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Evaluating The Double Bottom-L
Evaluating The Double Bottom-L
Evaluating The Double Bottom-L
https://doi.org/10.1007/s10551-018-3974-3
ORIGINAL PAPER
Received: 26 June 2017 / Accepted: 9 July 2018 / Published online: 20 July 2018
© Springer Nature B.V. 2018
Abstract
India is the emerging country with the world’s greatest social banking program, so Indian banks are required to finance
the weaker sectors of society that are excluded from the traditional financial system (priority sectors), while also providing
mainstream banking services to non-priority sectors. For social banks to promote the ethical–social management of their
dual mission and to be successful in today’s business environment, they must be as efficient as possible in both dimensions
of their banking activity. Whereas the efficiency of Indian banks in the financial dimension is well understood, to date there
has been no research evaluating their double bottom-line of achieving social and financial goals. Our study applies an inno-
vative Network Slack-Based DEA model to evaluate how efficient Indian public banks are when providing credit to priority
and non-priority sectors. We also explore the main factors influencing bank efficiency. Results suggest that Indian public
banks have performed relatively well in both activities, although social efficiency has been slightly greater than financial
efficiency. Moreover, their commitment to priority sector lending has not come into conflict with the profit-seeking objectives
of mainstream banking services. As regards determinants of social and financial efficiency, there are countervailing forces
played by regional wealth, bank size, branch networks, and rural location. Our findings are therefore useful for stakeholders
of Indian public banks as they indicate if these entities have adequately managed their double bottom-line, and hence if they
are critical for poverty alleviation and development in India.
Keywords Double bottom-line · Efficiency · Indian social banks · Priority and non-priority sectors · Ethical–social
management · Network slack-based DEA model
Introduction
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400 A. Martínez‑Campillo et al.
where certain strategic sectors of the economy, namely undesirable outputs (U-NSBM) to obtain both the overall
agriculture and small-scale industries, and people with low and divisional efficiencies of each bank as a whole and of
income have been marginalized by the traditional banking its banking activity in both priority and non-priority sectors
system for many years. Consequently, Indian commercial separately. Then, robust regression analyses are performed
banks have been called upon by the government to set up to examine the main determinants of efficiency.
special schemes for deploying credit at preferential rates to Our paper makes four significant contributions to the lit-
vulnerable sections of society (Thorat et al. 2017). This is erature. First, it is relevant for the study of ethical-social
the origin of the priority sector lending whereby commer- aspects of commercial banks in India because it evaluates,
cial banks provide inclusive financial services in India, the for the first time, their social and financial efficiency sepa-
country with the more ambitious public program of social rately according to a double bottom-line approach. Stake-
banking in the world. holders of these institutions have different expectations and
Broadly speaking, priority sectors in the Indian economy goals, so that while some of them focus on social banking
are those which, though viable and creditworthy, may not services, others emphasize for-profit services. Specifically,
receive timely and adequate credit in the absence of this spe- those more interested in their social mission (users of the
cial dispensation. Typically, credit takes the form of small priority sector lending scheme, staff, government, etc.) are
loans for farmers and low-income population, and for micro showing growing interest in measuring their social perfor-
and small enterprises, scheduled castes, and other weak sec- mance because information on financial performance alone
tions of society. In contrast, non-priority sectors cover all the gives an incomplete view of their global results. Second, our
remaining sectors towards which financial institutions are study also explores the determinants that influence social
always ready to lend, charging higher interest rates than in and financial efficiency because it is crucial for Indian banks
priority sectors to earn higher returns on loans. Indian com- to know the factors that may affect both types of efficiency
mercial banks, therefore, are social banks with a harmonious in order to survive and thrive in today’s environment. Third,
blend of banking services in both priority and non-priority this study assesses efficiency in Indian public banks during
sectors, so they have become key actors in alleviating pov- the last years of the post-crisis period (2011–2014), provid-
erty and improving quality of life in India (Das and Kumb- ing new evidence for a banking segment and a stage that
hakar 2012; Srinivasan and Thampy 2017). have not been analyzed before. Finally, from a methodo-
At present, much attention is being given to the role of logical perspective, this study extends previous research on
efficiency in social banks as a means of ensuring ethically Indian banking efficiency by employing a U-NSBM model
and socially responsible management of their dual mission, followed by robust regression-type models, which allow us
and as a way of better understanding their ability to sur- to offer more robust and meaningful policy conclusions.
