Measuring Efficiency, Effectiveness and Performance of Indian Public Sector Banks

International Journal of Productivity and Performance Management
Measuring efficiency, effectiveness and performance of Indian public sector banks

Sunil Kumar Rachita Gulati
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Performance
Measuring efficiency, of Indian PSBs
effectiveness and performance
of Indian public sector banks
51
Sunil Kumar and Rachita Gulati
Guru Nanak Dev University, Amritsar, India Received December 2008
Revised May 2009
Accepted June 2009
Abstract
Purpose The purpose of this paper is to appraise the efficiency, effectiveness, and performance of
27 public sector banks (PSBs) operating in India by using a two-stage performance evaluation model.
Design/methodology/approach Using the cross-sectional data for the financial year 2006/2007,
the technique of data envelopment analysis has been used for computing the efficiency and
effectiveness scores for individual PSBs. The overall performance scores have been derived by taking
the product of efficiency and effectiveness scores.
Findings The empirical results reveal that high efficiency does not stand for high effectiveness in
the Indian PSB industry. A positive and strong correlation between effectiveness and performance
measures has been noted. Further, on the efficiency front, State Bank of Travancore appears as an
ideal benchmark, while State Bank of Bikaner and Jaipur, and State Bank of Mysore emerge as ideal
benchmarks on the effectiveness front.
Practical implications The practical implication of the research findings is that in their drive to
improve overall performance, Indian PSBs should pay more attention to their income-generating
capabilities (i.e. effectiveness) relative to their ability to produce traditional outputs such as advances
and investments (i.e. efficiency).
Originality/value This paper is perhaps the first to evaluate the performance of Indian banks by
considering simultaneously the aspects of efficiency and effectiveness.
Keywords Organizational effectiveness, Performance measures, Public sector organizations,
Data analysis, Banks, India
Paper type Research paper
Introduction
Since the initiation of the process of banking reforms in 1992, the share of Indian public
sector banks (PSBs) in the deposits, advances, and total assets of banking industry
has declined due to intensive price and non-price competition that emerged in the wake
of relaxed entry norms during the post-reforms years[1]. For maintaining their
share and achieving sustainable growth in the highly competitive environment, PSBs
are incessantly reorienting and redesigning their operational strategies with the
sole objective to improve their performance. At present, PSBs are offering a number of
innovative products and services, and constantly improving delivery channels to
attract new customers and retain the existing ones. Further, to offer the service quality
that is being provided by foreign and de novo private domestic banks, PSBs are International Journal of Productivity
and Performance Management
Vol. 59 No. 1, 2010
The authors would like to thank anonymous reviewers and the Editor of this journal for pp. 51-74
q Emerald Group Publishing Limited
providing useful comments and suggestions which have resulted in significant improvements in 1741-0401
the quality of the paper. Errors remain unerringly their own. DOI 10.1108/17410401011006112
IJPPM making heavy investments in information technology on a regular basis to switch over
59,1 to information and communication technology-based modern automated banking
systems from their out-dated manual-based banking systems. Telephone banking and
online banking have become the integral part of the menu of the services available to
their customers.
Against this background, a need for an accurate appraisal of the performance of
52 PSBs has become more pressing. The existing studies on Indian banking industry have
concentrated only on the measurement of efficiency of banks in terms of resource
utilization (i.e. operating efficiency), and completely ignored the effectiveness of banks
in achieving their pre-determined policy objectives (Bhattacharyya et al., 1997; Das,
1997; Saha and Ravisankar, 2000; Mukherjee et al., 2002; Kumbhakar and Sarkar, 2003;
Sathye, 2003; Ram Mohan and Ray, 2004; Shanmugam and Das, 2004; Sensarma, 2006;
Sanjeev, 2006; Debnath and Shankar, 2008). Further, while a few of these studies
concentrate on the efficiency of only PSBs, another few look at the relationship between
ownership and efficiency. Nonetheless, the common feature of all the aforementioned
research investigations is that the concept of efficiency has been incorrectly dubbed as
performance. It is well-established in the literature on performance evaluation that the
performance of an organization should be appraised simultaneously, both in terms of
its efficiency in resource utilization process and effectiveness in realizing the
pre-determined goals (Mouzas, 2006; Asmild et al., 2007). This is because the overall
performance measure has been derived as the product of efficiency and effectiveness
measures, thereby neglecting either of these, provides an incomplete picture of the true
performance of an organization (Ho and Zhu, 2004; Ho, 2007).
To the best of our knowledge, there is hardly any publication in the academic journals
that evaluated the performance of Indian banks by considering simultaneously the
aspects of efficiency and effectiveness. The present study is an attempt in this direction
and intends to fill the void that seems to exist in the literature on performance evaluation
of Indian banks. The main objective of the present study is not only to compute
the efficiency, effectiveness, and performance measures for 27 PSBs using the
cross-sectional data for the financial year 2006/2007, but also to scrutinize the degree of
correlation among these measures. Besides, its academic contribution, the findings of the
present study would help the regulators to develop appropriate policies and guide the
managers in making strategic actions for improving the performance of PSBs. For
computing the efficiency and effectiveness scores for individual PSBs, we made use of
the technique of data envelopment analysis (DEA). DEA introduced by Charnes et al.
(1978) based on Farrells (1957) pioneering work, is a linear programming based
non-parametric frontier approach for measuring the relative efficiency of a set of similar
units, usually referred to as decision-making units (DMUs)[2].
The rest of the paper has been structured as follows. The next section briefly
discusses the structure of Indian banking industry. The subsequent section provides a
review of literature on the concepts of efficiency, effectiveness, and performance. The
following section describes the two-stage performance evaluation model that has been
utilized for obtaining the efficiency, effectiveness, and performance measures for
individual PSBs. The output-oriented DEA model for computing the efficiency and
effectiveness scores for individual PSBs has been discussed in the succeeding section.
The ensuing section discusses the data source and adequacy of the sample size for
DEA modeling in the present study. The penultimate section presents and discusses
the empirical results. The final section summarizes the discussion and highlights the Performance
significant conclusions. of Indian PSBs
The structure of Indian banking sector
The Reserve Bank of India (RBI) is the central bank of the country that regulates the
operations of other banks, manages money supply and discharges other myriad
responsibilities that are usually associated with a central bank. The banking system in 53
India comprises commercial and cooperative banks, of which the former accounts for
more than 90 percent of the assets of the banking system. Within the category of
commercial banks, there are two types of the banks:
(1) schedule commercial banks (i.e. which are listed in Schedule II of the RBI Act,
1934); and
(2) non-scheduled commercial banks.
Depending upon the pattern of ownership, scheduled commercial banks can be

