International Journal of Bank Marketing

Performance benchmarking and strategic homogeneity of Indian banks

Avinandan Mukherjee Prithwiraj Nath Manabendra Nath Pal
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Avinandan Mukherjee Prithwiraj Nath Manabendra Nath Pal, (2002),"Performance benchmarking and strategic homogeneity
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 Performance benchmarking and strategic
homogeneity of Indian banks
Keywords
Performance measurement,
Benchmarking, Groups,
Data envelopment analysis,
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
Banks, India
Abstract
Explores the linkage between
performance benchmarking and
strategic homogeneity of Indian
commercial banks. Devises a
method of benchmarking
performance of Indian commercial
banks using their published
financial information. Defines
performance by how a bank is able
to utilize its resources to generate
business transactions and is
measured by their ratio, which is
then called the efficiency. The
concept of efficiency is critical
from a marketing perspective.
Methodologically, in order to
overcome some of the
shortcomings of simple
efficiencies obtained through self-
appraisal of individual banks, a
more ``democratic'' concept of
cross-efficiency evaluated with
the process of peer-appraisal has
been brought in to benchmark the
banks. Clusters banks based on
similarity in business policy which
offers a framework for competitive
positioning in the target market
and serves as a basis for long-term
strategic focus. Finds that the
public sector banks generally
outperform the private and foreign
banks in this rapidly evolving and
liberalizing sector.
International Journal of Bank
Marketing
20/3 [2002] 122139
# MCB UP Limited
[ISSN 0265-2323]
[DOI 10.1108/02652320210430965]
[ 122 ]
Avinandan Mukherjee
Nanyang Technological University, Singapore
Prithwiraj Nath
Xavier Labour Relations Institute, Jamshedpur, India
Manabendra Nath Pal
Indian Institute of Management, Calcutta, India
Introduction
Banking institutions throughout the world
are facing a fast paced dynamic environment
where efficiency and competitiveness hold
the key to survival. The process of
establishing a competitive advantage is at the
heart of competitive marketing strategy
(Devlin and Ennew, 1997). With intense
competition from both domestic and
international players, rapid innovation and
introduction of new financial instruments,
changing consumer demands and explosive
growth in information technology, the way in
which a commercial banking firm conducts
business and reaches out to its customers has
significantly changed. Widespread mergers
and acquisitions in the banking sector point
to this quest for attaining competitive
advantage in a crowded marketplace. In
order to survive and adapt to the changing
environment, banking firms are putting
more stress on understanding the drivers of
success, like better utilization of its
resources (like technology, infrastructure
and employees), process of delivering quality
service to its customers and performance
benchmarking. Leading commercial banks
throughout the world are aggressively
strengthening their strategic marketing and
operational capabilities as a source of
competitive advantage. Concepts like service
profit chain (Heskett et al., 1994) and
operational capability-service quality-
performance triad (Roth and Jackson, 1995)
have turned out to be buzzwords for any
retail banking service firm, which wants to
retain its competitive edge over others.
While traditional bank performance
parameters like transactions, deposit and
income are significant indicators, the
criterion of efficiency has become a sine qua
non to achieving firm competitiveness in the
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banking sector like never before. It is
becoming increasingly relevant from a
marketing perspective to not only
outperform competitors on deposit or
income, but also be cost competitive. A bank
is considered to be cost competitive, if it
spends equal amount of money on resources
as others but generates higher levels of
performance or if it spends less amount of
money on resources to generate same level of
performance as others in the industry. The
need to be cost competitive is at the heart of
effective competition in today's financial
markets, because cost competitiveness
imparts the ingredients to long-term
commercial success. Therefore, efficiency of
banks is critical as a basis for effective
competition from a marketing perspective.
Extant literature on marketing efficiency of
firms mentions several financial variables as
inputs, like marketing expense (Gross, 1984),
investment (Drucker, 1986), number of
employees (Drucker, 1985), man-hours
(Gross, 1984) and administrative overheads
(Anderson and Weitz, 1986). Output has been
measured in terms of financial parameters
like profit (Sevin, 1965), sales (Bucklin, 1978),
number of units sold (Hall, 1975) and market
share (Donath, 1982).
The performance challenges and the need
to be cost competitive are apparent
throughout the world. The situation is no
different in the banking sector in India, one
of the world's largest emerging economies.
Significant changes have been taking place
in the Indian commercial banking sector as a
part of the financial sector reform initiatives
undertaken by the Government of India and
the Reserve Bank of India since the early
1990s. As the country's banking system,
which is still dominated by the public sector
banks, is exposed to structural reforms,
performance and efficiency issues are
gradually emerging as the touchstone of
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 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
success (Saha and Ravisankar, 2000). There is
an emerging need for a comprehensive
framework for measuring performance of
Indian banks and understanding their
strategies, both from the point of view of the
corporate and retail customers as also the
regulators.
alignment of the process design, the way in
Conceptually, performance benchmarking
and strategic grouping are of great relevance
to both marketing and strategy. The
marketing literature is increasingly paying
attention to different performance metrics.
The Marketing Science Institute considers
``Metrics for measuring marketing
performance'' as an area of highest research
priority for 2000-2002. Early work on
performance assessment in marketing
borrowed from the productivity concept in
manufacturing area which was measured as
output per unit input. In Marketing, this
output to input ratio concept has been
applied with financial measures factored by a
proxy of effort, which is also often financial
(Bonoma and Clark, 1988). Although the
immediate outcomes of marketing efforts are
more of qualitative nature like the level of
service quality delivered or the loyalty of the
customers, scholars have tried to quantify
the intangibility of marketing outcome with
something more tangible. They have
frequently used easily quantifiable financial
outputs, which are the end result of
marketing success. It is assumed that service
quality and customer satisfaction will
always lead to better financial performance
(Rust et al., 1995). The whole idea of defining
performance as the ability of a firm to
transform its resources to generate outcomes
has been used extensively in Marketing and
Strategy literature. Research has also been
devoted to find out how this transformation
is attuned to the overall objective of the firm.
On the conceptual front, a bank typically
performs two functions: it provides product
and services to its clients and engages in
financial intermediation and management of
risk. The servicing function is typically
measured using the level of quality service
provided and the intermediation activity is
measured using its risk management skills
(Harker and Zenios, 1998). There is empirical
evidence of the impact of service level on the
performance of financial institutions (Ittner
and Larcker, 1996) and also that of risk-taking
skills on the overall performance (Santomero
and Babbel, 1997).
Benchmarking on the basis of overall
financial performance and resultant strategic
grouping can help the banks to restructure
their policy choices to compete in this
dynamic environment. Analysing its position
in the performance hierarchy, a bank can
take decision on certain strategic variables
like product mix, client mix and distribution
channel whereby they can follow the market
leaders and devise their improvement
strategy. Comparing with industry
benchmarks can enable a bank to analyse the
which the bank is utilizing different
resources to deliver customer value, and its
human resource management. Thus, there is
a need to devise a methodology to measure
the overall performance of the banks with
respect to their competition using the
financial parameters, which could help
individual banks to take long-term strategic
decisions. This paper is set in this context.
Performance analysis of financial
institutions, particularly commercial banks,
has been a very well researched topic. The
whole idea of measuring performance of
banks is to separate out those which are
doing well, from those which are doing
poorly. Performance of a bank is generally
conceptualized as the extent to which the
bank is able to utilize its resources to
generate business transactions, and is
measured by their ratio, which we call
efficiency. Efficiency is measured by the
ratio of outputs to inputs, where larger value
of this ratio indicates better performance.
Studies of bank performance have, to date,
concentrated on obtaining a single
perspective of efficiency (Cook and Hababou,
2001). Traditional accounting and financial
ratio methods (like return on equity, return
on assets) have been very useful in the past
for providing information for benchmarking
a bank's performance, but they have
methodological limitations, which are
discussed later. Data envelopment analysis
(DEA) is a mathematical approach to handle
situations with multiple inputs and multiple
outputs and has been a proven way to
measure bank performance. This frontier
analysis method can identify those banks
which are able to convert multiple inputs to
produce higher amount of a combination of
outputs. These are called efficient banks and
their efficiency is measured by the ratio of
their combination of multiple outputs to
their multiple inputs. Banks which have the
scope to further increase their outputs given
their existing inputs are considered to be low
on efficiency (Coelli et al., 1998).
Performance measurement using frontier
efficiency approach is quite well established
in the literature. The proceedings of the
Wharton School conference on The
Performance of Financial Institutions (1999)
include several articles, which have used the
frontier efficiency scores to measure
performance of banking firms.
[ 123 ]
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
[ 124 ]
Athanassopoulos (1999) developed an
efficiency benchmarking method for
measuring performance of retail bank
branches in Greece. Soteriou and Zenios
(1999) proposed a common framework of
efficiency benchmarking model combining
operations, service and profitability to
determine the overall performance of bank
branches in Cyprus. Thus, in case of multi-
dimensional performance measurement, we
use the concept of ``efficiency'' to benchmark
``performance'' of banks.
The objective of this paper is to explore
efficiency analysis and performance
benchmarking of individual commercial
banks in the Indian banking sector and the
strategic grouping of these banks based on
their performance parameters. Efficiency
and performance reflect on and are affected
by the policy decisions made by banks in
relation to their long-term business
strategies. Therefore, the paper analyses
strategic groups of banks based on
homogeneity in converting resources into
performance. Thus, we address a unique
research issue of the link between
performance benchmarking and strategic
grouping. The focus of this paper is primarily
on its methodological contribution.
Background of the study and a
review of the literature
Financial statements (balance sheet and
profit and loss statement) can provide a
wealth of information regarding the
performance status and type of business
policy a firm is pursuing. Performance of a
firm is a multidimensional construct (Berger
and Mester, 1997). It has financial
components like earning ability, asset
quality and productivity measured by
different accounting ratios, which influence
the ability to maintain customer
relationship, service delivery level and
corporate image. The critical issues in
performance measurement of a service
organization have been discussed by
Gumesson (1993) and Nachum (1999), who
have used published financial figures for
quantifying performance. Frazier and Howell
(1983) used financial parameters like return
on sales, return on assets and return on
networth to understand the strategic
marketing plan of firms on the basis of
product segment, customer group served and
other business operational variables. Gupta
and Huefner (1972) used financial
performance to study the underlying
characteristics of industries. Sudarsanam
and Taffler (1985) used financial ratios to get
the underlying characteristics of 14 different
industrial sectors. Cinca (1998) obtained
strategic group with financial information
using neural network model. Pennings et al.
(1999) studied the marketing-finance
interface in financial services firms. Avkiran
(1997) measured retail performance of bank
branches in terms of key financial
parameters and explains this through
business drivers that capture the capacity to
generate retail business. Voss and Voss (2000)
used objective measures like total income,
net surplus/deficit to study the association
between strategic orientation and
performance of entertainment firms. Since
the heterogeneity and intangibility aspects of
a service sector firm are reflected in their
financial performance, so we employ
published accounting information to
determine a method of performance
benchmarking with identification of groups
having strategic homogeneity. Studies on
efficiency measurement of service sector
show that the outcomes of intangibility and
heterogeneity of service features have been
measured using concrete financial measures.
Athanassopoulos (1999) considered a two-
stage model for measuring bank efficiency,
where the resources are used by the bank to
generate a proper level of service for its
customers, which in turn is reflected in the
financial performance of the bank. In this
study, we have assumed that the banks using
different financial resources create a service
delivery mechanism for their customers,
which in turn leads to the performance of the
bank measured in terms of financial figures.
Since the model used here is an input-output
model, the intermediate layer of customer
service is not explicitly incorporated.
Although the bi-variate financial ratios
mostly used in extant research are simpler to
conceptualize and easier to calculate, they
ignore the multidimensional aspects of bank
performance. They give only a restricted,
incomplete picture of the process and fail to
account for the interactions between the
different factors, leading to contradictory
results. Our research incorporates several
critical financial variables in the same
