and
SBI are on the frontier for all the 20 years in all
efficiencies.
31. SBI is followed by State Bank of Hyderabad in all
efficiencies. Moreover, in revenue efficiency it is
accompanied by State Bank of Patiala. Similarly,
HDFC follow Axis Bank in both the efficiencies
i.e. capital and revenue.
32. BNP Paribus shared its first position with Citi
Bank, Oman International Bank and Bank of
Ceylon in staff efficiency. All these banks are four
192
Summary
193
times on the frontier in different years. Moreover,

Citi Bank follows BNP Paribus in capital and
revenue efficiency.
prior and three years after the acquisition period

for each acquiring bank in the sample is extracted
and t- test at confidence level 0.05 level is applied.
33. As far nationalised banks are concerned, result is

quite different for different efficiencies. PNB is
followed by Bank of Baroda and Canara Bank in
capital efficiency, Indian Overseas Bank in revenue
efficiency and Dena Bank, Indian Overseas Bank
as well as Canara Bank in staff efficiency.
It has been observed that after the acquisition of

Times Bank, the performance of HDFC Bank has
not improved. All the financial ratios have
decreased in the post merger period except equity
turnover ratio and current asset turnover ratio.
The decrease is not statistically significant as
measure through the t- values. But, in case of
asset turnover ratio, ROA and equity capital to
total asset ratio, the decrease is quite significant.
Moreover, the increase is significant only in the
case of fixed asset turnover ratio (t- value of 4.5).
34. In the same way, Catholic Syrian Bank, City Union

Bank and ING Vysya Bank follow Karur Vysya
Bank in capital efficiency. ING Vysya Bank and
Jammu and Kashmir Bank ranked second in
revenue and staff efficiency respectively.
35. Among the least efficient banks under CRS, Vijaya
Bank is on the lowest position which is never on
the frontier in revenue efficiency as well as staff
efficiency and only twice in capital efficiency. It
is the only bank which is never on the frontier in
revenue efficiency under VRS. All the other banks
are at least once on the frontier.
36. Tamilnad Mercantile Bank and State Bank of
Mauritius is on the frontier even once under VRS
but these two are the only banks which are never
on the frontier under CRS in all efficiencies.
37. Malmquist Index supports the DEA result under
CRS. SB group and NBs group occupied first two
places in all the efficiencies. Third place is taken
by NPB, FBs and OPB in capital efficiency, revenue
efficiency and staff efficiency respectively followed
by OPB, NPB and FBs in the respective efficiencies.
The last place is filled by FBs in capital efficiency
and OPB in revenue efficiency.
38. The performance of the acquired banks is compared
before and after merger with respect to profitability,
liquidity, efficiency and capital structure. For
comparing the performance of the bank before and
after merger financial ratios up to three years
39. The result of ICICI is quite different as compare

to other group of banks. Out of 13 parameters
used to measure the performance of the banks,
six show the increasing ratios after the merger.
However, out of these six ratios, only two ratios
i.e. equity turnover ratio (t- value: 26.42) and
advance to deposit ratio (t- value: -5.59) has a
significant change. Moreover, out of seven
remaining ratios three ratios show the significant
fall in the performance. These ratios are liquidity
current ratio (t- value: 10.38), acid test ratio (tvalue: 24.87) and equity capital to total asset ratio
(t- value: 7.53).
40. The merger of South Gujarat Local Area Bank
with BOB was a forced merger. This can be easily
analysed by seeing the financial ratios of the bank.
Even though, current asset turnover ratio (t- value:
-0.394), advance to deposit ratio (t- value: -1.1)
and interest coverage ratio (t- value: -1.63) has
increased after the merger but this increase was
not statistically significant.
However, from all the ratios which have decreased
the fall in acid test ratio (t- value: 4.57), asset
194
turnover ratio (t- value: 15.03), fixed asset turnover