classified into three types:
(1) PSBs which include:
.
State Bank of India (SBI) and its associate banks;
.
nationalized banks (NB); and
.
other PSBs.
(2) Private sector banks consists of private domestic banks (which can further be
classified as old private banks that are in business prior to 1995, and de novo
private banks that were established after 1995) and foreign banks.
(3) Others comprising regional rural banks (RRBs) and local area banks.
Of these, PSBs have a countrywide network of branches and account for over 70 percent
of total banking business. The contribution of PSBs in Indias economic and social
development is enormous and well-documented. They have strong presence in the rural
and semi-urban areas, and employ a large number of staff. On the other hand, de novo
private domestic banks are less labour-intensive, have limited number of branches, have
adopted modern technology, and are more profitable. Though foreign banks are more
techno-savvy and have carved a niche in the market but they confine their operations in
major urban centres. PSBs sponsor the RRBs and their activities are localized. Further,
RRBs serve the needs for rural credit and have a diminutive share (about 3 percent) in the
commercial banking industry of India. Table I provides summary details towards the
end of March 2007, regarding different types of commercial banks (excluding RRBs). It
has been observed that the market share of PSBs in terms of investments, advances,
deposits, and total assets is over 70 percent. About 87 percent of branches of the
commercial banks in India belong to PSBs. Further, their share in the total employment
provided by commercial banking industry is about 81 percent. In brief, PSBs command a
lions share of Indian banking industry.
In the post-reforms years, the PSBs got fierce competition from private banks,
especially from de novo private domestic banks that were better equipped with
banking technology and practices. Consequently, the market share of PSBs in terms of
investments, advances, deposits, and total assets has declined constantly. It is evident
54
59,1
Table I.
IJPPM
(at March 2007)

Structure of commercial
banking industry in India
Number Rupees in croresa
Bank group No. of banks Branches Staff Investments Advances Deposits Total assets
I. PSBs (a b) 28 50,542 729,172 664,645 1,440,123 1,994,200 2,439,986

Market share (%) 87.4 81.4 69.9 72.7 73.9 70.5
a. SBI group 8 14,132 256,225 211,664 482,426 633,476 805,795
Market share (%) 24.4 28.6 22.3 24.3 23.5 23.3
b. NB and other PSBs 20 35,978 465,465 452,981 957,697 1,360,724 1,634,191
Market share (%) 62.2 51.9 47.6 48.3 50.5 47.2
II. Indian private sector banks 27 7,002 139,285 214,655 414,755 551,987 745,404
Market share (%) 12.1 15.5 22.6 20.9 20.5 21.5
III. Foreign banks in India 29 268 27,850 71,469 126,339 150,794 278,016
Market share (%) 0.5 3.1 7.5 6.4 5.6 8.0
IV. Total Indian private and foreign banks (II III) 56 7,270 167,135 286,124 541,094 702,781 1,023,420
Market share (%) 12.6 18.6 30.1 27.3 26.1 29.5
V. Total commercial banks (I IV) 84 57,812 896,307 950,769 1,981,217 2,696,981 3,463,406
Market share (%) 100.0 100.0 100.0 100.0 100.0 100.0
Notes: Regional rural banks excluded; a1 crore 10 millions
Source: Authors calculations from Statistical Tables Relating to Banks in India (2006/2007)
from the table that the PSBs are still dominating players in the Indian banking sector, Performance
albeit their market share has declined in the deregulatory regime. The growth of PSBs of Indian PSBs
is still high on the agenda of the policy makers because of their gargantuan role as an
effective catalytic agent of socio-economic change in the country. During the last
16 years, the policy makers adopted a cautious approach for introducing reform
measures in the Indian banking sector on the basis of the recommendations of
Narasimham Committee I (1991), Narasimham Committee II (1998) and Verma 55
Committee (1999). The principal objective of the reforms process was to improve the
performance of PSBs in their operations and to inculcate competitive spirit in them.
Against this backdrop, we confine our analysis to PSBs which constitute most
significant segment of Indian banking sector.
Efficiency, effectiveness and performance: a literature review

Theoretical literature
Efficiency and effectiveness are the central terms used in assessing and measuring the
performance of organizations (Mouzas, 2006). Performance, in both profit and non-profit
organizations, can be defined as an appropriate combination of efficiency and
effectiveness. However, there seems to be some inconsistency in the use of these terms
in the existing literature on the subject matter. For the managers, these terms might be
synonymous but each of these has their own distinct meaning. Drucker (1977)
distinguished efficiency and effectiveness by associating efficiency to doing things right
and effectiveness to doing the right things. In his terminology, a measure of efficiency
assesses the ability of an organization to attain the output(s) with the minimum level of
inputs. It is not a measure of a success in the marketplace but a measure of operational
excellence in the resource utilization process. More precisely, efficiency is primarily
concerned with minimizing the costs and deals with the allocation of resources across
alternative uses (Achabal et al., 1984). While commenting on effectiveness, Keh et al. (2006)
observed that a measure of effectiveness assesses the ability of an organization to attain its
pre-determined goals and objectives. Simply, an organization is effective to the degree to
which it achieves its goals (Asmild et al., 2007). In sum, effectiveness is the extent to which
the policy objectives of an organization are achieved.
It is significant to note that though efficiency and effectiveness are two mutually
exclusive components of overall performance measure yet they may influence each
other. More specifically, effectiveness can be affected by efficiency or can influence
efficiency as well as have an impact on the overall performance (Ozcan, 2008). Figure 1
puts the argument in proper scenario. Nevertheless, it is possible that an organization
Efficiency
Performance
Figure 1.
Effectiveness Components
of performance
Source: Ozcan (2008)
IJPPM can be efficient in utilizing the inputs, but not effective; it can also be effective, but not
59,1 efficient.
For a profit organization, Ho and Zhu (2004) used Du Pont model and decomposed
the overall performance measure (proxied in terms of return on assets (ROA)) into the
product of efficiency (measured as total assets turnover ratio) and effectiveness
(measured as profit margin ratio) measures. Their decomposition is illustrated as
56 follows:
Earning before taxation

Return on assets ROA
Total assets
Earning before taxation Net sales
+
Net sales Total assets
Profit margin ratio Total assets Turnover ratio
Performance + +
Effectiveness Efficiency
In the aforementioned decomposition, the ROA is considered as a measure of overall
performance and assesses the profitability of total assets before taxation for an
organization. Further, it contains efficiency and effectiveness as its mutually exclusive
components. Total assets turnover ratio assesses the ability of an organization to use its
assets and could be treated as efficiency. It indicates the output generated by the use of
given level of inputs. On the other hand, the profit margin ratio assesses the net profitability
before taxation during the current accounting period and could be taken as a measure of
effectiveness. This ratio indicates the ability of an organization to achieve the expected
goals in terms of output(s). In a nutshell, the performance measure for an organization
is a product of efficiency and effectiveness measures (i.e. performance efficiency
effectiveness). Thus, overall performance measure can be seen as a means of quantifying
the efficiency and effectiveness of actions (Neely et al., 1995).
Mouzas (2006) illustrated the effect of different levels of efficiency and effectiveness
on the performance level of an individual organization (Figure 2). From the figure, it is
High
lity
abi
ofit
Efficiency
y
lit
l pr
bi
ita
era
of
pr
em
ble
Eph
na
Low
i
sta
Su wth
e gro
itabl
Figure 2. Un prof
The effect of different
levels of efficiency and Low High
effectiveness Effectiveness
Source: Mouzas (2006)
clear that mainly focusing on efficiency and neglecting effectiveness would result in an Performance
ephemeral profitability. In contrast, neglecting efficiency and focusing on effectiveness of Indian PSBs
may result in an unprofitable growth. The author suggested that a balanced approach
ensuring sustainable profitability needs an equal emphasis on both high efficiency and
high effectiveness.
57
Empirical literature
An inspection of the empirical literature provides that most of the studies on
performance measurement focus merely on the operational (technical) efficiency of an
organization(s) and the aspect of operational effectiveness is usually ignored.
Nevertheless, in recent years, there exists a few studies which explicitly recognized the
efficiency and effectiveness as two mutually exclusive components of the overall
performance of an organization. For instance, Byrnes and Freeman (1998) utilized DEA
to assess the efficiency and effectiveness in contractor delivery of service in Franklin