analysis in a non-parametric multivariate
approach. Output measures, by themselves,
are not sufficient in performance assessment,
as greater inputs would naturally lead to
greater outputs. The question that
performance measurement needs to address
is whether the outputs of one bank are
greater than that of the other, when the
inputs of the two banks are the same. Our
research model incorporates both inputs and
outputs to assess performance. Also, since
there are multiple outputs and multiple
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
inputs, there needs to be a composite index
incorporating all outputs and all inputs that
are relevant to the bank marketing process.
Thus, in this study, we have taken into
consideration both inputs and output factors,
which impact on performance of a banking
firm, and their interrelationships, and thus
developed a multidimensional efficiency
scale to benchmark bank performance.
Apart from simple financial ratio method,
parametric methods like stochastic frontier
approach (Giokas, 1991) and non-parametric
methods like DEA have been used to measure
banking performance (Oral and Yolalan,
1990). Berger and Humphrey (1997) provide
an extensive account of 130 studies that
applied different frontier efficiency analysis
methods to financial institutions in 21
countries. Our research has used DEA for
performance benchmarking.
The concept of ``strategic group'' came from
Hunt's (1972) classic analysis of competition
which defined it as ``a group of firms within
an industry that are highly symmetric with
respect to cost structure, degree of product
differentiation, degree of vertical integration
and the degree of product diversification''.
Porter (1980) defines a strategic group as ``the
group of firms in an industry following the
same or a similar strategy along the strategic
dimensions''. They are the ``group of firms
which compete within an industry by
deploying similar configuration of resource
bundles'' (Mehra, 1996). Extensive discussion
about strategic groups can be found in McGee
and Thomas (1986).
The concept of strategic groups has been
used in marketing and strategy literature to
identify industry pattern and its linkage with
firm performance. Proper identification of
strategic groups helps the firms to insulate
them not only from the new entrants to the
industry but also from firms belonging to
other strategic groups in the same industry
(Porter, 1979). Zineldin (1996) discusses
strategic issues related to bank positioning.
He argues that since no bank can offer all
products/services and be the preferred bank
for all customers, each bank must examine
its strengths and opportunities and choose a
competitive position for itself in the
marketplace. Thus, we have some banks
competing in terms of deposit base, some on
loans base and some in terms of assets. This
leads to strategic grouping. The relationship
between strategic groups and firm
performance has been documented by Cool
and Schendel (1987) and by McGee and
Thomas (1986). Although, the relationship
has been inconclusive in previous studies
(Fiegenbaum and Thomas, 1990; Lewis and
Thomas, 1990), it would be of extreme
importance to investigate in this research
how the different strategic groups of banks
differ in their overall performance in terms
of efficiency. Our research has used multiple
correlation clustering (MCC) for strategic
grouping of Indian banks.
Indian banking sector
India is an important market as far as
banking is concerned. It is also interesting to
study, not only due to its sheer size, but also
because of the sweeping changes the sector
has witnessed in the last decade.
The process of financial sector reform as a
part of the broader programme of structured
economic reform started in India in 1992.
With initiation by the Narasimham
Committee report, and later in 1994 by
constituting the Board of Financial
Supervision, the government took several
important steps to strengthen the functioning
of the financial sector. Some of the important
steps were reduction in the level of cash
reserve ratio and statutory liquidity ratio
and creation of a more competitive
environment in the financial sector through
reform measures like relaxation of entry-exit
norms, reduction in public ownership in
banking industry and letting banks access
capital market for meeting their fund
requirement (Reserve Bank of India, 1999a).
In spite of all these reformatory measures,
which were aimed at providing a level
playing field to the nationalized banks of the
country, the government in October 1999 had
to constitute the Verma Committee to
identify the weak public sector banks and
develop a restructuring policy for them with
the motive to equip them to sustain in this
new liberalized regime (Verma Committee,
1999). Therefore, we feel it is important to
find out how the Indian banks, belonging to
both public and private sector, would be able
to compete with the multinational banks. The
framework of strategic grouping would be
necessary for a bank to identify its position
vis-a-vis competitors and to enable poor
performing banks willing to switch over to
better groups. A bank needs to understand
the inherent dimensions, which make that
group more efficient. It also has to
comprehend what sort of structural changes
in its long-term business policy are required.
In this study, we considered a total of 68
banks which includes all the 27 public
owned banks, 21 foreign owned and 20
privately owned banks operating in India
(see Table I for the list of banks studied with
their ownership forms).
The rest of the paper is structured as
follows: first we delineate the research
questions and explain their significance.
[ 125 ]
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
[ 126 ]
Table I
List of banks studied with their ownership forms, 1996-1999
1 Bank Of America (Foreign)
2 IndusInd Bank (Private)
3 Deutsche Bank (Foreign)
4 ANZ Grindlays Bank (Foreign)
5 Citibank (Foreign)
6 ABN Amro Bank (Foreign)
7 HDFC Bank (Private)
8 Global Trust Bank (Private)
9 Corporation Bank (Public)
10 American Express Bank (Foreign)
11 ICICI Banking Corp (Private)
12 State Bank of Mauritius (Foreign)
13 Sanwa Bank (Foreign)
14 Hongkong Bank (Foreign)
15 KarurVyasa Bank (Private)
16 Tamilnad Mercantile Bank (Private)
17 Oriental Bank of Commerce (Public)
18 Centurion Bank (Private)
19 Karnataka Bank (Private)
20 Jammu and Kashmir Bank (Private)
21 State Bank of India (Public)
22 Standard Chartered Bank (Foreign)
23 Bank of Nova Scotia (Foreign)
24 State Bank of Patiala (Public)
25 Sakura Bank (Foreign)
26 Credit Lyonnais (Foreign)
27 Bank of Baroda (Public)
28 State Bank of Bikaner and Jaipur (Public)
29 Dena Bank (Public)
30 State Bank of Saurashtra (Public)
31 Banque Nationale De Paris (Foreign)
32 State Bank of Hyderabad (Public)
33 State Bank of Travancore (Public)
34 Punjab National Bank (Public)
Then, there is a discussion on the
methodology used in this research,
specifically on data envelopment analysis
with some reference to its application to
banking efficiency and on multiple
correlation clustering and its use in
identifying homogeneity among units. It is
followed by a discussion of our data sources,
method of analysis and the results.
Conclusions and scope for future research
are discussed in the last section.
Research questions
Research on performance and efficiency of
the Indian banking industry is rare in extant
literature. Notable among them are
Bhattacharya et al. (1997) and Saha and
Ravisankar (2000). Bhattacharya et al. (1997)
examined the impact of liberalization on the
efficiency performance of the Indian
banking industry. They studied the
productive efficiency of 70 Indian
35 United Western Bank (Private)
36 Societe Generale (Foreign)
37 UTI Bank (Private)
38 Bank of Madura (Private)
39 Bank of India (Public)
40 State Bank of Mysore (Public)
41 Union Bank of India (Public)
42 Bharat Overseas Bank (Private)
43 Canara Bank (Public)
44 Abu Dhabi Commercial Bank (Foreign)
45 Andhra Bank (Public)
46 State Bank of Indore (Public)
47 Federal Bank (Private)
48 Chase Manhattan Bank (Foreign)
49 City Union Bank (Private)
50 Allahabad Bank (Public)
51 Lakshmi Vilas Bank (Private)
52 Oman International Bank (Foreign)
53 Bank of Tokyo Mitsubishi (Foreign)
54 British Bank of The Middle East (Foreign)
55 Indian Overseas Bank (Public)
56 Punjab and Sind Bank (Public)
57 South Indian Bank (Private)
58 Central Bank of India (Public)
59 Bank of Maharashtra (Public)
60 Syndicate Bank (Public)
61 Catholic Syrian Bank (Private)
62 United Bank of India (Public)
63 Vijaya Bank (Public)
64 Nainital Bank (Private)
65 Credit Agricole Indosuez (Foreign)
66 UCO Bank (Public)
67 Ganesh Bank of Kurundwad (Private)
68 Indian Bank (Public)
commercial banks during the earlier phases
of liberalization (1986-1991). They used a two
stage approach where they first calculated
the radial technical efficiency scores using
DEA and then used stochastic frontier
analysis to attribute variation in efficiency
scores to three sources: temporal, ownership
and noise component. In the DEA phase,
they followed the intermediation approach
where they considered a bank to use
resources like operating expense and
interest expense to provide service to its
customers measured in the form of
advances, investments and deposits. In the
second phase of their study, they considered
exogenous variables like governmental
regulations, which influenced number of
branches in the semi-urban and the rural
areas, ratio of priority sector lending to total
advances and capital adequacy ratios of the
banks. Saha and Ravisankar (2000)
measured the efficiency of Indian public
sector banks using the method of DEA. They
studied the efficiency of the Indian public
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
sector banks in two phases in the post
liberalization phase (1992-1995). In the first
phase, certain key ratios like deposits to
establishment expenses and advances to
establishment expenses; and deposits to staff
and advances to staff were considered and
the banks were plotted in a two dimensional
The bank performance model employed in
graph to identify better performing banks.
In the second stage, for further refinement of
their finding, they used DEA to find out the
relative efficiency of Indian banks. They
considered four input variables namely
interest expenditure, establishment
expenditure, non establishment expenditure
and six outputs, namely deposits, advances,
investments, non interest income, interest
spread and total income as output variables.
They found that the performance of the
public sector banks had generally improved
over years with the exception of a few banks,
which continued to be at the lower end of the
range during the period of study. No study
so far has gone beyond efficiency
measurement purely from a technical point
of view. In addition, the methodology
employed also has shortcomings because it
generates higher simple efficiencies through
the use of self-appraisal of individual banks.
Further, the linkages between performance
and strategic groups have remained
unexplored so far. This paper addresses
these gaps.
We have two broad research questions in
this study:
1 How to obtain a performance
benchmarking of the Indian banking
sector from their financial parameters.
2 Whether any groupings of the Indian
banks can be obtained based on
homogeneity in business strategies.
In this paper, we conceptualize performance
of a bank in terms of its efficiency in
converting its resource inputs to transaction
generating outputs. Saha and Ravisankar
(2000) suggest that DEA could be a suitable
approach towards measuring the relative
efficiency of banks in the Indian context.
DEA has also been used to analyze bank
performance in Taiwan (Chen, 2001),
Australia (Sathye, 2001), the USA (Mukherjee
et al., 2001; Golany and Storbeck, 1999;
Sherman and Ladino, 1995; Sherman and
Gold, 1985), UK (Thanassoulis, 1999), Canada
(Schaffnit et al., 1997; Parkan, 1987), Greece
(Athanassopoulos, 1997; 2000; Vassiloglou and
Giokas, 1990; Giokas, 1991), Turkey (Oral and
Yolalan, 1990), Cyprus (Zenios et al., 1999),
Mid East (Kantor and Maital, 1999) and
Holland (Dekker and Post, 2001). To obtain
strategic groupings of Indian banking sector,
we use the method of MCC. This can identify
homogeneous groups having uniform
efficiency measures.
Methodology
The performance model
this research is a relative evaluation of their
overall efficiency using DEA. Here, we
adopted the intermediation approach where
the banks are considered to play the role of
intermediaries of collecting funds in form of
deposits, incurring expenses to service
transactions and using resources to disburse
loans and for other income generating
activities. We took five parameters as output
variables in our DEA model. They are:
1 Deposits.
2 Net profits.
3 Advances as given by each individual
bank.
4 Non-interest income like sum of
commission exchange and brokerage; sale
of investments; revaluation of
investments, sale of land/buildings;
exchange transactions; income earned
from dividends and other miscellaneous
income.
5 Interest spread which is the difference
between the interest earned by the bank
and the interest paid by it.
The five input parameters taken were:
1 Net worth of the banks.
2 Borrowings of the banks.
3 Operating expenses which are the non-
interest related expenses like sum of
establishment expenses; rent, taxes and
electricity; printing and stationery;
advertising; depreciation; director's fees;
auditor's fees; law charges; post/ telegram
and telephone expenses; repair and
maintenance; insurance and
miscellaneous other expenses.
4 Number of employees in the country.
5 Number of bank branches in the country.
The inputs and outputs are listed in Table II.
The choice of the inputs and outputs is
influenced by literature on DEA applications
in banking industry. The inputs and outputs
Table II
List of input variables and output variables
Input variables Output variables
Net worth Deposit
Borrowings Net profit
Operating expenses Advances
Number of employees Non-interest income
Number of branches Interest spread
[ 127 ]
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
used in earlier DEA applications in banking
industry are listed in Table III.
All the inputs and outputs selected in this
study are important variables as far as bank
marketing is concerned. We know the overall
productivity of any business is largely
financial. Its outputs include its cash flows,
the industry. The outcome of all such
profits and its competitive positioning in the
industry. Its inputs consist of investments,
technology, expenses, and people, among
other things. Efficiency of any firm is
measured by how well they can manage their
resource to get superior performance
(Bonoma and Clark, 1988). A bank deploys
resources like its establishment for doing
business, technology for better and faster
transactions, human resource for a higher
level of service delivered and different types
of marketing efforts for increase in its
market share and facing the competition in
activities results in financial performance. In
our bank efficiency measurement model, we
have considered the distribution network of
the bank to be represented by inputs like
``number of employees'' and ``number of
branches''. ``Operating expense'' is a
surrogate of administrative and marketing