vive in an increasingly competitive environment (Mia and
Chandran 2016; Smith 2018). As a result, Indian commercial
banks must be as efficient as possible in both dimensions of The Banking Sector in India
their activity to manage their banking practice with ethical-
social responsibility towards their main stakeholders, and The Country Context: An Overview (2011–2014)
at the same time to compete and thrive in the global mar-
ketplace. Unfortunately, there have been no studies on their The banking sector in India consists of commercial banks,
efficiency considering their social and for-profit missions cooperatives, and regional rural banks. The former com-
separately. So, Indian banks’ efficiency needs to be evalu- prise three types of financial institutions: (a) public banks,
ated by determining both their global performance and their including the State Bank of India and its associates, and
performance according to the double bottom-line approach. nationalized banks; (b) private banks, which are the old and
This paper aims to give evidence on how efficiently new private-sector banks; and (c) foreign banks. All banking
Indian commercial banks use their resources to deploy credit operations in India are controlled by the Reserve Bank of
in both priority (social efficiency) and non-priority (financial India (RBI), a governing body that took over the responsibil-
efficiency) sectors. In particular, it focuses exclusively on ity of formally regulating the Indian banking system in 1935
public banks for two reasons: (a) they dominate the financial and has played an important part in the development strategy
market in India; (b) they account for the highest percent- of the government of India.
age of priority sector lending in total credit of the Indian Indian commercial banks are a unique example of the
commercial banks. More specifically, we use a homogene- combination of social and mainstream banking services,
ous sample of 26 public banks over the period 2011–2014 and they hold more than 95% of the total financial market.
to determine whether they were socially and financially Table 1 summarizes information about the total number
efficient during the last years of the post-crisis period. To of entities, branches, and employees in the three types of
do so, we apply a Network Slack-Based DEA model with Indian commercial banks over 2011–2014. It shows that
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Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 401
Banks 26 21 34 26 20 41 26 20 43 26 23 43
Branches 65,800 12,097 318 70,969 13,970 323 75,779 16,001 334 80,665 21,456 334
Employees 755,102 187,913 27,767 774,329 248,284 25,907 798,535 273,070 25,375 830,487 294,968 24,826
the number of public banks remained constant throughout have therefore made a larger contribution to social welfare
this period (26 entities), but their branches and employ- in India than their private and foreign counterparts.
ees increased by 23 and 10%, respectively. In fact, public
banks had a substantially higher number of branches and The Evolution of the Social Banking Policy in India
workers than the other two types of Indian commercial
banks. In contrast, the number of private and, especially, India has been blessed with the largest social banking exper-
foreign banks grew. Private banks became stronger during iment in the world, and priority sector lending has continued
this period, with increases in branches and employees of to be an integral part of the public policy to support sus-
77 and 57%, respectively. Although the number of foreign tainable development and poverty alleviation (Burgess and
banks rose substantially, their branches only increased by Pande 2005; Das and Kumbhakar 2012). Specifically, the
5% while their staff decreased by almost 11%. banking program launched by the Indian government with
Figure 1 shows the relative market share of each type the aim of channeling financial resources towards greater
of bank in the commercial banking sector in India over social inclusion is divided into four main phases (Srinivasan
2011–2014. Public banks on average held 76.3% of total and Thampy 2017): in the first one (Pre-nationalization:
loans compared to 19.2% in private banks and 4.5% in prior to 1969), the Indian financial market was not governed
foreign banks. Specifically, regarding loans to priority by clear policy requirements regarding equitable deployment
sectors, public banks held 76.2% of total credit from all of credit and was dominated by large private banks with very
commercial banks, as opposed to 19.1% held by private narrow spatial and sectorial coverage.