County Alcohol, Drug and Mental Health Board at Ohio State. They utilized
client-level data for 632 behavioural health clients served by seven different non-profit
providers. It has been concluded that integrating DEA results into current board
performance funding could be a valuable instrument for promoting efficiency and
effectiveness.
Karlaftis (2004) utilized DEA to evaluate the efficiency and effectiveness of 256 US
urban transit systems over a five-year period (1990-1994). The results show that
efficiency and effectiveness are positively related and, thus, the systems performing
well in one dimension (i.e. efficiency) generally perform well in the other dimension
(i.e. effectiveness).
Ho and Zhu (2004) utilized a two-stage DEA model to evaluate the performance of
41 Taiwans commercial banks for the financial year 2001. The main empirical finding
is that the bank with better efficiency does not always mean that it has better
effectiveness. They found no apparent correlation between efficiency and effectiveness.
Mouzas (2006) examined the efficiency and effectiveness of manufacturer-retailer
networks in Germany and Switzerland. It has been observed that the companies rarely
balance the achievement of efficiency and effectiveness simultaneously, and put
overemphasis on efficiency aspect of the performance. The author suggests that the
companies need to see efficiency as a necessary, but not a sufficient, condition and to
consider effectiveness not just as an output but as a continuous process impacting on
their surrounding networks.
Keh et al. (2006) assessed the efficiency, effectiveness, and productivity of marketing
in a 49-unit Asia Pacific hotel chain. A triangular DEA model has been utilized. It has
been inferred that efficiency tails off when more than 12 percent of the budget is
expended on marketing activities. In terms of effectiveness, the study finds that all the
units rated as relatively inefficient can accrue increasing returns to scale in revenues
from marketing activities.
Garca-Sanchez (2007) applied a three-stage DEA model to the Spanish professional
football league, to measure operating efficiency (of the offence and defence), athletic or
operating effectiveness, and social effectiveness. The results show that the technical
inefficiency of the defence is greater than that of the offence. The researcher noticed
that the teams with the most experience perform athletically in a more effective
IJPPM manner, and their social effectiveness is strongly related to the level of play in itself
59,1 and to factors linked to their league ranking.
Ho (2007) made an attempt to analyze the performance of 59 listed corporations of
the electronic industry in Taiwan. A two-stage DEA model has been used to compute
efficiency and effectiveness scores. The empirical results indicate that a company with
a better efficiency does not always have better effectiveness and there is no apparent
58 correlation between these two indicators.
Yu and Lin (2007) proposed and applied multi-activity network DEA to measure
efficiency and effectiveness of 20 selected railways in the world. To gain more insight
into the railways performance, they estimated four measures, namely passenger
technical efficiency, freight technical efficiency, service effectiveness, and technical
effectiveness. The results show that these measures differ significantly. It has been
noted that a higher technical efficiency does not necessarily imply higher service
effectiveness, while higher technical efficiency and/or higher service effectiveness will
lead to higher technical effectiveness.

It is noteworthy here that no study on Indian banking industry has evaluated
the performance of Indian banks by considering simultaneously the aspects of
efficiency and effectiveness. As mentioned in the introductory part of this paper that
the existing studies on Indian banks concentrated only on the measurement of
operational (technical) efficiency, and operational effectiveness which might directly
influence the survival of banks is completely ignored. Also, almost all the studies
incorrectly dubbed the efficiency as the performance. For instance, the most cited
study in Indian context is of Bhattacharyya et al. (1997), but the authors used the terms
productive efficiency and performance interchangeably. The present study is
perhaps the first one which distinguishes between efficiency and effectiveness, and
derives the performance measure for a bank as the product of its efficiency and
effectiveness measures.
A two-stage performance evaluation model for Indian PSBs

In order to appraise the efficiency, effectiveness, and performance of Indian PSB
industry at the level of individual banks, we utilized an innovative two-stage
performance evaluation model as proposed by Ho and Zhu (2004). In Stage I, the
efficiency scores for individual PSBs have been computed. In computing the efficiency
scores, the most challenging task that an analyst always encounters is to select the
relevant inputs and outputs for modeling bank behaviour. It is worth noting here that
there is no consensus on what constitute the inputs and outputs of a bank. In the
literature on banking efficiency, there are mainly two approaches for selecting the
inputs and outputs for a bank:
(1) the production approach, also called the service provision or value added
approach; and
(2) the intermediation approach, also called the asset approach (Humphrey, 1985;
Hjalmarsson et al., 2000).
Berger and Humphrey (1997) suggested that the intermediation approach as proposed
by Sealey and Lindley (1977) is best suited for analyzing bank level efficiency, whereas
the production approach as pioneered by Benston (1965) is well suited for measuring
branch level efficiency. As our study is based on bank level data, we have, therefore,
adopted the intermediation approach as opposed to the production approach for Performance
selecting input and output variables for computing the efficiency scores for individual of Indian PSBs
PSBs in Stage I of the performance evaluation model. The selected output variables are:
.
advances; and
.
investments.
The inputs used for computing the efficiency scores are: 59

