European Journal of Operational Research 124 (2000) 187203

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Rating of Indian commercial banks: A DEA approach

Asish Saha *, T.S. Ravisankar
National Institute of Bank Management, NIBM Post Oce, Kondhwe Khurd, Pune 411 048, India Received 7 July 1998; accepted 25 January 1999

Abstract Signicant changes have been taking place in the Indian banking scenario under the nancial sector reform initiatives of 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 on the threshold of the new millennium, eciency issues are gradually emerging as the touchstone of success. There is an emergent need for a comprehensive framework for measuring eciency of Indian banks both from the point of view of the investors as also the regulators. The present paper, based on empirical analysis, suggests that Data Envelopment Analysis (DEA) could be a suitable approach towards measuring the relative eciency of banks in the Indian context. 2000 Elsevier Science B.V. All rights reserved. Keywords: Indian banks; Eciency; Productivity; Rating; Data envelope analysis

1. Introduction Indian banking is passing through a major phase of transformation under the Financial Sector Reform initiatives launched by the Government of India since the last vesix years, under the framework provided by the Narasimhan Committee (1991). The major thrust during the rst phase of reforms beginning from April 1992 was to ensure increasing the competitive strength of the system through a process of cleaning-up of

* Corresponding author. Tel.: +91-020-673-080; fax: +91-020674-478. E-mail address: saha@nibm.ernet.in (A. Saha).

the balance sheets of the banks from past loanlosses and also through infusion of fresh capital (from the government and/or market) in order to achieve the international standards of capital adequacy requirements. It is pertinent to point out at this stage that about 60% of the total banking business is still accounted for by the governmentowned banks and about 25% is in the hands of the State Bank of India and its seven subsidiaries. Foreign banks and banks in the private and cooperative sectors account for the rest of the business. After reporting major set-backs in terms of both operating and net prot during the rst two years of reform, because of the stringent requirements of asset-classication, income recognition and provisioning guidelines, most of the banks

0377-2217/00/$ - see front matter 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 7 - 2 2 1 7 ( 9 9 ) 0 0 1 6 7 - 8

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bounced back to prot at the close of the accounting year 199596: of the 27 banks in the public sector as many as 24 showed operating prot and 19 of them also recorded net prot during this period. With most of the public sector banks showing distinct signs of improvement in nancial health at that time, the country's central bank was contemplating an initiation of a second phase of reform; a ve-point agenda was set out by the then Governor of the Central Bank. Shifting the emphasis of banking away from asset management to a more generalised framework of assetliability management, according high priority to management of credit risk, gearing up to operate in an era of deregulated interest rates, ensuring signicant improvement in customer service with appropriate technology and innovative approach to housekeeping constitute the major items in the agenda of the second phase of reforms (Rangarajan, 1996). Focus of this prescription was to raise the country's banking and nancial system to global standards. This need was formalised with the appointment of the (second) Narasimham Committee (1997) with a mandate ``to chart a programme of banking sector reforms necessary to strengthen India's banking system and make it internationally competitive...''; the committee has since submitted its report and a phased implementation of some of its suggestions is under way. It may be noted here that some public sector banks have already made successful entry into the capital market to raise equity and the State Bank of India has also raised money through GDR and bond routes; some have also raised subordinated debts. Few others are also now in the queue. Market perception about the strength and eciency of a bank usually gets reected in the premiums charged and the response to the public issues. However, there is a need for a structured approach to measure eciency of banks. The present paper attempts to provide a framework for measuring and rating the relative eciency of public sector banks in India based on the data provided by their published annual reports for the period 199192 to 199495. Two out of the 27 public sector banks were excluded from this analysis. In the case of Punjab National Bank (PNB) it was felt that with the merger of the New Bank of India with PNB in

1993, the post-1993 nancial parameters of PNB would not reect the true picture of the Bank. In the case of the second bank (State Bank of Mysore), relevant classied data was not available for one of the years. Hence these two banks were excluded from the study. The study has been conned to the post-reforms period with 199192 as the starting point for two reasons one, the account reporting format which was changed in the previous year got stabilised during 199192; second, the prudential norms regarding capital adequacy, income recognition, asset classication and provisioning were introduced in April 1992 and their impact was expected to get reected in the 199293 balance sheets and prot and loss accounts of banks. As such, the 199192 data was considered as a benchmark/base year for the study. The year 199495 was chosen as the terminal point of the study in order to validate the applicability and predictive power of the model used in the paper for evaluating relative eciency of Indian public sector banks. Accordingly, the data for the subsequent two years for these banks has been used to verify the robustness of the model on a heuristic basis. 2. Issues in evaluating eciency of commercial banks The performance of any institution is often evaluated in terms of its eciency in the use of its resources. The concept of eciency is primarily an engineering concept, concerned at the basic stage with measuring the value of (a single) output for a given level of input. In a wider context, eciency management is concerned with fuller utilisation of available inputs to achieve an optimum mix of outputs within the boundaries of feasibility in operations. Both capacity utilisation and quality of output are relevant parameters in the measurement of productivity of any decision making unit. This concept of productivity/eciency is also meaningful in the case of banking operations. In the literature pertaining to performance evaluation of banks, various measures of eciency have been proposed, like scale eciency, scope eciency,

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allocative eciency, productive eciency, technical eciency, etc.; for details one can refer to the survey made by Berger et al. (1993). The present paper mainly deals with technical eciency of banks which is based on inputoutput congurations. In the context of a service industry like banking, technical eciency reects the degree of slack in the utilisation of the physical, nancial and human resources. The need to study bank eciency arises due to a variety of reasons. Firstly, a measure of (relative) eciency provides a good indicator of the success or otherwise of a bank in a competitive market; in fact, it also reects the potentiality for failure of a banking institution. Studies reveal that banks which operate eciently have a better chance of sustaining their business in the future also. Berger et al. (1992) found that during the 1980s, the high-cost banks experienced a higher rate of failure than more ecient banks. On the other hand, in a study of banks during the 1920s Wheelock et al. (1995) found that the less technically ecient a bank was, greater its likelihood of failure. Moreover, eciency indices could also be used to evaluate the impact of changes in regulation and in market conditions on the performance of banks. Further, the mechanism will also help a bank in identifying the areas of ineciency and formulating suitable strategies to improve its relative position in the market. It can also provide a framework to the regulators to assess the health of individual banks and to work out appropriate interventions to prevent systemic failures (Lacasta, 1988). In a globalised situation, some of the parameters that determine the competitive strength of a bank have been identied (McNaughton and Diana, 1992) as Capital Adequacy, Asset Quality, Human Resources Information, Financial Innovation, Technology and Brand equity not all of which are directly measurable. A single index which can be used to estimate the relative strength of a bank can be the capital adequacy ratio. Banks with a higher capital adequacy would be in a better position to expand their balance sheets, take legitimate risks (and get higher returns) and to undertake such auxiliary services like guarantee/ underwriting, etc., with credibility in the market;

inadequate capital can constrain all these activities. A classic case is that of Continental Illinois Bank which failed due to poor asset management despite having good capital base, reecting management failure. The fact that this bank could be turned around in a span of ten years also conrms that quality of management does make a dierence to the performance of a bank. The qualitative dimensions indicated above, like induction of technology, developing a competent workforce or establishing brand equity, or making waves with innovations do come under the broad umbrella of ``management''. As a commercial organisation, protability is also a key index of the nancial health of the organisation. Keeping all these factors in view, a system of evaluation of banks, known by the acronym ``CAMEL'', was evolved and used by the regulatory authorities in many countries, these alphabets respectively represent Capital adequacy, Asset quality, Management, Earnings and Liquidity (Cole and Rebel, 1995). Bank of England (1997) has issued a consultative paper on a risk-based approach to supervision the RATE (Risk Assessment Tools and Evaluation) framework which has a broader perspective that includes CAMEL. 3. Bank eciency measurement in Indian context Prior to 1969 the Indian banking scene was dominated by private ownership. As such, prot and return on investments reected the performance prole of banks. A large part of the banking system was brought under direct government control in 1969. Nationalisation of banks brought with it a shift in focus towards optimising social benet and spatial coverage of banking services with commercial viability only as a sustenance factor. The PEP Committee (1977) proposed a system of assessment of relative performance of banks on four major aspects, viz. productivity, social objectives (spatial), social objectives (sectoral) and protability, in all 19 indicators were proposed. Similar indicators were also used by the Finance Ministry during 198586 to rate the performance of banks on a relative basis.