Table III
DEA in banking industry a survey
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Author
Sherman and Gold (1985)
Parkan (1987)
Oral and Yolalan (1990)
Vassiloglou and Giokas (1990)
Giokas (1991)
Sherman and Ladino (1995)
Athanassopoulos (1997)
Bhattacharya et al. (1997)
Schaffnit et al. (1997)
Kantor and Maital (1999)
Golany and Storbeck (1999)
Thanassoulis (1999)
Zenios et al. (1999)
Country of No. of
study banks Input variable Output variable
USA 14 Labour, expenses, space Number of transactions
Canada 35 Labour, expenses, space, rent, terminals Number of transactions,
customer response, error corrections
Turkey 20 Labour, terminals, number of accounts, Number of transactions
credit applications
Greece 20 Labour, supplies, floor space, Number of transactions
computer terminals
Greece 17 Labour, expenses, rent Number of transactions
USA 33 Labour, expenses, rent Number of transactions
Greece 68 Number of employees, ATMs, Volume of loans, time deposit accounts,
computer terminals, interest costs, saving deposit accounts,
non-interest costs, approachablity, current deposit accounts,
location of branch, image of bank, non-interest income
product range, network size
India 74 Interest expense, operating expense Advances, deposits, investments
Canada 291 Personnel (Teller, typing, accounting, Transactions (counter transactions,
supervision, credit) counter sales, security transactions,
deposit sales, commercial loan sales,
personal loan sales), maintenance
(commercial and personal loan
accounts)
Mid-East 250 Labour costs, services, area Number of demand deposits, customer
service transactions, credit cards,
commision on import-export, commercial
accounts activity
USA 182 Labour, area, marketing Loans, deposits, depth (average number
of accounts per customer), satisfaction
Britain Number of facilities, number of sales Mortgage applications secured,
persons, opening hours, market size insurance sales, saving accounts sales
estimate, existing customer base,
transactions
Cyprus 144 Managerial personnel, clerical Total amount of work produced in time
personnel, computer terminals, work (hours)
space, current accounts, savings
accounts, foreign currency accounts,
credit applications