. physical capital (measured as the value of fixed assets);
.
labour (measured as the number of employees); and
.
loanable funds (measured as the sum of deposits and borrowings).
Thus, the efficiency scores computed in the Stage I capture the ability of the banks to
generate advances and investments using the inputs of physical capital, labour and
loanable funds.
In the Stage II of performance evaluation model, the effectiveness scores for
individual PSBs have been computed. As noted above, a measure of effectiveness
provides the extent to which policy objectives of an organization are achieved. Thus, for
computing the effectiveness scores for individual PSBs, it is essential to delineate the
objectives of Indian banks. In the post-reform years since 1992, intense competition in
the Indian banking sector has forced the banks to reduce all the input costs to the
minimum and to earn maximum incomes from traditional and non-traditional
activities with fewer inputs. Ram Mohan and Ray (2004) rightly remarked that in the
post-reforms period, Indian banks are putting all their efforts in the business of
maximizing incomes from all possible sources. On the whole, we can safely infer that in
the post-liberalization period, the main policy objective of Indian banks is to augment
the interest and non-interest incomes to the maximum. In consonance of the policy
objectives that are being pursued by the Indian banks, we have selected: net-interest
income and non-interest income as the output variables in the Stage II of the
performance evaluation model.
The variable net-interest income is computed by taking difference between interest
earned and interest expended, and take into account the income from traditional
intermediary functions of the banks. However, the variable non-interest income
accounts for income from off-balance sheet items such as commission, exchange and
brokerage, etc. The inclusion of non-interest income enables us to capture the recent
changes in the production of services as Indian banks are increasingly engaging in
non-traditional banking activities. The performance evaluation model as developed by
Ho and Zhu (2004) takes the output variables of Stage I as the input variables in
the Stage II. Accordingly, the input vector in the Stage II includes: advances and
investments.
It is significant to note that the effectiveness scores obtained in the Stage II indicate
how effectively the PSBs are transforming the outcomes of the Stage I to accomplish
the pre-determined policy objectives of the banks. After obtaining the efficiency and
effectiveness scores, the overall performance scores for individual PSBs have been
computed by multiplying their respective efficiency and effectiveness scores.
A complete presentation of the two-stage performance evaluation model for Indian
PSBs is shown in the self-explanatory Figure 3.
IJPPM A two-stage performance evalution model
59,1 Physical capital
Net-interest income
Advances
Loanable funds Stage I Stage II
(Efficiency) Investments (Effectiveness) Net-interest income
Labour
60
Stage I Stage II
Figure 3.
Source: Authors elaboration
DEA model
As noted above, we employed DEA for computing efficiency and effectiveness scores
for individual PSBs using the cross-sectional data for the financial year 2006/2007. The
embryonic form of DEA method is proposed by Farrell (1957). However, the currently
popular DEA models start from the seminal work of Charnes et al. (1978). DEA is a
data-oriented approach for evaluating the performance of a set of peer entities called
DMUs whose performance is characterized by multiple measures/indicators
(Gregorious and Zhu, 2005). The technique was first applied by Sherman and Gold
(1985) in the banking industry and thereafter, it has been utilized to derive efficiency
scores in a number of banking studies including Aly et al. (1990), Elyasiani and
Mehdian (1990), Yue (1992), Grabowski et al. (1994), Fukuyama (1993, 1995), Berg et al.
(1993), Avkiran (1999), Cook and Hababou (2001), Vivas et al. (2002), Luo (2003), Drake
and Hall (2003), Kao and Liu (2004), Oliveira and Tabak (2005), Kirkwood and Nahm
(2006), Havrylchyk (2006), Drake et al. (2006), Hahn (2007) and Sharkas et al. (2008). In
the 122 studies reviewed by Berger and Humphrey (1997), DEA has been applied in 62
studies (i.e. just over 50 percent). This reference simply indicates DEAs significance
and relevance in banking efficiency analyses.
We preferred the use of DEA over other frontier efficiency measurement
techniques of banking efficiency[3], especially its closest rival stochastic frontier
analysis (SFA) because it has a number of advantages. First, it can simultaneously
use several inputs and outputs, which is an attractive feature because production in
the banking industry often involves multiple inputs and multiple outputs. Second, it
does not require any assumptions about the functional form of the production
function. Third, it calculates a maximal performance measure for each bank relative to
all other banks in the sample with the sole condition that each bank lies on or below
the efficient frontier. Fourth, it is particularly suitable for small sample studies like
ours[4]. Fifth, DEA uses exclusively quantity information and, thus, demands neither
problematic price information nor a restrictive behavioural assumption in its
calculation.
DEA calibrates the level of efficiency on the basis of estimated discrete piecewise
frontier (or so-called best-practice or efficient frontier or envelopment surface) made up
by a set of Pareto-efficient DMUs. In all instances, these Pareto-efficient DMUs located
on the efficient frontier, compared to the others, minimize the use of productive
resources given the outputs (input-oriented measure), or maximize the outputs given
the inputs (output-oriented measure) and called the best-practice performers or
reference units or peer units within the sample of DMUs. These Pareto-efficient DMUs
have a benchmark efficiency score of one that no individual DMUs score can surpass. Performance
Further, the efficient frontier provides a yardstick against which to measure the of Indian PSBs
relative efficiency of all other DMUs that do not lie on the frontier. The DMUs which do
not lie on efficient frontier are deemed to be relatively inefficient (i.e. Pareto
non-optimal DMUs) and receives a score between 0 and 1. The efficiency score of each
DMU can be interpreted as the radial distance to efficient frontier. In short, DEA forms
a non-parametric efficient frontier over the data points to determine the efficiency of 61
each DMU relative to this frontier.
Several different mathematical programming models have been proposed in the
literature (see Charnes et al., 1994; Coelli et al., 1999; Thanassoulis, 2001; Cooper et al.,
2004, 2007 for details on various models). Essentially, these models seek to establish
which of n DMUs determine the envelopment surface. The geometry of the surface is
prescribed by the specific DEA model employed. In the present study, we made use of
output-oriented Charnes-Cooper-Rhodes (CCR) model, named after its developers
Charnes et al. (1978) to obtain a scalar measure of efficiency and effectiveness for
individual PSBs. CCR model imposes three restriction on the frontier technology:
constant returns-to-scale, convexity of the set of feasible input-output combinations,
and strong disposability of inputs and outputs (Murillo-Zamorano, 2004).
To illustrate the CCR model, consider n DMUs, j 1; . . . ; n: The units are
homogeneous with the same types of inputs and outputs. Assume there are m inputs
and s outputs. Let xj and y j denote, respectively, the input and output vectors for the
jth DMU. Thus, xj is a m 1 column vector and yj is a s 1 column vector.
Moreover, X x1 ; x2 ; . . . ; xn is the m n input matrix and Y y1 ; y2 ; . . . ; yn is the
s n output matrix. The CCR model assigns weights to each input and output, and
then assesses the efficiency of a given DMU by the ratio of the aggregate weighted
output to the aggregate weighted input. The weights assigned must be non-negative.
Also, they must restrict each DMU from receiving a ratio (of the weighted output to the
weighted input) that is greater than 1. Mathematically, when evaluating the efficiency
of the DMU o, we solve for the following linear programming problem (LPP):
u T yo
Maximize v T xo
{u;v}
T
1
u yj
Subject to : vTxj
#1 j 1; . . . ; n; u; v $ 0
where u is the (s 1) vector of output weights and v is the (m 1) vector of input

weights. T denotes the matrix transpose operator. Thus, u and v are chosen to
maximize the efficiency measure of the DMU o subject to the constraints that the
efficiency levels of all units must be less than or equal to 1.
The above problem has an infinite number of solutions. To generate a unique
solution, the following constraint is imposed: uTyo 1. The maximization problem
then becomes:
Minimize vT xo
{u;v}
2
Subject to : uT yo 1; uT yj 2 vT xj # 0; j 1; . . .; n; u; v $ 0
The duality problem to equation (2) can be written as follows:

IJPPM Maximize
{fo ; l }
fo
59,1 3
Subject to : fo yo # l T Y; xo $ l T X; l$0
where l is a (n 1) column vector and fo is a scalar. In other words, we search for all
62 linear combinations of input vectors in current practices that can be provided by the
input vector of the o unit. We then compute the maximal proportional output vector
that can be produced by these linear combinations. Let f*o denote the optimal solution
to equation (3). Obviously, f*o $ 1. If f*o 1, then the DMU o is efficient, otherwise,
f*o . 1 and DMU o is inefficient. Later, we also denote 1=f*o by Eo, the efficiency score
for DMU o. Note that the LPP equation (3) must be solved n times, once for each DMU
in the sample. It is significant to note here that the implementation of equation (3) with
the input and output vectors of the Stages I and II yields the efficiency and
effectiveness scores, respectively.
Data source and adequacy of sample size

For 27 PSBs under consideration, we collected the required data from two distinct
sources:
(1) Statistical Tables Relating to Banks in India, 2006/2007: a publication of the
RBI.
(2) Performance Highlights of Public Sector Banks, 2006/2007: a publication of
Indian Banks Association.
Except labour, all the input and output variables in the above outlined performance
evaluation model are measured in rupee lacs (note that 10 lacs 1 million). It is worth
mentioning here that in March 2007, the data for 28 PSBs were available. However, we
dropped a bank, namely, IDBI Ltd, a new entrant in the PSB industry because it seems
to be a potential outlier in the sample.
Since, DEA results are influenced by the size of the sample, some discussion on the
adequacy of sample size is warranted here. The size of the sample utilized in the
present study is consistent with the various rules of thumb available in the DEA
literature. Cooper et al. (2007) provides two such rules that together can be expressed
as: n $ maxfm s; 3m sg where n number of DMUs, m number of inputs,
and s number of outputs. The first rule of thumb states that sample size should be
greater than equal to product of inputs and outputs. While the second rule states that
number of observation in the data set should be at least three times the sum of number
of input and output variables. Given m 3 and s 2 in the Stage I, and m 2 and
s 2 in the Stage II, the sample size (n 27) used in the present study exceeds the
desirable size as suggested by the abovementioned rules of thumb to obtain sufficient
discriminatory power. In sum, the sample size in this study is feasible and larger than
that used in some of the studies in the DEA literature (Avkiran, 1999).
Empirical results
This section presents and discusses the empirical findings of the study. The efficiency
and effectiveness scores for individual PSBs that have been obtained by implementing
output-oriented CCR model are given in Table II. It has been observed that estimated
Performance
Efficiency Effectiveness Performance
Banks Score Ranks Score Ranks Score Ranks of Indian PSBs
State Bank of Travancore 1.0000 1 0.9634 2 0.9634 1
State Bank of Mysore 0.9495 4 1.0000 1 0.9495 2
State Bank of Bikaner and Jaipur 0.9242 10 1.0000 1 0.9242 3
Punjab National Bank 0.9040 14 1.0000 1 0.9040 4 63
Corporation Bank 0.9400 6 0.9340 4 0.8780 5
SBI 0.9420 5 0.9259 5 0.8722 6
Bank of India 0.9078 13 0.9591 3 0.8707 7
Dena Bank 0.8633 20 1.0000 1 0.8633 8
State Bank of Indore 0.9879 2 0.8349 9 0.8248 9
Bank of Baroda 0.9150 12 0.8802 7 0.8054 10
Punjab and Sind Bank 0.7981 22 1.0000 1 0.7981 11
Indian Overseas Bank 0.8850 18 0.9002 6 0.7967 12
Indian Bank 0.7871 23 1.0000 1 0.7871 13
State Bank of Hyderabad 0.9218 11 0.8516 8 0.7850 14

Union Bank of India 0.9583 3 0.8143 10 0.7803 15
Andhra Bank 1.0000 1 0.7799 14 0.7799 16
Oriental Bank of Commerce 1.0000 1 0.7362 19 0.7362 17
State Bank of Patiala 1.0000 1 0.7311 20 0.7311 18
Canara Bank 0.9296 7 0.7811 13 0.7261 19
Bank of Maharashtra 0.8915 16 0.8100 12 0.7221 20
Allahabad Bank 0.9247 9 0.7634 16 0.7059 21
Vijaya Bank 0.8995 15 0.7486 18 0.6734 22
State Bank of Saurashtra 0.8790 19 0.7526 17 0.6615 23
UCO Bank 0.9261 8 0.7052 22 0.6531 24
United Bank of India 0.7831 24 0.8133 11 0.6369 25
Syndicate Bank 0.8894 17 0.7151 21 0.6360 26
Central Bank of India 0.8228 21 0.7637 15 0.6284 27
Descriptive statistics
Average 0.9122 0.8579 0.7812
SD 0.0624 0.1055 0.0944
Median 0.9218 0.8349 0.7850
Minimum 0.7831 0.7052 0.6284
Maximum 1.0000 1.0000 0.9634
Q1 0.8850 0.7634 0.7059
Q3 0.9495 0.9634 0.8707
Table II.
Notes: Performance score efficiency score effectiveness score; banks are arranged in accordance Efficiency, effectiveness,
of their ranking on performance score; Q1 first quartile; Q3 third quartile and performance scores
Source: Authors calculation for Indian PSBs
efficiency scores range from 0.7831 to 1, with an average of 0.9122. The explicit
implication of this finding is that Indian PSBs on average have the potential to increase
their traditional outputs (i.e. advances and investments) by about 8.78 percent with the
same level of inputs (i.e. physical capital, labour, and loanable funds) that is currently
being utilized. The perusal of the table further tells us that out of 27 PSBs, only four
banks, namely, State Bank of Patiala, State Bank of Travancore, Andhra Bank, and
Oriental Bank of Commerce, have been found to be efficient with efficiency score of
one. This indicates that only 15 percent PSBs in the sample are fully efficient. The
resource utilization process of these PSBs is functioning well, and characterizing no
IJPPM input waste. In the remaining 85 percent of PSBs, some degree of inefficiency has been
59,1 observed which ranges from 5.05 to 21.69 percent[5].
Further, it has been noted that estimated effectiveness scores range from 0.7052 to 1,
with an average of 0.8579. This indicates that on an average, Indian PSBs can
effectively increase their net-interest and non-interest incomes by about 14.2 percent by
utilizing the same level of advances and investments. In addition, out of 27 PSBs, only
64 six banks, namely, State Bank of Bikaner and Jaipur, State Bank of Mysore, Dena
Bank, Indian Bank, Punjab and Sind Bank, and Punjab National Bank, obtained the
effectiveness score equal to one. The implication of this result is that these banks are
effectively using advances and investments available at their disposal to generate
net-interest and non-interest incomes. Thus, only 22 percent PSBs in the sample are
fully effective in generating incomes. In the remaining 78 percent of PSBs, some degree
of ineffectiveness has been observed that ranges from 3.36 to 29.48 percent[6].
Recall that the overall performance score for a bank can be obtained by multiplying
efficiency and effectiveness scores for that bank. Table II also reports the overall
performance scores for 27 PSBs along with their ranks that are obtained on the basis of
these scores. It has been noted that estimated performance scores range from 0.6284 to
0.9634, with an average of 0.7812. It is quite interesting to note that none of the PSBs
has attained overall performance score equal to one and, thus, does not exhibit best
practices in efficiency and effectiveness facets simultaneously. The results indicate
that in the sample of 27 PSBs under consideration, the bank appearing best on
efficiency front does not always stand best on effectiveness front, and vice-versa. For
example, Oriental Bank of Commerce ranks first on the efficiency front but ranks 19th
on the effectiveness front. This explicitly indicates that there is no apparent correlation
between efficiency and effectiveness measures. It is significant to note that PSBs would
be able to improve their performance either by improving their efficiency or
effectiveness or both. For example, all the four efficient banks that obtained efficiency
score equal to one in the Stage I can improve their overall performance by increasing
their effectiveness (i.e. ability to generate incomes by using advances and investments).
Besides, this, all the six banks that attained effectiveness score equal to one in the
Stage II can enhance their performance by increasing their efficiency (i.e. their ability to
produce advances and investments using physical capital, labour, and loanable funds).
All the banks that do not define best-practice frontier in the either stage of performance
evaluation model can improve their performance only by enhancing efficiency and
effectiveness simultaneously.
To draw a more accurate inference about the relationship between efficiency,
effectiveness, and performance measures in Indian PSB industry, we computed
Pearsons correlation coefficients among these measures (Table III). The correlation
Efficiency Effectiveness Performance
Efficiency 1
Table III. Effectiveness 2 0.216 1
Pearsons correlation Performance 0.336 0.845 * 1
coefficients of efficiency,
effectiveness, and Note: *Correlation coefficient is significant at the 0.01 level (two-tailed)
performance scores Source: Authors calculations
analysis reveals that there is a negative and statistically insignificant correlation Performance
between efficiency and effectiveness. This implies that high efficiency does not stand of Indian PSBs
for high effectiveness in the Indian PSB industry. Further, a positive but weak,
and statistically insignificant correlation has been noted between efficiency and
performance measures. The most significant finding relates with the correlation
between effectiveness and performance measures. It has been noted that a positive and
strong correlation exists between effectiveness and performance measures. Further, 65
this correlation has been noted to be statistically significant. The implication of this
finding is that the PSBs can improve their performance by improvising their
effectiveness in terms of income generation.
Effect of size and group affiliation