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While addressing the eciency issues in commercial banks, especially in the Indian context, Sukhmoy Chakravarty Committee (1985) observed, ``The concept of operational eciency of a bank in India is associated with such diverse aspects of its operations as cost eectiveness, profitability, customer services, priority sector lending, mobilisation of deposits and deployment of credit in the rural and backward regions and so on. Operational eciency in Indian banking has thus attained a wider connotation. Precisely for this reason, a generally acceptable denition of the concept and selection of appropriate indicators are beset with diculties. Nevertheless, improvement in productivity in all aspects of banking operations has to be pursued by banks as an important management objective as it vitally aects the eciency of the monetary system.'' It is pertinent to note at this point that some of the performance parameters being talked about today in Indian banking context have been highlighted even as early as 1983 by the Pendharkar Working Group (198283). The report stated: ``...there is a need for evolving a system of evaluation and rating of a bank's performance on the basis of certain parameters... To make the system of supervision more purposeful and action-oriented, the broad parameters could be (i) quality of advances, (ii) management of cash and investment portfolios, (iii) management of funds, (iv) capital adequacy, (v) protability, (vi) internal control and administration, (vii) quality of management and (viii) compliance with the socio-economic objectives by the oces in India.'' The Padmanabhan Working Group (1991) in its report to the Reserve Bank of India has recommended the adoption of CAMELS rating mechanism with the inclusion of an additional parameter S symbolising `Systems' for the purpose of supervision by regulators. In view of the technical problems in measuring management eciency, quantitative studies of bank eciency have generally assumed that the managerial factor is implicitly reected in the other four factors. A corresponding CAEL model has been developed and discussed in an earlier paper by the present authors (Saha and Ravisankar, 199596). However, CAEL rating is essentially an indicator of

the nancial condition of a bank at a particular point in time, rather than of its performance eciency. Also, only a few of the nancial ratios used in this methodology reect productive eciency, in terms of output/input relationships. This approach as such does not give a composite picture of (productive) eciency, that reects the multiple input-output situation prevalent in the banking context. Ahluwalia (1985) has pointed out that in the context of service sector in India one needs to look at the broader concept of total factor productivity, which is used to explain not merely the (productive) eciency of labour or capital but also the way the management combines these and other factors to enhance the output of the unit. The productive eciency in this approach is measured as the ratio of weighted output by weighted input, with weights assigned to various inputs and outputs on a heuristic basis. In this paper we use the `frontier model' approach to measure bank eciency, wherein the weights are determined using optimality considerations. 4. Quantifying bank eciency and data envelopment analysis A variety of techniques have been used to study the eciency of commercial banks. It is found that estimates of eciency are sensitive to the choice of technique. It is also found that dierent studies of commercial bank eciency often reach contradictory ndings. This may however be due to the fact that there are dierences in the manner in which a banking institution is modelled. Some researchers view banks as producers of loans and deposit accounts (Sherman and Gold, 1985) and measure output either by the number of transactions or by the number of accounts serviced (Production Approach). Others have argued that output of banks should be measured in terms of the value of loans and inputs are various costs of labour, capital, operations, deposits and other resources (Piyu Yue, 1992) (Intermediation Approach). Unlike the production approach, which focuses on operating cost and ignores interest expense, in the intermediation approach both operating and interest ex-

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penses are included in the analysis (Berger et al., 1987). Data Envelopment Analysis (DEA) computes the eciency of a bank in transforming inputs into outputs in relation to its peer group. Charnes et al. (1978) rst developed the DEA approach based on the concept of technical eciency of Farrel (1957). ``DEA in essence is a linear programming technique that converts multiple inputs and outputs into a scaler measure of eciency. This conversion is accomplished by comparing the mix and volume of services provided and the resources used by each bank compared with all other banks. Each bank is evaluated against a hypothetical bank with an identical output mix that is constructed as a combination of ecient banks. DEA identies the most ecient banks in a population and provides a measure of ineciency for all others. The most ecient banks are rated to have an eciency score of one, while the less ecient institutions score between zero and one. Though DEA does not give a measure of optimal eciency, it however dierentiates the least ecient banks from the set of all banks. Thus, the ecient institutions calculated using DEA establish the best practice frontier'' (Siems and Thomas, 1992). Brown and Gardner (1995), in their exploratory analysis of European banking strategies, have used the DEA approach to provide another relative eciency measure which is also referred to as `competitive advantage' or `cost/revenue eciency'. The mathematical formulation of the (relative) eciency measure for a bank in a group of banks would be as follows. Let us assume that there are p banks in the group and that there are n output variables and m input variables for a bank. Let Yjk and Xik respectively denote the jth output and the ith input for the kth bank j 1Y 2Y F F F Y nY i 1Y 2Y F F F Y mY k 1Y 2Y F F F Y p. The relative eciency Ek of the kth bank is then dened as n j1 Vjk Yjk Y E K m i1 Uik Xik 1

The eciency score of a bank will depend upon the choice of these weights. In the traditional basic eciency measure, the weights are assumed to be uniform across the input and output variables, i.e. Vjk 1/n for all j and Uik 1/m for all i, for all banks k 1Y 2Y F F F Y p. This specication does not take into account the likely variations in the intensity of contributions to efciency made by dierent input variables; similarly for outputs. DEA, however, selects the weights that maximize each bank's eciency score under the conditions that no weight is negative, that any bank should be able to use the same set of weights to evaluate its own eciency ratio, and that the resulting eciency ratio must not exceed one. That is, for each bank, DEA will choose those weights that would maximise the eciency score in relation to other banks. In general, a bank will have higher weights on those inputs that it uses least and on those outputs that it produces most. The DEA model for a specic bank can be formulated as a linear fractional programming problem, which can be solved if it is transformed into an equivalent linear form in which the bank's input and output weights are treated as the decision variables. A complete DEA solution would require one such linear program to be solved for each bank. In the present study covering 25 banks, for the kth bank k 1Y 2Y F F F Y 25, the problem corresponding to maximisation of Ek as dened in Eq. (1) above can be transformed into the following equivalent LP problem: Maximise Ek
n j1

Vjk Yjk Y

subject to the constraints m Uik Xik 1Y a b c

n j1 i1

Vjk Yjk

m i1

Uik Xik 6 0Y

Uik P 0Y

i 1Y 2Y F F F Y mY

where, Vjk is the weight placed on jth output and weight placed on ith input of the kth Uik is the bank and j Vjk i Uik for all k.

d Vjk P 0Y j 1Y 2Y F F F Y nY m n Uik Vjk X e

i1 j1

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In the above formulation, the choice of input/ output variables in the banking context is crucial. However, there is a considerable debate in the relevant literature regarding this choice; for details see Brown and Gardner (1995). Also, there is the other consideration of whether these input/ output parameters should be treated as `stock' or `ow' variables (Resti Andrea, 1997). In practice, however, researchers have generally been forced (due to data non-availability) to rely on stock measures of output/input for most purposes. The real value of bank deposits and loans have been widely used as key input and output (stock) parameters. Although there is less controversy in respect of measuring bank inputs, there are still contentious issues. Labour (total man hours employed or total number of sta) and the real (or constant) value of physical capital (usually the book value of premises, furniture and equipment deated by a price index) are generally accepted as `obvious' inputs required to produce bank outputs. There is less agreement, however, about treating the real or constant value of loanable funds (core deposits plus purchased funds) as an input. Humphrey (1991) concludes: ``... the ve appropriate inputs are labour, capital, demand deposits, small time and savings deposits, and purchased funds.'' The choice of input and output variables would necessarily depend on the nature and the thrust areas of banking in the country concerned as the role played by the banking system is dictated by the needs of the society and the state of the economy and the expectations of the Governments. The choice of the inputoutput variables in the present study are primarily guided by these considerations. 5. Analysis and ndings DEA analysis, was carried out in two stages. Initially certain key input and output variables which can be used to evaluate relative eciency of Indian commercial banks were identied. At the rst stage the frontier model a basic form of DEA was considered, using at a time, one input (a) and two outputs (b1 , b2 ) amongst the identied vari-

ables; herein the solutions are obtained graphically (Siems and Thomas, 1992). In the second stage an attempt was made to quantify the relative eciency of banks in the form of a total weighted output by total weighted input. The weights were obtained for each bank by solving a linear objective function using DEA as specied earlier in the paper. 5.1. Stage I Initially, the following four input variables and eight output variables were used in the present study to evaluate the eciency levels of banks. The choice of variables was essentially guided by the thrust areas of Indian banking in the post-nationalisation period. Input variables Branch (number of branches), sta (number of employees), establishment expenditure, non-establishment expenditure (excluding interest expenditure). Output variables Deposits, advances, investments, spread, total income, interest income, non-interest income and working funds. In the post-nationalisation era, expansion and geographical coverage of banking services was sought to be achieved by creating an extensive network of branches. In view of this, `branch' becomes the nodal point, and is, therefore, considered as an input variable. Also, since most of the banking operations in India are still carried out manually with little use of technology, `sta' becomes an essential input variable. The other two variables reect the running cost of operations. The output parameters essentially reect the major components of the balance sheet and prot and loss account of Indian banks. Even though spread ( interest income interest expenditure) includes interest income in its calculation, it is considered as an output of the intermediation process and treated as a separate variable. Working funds reect the size dimension of the balance sheet.