ratio (t- value: 37.95), advance turnover ratio (tvalue: 8.52), equity turnover ratio (t- value: 6.95),
ROA (t- value: 8.06), equity capital to total asset
ratio (t- value: 3.31) is very much significant as
seen from their t- values.
41. The merger of Global Trust Banks with OBC is
very different. The efficiency position of the banks
has fallen after the merger. All the six ratios
showing the efficiency has significantly declined
after the merger. The ratios include asset turnover
ratio (t- value: 14.07), fixed asset turnover ratio
(t- value: 21.73), current asset turnover ratio (tvalue: 4.31), advance turnover ratio (t- value: 46.42),
equity turnover ratio (t- value: 5.49) and cash
turnover ratio (t- value 3.22).
There is insignificant change in liquidity current
ratio, acid test ratio and interest coverage ratio.
Moreover, significant fall have taken place in ROA,
ROE and equity capital to total assets ratio. All
these indicate decreasing performance of the bank.
The only significant rise has taken place in advance
deposit ratio.
42. IDBI does not experience much change in the
performance after acquiring United Western Bank.
Some ratios increase and some decrease but the
change is statistically insignificant. The only
exception is of two ratios i.e. equity capital to
total asset ratio (decreased from 0.014 to 0.006)
and current asset turnover ratio (increased from
1.3 to 1.43). Both the changes are statistically
significant as calculated from the t- values. It is
4.86 for the former and -5.25 for the latter.
43. The last merger under consideration is that of
Federal Bank with Ganesh Bank of Kurundwad.
It also has the same experience as of IDBI. The
changes in all the ratios are insignificant except
few one. The fixed asset turnover ratio (t- value:
Summary
195
-4.80) and advance to deposit ratio (t- value: 10.43) shows the improvement after the merger.
On the other hand, there is significant fall in the
performance of acid test ratio (t- value: 3.15),
current asset turnover ratio (t- value: 3.84) and
equity turnover ratio (t- value: 8.29) after the
merger.
It is clear from the analysis that all the hypothesis
set for the validation are accepted and the acquired
banks have not benefitted much from the merger.
44. The DEA is used to measure and compare the
capital efficiency, revenue efficiency and staff
efficiency of acquired banks before and after the
merger. It has been noticed that ICICI is on the
frontier in all the three efficiencies and HDFC
Bank is on the frontier for revenue and staff
efficiencies before the merger as both the banks
acquired the mean efficiency of one. However, after
the merger, the efficiencies of all the banks have
decreased and none of them was able to have DEA
score of one.
45. The Malmquist Productivity index or total factor
productivity change (TFPCH) is also calculated.
TFPCH is the product of TEFFCH (technical
efficiency change) and TECHCH (technological
change). The result shows the TEFFCH has
decreased for all the acquired banks except for
Federal Bank. It remained same for Federal bank.
However, banks became technologically advanced
after the merger. But still TFPCH has declined
in the post merger period due to fall in TEFFCH.
TFPCH remained same for Federal Bank.
6.2. Suggestions
1. The yield on government securities should be
reduced further. This will prevent banks to take
shelter in government securities and starve
productive sector is bound to persist.
196
2. Since banks are highly leveraged and exposed to

risks, the capital adequacy requirements provide
them with the financial cushion to cope with the
adverse effects on their portfolios. With the
introduction of CRAR norms in 1992, significant
improvement was noticed in capital position of
banks operating in India. However, as some PSBs
are not able to comply with CRAR norms, there is
a need to recapitalize them to augment their capital
base.
3. Increase in the GDPgr is the indicator of growth
of the economy. As there is inverse relation between
GDPgr and profitability of the banks, efforts should
be made to make it positive. Equal availability of
opportunities, technological advancement in
banking sector and symmetric information will help
us to achieve it.
4. In relation to asset, quality banks are required to
focus on loans and investment to improve their
profit performance with strong credit appraisal
and monitoring system. Both should concentrate
on asset quality and earning there from. This
involves targeting markets that are difficult to
penetrate for other banks.
5. It is recommended that priority sector lending
should be redefined and lending should be
monitored carefully. As it is important to have
regular recovery of loans and interest thereon.
These should be ensured through securities and
guarantees etc. RBI is required to have control
over NPAs through adopting more pragmatic
approach to workout in collaboration with each
bank a time bound schedule for reducing NPAs.
A quiet and sustainable effort is required in this
direction
6. From time to time, efforts have been made to
improve the managerial efficiency of banks. The
managerial efficiency is measured as increase in
operating profits or decrease in expenses and so
Summary
197
on. However, the management is considered more

efficient when it is able to cope up with the
changing scenario of the economy. For this, it leads
easy compatibility with new upcoming knowledge
and techniques of banking. One is required to have
technological training and up gradation.
7. Interest income is the major source of income of
the banks. It is one of the factors affecting the
profitability of banks. Thus, the banks should
endeavour to step up the flow of bank credit. This
would need streamlining and improving credit
delivery system by giving greater freedom to banks.
Besides, the banks must endeavour to bring down
the interest rates by reducing spreads. Thus, efforts
should be made to widen the credit brackets as it
will lead to increase in income of the banks.
8. As profitability and liquidity is inversely related,
it is necessary to have a balance between the both.
Loan to deposit ratio of PSBs is increasing
indicating surfeit of liquidity coexisting with large
unsatisfied demand for credit by productive sectors.
The excess liquidity is in the sense of investment
in government securities far in excess of SLR.
This mountain of liquidity stands as a monument
of ineptitude in management of banking sector
resources. A more meaningful utilization of these
resources holds the key to improve profitability of
banks and to promote faster growth of the economy.
9. Banks need to refocus on nontraditional bank
services such as mutual funds, insurance to improve
performance. However, reliance should be placed
more on fee based activities rather profit earning
on securities investments.
10. Maintenance of CAR, control over NPAs and
improvement in management quality help in
increasing the productivity of the banks. What is
required is to have the optimal utilization of
resource as well as available information.
198
11. The FBs are showing poor performance in all the