[ 128 ]
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
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expenditure. Market reputation is
represented by input variables like
``borrowings'' and ``net worth''. Market
performance is measured by outputs like
``deposits'', ``net profits'' and ``advances''.
``Non-interest income'' and ``interest spread''
serve as proxy of customer service. Thus, we
can link the choice of input and output
measures to marketing issues.
Data envelopment analysis (DEA)
DEA is a linear programming technique used
for measuring relative efficiency for a set of
homogeneous decision-making units (DMUs)
in converting multiple inputs (resources) to
produce multiple outputs (performances). It
can identify a set of efficient or ``best
practice'' units (efficiency 1) for which no
other decision-making units or linear
combination of units has as much or more of
every output (given inputs) or little or less of
every input (given outputs). For inefficient
DMUs (efficiency < 1), DEA can measure the
slacks in each of the input and output
variables and also derive a reference group of
efficient units with which they can be
directly compared (Cooper et al., 1999). The
basic mathematical formulation of DEA is
given in Formulation 1 in the Appendix.
Since the pioneering work by Charnes
et al. (1978), DEA has been extensively
applied to study efficiency of homogeneous
units like banks and branches of individual
banks. Other than banks, DEA has also been
applied to sectors like educational
institutions (Sarrico and Dyson, 2000),
hospitals (Harris et al., 2000), and police force
(Thanassoulis, 1995).
DEA has been extensively used to study
performance of banking sector both for banks
as a whole and for branches of individual
banks in the last decade. In the literature,
two types of approaches have been used by
researchers to measure efficiency of a
financial institution: production approach
and intermediation approach. Under the
production approach, financial institutions
are thought to be producers of loans and
deposit accounts for their customers. They
perform transactions and process documents,
such as processing the loan applications.
Here, the output is measured by the number
and type of the transactions carried out by
the financial institution or the number of
deposits and loan accounts serviced by the
institution. This approach is more suitable
for measuring efficiencies of branches of
financial institutions such as branches of a
bank because customer level transactions are
carried out at the branch level where the
branch managers have little control on the
overall decision making regarding the
funding and investment decisions of the bank
(Berger and Humphrey, 1997). Sherman and
Gold (1985) used this approach to measure
performance of the branches of a US savings
bank. This approach has also been used by
Vassiloglou and Giokas (1990), Schaffnit et al.
(1997) and Soteriou and Zenios (1999).
In the alternative intermediation
approach, financial institutions are thought
to be intermediaries between the savers and
the investors where the outputs are
considered in terms of value of loans rather
than the number of loan accounts, and the
inputs are measured by the various costs of
labour, capital, deposits and other resources.
This approach is more suitable for evaluating
the performance of an entire financial
institution, as this is inclusive of the interest
expenses which the institution is incurring.
This is unlike the production approach,
where the focus is only on the operating cost,
ignoring the interest expenses (Berger and
Humphrey, 1997). This approach has been
extensively used in performance
benchmarking studies of banking
institutions. Seiford and Zhu (1999) used it for
studying the efficiency of 55 US commercial
banks. This approach has also been used in
studies like Barr et al. (1994) and
Athanassopoulos (1997).
In this study, our objective is to do
performance benchmarking of the 68 banks
operating in India. Since, following the
process of financial liberalization in India,
the sustenance of any banking firm depends
on its intermediation power of transferring
funds from savers to investors and since
their profit maximization would involve
minimization of total cost which includes
both operating and interest expenses
incurred and not just the production cost, we
have considered the ``intermediation
approach'' to measure efficiency of Indian
banks.
Multiple correlation clustering (MCC)
Next, we identify strategic groups of the
banks with their efficiency measures using
MCC. This would help bank management to
identify their strategic group, key
competitors, and strategic dimensions for
future planning. MCC is a method of divisive
clustering where the entire data set is
partitioned into two sub-sets; these sub-sets
are further partitioned, and so on with the
objective of identifying homogeneity between
objects (Doyle, 1992). Correlation between
variables in a set of data in a matrix form is
obtained and the data set is divided into two
parts based on the sign of the correlation
coefficients. So, members within one group
are positively related to each other but have a
[ 129 ]
 Avinandan Mukherjee, negative relationship with the members of Table IV
Prithwiraj Nath and the other group. Each group is again Average efficiency scores of Indian banks by
Manabendra Nath Pal
Performance benchmarking subdivided into its two sub-groups according ownership form, 1996-1999
and strategic homogeneity of to the sign of the correlation coefficients
Indian banks among the group members and the iteration
1999 1998 1997 1996 Average
International Journal of Bank is continued until the final correlation All
Marketing Mean 0.74 0.73 0.87 0.67 0.75
20/3 [2002] 122139 matrices consist of values very close to 1 or
1. This clustering algorithm is extremely SD 0.19 0.19 0.14 0.24 0.04
powerful as it always considers the global Publicly owned
data, is stable in case of missing data and is Mean 0.91 0.95 0.92 0.68 0.86
impervious to multicollinearity (for details SD 0.15 0.09 0.14 0.22 0.05
refer to Doyle, 1992; Doyle and Green, 1994).
Privately owned
Data Mean 0.86 0.93 0.94 0.98 0.93
The source of the data used in this research is SD 0.14 0.09 0.08 0.04 0.04
the Report on Trend and Progress of Banking Foreign owned
in India published by the Reserve Bank of Mean 0.81 0.81 0.96 0.84 0.85
India (1999b). This is an annual report, which SD 0.22 0.22 0.09 0.22 0.06
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contains the financial information about all