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Taking one input (a) and two outputs b1 and b2 from the above set of variables, the two basic efciency ratios b1 /a and b2 /a were calculated for each of the 25 banks and represented as points (b1 / a, b2 /a) in a two-dimensional graph; the 25 banks' names are listed serially in Appendix A. The piecewise linear curve joining the outermost points (and enveloping the entire set of points) corresponds to the `eciency-frontier' for this particular inputs outputs combination. The banks appearing on the boundary are considered to be the relatively more ecient ones (in the usage of the input a for producing the outputs b1 and b2 ). For each of the specied inputs, relevant and meaningful combinations of the outputinput ratios were chosen, and the corresponding graphs (40 out of the possible 112 combinations) were plotted. Illustratively, four of these graphs corresponding to March 31, 1995, are presented in Appendix B. The ndings at this stage indicate that bank number 8 is consistently appearing on almost all these frontiers of eciency. In few cases, this bank alone dened the frontier. Among other banks, banks 3 and 13 are positioned more frequently on these ecient frontiers; Banks 10 and 21 also appeared in few frontiers of eciency. The analysis at this stage shows that there is a natural clustering amongst the banks into groups, viz. the banks on/around the frontier, the banks far away from the frontier and the mid-way banks. For example, banks numbered 5, 15, 21, 22, 24 were, in general, farthest from the eciency frontiers in the charts included in the appendix and are being the least ecient ones in the group. It may be noted that the Reserve Bank of India appointed teams which worked out revival strategies for three of these banks (5, 22 and 24) in the year 1995. Nevertheless, in the year 1996 and 1997 these three banks continued to be furthest from the eciency frontier on the same input/output combinations. However, Bank-5 improved its relative position and moved closer to the frontier involving net prot parameter. Similarly, banks numbered 12, 16, 20, 23, 18 are the mid-way banks. These 5 banks continued to be in the same mid-way position in the subsequent two years also in the same parameter combinations. However these banks also improved their prot performance and moved

closer to the prot frontiers. Thus, even this basic approach is apparently able to provide a reasonable rating framework for the Indian banks in restricted sense. The above discussion also indicates that only a two-way input/output combinations fails to give an integrated picture of total eciency. A further renement in measuring relative eciencies of the banks is therefore achieved using DEA methodology, as presented below. 5.2. Stage 2 (DEA approach) In quantifying eciency, the input parameters included at this stage were interest expenditure (X1 ), establishment expenditure (X2 ), non-establishment expenditure (excluding interest expenditure) (X3 ), and xed assets (X4 ). The output parameters included were deposits (Y1 ), advances (Y2 ), investments (Y3 ), non-interest income (Y4 ), spread (Y5 ) and total income (Y6 ). For the kth bank k 1Y F F F Y 25, the variables will be designated X1k Y X2k Y F F F Y X4k and Y1k Y Y2k Y F F F Y Y6k . The choice of variables in this stage from among the ones listed earlier is dictated by the consideration of parity in the units of measurement of the variables and also to ensure uniqueness in the representation of parameters. Among the earlier set of input variables, `employees' and `branch' are measured as numerals but in the new set they are reected in monetary terms as establishment expenditure (employees' cost) and nonestablishment expenditure and xed assets (capital cost of the physical set-up) together reecting the capital, maintenance and the operational cost. Interest expenditure is essentially the direct cost of generating the deposit output and hence is treated as an additional input variable. While choosing the output variables from the earlier set we have omitted `interest income' and `working funds'. This is in view of the fact that `interest income' is just the dierence of `total income' and `non-interest income'. Moreover, in Indian banking context, especially for the Public Sector banks, the ratio of working funds to deposits have generally remained constant. As there were 25 banks included in the study, 25 linear programs were solved using `Solver' in

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Table 1

ALLA AND BOB BOI BOM CAN CBI CORP DENA IND INDO IOB OBC PSB SBBJ SBH SBI SBP SBS SBT SYND UCO UNI UTD VIJ

(a) Scenario summary 1992 WTS: X1 0.01 0.01 0.01 0.01 X2 0.26 0.64 0.03 0.01 X3 1.37 2.61 0.61 5.03 0.01 0.01 0.01 0.01 X4 Y1 0.01 0.01 0.01 0.39 Y2 0.01 0.01 0.01 0.01 Y3 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Y4 Y5 0.01 0.01 0.01 0.01 Y6 1.64 3.27 0.65 5.43 0.01 0.01 0.86 0.01 0.03 0.01 0.01 0.01 0.01 0.90 0.01 0.01 0.91 0.01 0.04 0.01 0.01 0.01 0.01 0.96 0.01 0.01 5.79 0.64 0.01 0.01 0.01 0.01 0.01 6.44 0.01 0.71 2.84 0.01 0.01 0.01 0.01 0.01 0.01 3.56 0.01 0.10 0.87 0.01 0.01 0.01 0.01 0.01 0.01 0.98 0.01 1.93 6.79 0.01 0.01 0.01 0.01 0.01 0.01 8.73 0.01 0.01 1.28 0.01 0.07 0.01 0.01 0.01 0.01 1.36 0.01 0.01 3.71 0.01 0.28 0.01 0.01 0.01 0.01 4.00 0.01 0.86 3.31 0.01 0.01 0.01 0.01 0.01 0.01 4.18 0.01 0.99 3.72 0.01 0.01 0.01 0.01 0.01 0.01 4.72 0.01 0.01 3.90 0.01 0.29 0.01 0.01 0.01 0.01 4.21 0.01 0.01 1.54 0.01 0.09 0.01 0.01 0.01 0.01 1.64 0.01 0.99 3.73 0.01 0.01 0.01 0.01 0.01 0.01 4.73 0.01 1.45 5.23 0.01 0.01 0.01 0.01 0.01 0.01 6.69 0.01 0.88 3.39 0.01 0.01 0.01 0.01 0.01 0.01 4.29 0.01 0.26 1.39 0.01 0.01 0.01 0.01 0.01 0.01 1.66 0.01 0.01 1.11 0.01 0.06 0.01 0.01 0.01 0.01 1.18 0.01 0.29 1.46 0.01 0.01 0.01 0.01 0.01 0.01 1.76 0.01 0.01 1.93 0.18 0.01 0.01 0.01 0.01 0.01 2.11

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0.01 0.66 2.66 0.01 0.01 0.01 0.01 0.01 0.01 3.33

0.01 0.68 2.74 0.01 0.01 0.01 0.01 0.01 0.01 3.44

(b) Relative eciency ALLA 0.63 0.64 AND 0.64 0.65 BOB 0.58 0.61 BOI 0.59 0.62 BOM 0.64 0.65 CAN 0.58 0.61 CBI 0.58 0.61 CORP 0.58 0.62 DENA 0.64 0.65 IND 0.61 0.63 INDO 0.65 0.66 IOB 0.58 0.61 OBC 0.59 0.62 PSB 0.65 0.66 SBBJ 0.65 0.66 SBH 0.59 0.62 SBI 0.58 0.61 SBP 0.65 0.66 SBS 0.65 0.66 SBT 0.65 0.66 0.51 0.46 0.66 0.77 0.46 0.72 0.73 0.72 0.45 0.58 0.43 0.74 0.77 0.45 0.45 0.77 0.75 0.45 0.44 0.45 0.43 0.39 0.56 0.63 0.39 0.60 0.60 0.63 0.38 0.49 0.36 0.61 0.63 0.37 0.37 0.63 0.62 0.37 0.36 0.38 0.79 0.80 0.78 0.74 0.80 0.76 0.76 0.81 0.80 0.79 0.80 0.76 0.75 0.80 0.80 0.75 0.75 0.80 0.80 0.80 0.66 0.67 0.61 0.60 0.68 0.60 0.60 0.66 0.68 0.64 0.69 0.60 0.60 0.68 0.68 0.60 0.60 0.68 0.68 0.68 0.58 0.61 0.52 0.61 0.61 0.55 0.55 0.46 0.61 0.56 0.62 0.57 0.61 0.61 0.61 0.61 0.58 0.61 0.62 0.61 0.75 0.77 0.69 0.76 0.77 0.71 0.71 0.70 0.78 0.72 0.79 0.73 0.75 0.78 0.78 0.75 0.73 0.78 0.79 0.78 0.64 0.65 0.61 0.71 0.65 0.64 0.65 0.57 0.65 0.62 0.66 0.67 0.70 0.65 0.65 0.70 0.68 0.65 0.66 0.65 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.62 0.63 0.57 0.58 0.63 0.57 0.57 0.63 0.63 0.60 0.64 0.57 0.58 0.64 0.64 0.58 0.58 0.64 0.64 0.64 0.79 0.81 0.73 0.77 0.81 0.74 0.74 0.72 0.81 0.76 0.82 0.75 0.77 0.82 0.82 0.77 0.76 0.82 0.82 0.82 0.83 0.84 0.79 0.87 0.84 0.82 0.82 0.80 0.84 0.81 0.85 0.84 0.87 0.84 0.85 0.87 0.85 0.85 0.85 0.84 0.74 0.76 0.67 0.77 0.76 0.70 0.70 0.62 0.76 0.70 0.77 0.73 0.76 0.76 0.77 0.77 0.74 0.77 0.77 0.76 0.79 0.82 0.72 0.79 0.82 0.74 0.74 0.76 0.82 0.76 0.83 0.76 0.79 0.82 0.83 0.79 0.77 0.83 0.83 0.82

score 0.67 0.68 0.62 0.68 0.68 0.64 0.64 0.52 0.68 0.65 0.69 0.66 0.68 0.68 0.68 0.68 0.66 0.68 0.69 0.68