efficiencies. This is due to their limited knowledge
of the local industry and branch network. They
are very much concerned about their asset quality
as a result of which they are neglecting the credit
requirements of small and medium sized businesses,
whose development is essential for emerging
markets. Even though they carry relatively high
risks, FBs should widen their credit structure and
incorporate these industries also.
12. The productivity of banks has improved after
liberalization, but still most of the banks in India
are lagging behind. The CRS and VRS result shows
that there is a wide possibility to improve the
staff efficiency of all the groups of banks. Thus,
we need substantial changes in the working
processes and sharpening of the managerial skills
through various training programmes.
13. Managerial irregularities have played a key role
in emerging technical inefficiencies among
commercial banks in India. This calls for the need
of human resource development through various
programmes in order to impart knowledge and
inculcate special skills among workers.
14. In order to increase the productivity of the banking
sector, one should need to have efficient use of
available resources and technological development.
15. For a strong and resilient banking system, banks
need to go beyond peripheral issues and tackle
significant issues like improvement in profitability,
efficiency and technology, while achieving economies
of scale through consolidation and exploring
available cost effective solutions.
16. In revenue efficiency, the outputs are interest
income and non- interest income. The income of
the banks has increased due to increase in retail
business. This helped them to improve their revenue
efficiency. Therefore, banks should put more
Summary
199
emphasis on generation of revenue from retail

business.
17. In order to make the staff more competent to face
challenging and stressful work environment, banks
should arrange various stress buster programmes
like yoga and meditation.
18. At times, borrowers put various monetary and non
monetary pressure and influence in getting the
loan and both the parties finely join the hands,
which lead to rising NPAs. Thus, banks should
have robust mechanism and strong internal
guidelines as well as proper auditing system to
avoid disbursement of loans. All these help in
improving the capital efficiency and thus the
productivity and profitability of banks.
19. In order to improve the Malmquist productivity
score, banks need technological advancement as
well as improvement in managerial skills. It will
help in increasing the productivity of the banks
by increasing capital, revenue and staff efficiencies.
20. Forced merger among these banks succeeded in
protecting the interest of depositors of weak banks
but stakeholders of these banks as well as voluntary
merged banks have not exhibited any gain from
the merger. Thus, efforts should be made to
encourage voluntary mergers and steps should be
taken so that stakeholders can enjoy the benefits
of the merger.
21. There is constant reduction of number of banks
through merger and acquisitions, which reflects
consolidation process in the banking industry. Thus,
the recent trends towards consolidation have led
to more rather than less competition in the banking
sector. The further consolidation in the banking
industry without compromising competition
consideration may be implemented.
22. As we can see technology adaptation is one of the
reasons for the declining performance of acquired
200
banks. There is a need to have seminars and

workshops for the employees before the merger.
This will help the employees of both the banks to
get to know each other working conditions and
become comfortable to it.
23. The acquired banks should make itself aware of
the cultural diversity of the target banks. This
can be done through informal meeting and
excretions. This will help in building friendly
environment on both sides.
The decline in the performance of merging firms
cannot be attributed to merger alone; it depends
upon the economic conditions also. The banks are
reeling under pressure because of their exposure
to the aviation, power generation, infrastructure,
mining and agriculture sector. The banking sector
is the pulse of the economy and decisions should
be taken by keeping the long term implications in
view.
6.3. Policy Implications

1. It is mandatory for the banks to keep a fixed
percentage of their deposits in the form of CRR
with RBI, which leads to fewer deposits available
for the banks to lend money and to earn interest
from it. As a result, there is loss of interest earned
on account of setting aside a fixed percentage of
deposits. It is advised that RBI should either reduce
the rate of CRR or give some interest to the banks
for keeping the reserves with RBI which would
lead to increase in the profitability of banks.
2. Banks are required to maintain minimum
percentage of deposits in form of gold, cash or
other approved government securities as SLR. RBI
should allow investment in other kind of investment
options as well, having greater returns as compared
to government securities as yield in government
securities is low. Such initiatives by RBI would
Summary
201
help the banks in generation of higher revenue