banks and 4.7% by foreign banks. They represented 77.5% In the second phase (Nationalization and consolidation:
of total deposits in this sector in comparison with 18.4 and 1969–1990), all commercial banks were called upon by the
4.1% in private and foreign banks, respectively, and 72.9% Indian government to allocate a portion of their lending
of total banking assets as opposed to 20.3% in private to the weaker sectors of the economy as part of an overall
banks and 6.8% in foreign banks. So, public banks domi- nationalization policy. With a view to enabling banks to pro-
nate the Indian financial sector and have the highest rate mote financial inclusion in priority sectors and rural areas,
of participation in priority sector lending schemes. They reforms in the banking sector started with the nationalization
13
402 A. Martínez‑Campillo et al.
of 14 major private banks in 1969 and six additional banks The double bottom-line is a concept that is closely associ-
in 1980. As a result, public banks gained an overwhelm- ated to ethically responsible management in social banking,
ingly dominant position in the Indian banking system. This where performance is measured in both social and economic
nationalization and consolidation process brought many terms, hence the double social and financial bottom-line
advantages for the economy of the country, although in fact (Cornée and Szafarz 2014; Crowther and Lauesen 2016).
it ending up lowering the efficiency of Indian commercial Social performance is the effective conversion of a bank’s
banks. social mission into practices in line with accepted ethical-
In the third phase (Banking sector reforms and partial social values, such as serving larger numbers of poor and
liberalization: 1991–2004), the Indian government launched excluded people, improving the quality and appropriateness
a series of financial reforms following a policy of liberaliza- of financial services, or improving the bank’s social respon-
tion to create a more competitive financial system. These sibility. Financial performance forms the basis for analyz-
reforms were based on the recommendations of the Narasim- ing most for-profit activity and it is especially important to a
han Committee in 1991 and 1998. The first phase of reforms bank’s owners, although other stakeholders, like the bank’s
focused on enhancing bank efficiency and profitability, and employees and the society at large, are also deemed to benefit
the second one on aligning Indian banking standards with from such performance, albeit less directly. Thus, the dou-
internationally recognized best practices. During this period, ble bottom-line combined with stakeholder engagement can
the entry of private and foreign banks was liberalized with a successfully help a social bank to re-balance its positioning
view to enhancing efficiency in the banking sector. between wealth generation and social value creation (Ramus
Finally, in the last phase (Increased liberalization: and Vaccaro 2017).
2005-onwards), since the mid-2000s, several government Recent literature also considers efficiency as a means of
committees have pointed out relevant problems in the pri- guaranteeing ethically responsible management in social
ority sector lending of Indian banks (i.e., political interven- banking. In particular, it is argued that efficiency cannot be
tion, low profitability), recommending its alignment with fully separated from the planning and intentions of business
the national priorities for greater liberalization of the sector. managers as long as they manage their firms in an ethically
However, these suggestions have not been implemented by and socially responsible fashion (Smith 2018). Accordingly,
the Indian government. Recently, the RBI has reinforced and as social banks work towards a double bottom-line, they
extended the priority sector lending policy with to the aim must be as efficient as possible in both social and financial
of developing a more inclusive financial system. dimensions of their banking activity. For this reason, a key
concern of policymakers is to enable bank leaders to make
more productive use of resources to achieve social outreach
Literature Review and financial sustainability (Bagnoli and Megali 2009; Wije-
siri et al. 2015).