1992 0.63 0.63 0.64 0.65 0.57 0.57 0.67 0.58 0.64 0.65 0.60 0.57 0.61 0.57 0.46 0.65 0.65 0.65 0.60 0.60 0.66 0.66 0.63 0.58 0.67 0.58 0.65 0.65 0.65 0.65 0.67 0.58 0.64 0.58 0.65 0.65 0.65 0.65 0.65 0.65

0.68 0.71 0.58 0.64 0.71 0.60 0.60 0.54 0.71 0.64 0.73 0.61 0.64 0.72 0.72 0.64 0.62 0.72 0.73 0.72

0.66 0.67 0.60 0.63 0.67 0.60 0.60 0.58 0.68 0.63 0.69 0.61 0.63 0.68 0.68 0.63 0.62 0.68 0.68 0.68

0.69 0.70 0.65 0.67 0.70 0.65 0.65 0.66 0.70 0.67 0.71 0.66 0.68 0.70 0.70 0.67 0.66 0.70 0.71 0.70

0.61 0.62 0.58 0.70 0.62 0.62 0.63 0.50 0.62 0.60 0.63 0.66 0.70 0.62 0.63 0.70 0.67 0.63 0.63 0.63

0.71 0.72 0.68 0.66 0.72 0.67 0.67 0.73 0.73 0.70 0.73 0.66 0.66 0.73 0.73 0.66 0.66 0.73 0.73 0.73

0.61 0.62 0.56 0.57 0.62 0.56 0.56 0.64 0.62 0.59 0.63 0.57 0.57 0.62 0.63 0.57 0.57 0.63 0.63 0.62

0.60 0.62 0.52 0.53 0.62 0.51 0.51 0.52 0.62 0.56 0.64 0.52 0.53 0.63 0.63 0.53 0.52 0.63 0.64 0.63

A. Saha, T.S. Ravisankar / European Journal of Operational Research 124 (2000) 187203 ALLA AND BOB BOI BOM CAN CBI CORP DENA IND INDO IOB OBC PSB SBBJ SBH SBI SBP SBS SBT SYND UCO UNI UTD VIJ 0.60 0.52 0.60 0.52 0.62

195

the MS-Oce EXCEL-Version 5.1 for each of the years 1992, 1993, 1994 and 1995. Scenario summaries presented in the rst part of the Tables 13 and Table 4 provide the input and output weights that maximised the eciency score of each bank for 1992, 1993, 1994 and 1995. The eciency scores of each bank (for these years) including the relative eciency scores of the other banks are presented in the second part of the Tables 13 and Table 4. For example, the input and output weights that maximised the eciency score of Bank 1 (for 1995) are as follows: X11 1.37, Y11 0.01, Y51 0.24, X21 0.01, Y21 0.01, Y61 0.01, X31 0.01, Y31 0.01, X41 0.01, Y41 1.12. From the result in this run, one can infer that interest expenditure does not contribute signicantly to the eciency of the bank. On the other hand, in comparison to other outputs, Bank-1 is more ecient in producing the outputs non-interest income and spread. Maximum eciency score of Bank-1 in 1995 was 0.70 (the rst diagonal element in Table 4) and at that stage the eciency scores of other banks (the rst row o-diagonal elements in Table 4) were as follows: Bank-2 0.82 Bank-3 0.85 Bank-4 0.82 Bank-5 0.76 Bank-6 0.87 Bank-7 0.76 Bank-8 1.00 Bank-9 0.78 Bank-10 0.71 Bank-11 0.93 Bank-12 0.74 Bank-13 0.82 Bank-14 0.74 Bank-15 0.87 Bank-16 0.90 Bank-17 0.84 Bank-18 0.77 Bank-19 0.86 Bank-20 0.77 Bank-21 0.78 Bank-22 0.76 Bank-23 0.79 Bank-24 0.67 Bank-25 0.87

0.79 0.76 0.79 0.81 0.80

Input wts: Xi ; Output wts: Yj ; X1 : Interest Expenditure Wt. X2 : Establishment Expenditure Wt. X3 : Non-Establishment Expenditure Wt. X4 : Fixed Assets Wt. Y1 : Deposits Wt. Y2 : Advances Wt. Y3 : Investment Wt. Y4 : Non-interest Income Wt. Y5 : Spread Wt. Y6 : Total Income Wt.

0.64 0.61 0.64 0.62 0.65

0.67 0.65 0.67 0.54 0.68

0.63 0.62 0.63 0.48 0.65

0.63 0.58 0.63 0.64 0.65

0.51 0.74 0.50 0.71 0.46

0.53 0.61 0.42 0.62 0.38

0.66 0.60 0.66 0.65 0.68

0.59 0.57 0.59 0.47 0.61

0.75 0.72 0.76 0.69 0.77

0.64 0.66 0.64 0.58 0.65

1.00 1.00 1.00 1.00 1.00

0.62 0.57 0.62 0.61 0.63

0.79 0.75 0.79 0.72 0.81

0.83 0.84 0.83 0.80 0.84

0.74 0.72 0.74 0.63 0.76

0.79 0.75 0.80 0.75 0.82

0.68 0.61 0.68 0.54 0.71

0.66 0.61 0.66 0.58 0.68

0.69 0.66 0.69 0.65 0.70

0.61 0.65 0.61 0.52 0.62

0.71 0.66 0.71 0.72 0.72

0.61 0.57 0.61 0.62 0.62

The above result shows that despite a built-in bias towards Bank-1 in the choice of weights, there are many banks which have achieved higher eciency score with the same weighting pattern. Effectively this would imply that in 1995 Bank-1 is situated in the lower end of the eciency spectrum

Table 1 (Continued)

SYND UCO UNI UTD VIJ

0.63 0.58 0.63 0.58 0.64

196

Table 2

ALLA AND BOB BOI BOM CAN CBI CORP DENA IND INDO IOB OBC PSB SBBJ SBH SBI

SBP SBS SBT SYND UCO UBI UTD VIJ

(a) Scenario summary 1993 WTS: X1 1.34 2.78 0.58 0.60 2.87 0.01 0.01 0.01 0.01 0.01 X2 X3 0.01 0.01 0.01 0.01 0.01 X4 0.01 0.01 0.01 0.01 0.01 Y1 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Y2 Y3 0.01 0.01 0.01 0.01 0.35 Y4 0.53 1.39 0.08 0.09 0.01 Y5 0.80 1.38 0.49 0.49 2.51 Y6 0.01 0.01 0.01 0.01 0.01 0.69 0.01 0.01 0.01 0.01 0.01 0.01 0.15 0.53 0.01 0.81 0.01 0.01 0.01 0.01 0.01 0.01 0.22 0.58 0.01 4.81 0.01 0.01 0.01 0.01 0.01 0.01 2.59 2.21 0.01 2.90 0.01 0.01 0.01 0.01 0.01 0.01 1.46 1.43 0.01 0.80 0.01 0.01 0.01 0.01 0.01 0.01 0.22 0.58 0.01 7.14 0.01 0.01 0.01 0.01 0.01 0.01 3.97 3.15 0.01 1.24 0.01 0.01 0.01 0.01 0.08 0.01 0.01 1.15 0.01 2.76 0.01 0.01 0.01 0.01 0.01 0.33 0.01 2.42 0.01 3.34 0.01 0.01 0.01 0.01 0.01 0.41 0.01 2.92 0.01 3.71 0.01 0.01 0.01 0.01 0.01 0.01 1.94 1.76 0.01 3.13 0.01 0.01 0.01 0.01 0.01 0.01 1.59 1.52 0.01 1.48 0.01 0.01 0.01 0.01 0.01 0.01 0.62 0.85 0.01 3.46 0.01 0.01 0.01 0.01 0.01 0.01 1.79 1.66 0.01 6.04 0.01 0.01 0.01 0.01 0.01 0.01 3.32 2.71 0.01 3.28 0.01 0.01 0.01 0.01 0.01 0.01 1.69 1.59 0.01 1.44 0.01 0.01 0.01 0.01 0.01 0.01 0.59 0.84 0.01 1.09 0.01 0.01 0.01 0.01 0.07 0.01 0.01 1.01 0.01 1.32 0.01 0.01 0.01 0.01 0.01 0.01 0.52 0.79 0.01 1.72 0.01 0.01 0.01 0.01 0.01 0.19 0.01 1.52 0.01 3.59 0.01 0.01 0.01 0.01 0.01 0.01 1.87 1.71 0.01