commercial banks operating in India,
including public, private and foreign banks.
Data were collected for 68 banks over the
period 1996-1999. All banks, on which data
existed in the report for the given period,
were included in the research. Some of the
newly opened private and foreign owned
banks were not considered, as data for the
entire period were not available. All the
financial data are in terms of Indian Rupees
(in millions).
Analysis and results
We performed our analysis in three stages.
Stage 1: DEA efficiency results
We employed output oriented, constant-
returns-to-scale CCR DEA model (Charnes
et al., 1978), where we assume that the banks
are trying to deliver maximum output by
using available resources. Banks are studied
sector-wise according to ownership and also
in the collated form where they are compared
across ownership over the time period 1996-
1999.
Table IV gives the summarized form of the
average efficiency figures by ownership form
over the period 1996-1999. Private banks have
the highest efficiency figures and the least
variation whereas foreign owned banks, on
the contrary to our expectations, show the
least average efficiency and maximum
variation. Even after rapid technology
applications and aggressive marketing effort
by the foreign banks, the public sector banks
have performed better. Almost throughout
the entire period of study, the foreign banks
showed more variability in performance
than the publicly owned banks because the
foreign banks depend on less stable corporate
resources and inter-bank market borrowings
[ 130 ]
whereas the domestic banks have more
extensive branch networks, distribution
power and therefore a more stable retail
business.
The efficiency distribution charts for the
overall banking sector over the period of four
years is shown in Figure 1.
Thus from the first stage, we get the overall
relative efficiency figures of all the banks
according to the ownership form over the
four years of time period. Relative ranking in
terms of operational efficiency and their
variations year wise for individual banks can
be obtained from the results.
Stage 2: cross-efficiency results
The main shortcoming of this traditional self-
efficiency approach in DEA is that each bank
tries to optimize its own weight to get
maximum efficiency, while there can be
other banks which can perform even better
with these weights. This tends to
overestimate the efficiency of most banks,
leading to a clustering around the maximum
efficiency value of 1. This makes
discrimination difficult. So in our second
stage of analysis, we employed a more
``democratic'' concept of cross-efficiency,
where the efficiency of a unit is obtained by
using its peer group ratings and their optimal
weights are substituted to find out the
relative efficiency of all the banks in this
case.
Although the terms self-appraisal and peer-
appraisal have been more commonly used in
the personnel management vocabulary of
individual assessment (people), here we have
used the concepts of self-appraisal and peer-
appraisal to discuss the efficiency of Indian
banks. Self-appraisal is the efficiency of a
bank as it appraises itself, while peer-
appraisal is the efficiency of a bank as
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
Figure 1
CCR efficiency distribution for Indian banks by ownership form, 1996-1999
evaluated by its peers. A uniqueness of the
DEA approach is that each bank is allowed to
choose the weights of its inputs and outputs
in such a fashion that maximizes the ratio of
their weighted output to weighted input, i.e.
its efficiency. It is similar to an individual
rating himself or herself and trying to project
strengths and hiding weaknesses so that the
overall image is enhanced. This, in DEA
terms, is called self-appraisal. Banks which
are stronger in some of the outputs, or use
less of some of the inputs compared to their
competitors may allocate higher weight to
these to maximize their output-to-input ratio.
Thus, in effect, they are focusing on their
strengths and hiding their weaknesses to
project themselves as more efficient or ``self-
efficient''. So, there is an inherent tendency
for the banks to over-rate themselves. To
remove this inbuilt deficiency in the
traditional DEA-based efficiency
measurement method, we suggest the use of
cross-efficiency which has intuitive
interpretation as peer appraisal. In
calculating the cross-efficiency measures, we
take the weights which each bank has used to
maximize its own self-efficiency and use
them in calculating the efficiency of each of
the other banks to find out which banks
having similar profile of inputs and outputs
would have been more efficient. This is
carried out for all the banks. So virtually, the
weights chosen by each bank for its own
benefit is used to find the efficiency of each of
its peers and the process is called ``peer-
efficiency'' measurement.
The mathematical formulation of cross-
efficiency is discussed in Formulation 2 in
the Appendix. We use the set of optimal input
and output weights of each bank from the
CCR DEA output to calculate the efficiency of
all other banks. We thus calculate the cross-
efficiency matrix where each bank is rating
all other banks using its own optimal
weights. This is like taking responses of each
bank about its rival banks.
Then we identify which banks enjoy the
maximum relative increment when we shift
our focus from peer-appraisals to self-
appraisal, and term them as ``Maverick''
banks (Doyle and Green, 1994). The
mathematical formulation of Maverick
Index is discussed in Formulation 2 in the
Appendix. Table V gives a summary of the
cross-efficiency and the maverick indices of
all banks as well as by their ownership form.
The publicly owned banks have the least
average maverick index and the foreign
owned banks have the most. This signifies
that the publicly owned banks are rated
relatively uniformly in terms of self-
appraisal as well as peer-group appraisal.
The difference between self- and cross-
efficiencies in case of public banks is much
less than the foreign owned banks. In case of
foreign banks, the cross-efficiencies are
much less than the self-efficiencies, causing
them to have a large maverick index. This
means that the foreign banks are able to
manipulate their areas of strength in a much
better way when they are evaluating
themselves using self-efficiency. To have a
[ 131 ]
 Avinandan Mukherjee, Table V
Prithwiraj Nath and Average cross-efficiencies (CE) and maverick indices (MI) of Indian banks according to
Manabendra Nath Pal
Performance benchmarking ownership form, 1996-1999
and strategic homogeneity of
Indian banks 1999 1998 1997 1996 Average
International Journal of Bank CE MI CE MI CE MI CE MI Self-eff. CE MI
Marketing All banks
20/3 [2002] 122139
Mean 0.41 0.91 0.41 0.94 0.52 0.74 0.35 1.13 0.75 0.42 0.93
SD 0.12 0.85 0.13 0.93 0.14 0.33 0.16 0.94 0.04 0.14 0.76
Publicly owned
Mean 0.74 0.24 0.77 0.27 0.68 0.37 0.47 0.48 0.86 0.66 0.34
SD 0.15 0.11 0.14 0.16 0.14 0.19 0.13 0.19 0.05 0.14 0.16
Privately owned
Mean 0.60 0.45 0.74 0.29 0.69 0.39 0.53 0.98 0.93 0.64 0.53
SD 0.12 0.18 0.13 0.17 0.11 0.19 0.12 0.57 0.04 0.12 0.27
Foreign owned
Mean 0.45 0.85 0.47 0.75 0.61 0.66 0.45 1.04 0.85 0.49 0.83
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SD 0.14 0.32 0.14 0.44 0.14 0.37 0.19 0.68 0.06 0.15 0.45