Besides analyzing the efficiency, effectiveness, and performance measures for
individual PSBs, we also made an attempt to explore the effect of size on these
measures. For this, we bifurcated the entire sample of 27 PSBs into two categories:
(1) large banks; and
(2) small banks.
Large banks are defined as those banks which have total assets greater than the
median of total assets of the entire sample. Out of 27 PSBs, 13 banks have been
observed as large banks and the remaining 14 banks have been included in the
category of small banks. Table IV provides the summary statistics of efficiency,
effectiveness and performance scores for large and small PSBs. The results pertaining
to efficiency score indicate that large banks are more efficient than small banks in
producing advances and investments (0.9231 vs 0.9021). However, small banks have
been found to be more effective than large banks in generating net-interest and
non-interest incomes (0.8816 vs 0.8325). The results further delineate that the overall
performance of small banks is better than the large banks (0.7939 vs 0.7675). Thus, the
underperformance of large banks has been observed primarily due to their relative
ineffectiveness in generating incomes.
Further, in order to identify whether the efficiency, effectiveness, and performance
measures differ significantly between large and small banks, we utilized the
Mann-Whitney U-test as suggested by Cooper et al. (2007). The null hypotheses are
that both large and small banks have same level of efficiency, effectiveness, and
Large banks Small banks

Statistics Efficiency Effectiveness Performance Efficiency Effectiveness Performance
n 13 13 13 14 14 14
Mean 0.9231 0.8325 0.7675 0.9021 0.8816 0.7939
Median 0.9218 0.8143 0.7803 0.9119 0.8845 0.7926
SD 0.0472 0.0939 0.0854 0.0742 0.1134 0.1126
Minimum 0.8228 0.7151 0.6284 0.7831 0.7052 0.6369
Table IV.
Maximum 1.0000 1.0000 0.9040 1.0000 1.0000 0.9634
Descriptive statistics of
Q1 0.8967 0.7498 0.7160 0.8470 0.7731 0.6704
efficiency, effectiveness,
Q3 0.9502 0.9131 0.8381 0.9591 1.0000 0.8896
and performance scores:
Source: Authors calculations large vs small banks
IJPPM performance. If p-value is less than equal to 0.05 (i.e. level of significance 5 percent),
59,1 then the underlined null hypotheses are rejected. The results of Mann-Whitney U-test
are shown in Table V. It has been clearly observed that all the three null hypotheses
under consideration are not to be rejected when comparison between large and small
banks is made on the basis of efficiency, effectiveness and performance measures.
Thus, the large and small banks do not differ significantly in terms of efficiency,
66 effectiveness and performance.
In order to study the effect of group affiliation on efficiency, effectiveness, and
performance measures, we followed the prevailing categorization in the Indian
banking industry and bifurcated 27 PSBs into two groups:
(1) State Bank of India (SBI).
(2) Nationalized banks (NB).
SBI group consists of eight banks including SBI itself (majority equity holding being
with the RBI) and its seven associate banks (majority holding being with SBI), while
NB group includes 19 NB (majority equity holding is with the Government of India).
The descriptive statistics of efficiency, effectiveness and performance scores for SBI
and NB groups are reported in Table VI. The results pertaining to efficiency scores
indicate that the banks in SBI group are more efficient in producing advances and
investments than the NB (0.9506 vs 0.8961). Regarding effectiveness, it has been noted
that the banks affiliated with SBI group are more effective in generating net-interest
and non-interest incomes than the banks belonging to NB group (0.8824 vs 0.8476).
U-statistics Z p-value Inference
Efficiency 77 0.65 0.5180 Do not reject H 0

Table V. Effectiveness 66.5 1.16 0.2462 Do not reject H 0
Results of Mann-Whitney Performance 77 0.65 0.5186 Do not reject H 0
U-test: large vs small
banks Source: Authors calculations
SBI group NB group