A. Saha, T.S. Ravisankar / European Journal of Operational Research 124 (2000) 187203

(b) Relative eciency score ALLA 0.70 0.72 0.81 AND 0.72 0.73 0.84 BOB 0.65 0.67 0.73 BOI 0.65 0.67 0.74 BOM 0.68 0.68 0.64 CAN 0.67 0.68 0.76 CBI 0.68 0.69 0.77 CORP 0.73 0.74 0.86 DENA 0.72 0.73 0.85 IND 0.68 0.69 0.77 INDO 0.73 0.74 0.86 IOB 0.63 0.63 0.74 OBC 0.68 0.68 0.64 PSB 0.68 0.69 0.64 SBBJ 0.72 0.74 0.85 SBH 0.72 0.74 0.85 SBI 0.70 0.72 0.82 SBP 0.72 0.74 0.85 SBS 0.73 0.74 0.86 SBT 0.72 0.74 0.85 SYND 0.70 0.72 0.82 UCO 0.63 0.63 0.74 UBI 0.70 0.71 0.81 UTD 0.67 0.68 0.65 VIJ 0.72 0.74 0.85 0.89 0.93 0.80 0.80 0.90 0.83 0.84 0.94 0.93 0.84 0.95 0.73 0.90 0.90 0.94 0.93 0.90 0.94 0.95 0.93 0.90 0.73 0.89 0.88 0.94 0.73 0.76 0.67 0.67 0.69 0.69 0.70 0.77 0.76 0.70 0.77 0.64 0.69 0.69 0.76 0.76 0.74 0.76 0.77 0.76 0.83 0.64 0.73 0.68 0.76 0.89 0.91 0.84 0.84 0.89 0.85 0.86 0.92 0.91 0.86 0.92 0.77 0.89 0.89 0.92 0.91 0.90 0.92 0.92 0.92 0.89 0.78 0.89 0.88 0.92 0.79 0.82 0.72 0.72 0.78 0.74 0.76 0.83 0.82 0.75 0.83 0.68 0.78 0.78 0.82 0.82 0.79 0.82 0.83 0.82 0.79 0.68 0.79 0.77 0.82 0.70 0.74 0.62 0.63 0.54 0.65 0.66 0.75 0.74 0.66 0.75 0.66 0.64 0.54 0.74 0.74 0.71 0.74 0.75 0.74 0.71 0.65 0.70 0.55 0.74 0.85 0.88 0.77 0.78 0.76 0.80 0.81 0.90 0.89 0.81 0.90 0.79 0.76 0.76 0.89 0.89 0.86 0.89 0.90 0.89 0.86 0.78 0.85 0.76 0.89 0.74 0.74 0.76 0.76 0.73 0.75 0.75 0.74 0.74 0.75 0.73 0.81 0.73 0.73 0.74 0.74 0.74 0.74 0.74 0.74 0.74 0.81 0.74 0.74 0.74 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.67 0.68 0.64 0.64 0.72 0.65 0.66 0.68 0.68 0.65 0.68 0.61 0.72 0.72 0.68 0.68 0.67 0.68 0.68 0.68 0.67 0.61 0.67 0.71 0.68 0.87 0.91 0.79 0.80 0.75 0.82 0.83 0.92 0.91 0.83 0.93 0.79 0.75 0.75 0.91 0.91 0.88 0.91 0.92 0.91 0.88 0.79 0.87 0.75 0.91 0.93 0.96 0.85 0.86 0.82 0.88 0.89 0.97 0.96 0.89 0.98 0.86 0.82 0.82 0.97 0.96 0.94 0.97 0.98 0.97 0.93 0.86 0.93 0.82 0.97 0.88 0.91 0.79 0.79 0.77 0.81 0.83 0.92 0.91 0.83 0.93 0.83 0.77 0.77 0.92 0.91 0.88 0.92 0.93 0.92 0.88 0.82 0.87 0.77 0.92 0.91 0.96 0.77 0.78 0.70 0.81 0.84 0.98 0.96 0.84 0.99 0.77 0.70 0.70 0.97 0.97 0.92 0.97 0.99 0.97 0.91 0.77 0.91 0.70 0.97 0.88 0.92 0.88 0.80 0.74 0.82 0.84 0.93 0.92 0.84 0.94 0.81 0.74 0.74 0.92 0.92 0.89 0.92 0.93 0.92 0.89 0.81 0.88 0.74 0.92

1993 0.76 0.71 0.78 0.73 0.71 0.66 0.71 0.66 0.60 0.74 0.72 0.67 0.73 0.69 0.79 0.74 0.78 0.73 0.73 0.68 0.79 0.74 0.75 0.62 0.60 0.73 0.60 0.74 0.79 0.73 0.78 0.73 0.76 0.71 0.78 0.73 0.79 0.74 0.78 0.73 0.76 0.71 0.74 0.62 0.76 0.71 0.61 0.72 0.79 0.73

0.82 0.85 0.73 0.74 0.67 0.76 0.78 0.87 0.86 0.78 0.87 0.73 0.67 0.67 0.86 0.86 0.83 0.86 0.87 0.86 0.82 0.73 0.82 0.68 0.86

0.76 0.77 0.72 0.72 0.72 0.73 0.74 0.78 0.77 0.74 0.78 0.71 0.72 0.72 0.78 0.77 0.76 0.78 0.78 0.77 0.76 0.71 0.76 0.72 0.78

0.69 0.70 0.68 0.68 0.66 0.68 0.69 0.70 0.70 0.69 0.70 0.72 0.66 0.66 0.70 0.70 0.69 0.70 0.70 0.70 0.69 0.72 0.69 0.66 0.70

0.81 0.84 0.74 0.75 0.77 0.76 0.78 0.85 0.84 0.78 0.85 0.70 0.77 0.77 0.84 0.84 0.81 0.84 0.85 0.84 0.81 0.71 0.81 0.76 0.84

0.63 0.65 0.59 0.59 0.68 0.60 0.61 0.66 0.65 0.61 0.66 0.56 0.68 0.68 0.65 0.65 0.64 0.65 0.66 0.65 0.64 0.56 0.63 0.66 0.65

0.82 0.84 0.78 0.79 0.82 0.79 0.80 0.84 0.84 0.80 0.85 0.76 0.82 0.82 0.84 0.84 0.82 0.84 0.84 0.84 0.82 0.76 0.82 0.81 0.84

Input wts: Xi ; Output wts: Yj .

Table 3

ALLA AND BOB BOI BOM CAN CBI CORP DENA IND INDO IOB OBC PSB SBBJ SBH SBI SBP SBS SBT SYND UCO UBI UTD VIJ

1994 25.80 0.01 0.01 0.01 0.01 0.01 0.01 0.01 17.90 7.89 9.45 67.53 11.87 25.29 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.19 0.71 1.00 0.31 0.01 0.01 0.29 0.01 0.01 35.25 0.01 12.87 6.91 31.57 10.58 12.11 2.35 0.01 0.01 0.01 32.35 0.01 0.01 0.01 0.01 0.56 0.01 0.01 23.19 8.60 34.41 0.01 0.01 0.01 0.01 0.59 0.01 0.01 24.65 9.17 28.94 0.01 0.01 2.89 0.01 0.76 0.01 1.57 23.57 5.92 1.56 30.51 60.07 25.37 13.58 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.09 0.01 0.41 0.01 0.01 34.94 0.01 0.01 0.01 0.01 0.01 0.01 0.10 0.36 0.64 1.81 0.01 0.01 0.01 0.01 0.01 0.01 0.01 15.64 31.29 0.01 7.49 1.78 14.52 28.13 58.55 6.07 0.08 0.01 0.01 0.01 0.01 12.00 0.01 0.01 0.01 0.01 0.24 0.01 0.01 8.72 3.05 11.78 0.01 0.01 0.01 0.01 0.18 0.01 5.71 5.89 0.01 17.61 34.82 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.40 0.01 0.01 0.01 17.92 12.26 16.50 5.34 0.01

(a) Scenario summary WTS: X1 14.40 26.55 X2 0.01 0.01 0.01 0.01 X3 X4 0.01 0.01 Y1 0.01 0.01 Y2 0.27 0.01 Y3 0.01 0.01 0.01 0.01 Y4 Y5 10.42 18.42 Y6 3.70 8.12

5.78 0.01 0.01 0.01 0.01 0.14 0.01 0.01 4.29 1.35

6.84 27.68 6.73 8.48 39.45 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.16 0.01 0.01 0.01 0.01 0.38 0.01 0.13 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 15.56 3.02 0.01 0.01 6.30 12.11 3.57 5.97 27.30 0.01 0.01 0.02 2.49 12.14