and better profitability. RBI can also increase the
returns on government securities and make them
more attractive.
3. RBI recently formulated policy for granting of new
bank licenses is a major milestone in banking sector
and would inculcate more competition in the
banking space and to bring consolidation in banking
sector. Introduction of new banks would be
instrumental in having more financial inclusion
so that banking services can reach to each and
every citizen of India.
RBI should be very cautious in providing bank
licenses to business houses, NBFCs and other
financial institutions in order to safe-guard the
interest of the public and to avoid misappropriation
of funds by the new entrants in non-banking
activities.
4. One of the reasons for low capital efficiency among
the banks is high NPAs. Various banks impose
high sales targets for the sales staff for
disbursement of loans which leads to disbursement
of loans to the individual & corporate without
enquiring about their credit worthiness and without
having adequate know your customer norms.
Therefore, banks should have strict policies for
the disbursement of loans and should have frequent
as well as performance audits to ensure know your
customer guidelines and other internal guidelines
are strictly adhered to reduce the level of stressed
assets.
5. The need for technological up gradation has risen
over a period of time due to increase in complexities
in banking sector and ever increasing demands of
the banks customers for better, prompt and error
free service. Public sector banks specifically should
put in more efforts in technological changes to
compete with various private and foreign banks.
Banks should organize various training and
202
203
Bibliography
workshops to make the staff comfortable with latest

technological changes in banking sector for
improving operational efficiency.
6. The recommendation of Financial Sector Legislative
Reforms Commission (FSLRC) to move away from
the current sector-wise regulation to a system where
the RBI regulates the banking and payments
system, as well as where Unified Financial Agency
subsumes existing regulators like SEBI, IRDA,
PFRDA and FMC, to regulate the rest of the
financial markets an innovative step to regulate
and supervise all the financial agencies in an
uniform manner.
Banking Industry in India is poised to meet the
changing global environment. Significant progress
has been made in India for strengthening the
banking system under the financial sector reforms.
Banks have displayed considerable resilience with
which they can adapt themselves to change. Banks
can therefore look to the future with optimism,
given the vision, the will and the strategies to
deal with the challenges. However, the future would
belong to those who would be able to offer excellent
customer service by keeping pace with changing
technology and transparent operations.
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1

Performance of Banking Sector in India Since 1991

The Indian banking witnessed a remarkable growth in

the number of banks was due to closure of non-scheduled

Performance of Banking Sector in India Since 1991

and 14.6% respectively. The major thrust was on profit

During last two decades, maturity was felt of Indias

Performance of Banking Sector in India Since 1991

providing greater degree of professionalism in banking

Performance of Banking Sector in India Since 1991

The system of external supervision was revamped in

amalgamations; reduction in holdings of Government and

Performance of Banking Sector in India Since 1991

for a service organization like a bank is to meet rising

1.3. Data Collection

1.4. Data Analysis

1.2 Objectives of the Study

1.4.1.1 Data Envelopment Analysis

Performance of Banking Sector in India Since 1991

The dual of the program is as under:

The mathematical programming constructed from above

Performance of Banking Sector in India Since 1991

capacity, the only variables used in the analysis are the

i 1; whereas in BCC model

can be lesser or greater than one. Hence, in BCC model

The above measure is the geometric mean of two Caves

Performance of Banking Sector in India Since 1991

While the first component

change in technical efficiency, TEFFCH; the second

According to Fare et al (1992,1994), a value of TECHCH

TFPCH= TEFFCH * TECHCH

Table 1.1: Inputs- Outputs used to measure

1.4.2. To measure and compare the Performance of

Performance of Banking Sector in India Since 1991

recommendations of Padmanabhan Committee. The

and thus improvement in net profit. The productivity is

Expected effect on the likelihood

3) Net Non-Performing Assets

5) Burden to Total Assets

6) Operating Profit to Total Assets

7) Operating Expenses to Net Income Decrease

10) Operating Expenses to Total

11) Business (in Rs.) (Deposits+

Source: Computed by the researcher.

Performance of Banking Sector in India Since 1991

1.4.2.2. Multiple Regression Analysis

NIMTA= + 1CRR + 2SLR + 3GDPgr + 4MLR +

Regression is a statistical measure that attempts to

The two basic types of regression are linear regression

ROA (return on assets), ROE (return on equity) and NIMTA

Performance of Banking Sector in India Since 1991

1.4.3. To measure the Performance of the Acquired

Table 1.3: Financial Ratios

Current Assets/Current Liabilities

Acid test ratio

Liquid Assets/Current Liabilities

Net Sales/Average total Assets

Fixed assets turnover ratio

Net Sales/Average Fixed Assets

Current assets turnover ratio

Net Sales/Average Current Assets

Advances turnover ratio

Total Advances in the beginning of