higher self-efficiency score, they are putting
more weights on those input variables or
resources (say number of employees,
number of branches or operating expense),
which they are using less than industry
standards for comparable output. But, when
we tried to measure their cross-efficiency by
using the weights which their peers (public
and private banks) have used on the
resources and the performance variables, we
found they were having much less
efficiency. This also shows that the private
banks could have posted a better
performance if they had the luxury of just a
few branches in only the key metropolitan
cities of India without having to follow
governmental diktats in their recruitment
policy, which would bring down their
overall level of operating expenditure.
It is seen that sorting the banks according
to their maverick indices show that the most
cross-efficient banks are not always 100 per
cent simple efficient. The most maverick
banks are generally less efficient and the
least maverick banks are almost 100 per cent
efficient. So the least maverick but 100 per
cent efficient banks across the years can be
considered as the best performers in terms of
self-appraisal as well as peer group
appraisals. The same analysis was performed
for the three different segments and we
identified the best performers in each
segment. This was also used to distinguish
among the most efficient banks, thus
obtaining a meaningful ranking within each
set.
Thus, we eliminated the tendency of the
banks to over-rate themselves and made the
efficiency figures more realistic. However,
even this method of cross-efficiency or peer-
appraisal, when used alone, does not give
[ 132 ]
proper weightage to the superior core
competence or to the better positioning of the
banks on selected inputs or outputs in the
market. As a result, some of the very good
banks could suffer from underestimation of
their efficiency measures and some laggards
could get overestimated. Thus, to make this
study more realistic to the market
positioning of individual banks, we
developed four measures using a
combination of self- and cross-efficiency
figures of the banks. The estimates developed
ranged from the theoretically least to the
highest values of efficiency, or in other
words, we tried to measure the band of
efficiencies for each individual bank. The
four measures employed are furnished in
Formulation 3 in the Appendix.
Thus measure 1 which is the geometric
mean of cross-efficiencies, gives the
minimum efficiency value, and measure 4,
which is the arithmetic mean of simple
efficiencies, gives the maximum efficiency
value of any bank (refer to Table VI). The
public sector banks have scored much better
than the private or the foreign owned banks
in terms of these four estimates. Figure 2
explains the self, maximum and the
minimum level of efficiency as obtained from
self- and cross-efficiencies of individual
banks for the year 1999.
Stage 3: clustering of strategically
homogeneous banks
In the third stage of our analysis, with data
for the banks in the year 1999, we used the
method of multiple correlation clustering to
identify banks having homogenous
operational efficiencies. With the cross-
efficiency matrix, first we calculated the
correlation coefficient between the banks
 Avinandan Mukherjee, Table VI
Prithwiraj Nath and Average efficiency estimates of Indian banks according to ownership form, 1996-1999
Manabendra Nath Pal
Performance benchmarking 1999 1998 1997 1996
and strategic homogeneity of
Indian banks Est.1 Est.4 Self-eff. Est.1 Est.4 Self-eff. Est.1 Est.4 Self-eff. Est.1 Est.4 Self-eff.
International Journal of Bank All banks
Marketing Mean 0.47 0.58 0.74 0.45 0.57 0.73 0.53 0.69 0.87 0.36 0.49 0.67
20/3 [2002] 122139
SD 0.13 0.14 0.19 0.14 0.14 0.19 0.19 0.13 0.14 0.19 0.19 0.24
Publicly owned
Mean 0.81 0.82 0.91 0.84 0.86 0.95 0.77 0.79 0.92 0.52 0.57 0.68
SD 0.14 0.14 0.15 0.12 0.11 0.09 0.13 0.13 0.14 0.16 0.16 0.22
Privately owned
Mean 0.69 0.73 0.86 0.80 0.83 0.93 0.78 0.81 0.94 0.52 0.75 0.98
SD 0.12 0.12 0.14 0.11 0.10 0.09 0.09 0.09 0.08 0.12 0.06 0.04
Foreign owned
Mean 0.53 0.63 0.81 0.57 0.64 0.81 0.69 0.78 0.96 0.56 0.64 0.84
SD 0.15 0.17 0.22 0.16 0.16 0.22 0.11 0.09 0.09 0.19 0.19 0.22
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Figure 2
Measures of cross-efficiencies and its estimates, 1999