A. Saha, T.S. Ravisankar / European Journal of Operational Research 124 (2000) 187203

(b) Relative eciency ALLA 0.78 0.80 AND 0.78 0.81 BOB 0.77 0.80 BOI 0.70 0.75 BOM 0.77 0.78 CAN 0.77 0.78 CBI 0.78 0.80 CORP 0.79 0.81 DENA 0.78 0.81 IND 0.78 0.80 INDO 0.78 0.78 IOB 0.70 0.72 OBC 0.78 0.78 PSB 0.79 0.81 SBBJ 0.79 0.81 SBH 0.76 0.79 SBI 0.68 0.73 SBP 0.78 0.78 SBS 0.78 0.78 SBT 0.50 0.65 SYND 0.77 0.78 UCO 0.78 0.80 UBI 0.77 0.78 UTD 0.78 0.81 VIJ 0.78 0.78 0.89 0.89 0.88 0.83 0.89 0.88 0.89 0.89 0.89 0.89 0.89 0.82 0.89 0.89 0.89 0.87 0.81 0.89 0.89 0.69 0.89 0.89 0.89 0.89 0.89 0.77 0.78 0.77 0.73 0.75 0.75 0.77 0.78 0.78 0.77 0.76 0.69 0.75 0.78 0.78 0.74 0.75 0.75 0.76 0.44 0.75 0.77 0.75 0.78 0.76 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.85 0.85 0.84 0.76 0.86 0.85 0.84 0.85 0.85 0.84 0.86 0.77 0.86 0.85 0.85 0.82 0.74 0.86 0.86 0.56 0.86 0.85 0.86 0.85 0.86 0.81 0.79 0.81 0.76 0.77 0.79 0.79 0.80 0.79 0.81 0.78 0.78 0.78 0.82 0.82 0.80 0.76 0.78 0.78 0.62 0.76 0.81 0.78 0.79 0.78 0.96 0.95 0.96 0.90 0.96 0.97 0.94 0.95 0.95 0.96 0.98 0.93 0.98 0.97 0.97 0.97 0.94 0.98 0.98 0.91 0.96 0.96 0.98 0.94 0.98 0.91 0.88 0.91 0.94 0.79 0.84 0.88 0.88 0.88 0.91 0.81 0.95 0.82 0.90 0.90 0.90 0.92 0.82 0.81 0.83 0.79 0.91 0.82 0.88 0.82 0.87 0.86 0.86 0.79 0.91 0.90 0.85 0.86 0.86 0.87 0.91 0.82 0.91 0.87 0.87 0.86 0.80 0.91 0.91 0.67 0.90 0.87 0.90 0.86 0.91 0.81 0.81 0.81 0.76 0.79 0.80 0.81 0.81 0.81 0.81 0.80 0.76 0.80 0.82 0.82 0.79 0.73 0.80 0.80 0.55 0.79 0.81 0.80 0.81 0.80 0.93 0.92 0.92 0.86 0.90 0.91 0.91 0.92 0.92 0.93 0.91 0.88 0.91 0.93 0.93 0.93 0.91 0.91 0.91 0.92 0.90 0.93 0.91 0.92 0.91 0.99 0.97 0.99 0.98 0.99 1.00 0.96 0.97 0.97 0.99 1.00 0.97 1.00 0.99 0.99 1.00 1.00 1.00 1.00 1.00 0.98 0.99 1.00 0.97 1.00 0.95 0.94 0.95 0.90 0.94 0.95 0.93 0.94 0.94 0.95 0.95 0.94 0.95 0.96 0.96 0.96 0.95 0.95 0.95 0.95 0.94 0.95 0.95 0.94 0.95 0.91 0.90 0.91 0.84 0.97 0.96 0.90 0.91 0.90 0.91 0.97 0.84 0.97 0.92 0.92 0.91 0.85 0.97 0.97 0.75 0.96 0.91 0.96 0.90 0.97 0.98 0.96 0.98 0.94 0.97 0.98 0.96 0.96 0.96 0.98 0.99 0.96 0.99 0.98 0.98 0.99 0.98 0.99 0.99 0.97 0.97 0.98 0.98 0.96 0.99 0.90 0.89 0.90 0.83 0.86 0.87 0.88 0.89 0.89 0.90 0.87 0.86 0.87 0.90 0.90 0.90 0.89 0.87 0.87 0.91 0.86 0.90 0.87 0.88 0.87

score 1.00 0.97 1.00 1.00 0.97 0.99 0.96 0.97 0.97 1.00 0.99 1.00 0.99 1.00 1.00 1.00 1.00 0.99 0.99 0.91 0.96 1.00 0.99 0.97 0.99

1994 0.90 0.64 0.86 0.63 0.90 0.65 0.94 0.68 0.86 0.78 0.89 0.76 0.86 0.63 0.86 0.63 0.86 0.63 0.90 0.64 0.88 0.77 0.93 0.69 0.88 0.77 0.90 0.64 0.90 0.64 0.89 0.65 0.89 0.64 0.88 0.77 0.88 0.77 0.71 0.48 0.86 0.77 0.90 0.64 0.89 0.77 0.86 0.63 0.88 0.77

0.83 0.83 0.82 0.75 0.85 0.84 0.83 0.83 0.83 0.83 0.85 0.75 0.85 0.83 0.83 0.80 0.71 0.85 0.85 0.51 0.85 0.83 0.84 0.83 0.85

0.73 0.73 0.75 0.67 0.69 0.70 0.72 0.73 0.73 0.73 0.70 0.68 0.70 0.74 0.74 0.72 0.67 0.70 0.70 0.57 0.69 0.73 0.70 0.73 0.70

0.87 0.87 0.87 0.82 0.89 0.89 0.86 0.87 0.86 0.87 0.89 0.82 0.89 0.87 0.87 0.87 0.82 0.89 0.89 0.73 0.89 0.87 0.89 0.86 0.89

0.70 0.71 0.69 0.63 0.66 0.65 0.71 0.71 0.71 0.70 0.66 0.61 0.66 0.70 0.70 0.67 0.59 0.66 0.66 0.42 0.66 0.70 0.66 0.71 0.66

0.93 0.91 0.92 0.92 0.93 0.93 0.91 0.91 0.91 0.92 0.93 0.90 0.93 0.93 0.93 0.92 0.90 0.93 0.93 0.83 0.92 0.93 0.93 0.91 0.93

Input wts: Xi ; Output wts: Yj .

197

198

Table 4

ALLA AND BOB BOI BOM CAN CBI CORP DENA IND INDO IOB OBC PSB SBBJ SBH SBI

SBP SBS SBT SYND UCO UBI UTD VIJ

(a) Scenario summary 1995 WTS: X1 1.37 2.54 0.17 0.63 2.60 X2 0.01 0.01 1.34 0.01 0.01 X3 0.01 0.01 0.04 0.01 0.01 X4 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Y1 Y2 0.01 0.08 0.03 0.02 0.01 Y3 0.01 0.01 0.01 0.01 0.01 Y4 1.12 2.09 0.16 0.61 2.00 0.24 0.37 0.01 0.01 0.58 Y5 Y6 0.01 0.01 0.01 0.01 0.01 0.67 0.01 0.01 0.01 0.01 0.02 0.01 0.64 0.01 0.01 0.85 0.01 0.01 0.01 0.01 0.04 0.01 0.80 0.01 0.01 3.29 0.01 0.01 0.01 0.03 0.21 0.02 3.04 0.01 0.01 2.42 0.01 0.01 0.01 0.01 0.08 0.01 2.00 0.34 0.01 0.94 0.01 0.01 0.01 0.01 0.05 0.01 0.88 0.01 0.01 6.11 1.33 0.01 0.01 0.06 0.43 0.01 6.94 0.01 0.01 1.07 0.01 0.01 0.01 0.01 0.06 0.01 1.00 0.01 0.01 2.11 0.01 0.01 0.01 0.01 0.08 0.01 1.77 0.26 0.01 2.66 0.01 0.01 0.01 0.01 0.08 0.01 2.18 0.40 0.01 2.55 0.01 5.35 0.01 0.01 0.09 0.01 7.79 0.01 0.01 2.37 0.56 0.01 0.01 0.02 0.17 0.01 2.73 0.01 0.01 1.49 0.01 0.01 0.01 0.01 0.07 0.01 1.32 0.10 0.01 2.81 0.01 0.01 0.01 0.01 0.08 0.01 2.28 0.44 0.01 5.38 0.01 0.01 0.01 0.01 0.11 0.01 4.16 1.11 0.01 2.09 0.56 0.90 0.01 0.01 0.15 0.01 3.38 0.01 0.01 1.29 0.01 0.01 0.01 0.01 0.01 0.01 1.07 0.21 0.01 1.33 0.01 0.01 0.01 0.01 0.07 0.01 1.20 0.06 0.01 1.00 0.01 0.01 0.01 0.01 0.05 0.01 0.93 0.01 0.01 1.66 0.01 0.01 0.01 0.01 0.01 0.01 1.33 0.32 0.01 2.83 0.01 0.01 0.01 0.01 0.09 0.01 2.30 0.45 0.01