Statistics Efficiency Effectiveness Performance Efficiency Effectiveness Performance
n 8 8 8 19 19 19
Mean 0.9506 0.8824 0.8390 0.8961 0.8476 0.7569
Median 0.9458 0.8888 0.8485 0.9040 0.8133 0.7799
SD 0.0431 0.1063 0.1084 0.0631 0.1063 0.0872
Minimum 0.8790 0.7311 0.6615 0.7831 0.7052 0.6284
Table VI. Maximum 1.0000 1.0000 0.9634 1.0000 1.0000 0.9040
Descriptive statistics of Q1 0.9224 0.7732 0.7446 0.8633 0.7634 0.6733
efficiency, effectiveness Q3 0.9970 0.9909 0.9432 0.9296 0.9591 0.8054
and performance scores:
SBI vs NB groups Source: Authors calculations
The results further indicate that the banks in SBI group outperform the banks Performance
affiliated to NB group (0.8390 vs 0.7569).
To test whether the differences of efficiency, effectiveness and performance scores
of Indian PSBs
between SBI and NB groups are statistically significant, we again applied
Mann-Whitney U-test. The null hypotheses are that both SBI and NB groups have
the same population of the efficiency, effectiveness, and performance scores. Table VII
provides the results of Mann-Whitney U-test. It has been observed that we reject the 67
null hypothesis when the comparison between two groups is made on the basis of
efficiency. Thus, both groups differ significantly in terms of efficiency. However, from
effectiveness and performance dimensions, the null hypotheses are not to be rejected.
This helps us to infer that banks belonging to these groups have similar level of
effectiveness and performance. On the whole, it can be safely concluded that banks
affiliated with SBI group are more efficient than the banks belonging to NB group.
Efficiency-effectiveness matrix
In order to obtain the enhanced picture of banks performance, the relationship between
efficiency and effectiveness at the level of individual banks has been explored. For this,
DEA-based efficiency and effectiveness scores have been plotted. This resulted in
efficiency-effectiveness matrix containing four distinct quadrants. These quadrants
are labeled as:
(1) lucky;
(2) ace;
(3) underdog; and
(4) unlucky.
It is worth mentioning here that these quadrants are mutually exclusive in nature and
separated by the mean values of efficiency and effectiveness scores (i.e. 0.9122 and
0.8579). Figure 4 shows the efficiency-effectiveness matrix for Indian PSB industry.
A particular diamond in the figure represents the efficiency-effectiveness relationship
for an individual bank.
The north-west quadrant labeled as lucky contains those banks which have the
value of efficiency score below the sample average and the value of effectiveness score
above the sample average. The resource utilization process of these banks requires
overhauling so as to minimize the waste of primary inputs. The high effectiveness
experienced by these banks is more likely to be a consequence of a highly favourable
environment rather than better resource utilization. The banks falling in this quadrant
should be treated as prime candidates for a drive towards an efficiency improvement.
There is a likelihood that, with the improvement in efficiency, the lucky banks would
be able to earn more incomes than they had earned earlier. The Bank of India,
U-statistics Z p-value Inference
Efficiency 38 2.021 0.0445 Reject H 0

Effectiveness 62 0.747 0.4791 Do not reject H 0
Table VII.
Performance 40 1.912 0.5830 Do not reject H 0
Results of Mann-Whitney
Source: Authors calculations U-test: SBI vs NB groups
IJPPM Lucky
59,1 1.000
Ace
0.900
0.800
0.700
Effectiveness
68 0.600
0.500 Underdog
0.400
Unlucky
0.300
0.200
Figure 4. Banks
0.100
Efficiency-effectiveness
matrix for Indian PSB 0.000
0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900 1.000
industry
Efficiency
Dena Bank, Indian Bank, Punjab and Sind Bank, Punjab National Bank, and Indian
Overseas Bank have been placed in this quadrant.
The south-west quadrant is labeled as underdog. Those banks are positioned in
this quadrant that are below average in terms of both efficiency and effectiveness. The
underdog banks lack vitality in terms of efficiency in the use of resources. Thus, these
banks can be considered as distressed or weak banks and may be taken as the target
banks in any potential merger scenario that may appear in Indian PSB industry. The
underdog quadrant includes State Bank of Saurashtra, Bank of Maharashtra, Central
Bank of India, Syndicate Bank, United Bank of India, and Vijaya Bank. On the whole,
we identified 12 banks that are lying in the lucky and underdog quadrants. The
resource utilization process of these banks is not functioning well and featuring the
presence of considerable waste of resources.
The south-east quadrant is labeled as unlucky and contains those banks which
are operating with high efficiency and low effectiveness that probably occurs due to an
unfavourable environment. The basic characteristic of an unlucky bank is that it has a
value of efficiency score above the sample average and effectiveness score below the
sample average. The State Bank of Hyderabad, State Bank of Indore, State Bank of
Patiala, Allahabad Bank, Andhra Bank, Canara Bank, Oriental Bank of Commerce,
UCO Bank, and Union Bank of India are found to be the affiliates of this quadrant. The
reason for low effectiveness of these banks should be carefully studied to see whether
some improvement in income earning capacity is possible through the adoption of a
different product mix and business strategies.
The north-east quadrant is labeled as ace. The banks in this quadrant have both
efficiency and effectiveness scores which are above the sample average. The banks in
ace quadrant are the most efficient in terms of resource utilization and effective in
terms of income generating capacity. These banks are most suitable for others to
benchmark and can become role models for the inefficient and ineffective banks. The
banks located in this quadrant are flagship units and present the examples of superior
banking practices. These banks may probably be operating under favourable
conditions. Out of 27 PSBs, six banks have been noted to be the ace banks. The SBI,
State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore,
Bank of Baroda, and Corporation Bank occupied a place in this quadrant. On the Performance
efficiency front, the State Bank of Travancore turned out to be an ideal benchmark for of Indian PSBs
the inefficient banks since it has efficiency score equal to one and the effectiveness
score above the sample average. Further, from the dimension of effectiveness, the State
Bank of Bikaner and Jaipur, and State Bank of Mysore can be considered as ideal
benchmarks for ineffective banks since both of these banks attained the effectiveness
score equal to one and the efficiency score greater than the sample average. 69
Conclusions
The present study aims to evaluate the efficiency, effectiveness, and performance of 27
Indian PSB using the cross-sectional data for the financial year 2006/2007. A two-stage
performance evaluation model as proposed by Ho and Zhu (2004) has been followed.
The novel feature of performance evaluation model used is that it computes the overall
performance measure as a product of efficiency and effectiveness measures. The
technique of DEA as developed by Charnes et al. (1978) has been deployed for
computing efficiency and effectiveness scores for individual PSBs in the Stage I and
Stage II of performance evaluation model, respectively. In Stage I, the efficiency scores
have been computed using an output vector containing advances and investments and
an input vector containing physical capital, labour and loanable funds. However, the
output variables of Stage I have been treated as input variables in the Stage II. The
effectiveness score in the Stage II have been computed using an output vector
including net-interest and non-interest incomes and an input vector including advances
and investments. The overall performance scores have been obtained by multiplying
the efficiency and effectiveness scores.
The empirical results indicate that efficiency scores for the PSBs range from 0.7831
to 1, with an average of 0.9122. This implies that Indian PSBs on average have the
potential to increase their traditional outputs such as advances and investments by
about 8.78 percent with the same level of primary inputs. Out of 27 PSBs, only 15 percent
of banks have been observed to be fully efficient. The resource utilization process of
these banks has been found to be functioning well, and featuring no wastage of inputs.
Further, effectiveness scores for the PSBs range from 0.7052 to 1, with an average of
0.8579. This indicates that, on an average, Indian PSBs can effectively augment their
net-interest and non-interest incomes by about 14.2 percent by utilizing the same level of
advances and investments. Further, only 22 percent of banks are found to be fully
effective in generating incomes in the Stage II of performance evaluation model. From
the dimension of overall performance, it has been noted that the estimated performance
scores for an individual banks range from 0.6284 to 0.9634, with an average of 0.7812.
Further, none of the PSBs has attained overall performance score equal to one and, thus,
does not exhibit best practices both in efficiency and effectiveness dimensions.
The analysis of correlation between efficiency, effectiveness, and performance
measures indicates that a positive and strong correlation exists between effectiveness
and performance measures. This suggests that PSBs can improve their performance by
concentrating more on their income generating capabilities. Further, the results
indicate that high efficiency does not stand for high effectiveness in the Indian PSB
industry. The results pertaining to the effect of size on the performance and its
components reveal that in comparison of small banks, the large banks underperform
due to their relative ineffectiveness in generating incomes. The results further delineate
IJPPM that the banks affiliated with SBI group outperform NB in terms of operating
59,1 efficiency.
The efficiency-effectiveness matrix reveals that the resource utilization process of
12 PSBs is not functioning well and, featuring the presence of considerable wastage of
the primary inputs. These banks fall in the underdog and lucky quadrants and
have potential to improve the overall performance by enhancing their efficiency.
70 Further, 22 percent of PSBs occupied a place in the ace quadrant. These banks are
flagship units in the Indian PSB industry in terms of both efficiency and effectiveness.
The State Bank of Travancore has been observed to be an ideal benchmark for the
inefficient banks. Also, the State Bank of Bikaner and Jaipur, and State Bank of Mysore
appeared as ideal benchmarks for ineffective banks.
In sum, the empirical findings suggest that in their drive to improve overall
performance, PSBs should pay more attention to their income generating capabilities
(i.e. effectiveness) relative to their ability to produce traditional outputs such as
advances and investments (i.e. efficiency). The future work could extend our research
in various directions not considered in this study. First, we could examine the
inter-temporal variations in performance and its components using longitudinal data
for PSBs. Second, using the data across different ownership groups, there is a
possibility to analyze the efficiency, effectiveness and performance of PSBs vis-a-vis
their private counterparts.
Notes
1. This is evident from the fact that the share of PSBs in deposits, advances, and total assets of
Indian banking industry has declined from 87.9, 89.3, and 87.2 percent during the financial
year 1992/1993 to 73.9, 72.7, and 70.4 percent during the financial year 2006/2007,
respectively.
2. In their original paper, Charnes et al. (1978) introduced the generic term DMUs to describe
the collection of firms, departments, or divisions which have multiple incommensurate
inputs and outputs and which are being assessed for efficiency. In the present study, DMUs
refer to the PSBs.
3. There are a number of frontier techniques that are used in academic research to measure
banking efficiency. These techniques are generally grouped into parametric methods like the
SFA, the distribution free approach, and the thick frontier approach as well as non-parametric
methods like the DEA, and the free disposal hull. The parametric approaches are econometric
methods while the non-parametric approaches are mathematical programming techniques. A
brief review of these techniques can be found in Bauer et al. (1998).
4. In the empirical literature, many examples appear in which DEA has been utilized on small
sample. Few such examples are Oral et al. (1990) with 20 observations; Vassiloglou and
Giokas (1990) with 20 observations; Giokas (1991) with 17 observations; Haag and Jaska
(1995) with 14 observations; Avkiran (1999) with 16 observations; and Chang and Chiu
(2006) with 26 observations.
5. Inefficiency (percent) (1 2 efficiency score) 100.
6. Ineffectiveness (percent) (1 2 effectiveness score) 100.
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About the authors