using Kendall's Tau-b (Leach, 1979). Within
each cluster, ranking of the units were
performed using cross-efficiency figures and
the leaders of each cluster constituted the
Paragon Set (Doyle and Green, 1994) which is
an approximate analogue of the reference set
with which members of the cluster can
compare themselves, and any unit in the set
can be formed as a linear combination of the
members of the paragon set. The same thing
can be repeated with the bank data for the
other years to form a homogenous cluster of
banks and identify the reference set. In
Figure 3 (refer to the Table I for the serial
numbers of banks), the best performing
foreign and private sector banks have been
found to form clusters. State Bank of India
along with its group banks like State Bank of
Patiala, State Bank of Bikaner falls in the
same strategic group. Since these banks have
uniformity in operations, so they are
clustered together as expected. Similarly, the
laggards in each of the categories like UCO
Bank and Bank of Tokyo-Mitsubishi; United
Bank of India and Bank of Maharashtra have
combined to form groups. The best
performers according to their cross-
efficiency figures were identified within each
cluster and they form the Paragon set. Those
banks having high maverick index were
rejected from this paragon Set. Thus, the
cross-efficiency function of any bank can be
obtained from a linear combination of the
members in this paragon set. The
implications of identification of such
strategic groups can be immense for
[ 133 ]
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
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Figure 3
All 68 Banks 1999
[ 134 ]
long-term business policy decisions. Banks in
the same cluster have identical strategies in
converting resources into output parameters.
They also show similarity in the manner in
which they combine various critical inputs
to their banking process to generate a
combination of critical outputs. If a poor
performing bank wants to switch over to a
better performing group, it has to understand
the strategic dimensions which make a group
efficient. It also has to comprehend what sort
of structural changes in its future strategy is
required to make the switching successful.
Homogeneous strategy cluster identification
can give them such opportunities.
The groups in Figure 3 were formed
according to the performance of the banks on
key financial parameters. We have the good
performers coming together to form their
own group with the bad performers getting
segregated into other groups. Within each
group, the best performers were chosen using
their cross-efficiency measures and the set of
best performers from each group constituted
the paragon set which can be taken as the
representative of the entire set of banks
considered in this study. The members of this
paragon set are inherently similar in
strategy but better in performance than the
other banks in the same cluster. So, the first
objective of all the banks in each cluster
would be to try to follow the measures
adopted by their paragon set member in
order to improve their own performance.
Since the clusters have been formed by the
peer appraisal rating, banks coming under
the same cluster have similar ratings given
by their peers, and therefore we can assume
they are homogeneous in terms of business
strategy approach. So, the vertical shift
within the cluster to emulate the paragon set
is a viable alternative for each bank to
improve performance and it could be
achieved within a short period of time. After
improving their performance within the
cluster, the banks should try to re-orient
their business strategies depending on their
long-term vision to move onto a better
performing cluster which would be a
horizontal shift. This can only be possible if
the banks are going for a strategic redesign
and significantly overhauling their long-term
business plan. This could involve changing
position in the marketplace, targeting
different types of customer base, changing
product portfolio, and so on. This would
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
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require a long-term effort as it means
restructuring the overall business plan. To
embark on incremental improvement, a bank
from a poor performing cluster can try first
to emulate the paragon set member of its
immediate better performing group and get a
cue of how to proceed for this new business
plan. The clusters obtained in our study with
identification of the paragon set members
provide valuable direction to the different
banks to implement vertical and horizontal
shifts in business strategy.
Discussion
The results are interesting, particularly
with respect to the difference between
publicly owned banks and foreign banks.
The study reveals that the public sector
banks are more efficient in India than
private or foreign banks. This is counter
intuitive and warrants discussion. The
public sector banks cater to a much larger
number of customers across the country and
are much more widespread in their
operations. On the other hand, the foreign
banks cater to small niche markets, and do
not always reap the full benefits of the high
technology and huge investments in their
branches. This is particularly so, given that
our efficiency measure requires banks to
manage their resources better and to be cost-
competitive. This finding is supported by
Saha and Ravisankar (2000), who found that
the performance of the public sector banks
had improved over years, except a few banks
which continued to be at the lower end
during the period of study. Bhattacharya
et al. (1997) also found publicly owned banks
to be most efficient with a temporal decline
in their performance. They explained it in
terms of the governmental regulatory
policies. Another analogy is provided by the
study on Australian banks by Sathye (2001),
who found the domestic banks to be more
efficient than foreign-owned banks.
Conclusions, limitations and future
research
Like any other study, this research is also not
without its limitations. The variables
presented should be regarded as examples
rather than universally accepted measures of
bank performance. The variables used are all
objective measures, which influence
perceptual variables like customer
satisfaction or service quality. However, due
to methodological limitations of DEA,
perceptual variables were not directly
included in the study. Strategic groups are
generated here using performance
indicators. In a sense, the clusters are
generated on the inputs and outputs, and it is
assumed that the strategies adopted by the
banks are reflected in these inputs and
outputs. Further, in this research, we have
not measured marketing performance
directly but rather overall business
performance of banks. This is consistent with
our linking of performance with the strategic
issue of managing resources to be cost
competitive.
The major contribution of this paper is the
methodology used to measure performance of
the Indian banking sector after
liberalization. Applications of DEA in
marketing have been rare so far, with few
exceptions. Donthu and Yoo (1998) used DEA
to assess retail productivity, using variables
like store size (in square yards), store
manager's experience with the chain (years),
store location (inside a shopping mall versus
free standing) and promotion expense (in
dollar) as inputs, and sales (dollars) and
customer satisfaction as outputs. Rhonda
et al. (1998) also employed DEA to evaluate
retail store efficiency, with variables such as
labor (full time employee per square-foot),
experience (employee tenure), location
related cost (occupancy cost), and internal
process (inventory cost) as inputs, and dollar
sale and dollar contribution as outputs. Cook
and Hababou (2001) proposed a model to
evaluate simultaneously the sales, service
and aggregate efficiencies of a bank branch
using DEA. Our contribution lies in using the
modified DEA methodology to understand
issues of performance benchmarking and
strategic homogeneity through application of
output oriented CCR model on the banking
sector over a period of four years. We
addressed the methodological weaknesses of
conventional DEA by incorporating the
measure of cross-efficiency apart from the
classical self-efficiency. We proposed a
second ranking algorithm using the
maverick indices of the banks to enhance the
discriminating power of the analysis. We
found the publicly owned banks to be more
efficient having less variation in the overall
efficiency pattern, and the foreign banks to
be the most vulnerable lot. In the end, we
used multiple correlation clustering to find
banks having uniform operational efficiency.
Having clustered the banks on the basis of
performance, we went for deeper analysis of
the poor-performing clusters. We identified
the banks which were found to be weak, and
probed into their published annual reports.
We found that almost all of them were
overstaffed (in terms of business per
employee and profit per employee figures)
[ 135 ]
 Avinandan Mukherjee,
Prithwiraj Nath and
Manabendra Nath Pal
Performance benchmarking
and strategic homogeneity of
Indian banks
International Journal of Bank
Marketing
20/3 [2002] 122139
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)
[ 136 ]
with high percentage of non performing
assets (ratio of net NPA to net advance),
capital adequacy ratio less than the standard
norm and high cost of funds which all
showed that business policy was not
adequately planned to withstand the nature
of competition in the market. A similar
exercise of identifying the weak banks in the
Indian banking sector using different
financial ratios was carried out by Reserve
Bank of India in 1999. They identified three
principal causes: operational issues like
high level of NPA, slow decision making,
limited product lines, mediocre service;
human resource issues like overstaffing,
high age profile, lack of training; and
management related issues like frequent
changes in the top management level of the
weak banks, lack of proper business strategy
in terms of identification of the target
segment of customers and poor risk
management skills. Interestingly enough,
although our mode of analysis was different,
we got similar results to those found by the
central bank.
Such type of performance analysis and
identification of strategic grouping can help
individual banks to identify competition,
benchmark themselves with respect to
competition, compete with better
performers, develop their own business
strategies and strive for excellence. The
study has important implications, such as
guiding government policy regarding
deregulation and mergers. The study could
also help banks with strategic marketing,
restructuring, branch closures or
downsizing.
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Appendix. Mathematical formulations of
data envelopment analysis
DEA has the following mathematical
representations:
Formulation 1
Maximize bank efficiency
X
R X
I
Eb f urb yrb g=f vib xib g
r1 i1
Subject to
X
R X
I
f urb yrj g=f vib xij g
r1 i1
 1; 8j; j 1; 2; . . . ; b; . . . N
And urb , vib   for all r; i (where r 1; 2; . . . ; R
and i 1; 2; . . . ; N )
Where
Eb : efficiency of unit b
yrj : observed quantity of output r
produced by unit j 1; 2; . . . ; b; . . . ; N
xij : observed quantity of input I used by
unit j 1; 2; . . . ; b; . . . ; N
urb : the weight (to be determined) given to
output r by base unit b
vib : the weight (to be determined) given to
input i by the base unit b
 : a very small positive number (non
Archimedean infinitesimal)
In our present study, we have applied the
output-oriented (CCR) DEA model to
measure the performance efficiency of the
Indian banks (Charnes et al., 1978).
 !
Avinandan Mukherjee, X
m X
s v