Theoretical Background
Social and Financial Efficiency in Social Banking
Ethically Responsible Management, the Double
Bottom‑Line and Efficiency in Social Banking Two main concepts of efficiency can be used as a basis for
study (Farrell 1957). Firstly, technical efficiency is the abil-
Social banking refers to banks that apply an ethical-social ity of an organization to use minimum inputs to produce a
approach to their banking practice (Krause and Battenfeld given quantity of outputs or to maximize outputs from a
2017). Such banks therefore engage in sustainable invest- given set of inputs. Secondly, allocative efficiency reflects
ments and lending practices that produce a better quality of the ability of an organization to use inputs in optimal propor-
life for individuals and society (Ebrahim et al. 2014). Thus, tions given their respective prices and the available produc-
social banking can refer, in a broad sense, to the hybrid form tion technology. In particular, this study focuses on technical
of banking institutions that combine both social and finan- efficiency (hereinafter referred to as “efficiency”).
cial missions. The important question here is how can social As social banking has a dual mission, “social efficiency”
banks be managed with adequate attention to socio-ethical (that is, technical efficiency in social banking activity) can
concerns without compromising their financial stability? be defined as the degree of optimization achieved in the use
The main approach to this question is loosely referred to as of inputs for providing banking services aimed at improv-
Stakeholder Theory (Freeman 1984; Freeman et al. 2010), ing quality of life for individuals and society as a whole,
according to which ethically and socially responsible man- whereas “financial efficiency” (that is, technical efficiency in
agement pays careful attention to the potentially divergent for-profit banking activity) refers to the degree of optimiza-
interests of stakeholders in the decision-making process. tion achieved in the use of inputs for providing mainstream
13
Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 403
13
404 A. Martínez‑Campillo et al.
(7)
k
are kept unchanged (non-discretionary): 𝜌k = �∑ ∗ � (k = 1, … , K),
1 rk sk+
r
1+ r r=1 yk
k ro
Z (k,h) = (z(k,h)
1
, … , z(k,h)
n
) ∈ Rt(k,h)x n (5)
13
Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 405
where sk− and sk+ are the optimal input- and output-slacks
∗ ∗
n
∑
for (6). xok = xjk 𝜆kj + sk− (k = 1, … , K),
j=1
n
gk gk
∑
y0 = yj 𝜆kj − sgk (k = 1, … , K),
The NSBM Model with Undesirable Outputs j=1
(U‑NSBM) n
∑
ybk
0
= ybk k
j 𝜆j + s
bk
(k = 1, … , K),
Undesirable outputs are very common in production pro-
j=1
n
cesses but are not considered in the NSBM model pro-
∑ (gk,h) k
z(gk,h) = zj 𝜆j (∀(gk, h) (as desirable outputs from k)),
posed by Tone and Tsutsui (2009), which leads to biased j=1
estimates of efficiency in their presence. Recently, Fukuy- ∑n
ama and Matousek (2017) have suggested that it is appro- z(bk,h) = z(bk,h)
j
𝜆kj (∀(bk, h) (as undesirable outputs from k)),
priate to analyze both desirable and undesirable outputs
j=1
n
in order to credit the good outputs in the model and to z(k,h) =
∑
z(k,h) 𝜆hj (∀(k, h) (as inputs to h)),
penalize firms for producing bad outputs. The study by
j
j=1
Huang et al. (2014) extends the NSBM model to a new n
∑
one that deals with undesirable outputs to measure bank 𝜆kj = 1 (∀k), 𝜆kj ≥ 0 (∀j, k),
efficiency (U-NSBM)1. Specifically, overall efficiency can j=1
n
be computed using a simple linear program that takes into ∑
𝜆hj = 1 (∀h), 𝜆hj ≥ 0 (∀j, h),
account the weak disposability of the undesirable (bad) j=1
outputs, making it possible to expand desirable outputs K
while simultaneously contracting undesirable outputs and
∑
W k = 1,
inputs (Lozano( g 2016).g )
k=1
13
406 A. Martínez‑Campillo et al.
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Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 407
Desirable
Intermediate Product Outputs
Zo Yog
Inputs STAGE 1 STAGE 2
Xo (Production)
Zj (Intermediation)
Yob
Undesirable
Outputs
(undesirable outputs) in priority and non-priority lending nel that is labor-intensive and involves direct relations
schemes are used separately to construct social and financial between employees and customers.
outputs, respectively. Inputs and the intermediate output/ – Operating expenses This is an indicator of the costs gen-
input are similar for financial and social models because erated by banks in maintaining their daily business, and
they refer to resources that are common in both banking is quantified as total operating expenses (in millions of
activities, but the final outputs vary depending on whether Indian rupees).