A. Saha, T.S. Ravisankar / European Journal of Operational Research 124 (2000) 187203

(b) Relative eciency scores 1995 ALLA 0.70 0.82 0.85 0.82 0.76 AND 0.72 0.84 0.92 0.87 0.78 BOB 0.74 0.65 0.92 0.75 0.59 BOI 0.63 0.76 0.80 0.79 0.70 BOM 0.73 0.84 0.88 0.83 0.79 CAN 0.63 0.77 0.81 0.80 0.70 CBI 0.65 0.79 0.87 0.84 0.72 CORP 0.67 0.81 0.92 0.89 0.73 DENA 0.72 0.84 0.92 0.87 0.77 IND 0.66 0.80 0.88 0.86 0.72 INDO 0.67 0.86 0.94 0.88 0.70 IOB 0.67 0.81 0.91 0.87 0.73 OBC 0.71 0.84 0.92 0.87 0.77 PSB 0.72 0.84 0.92 0.87 0.78 SBBJ 0.58 0.72 0.84 0.79 0.63 SBH 0.67 0.80 0.94 0.87 0.70 SBI 0.69 0.82 0.92 0.88 0.75 SBP 0.72 0.84 0.92 0.87 0.78 SBS 0.74 0.85 0.92 0.87 0.79 SBT 0.66 0.79 0.93 0.86 0.68 SYND 0.70 0.82 0.85 0.82 0.76 UCO 0.69 0.82 0.92 0.88 0.74 UBI 0.67 0.80 0.89 0.87 0.73 UTD 0.71 0.83 0.86 0.82 0.77 VIJ 0.72 0.84 0.92 0.87 0.78 0.87 0.91 0.82 0.82 0.89 0.83 0.86 0.89 0.91 0.87 0.88 0.88 0.90 0.91 0.80 0.89 0.90 0.91 0.91 0.87 0.87 0.89 0.88 0.88 0.91 0.76 0.79 0.64 0.72 0.78 0.72 0.75 0.77 0.79 0.76 0.75 0.77 0.79 0.79 0.64 0.75 0.78 0.79 0.80 0.72 0.76 0.78 0.76 0.77 0.79 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.78 0.82 0.62 0.71 0.81 0.72 0.75 0.78 0.82 0.76 0.76 0.78 0.81 0.82 0.66 0.76 0.80 0.82 0.83 0.74 0.78 0.79 0.77 0.79 0.82 0.71 0.79 0.92 0.67 0.74 0.69 0.74 0.80 0.79 0.76 0.82 0.78 0.79 0.79 0.69 0.82 0.79 0.79 0.78 0.81 0.71 0.79 0.77 0.72 0.79 0.93 1.00 0.70 0.88 0.96 0.89 0.95 1.00 1.00 0.97 1.00 0.99 1.00 1.00 0.95 1.00 1.00 1.00 1.00 1.00 0.93 1.00 0.98 0.94 1.00 0.74 0.79 0.84 0.71 0.76 0.72 0.76 0.80 0.79 0.77 0.80 0.79 0.79 0.79 0.70 0.80 0.79 0.79 0.79 0.79 0.74 0.79 0.78 0.75 0.79 0.82 0.87 1.00 0.75 0.85 0.76 0.80 0.84 0.87 0.82 0.85 0.83 0.86 0.87 0.65 0.85 0.85 0.87 0.88 0.81 0.82 0.85 0.82 0.83 0.87 0.74 0.78 0.77 0.70 0.77 0.71 0.74 0.76 0.78 0.75 0.75 0.66 0.78 0.78 0.66 0.76 0.77 0.78 0.79 0.74 0.75 0.77 0.75 0.76 0.78 0.87 0.91 0.60 0.82 0.89 0.83 0.86 0.89 0.91 0.87 0.88 0.80 0.91 0.91 1.00 0.88 0.90 0.91 0.92 0.92 0.87 0.89 0.75 0.88 0.91 0.90 0.97 0.86 0.86 0.92 0.87 0.93 0.98 0.97 0.95 1.00 0.97 0.97 0.97 0.93 1.00 0.98 0.97 0.96 1.00 0.89 0.98 0.96 0.90 0.97 0.84 0.89 0.68 0.78 0.87 0.79 0.83 0.86 0.89 0.84 0.85 0.86 0.89 0.89 0.83 0.85 0.88 0.89 0.90 0.86 0.84 0.87 0.85 0.85 0.89 0.77 0.83 0.83 0.76 0.80 0.72 0.76 0.80 0.82 0.77 0.79 0.79 0.82 0.83 0.55 0.79 0.81 0.83 0.84 0.74 0.77 0.81 0.78 0.79 0.83 0.86 0.93 0.70 0.80 0.89 0.82 0.87 0.92 0.93 0.89 0.91 0.91 0.93 0.93 0.83 0.91 0.92 0.93 0.93 0.90 0.86 0.92 0.90 0.87 0.93

0.77 0.83 0.85 0.71 0.80 0.72 0.77 0.82 0.83 0.79 0.85 0.81 0.83 0.84 0.86 0.85 0.83 0.84 0.84 0.87 0.77 0.83 0.80 0.78 0.84

0.78 0.78 0.53 0.72 0.81 0.72 0.73 0.73 0.78 0.73 0.69 0.73 0.77 0.78 0.62 0.69 0.75 0.79 0.80 0.66 0.78 0.77 0.73 0.79 0.79

0.76 0.79 0.63 0.71 0.78 0.72 0.75 0.77 0.79 0.76 0.75 0.77 0.79 0.79 0.71 0.71 0.78 0.79 0.80 0.74 0.76 0.78 0.76 0.77 0.79

0.79 0.83 0.86 0.74 0.82 0.75 0.78 0.81 0.83 0.79 0.80 0.80 0.82 0.83 0.65 0.80 0.82 0.83 0.84 0.77 0.79 0.81 0.79 0.80 0.83

0.67 0.66 0.60 0.62 0.69 0.62 0.62 0.61 0.66 0.62 0.59 0.62 0.66 0.67 0.58 0.59 0.64 0.67 0.69 0.58 0.67 0.63 0.62 0.68 0.67

0.87 0.89 0.75 0.85 0.86 0.85 0.87 0.89 0.89 0.88 0.88 0.88 0.89 0.89 0.86 0.87 0.89 0.89 0.89 0.87 0.87 0.89 0.88 0.88 0.89

Input wts: Xi ; Output weights: Yj .

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amongst the 25 banks included in the study. This relative position of Bank-1 amongst this group of banks is also corroborated by the score obtained by the said bank in relation to others in the DEA runs for those banks as evident from Table 4. A comparison of the scores obtained by Bank-1 across the years 1992 and 1995 also give an indication that many Banks have moved ahead of Bank-1 during this period. In essence, results indicate that Bank-1 has used the input X11 (interest expenses) least and has produced its outputs Y41 (spread) and Y61 (Total Income) the most and these in turn have enabled the bank to attain its maximum eciency score of 0.70. At that stage, Bank-8 was the most ecient with a score of 1.00. Since one Bank (Bank-8) has already reached the eciency score of 1 in this case, it is clear that Bank-1 cannot improve its score beyond 0.7 by choosing higher output in any other combination of input/output weights. The diagonal elements of the 25 25 matrices of eciency scores as presented in Tables 13 and Table 4 provide the maximum score achieved by each bank in the DEA. Table 4 summarises the above-cited maximum eciency score achieved by each bank in 1992, 1993, 1994 and 1995. It can be seen from the tables that, barring few exceptions, most of the banks have generally improved their eciency scores over these years. The net increase in eciency of relevant banks between 1992 to 1995 ranged between 0.06 to 0.30, with 4 banks gaining less than 0.1; 9 banks gaining between 0.1 to less than 0.15; 5 banks gaining between 0.15 to less than 0.2 and another ve gaining by 0.2 and above. Of the remaining two banks, one (Bank-13) lost 0.14 in terms of its maximum eciency between 1992 and 1995 and in the case of other banks there was no net change in eciency score during this period. These changes in the maximum eciency score over the years have also obviously changed their relative eciency positions. It is seen that the relative order of importance of input and output parameters have changed over the years for most of the banks, indicating a possible shift in their focus. For example, in the case of Bank-13, the key (greater used lower weight) input parameters and key (highest produced higher

weight) output parameters have moved as shown below: Year 1992 1993 1994 1995 Key inputs X1 , X2 , X2 , X2 , X2 , X3 , X3 , X3 , X4 X4 X1 X4 Key outputs Y6 , Y5 , Y4 , Y4 , Y1 Y3 Y5 , Y2 Y5 , Y2

A comparative prole of the key input parameters (ones with lower input weights) and key output parameters (ones with higher output weights) over the years for all banks taken together is presented below in their order of importance in terms of frequency of occurrence: Key input variables X1 , X2 , X2 , X , 2

Year 1992 1993 1994 1995

Signicant output variables Y6 , Y 1 Y4 , Y5 and Y 3 Y5 and Y , Y , Y 2 4 6 Y4 and Y , Y 5 2

X4 X3 , X4 X3 , X4 X3 , X4

relatively less signicant in terms of weights.