max 0  si sr u 0
Prithwiraj Nath and u
Manabendra Nath Pal u BX N
i1 r1 u B
Performance benchmarking X
n uxii @ xji =N 1 2
and strategic homogeneity of t
s:t: j xij sj xi0 ; 8i 1; 2; . . . ; m j1
Indian banks j6i
j1
International Journal of Bank 0 11=N
Marketing X
n 1

20/3 [2002] 122139 j yrj sr 0 yr0 ; 8r 1; 2; . . . ; s BYN C

i1 xii B C
@ xji A
j ; s i ; s r  0 j1
j6i
3
Where xij and yrj are the amount of i th input 2
consumed and the amount of r th output and
produced by the j th DMU. If 0  1 and all
X
N
the input/output slacks are zero, then a unit xii xji =N 1
is said to be efficient. j1
j6i
4
Formulation 2 2
For the k th unit, cross-efficiency can be
where, xii and xji are the self-efficiency of the
defined as
Downloaded by University of Ghana At 14:07 20 February 2017 (PT)

X X ith unit and the average cross-efficiency of

Eks Osy vky = Isx ukx the ith unit by its peer group. It can be shown
y x
that
s.t. (1) ukx and vky  0 and (2) Eks  1 for all v v
DMUs, including k with Osy , Isx are the u 0 11=N 1 u 0 1
u u
u u
outputs and inputs variables respectively. u BY C N
u BX
N C
uxii B xji C  uxii B xji =N 1C
For ``n'' DMUs, average cross-efficiency is t @ A t @ A
j1 j1
defined as: j6i j6i
X
ek Esk =n 1
An earlier version of this s6k X
N

research was presented at xii xji =N 1

the International DEA Maverick index of a DMU is defined as j1
j6i
Symposium 2000 on Mk Ekk ek =ek 
``Measurement and 2
improvement of productivity
in the 21st Century'' Formulation 3 and
organized by the University We used the following efficiency measures:
of Queensland at Brisbane, 0 11=N 1
Australia in July 2000. The v
u 0 11=N 1
BYN C X
N
authors thank the u
anonymous reviewers and
u
u BY C N xii B C
@ xji A xii xji =N 1
the editor of IJBM for their uxii B xji C 1 j1 j1
t @ A j6i j6i
helpful comments on earlier j1 
versions of this manuscript. j6i 2 2

[ 139 ]
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