Indian public banks provide credit to the priority or non-
priority sectors. Finally, we construct a third model, the Full Intermediate output variable (first stage)—intermediate
Model, which is based on the same inputs and intermediate input variable (second stage):
product, and in which all desirable and undesirable outputs
considered in social and financial models are jointly intro- – Deposits This defines the funds placed in an account that
duced, allowing evaluation of the overall and divisional effi- are payable on demand to the depositor, and is measured
ciencies of each bank at a global level. Figure 2 illustrates by total deposit values (in millions of Indian rupees).
the two-stage network framework of our three models.
Final output variables (second stage):
Variables
(a) Social outputs
Input and output variables for measuring bank efficiency
were selected according to a number of earlier studies – Loans to priority sectors This variable refers to the
(Fukuyama and Weber 2010; Zha et al. 2016; Fukuyama main desirable output from social banking services,
and Matousek 2017), based on data available on the Indian and is quantified by the gross loan portfolio to prior-
banking industry. ity sectors (in millions of Indian rupees).
Input variables (first stage): – NPLs to priority sectors This variable defines the
main undesirable output from social banking ser-
– Physical capital This variable measures the physical vices, and is captured by the total volume of risky
capital associated with the activity carried out by banks, loans in priority sectors, that is, when interest and/
and is proxied by the value of fixed assets (in millions or an installment of the principal has remained “past
of Indian rupees). The use of fixed assets as an input due” or unpaid for more than 90 days (in millions of
is important in this study given the considerable invest- Indian rupees).
ments in Information and Communications Technology
and Automated Teller Machines by Indian public banks (b) Financial outputs
with the aim of increasing the financial inclusion.
– Labor This refers to the human resources employed by – Loans to non-priority sectors This variable refers
banks for performing their activity, and is measured as to the main desirable output from for-profit banking
the number of employees. Human resources are one of services, and is measured by the gross loan portfolio
the main inputs in any banking activity and play a key in non-priority sectors (in millions of Indian rupees).
role in customers’ final decisions, especially in Indian – NPLs to non-priority sectors This variable defines
banks, which mostly use a traditional distribution chan- the main undesirable output from for-profit bank-
13
408 A. Martínez‑Campillo et al.
ing services, and is quantified by the total volume Average Overall Efficiency Estimates: Full, Social,
of risky loans in non-priority sectors (in millions of and Financial Models
Indian rupees).
The results of the U-NSBM model are provided in Table 5,
The data about physical capital, labor, operating expenses, which presents an overview of the average overall efficiency
and deposits were collected from the Annual Reports of the scores of each Indian public bank in the Full, Social and
RBI (RBI 2012–2015), while the information on loans and Financial Models over the period 2011–2014. All banks are
NPLs of priority and non-priority sectors was obtained from assigned scores between 0 and 1 with higher values indicat-
Indiastat Database (Datanet India 2017). Data expressed in ing more efficient organization relative to other organiza-
monetary units are deflated, at constant prices for 2011, tions in the sample. These efficiency scores must therefore
using the GDP deflator. Table 3 presents the main descrip- be interpreted cautiously as they are relative to best observed
tive statistics for all input and output variables. practice within our particular sample. Specifically, we pre-
According to Cooper et al. (2007), in order for the effi- sent the total 26 banks in order of their mean overall effi-
ciency estimates to be robust and reliable, the number of ciency, from the most to the least efficient.
DMUs must be at least the maximum between m * s or 3 * Regarding the Full Model, the average overall efficiency
(m + s), with m and s being the number of inputs and out- of Indian public banks as a whole over the 4-year period is
puts, respectively. In this study, all efficiency models to be 78.25%, well above 50% which is the minimum tolerable
estimated meet this requirement. value for estimates of technical efficiency (Cooper et al.
