Productivity Analysis of Commercial Banks in India

Abstract

This paper seeks to explain the productivity growth of the Indian banking sector using panel data of 63 commercial banks from 1996-2005. We have used the data envelopment analysis to calculate and decompose the Malmquist index of total factor productivity (TFP) growth into technical change, change in technical efficiency, and change in scale efficiency. It allows the identification of the sources of productivity growth which is crucial for policy formulation. The production process of a commercial bank is modeled on the basis of its intermediation role and the inputs and outputs are specified for the purpose of productivity measurement on the basis of its three important invariants-(i) asset approach (ii) value addition approach and (iii) income approach. It was found for the asset approach, all commercial banks on the average experienced a 2.5% total factor productivity growth over the period 1997-2005, while in case of value added approach and income approach it was registered at 5.7% and 0.6% respectively. In all the approaches, the overall productivity growth is the result of technical progress accompanied by stagnating and negative growth rate in the other components of total factor productivity. It suggests that the major contribution in the productivity growth is due to shift in the production frontier which may be the outcome of new investment and technology.