Sunil Kumar has been a Reader in Economics at Punjab School of Economics, Guru Nanak Dev
University, Amritsar, Punjab, India, since 1994. He received a mark of distinction for his MSc
(Hons) in Economics degree. He has also completed his MPhil and PhD degrees from Punjab
School of Economics. He has credited more than two dozen research papers in various journals
including International Journal of Productivity and Performance Management, International
Review of Economics, Prajnan: Journal of Social and Management Sciences, Global Business
Review, Productivity (Journal of National Productivity Council ), Artha Vijnana: Indian Journal of
Development Economics, The Indian Journal of Economics. He also wrote a research book
entitled, Productivity and Factor Substitution: Theory and Analysis. At present, five research
scholars are working for PhD degrees under his guidance. His professional memberships include
the Indian Society of Regional Science and Indian Economic Association. Sunil Kumar is the
corresponding author and can be contacted at: sunil12eco@yahoo.com
Rachita Gulati is currently a PhD Candidate at Punjab School of Economics, Guru Nanak Dev
University, Amritsar, Punjab, India. She received MSc (Hons) in Economics degree with
distinction and qualified for the prestigious National Eligibility Test for Lectureship and Junior
Research Fellowship. Her research interests include the performance measurement using DEA
and SFA and Indian banking sector. Her publications have appeared in International Journal of
Productivity and Performance Management, International Review of Economics, and The ICFAI
Journal of Bank Management. Previously, she taught at BBK DAV College for Women, Amritsar,
Punjab, India in the capacity of Lecturer in Economics.
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Measuring Efficiency, Effectiveness and Performance of Indian Public Sector Banks

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Depending upon the pattern of ownership, scheduled commercial banks can be

(at March 2007)

I. PSBs (a b) 28 50,542 729,172 664,645 1,440,123 1,994,200 2,439,986

Efficiency, effectiveness and performance: a literature review

Earning before taxation

to assess the efficiency and effectiveness in contractor delivery of service in Franklin

lead to higher technical effectiveness.

A two-stage performance evaluation model for Indian PSBs

The inputs used for computing the efficiency scores are: 59

where u is the (s 1) vector of output weights and v is the (m 1) vector of input

The duality problem to equation (2) can be written as follows:

effectiveness scores, respectively.

Data source and adequacy of sample size

State Bank of Hyderabad 0.9218 11 0.8516 8 0.7850 14

Efficiency Effectiveness Performance

Effect of size and group affiliation

Large banks Small banks

U-statistics Z p-value Inference

Efficiency 77 0.65 0.5180 Do not reject H 0

SBI group NB group

U-statistics Z p-value Inference

Efficiency 38 2.021 0.0445 Reject H 0

a three-stage-DEA approach, Central European Journal of Operations Research, Vol. 15

Economic Surveys, Vol. 18 No. 1, pp. 33-77.

About the authors

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