The above two tables show that the banks in general have also shifted their attention towards more or less the same parameters as Bank-13, indicating that the competition element became more prominent over these years. This could be the reason why the relative eciency score of Bank-13 declined during this period. It is also interesting to note that the input variable X1 (interest expenses) in the case of the banks under study, which was signicant in 1992 in determining the eciency score, lost its importance in the subsequent years. To the contrary, X2 , X3 and X4 became signicant input parameters. Of the output parameters, Y4 (Non-interest Income) and Y5 (Spread) were more signicant during 1993, 1994 and 1995. Y1 was signicant in 1992, Y6 was signicant in 1992 and also in 1994 in the case of few banks, and Y3 was signicant in some cases in 1993. From this analysis, it is found that Bank-8 has been consistently appearing at the higher-end of the relative eciency scale (in fact, it gradually strengthened its relative eciency position over the

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years). The contributing variables, as revealed by the DEA analysis, were the achievement of the bank in generating superior non-interest income (Y4 ) in 1995, Spread (Y5 ) and Total Income (Y6 ) in 1994, Non-interest income and spread in 1993 and Total Income in 1992. In order to verify the relative importance of the signicant input and output parameters as presented above, an attempt was made to maximise the eciency score of Bank-1 using only the signicant inputoutput variables, namely, X3 and X4 and Y2 , Y4 and Y5 and constraints in line with what was specied in Eq. (1) (of Section 4). No feasible solution however could be achieved satisfying all the constraints. Perhaps this means that all the identied parameters are relevant and essential for the analysis, even though some of them may not show signicance in isolation. 6. Summary and conclusions The forces of change that are sweeping the banking system worldwide have signicantly increased the range, volume and potential impact of risks being faced by banks. In the current phase of globalisation and economic liberalisation, Indian banking cannot remain isolated and be immune to the rapid changes that are taking place in the international banking arena. Through the reform initiatives of the Government of India and the Reserve Bank of India, Indian banking industry is gradually emerging from an era of veiled secrecy, in terms of disclosures in their balance sheets and prot and loss accounts, to a period of transparency as per international standards. Further, entry of new private sector banks and foreign banks, besides adding to competition, is also likely to facilitate the process of globalisation. It is hypothesised that a new banking structure is in the ong in which each commercial bank will have to redene its competitive business position in the market and evolve suitable corporate strategies (including comprehensive risk management processes) to achieve the same. As pointed out earlier, the second Narasimhan Committee (1997) was expected to

``Chart a Programme of Banking Sector Reforms necessary to strengthen India's banking system and make it internationally competitive taking into account the vast changes in the international nancial markets and technological advances and experiences of other developing countries in adapting to such changes and to make detailed recommendations in regard to banking policy,..., supervisory... dimensions''. This clearly implies that eciency issue is going to assume greater signicance at individual bank's level and also at the supervisory authority level so as to gain better understanding of the various facets of the new banking business. The present paper has attempted to address the above issue in the Indian banking context and has advocated the use of DEA approach in evaluating the relative eciency of Indian commercial banks. The results of the analysis indicate that, barring few exceptions, the public sector banks have in general improved their eciency scores over the years 1992 to 1995. Inspite of this there are few banks like United Bank of India, UCO Bank, Syndicate Bank and Central Bank of India continued to be at the lower end of the relative eciency scales during the study period. Some of them continue to be in tight spot even today. On the other hand, it is found that banks like Corporation Bank, Oriental Bank of Commerce, State Bank of India, Canara Bank, State Bank of Hyderabad, Bank of Baroda and Dena Bank have consistently been among the relatively more ecient banks. It is interesting to note that following ve among these banks have successfully tapped the capital markets: State Bank of India (December 1993), Oriental Bank of Commerce (October 1994), Dena Bank (October 1996), Bank of Baroda (December 1996) and Corporation Bank (September 1997). Their equity issues have all commanded sizeable premia and have subsequently traded much above the initial oer price since their listing. This indicates that the ndings of the present DEA study are consistent with the market perceptions about these banks. The present study has mainly conned itself to the Public Sector banks primarily because they account for about 85% of the Indian commercial

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banking business. Under the present globalisation/ liberalisation eorts of the Indian economy, the ownership composition of the Indian banking system may undergo substantial changes in the coming years. At that stage similar study may have to be done on a wider spectrum. However, the preceding discussion essentially supports the contention of this paper that DEA methodology is

useful and suitable for rating the eciency of Indian banks. Acknowledgements The authors would like to express their sincere thanks to the anonymous referees for their

Fig. 1.

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A. Saha, T.S. Ravisankar / European Journal of Operational Research 124 (2000) 187203 Berger, A.N., Hunter, C.W., Timme, S.G., 1993. The eciency of nancial institution: A review and preview of research past present and future. Journal of Banking and Finance, 17, 221249. Berger, A.N., Hanweck, G.A., Humphrey, D.B., 1987. Competitive viability in banking: Scale, scope and product mix economies. Journal of Monetary Economics 501520. Brown, Z.M., Gardener, E.P.M., 1995. Bancassurance and European banking strategies: An exploratory analysis using DEA of the concept and treatment of ``Relative Eciency'', Research Papers in Banking and Finance, RP 95/20, Institute of European Finance. Bank of England, 1997. A risk based approach to supervision (the RATE Framework). A consulative paper by the Bank of England. Charnes, A., Coopers, W.W., Rhodes, E., 1978. Measuring the eciency of decision making units. European Journal of Operational Research 2 (6), 429444. Cole, Rebel, A., 1995. FIMS: A new monitoring system for banking institutions. Federal Reserve Bulletin 81 (1), 115. Farrell, M.J., 1957. The measurement of productive eciency. Journal of the Royal Statistical Society, 120A, 253281. Humphrey, D., 1991. Productivity in banking and eects from deregulation. Economic Review, Federal Reserve Bank of Richmond 77 (2). Lacasta, I., 1988. Risk and recent evolution of banking system: A case study of Spain. Research Paper in Banking and Finance, RP 88/9, Institute of European Finance. McNaughton, D., 1992. Banking institutions in developing markets, Vol. 1, Building Strong Management and Responding to Change (Washington, DC). Narasimhan Committee, 1991. Report of the Committee on the Financial System, Government of India. Padmanabhan Working Group, 1991. Report of the working group to review the existing system of inspection of banks. Reserve Bank of India, Mumbai, India. PEP Committee, 1977. Report of the productivity, eciency and protability, Reserve Bank of India, Mumbai, India. Pendharkar Working Group, 198283. Report of the working group to review the existing system of inspection of banks. Reserve Bank of India, Mumbai, India. Piyu, Y., 1992. Data envelop analysis and commercial bank performance: A primer with applications to Missouri Banks, Federal Reserve Bank of St. Louis 74 (1), 3145. Rangarajan, C., 1996. Towards Second Phase of Banking Reform, Central Bank of India Economic Bulletin, No. 2. Resti, A., 1997. Linear programming and econometric methods for bank eciency evaluation, Research Paper in Banking and Finance, RP97/1, Institute of European Finance. Saha, A., Ravisankar, T.S., 1995. Assessing relative strength of banks in managing risk: An Indian evidence, prajnan, vol. XXIV, No. 4, National Institute of Bank Management, Pune, India, pp. 461474. Second Narasimhan Committee, 1997. Committee on Banking Sector Reform. Gazette of India Extraordinary Notication, Part II, Sec 3(ii), Ministry of Finance, Government of India.

valuable suggestions on an earlier version of the paper. Appendix A

No. of Banks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Legends ALLA AND BOB BOI BOM CAN CBI CORP DENA IND INDO IOB OBC PSB SBBJ SBH SBI SBP SBS SBT SYND UCO UNI UTD VIJ

Name of the Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank State Bank of Indore Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of India State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

Appendix B See Fig. 1. References

Ahluwalia, I., Shanker Q.F.R. (Eds.), 1985. Low productivity and high cost the managerial challenge, Tata McGrawHill, New Delhi, 5661. Berger, A.N., Humphrey, D.B., 1992. Measurement and eciency issues in commercial banking, In: Z. Griliches (Ed.), Output Measurement in Services Sector. University of Chicago Press, Chicago, IL, 245279.

A. Saha, T.S. Ravisankar / European Journal of Operational Research 124 (2000) 187203 Sherman, H.D., Gold, F., 1985. Bank branch operating eciency: Evaluation with data envelope analysis. Journal of Banking and Finance 9, 297316. Siems, Thomas F., 1992. Quantifying management's role in bank survival, 1st Quarter, Federal Reserve Bank of Dallas, Economic Review, January 1992, 2941.

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Sukhmoy Chakravarty Committee, 1985. Report of the committee to review the working of the monetary system. Reserve Bank of India, Mumbai, India. Wheelock, D.C., Wilson, P.W., 1995. Evaluating the eciency of commercial banks: Does our view of what banks do matter? Review, Federal Reserve Bank of St. Louis 77 (4), 3952.