2007), and ranges between 46.07% and 100%. Thus, in order
to be totally efficient at a global level, these entities should
Empirical Results have increased their social and for-profit banking services by
21.75%, given the resources at their disposal. Fig. 3 shows
This study applies the U-NSBM model to estimate if Indian a Pareto chart with the positions of the 26 banks regarding
public banks are relatively efficient compared to each other, the estimates of global efficiency reported in Table 5, which
both globally (Full Model) and when providing credit to are classified in four categories: total efficiency ([U]𝜌∗o = 1);
priority (Social Model) and non-priority (Financial Model) low inefficiency (0.75 ≤ [U]𝜌∗o < 1) ; moderate inefficiency
sectors. Overall and divisional efficiencies are provided for (0.5 ≤ [U]𝜌∗o < 0.75) ; and high inefficiency ([U]𝜌∗o < 0.5) .
the three models. As the graph shows, only seven banks were totally efficient
Global, social, and financial efficiency scores are then at a global level (26.9% of the total). The remaining banks
regressed using Beta and Simplex regression models. The were inefficient, albeit to different extents. Specifically,
following control variables are included in all regressions 96.1% of Indian public banks achieved an acceptable effi-
as factors that may affect efficiency: (a) Regional wealth ciency level (0.5 ≤ [U]𝜌∗o ) , whereas only 3.9% were highly
(REGWEA), measured in terms of annual GDP per capita inefficient.
of the Indian states where the banks have their headquarters When the overall efficiency of the 26 Indian public
(in USD); (b) Bank size, proxied by two dummies for large banks is evaluated in the Social and Financial Models
(LARGE) and medium (MEDIUM) banks, as data on total separately, they are seen to have achieved a quite adequate
bank assets were divided into three tertiles (the reference level of performance in both priority and non-priority sec-
category is “small banks”); (c) Branch network (BRANCH), tors. More specifically, the mean score for overall social
measured by the total number of branches; and (d) Rural loca- efficiency (74.96%) is slightly higher than that for over-
tion (RURAL), proxied by a dummy that takes the value of 1 all financial efficiency (71.97%), which means that banks
when the proportion of branches in municipalities with less provided around 25 and 28% less, respectively, than the
than 10,000 inhabitants in the total number of branches is maximum flow of credit to priority and non-priority sec-
greater than the annual average for all the banks analyzed, and tors that might be expected if they had used their inputs
0 otherwise. Table 4 presents correlation coefficients and vari- better. Scores for social efficiency ranged between 41.79
ance inflation factor (VIF) scores for the control variables.3 and 100%, and run from 41.35% for financial efficiency.
We observe that there are two low, positive and statistically Figure 4 compares two Pareto charts based on the scores
significant correlations, but analysis of the VIFs reveals that for social and financial efficiency, respectively. In both
multicollinearity is not a problem (all values are below 5). cases, 69.2% of the banks presented either moderate or low
levels of inefficiency, while 11.5% were highly inefficient
3
at a social level and 15.4% at a financial level. Only five
We use Spearman´s Rho correlation coefficients rather than Pear-
banks were totally efficient in providing credit to priority
son correlation coefficients because the latter are subject to biases
if all variables are not normally distributed, which is the case in our sectors (19.2% of the total) and four to non-priority sectors
study. (15.4% of the total).
13
Table 3 Descriptive statistics of inputs and outputs
Variables 2011 2012 2013 2014
Mean SD Min. Max. Mean SD Min. Max. Mean SD Min. Max. Mean SD Min. Max.
Inputs
Fixed 13,905 11,815 2095 47,642 14,731 12,711 2021 54,665 16,385 14,628 2313 70,050 20,756 20,163 2642 80,022
assets*
Personal** 29,042 41,314 8107 222,933 29,782 40,062 8041 215,481 30,713 42,260 8533 228,296 31,934 41,128 8870 222,033
Operating 31,910 42,936 9174 230,154 34,694 48,544 10,411 260,690 39,180 54,578 10,964 292,844 46,362 66,637 12,473 357,259
expenses*
Intermediate output/input
Deposits* 1,681,711 1,771,028 432,255 9,339,328 1,923,851 1,992,511 501,863 10,436,474 2,209,884 2,288,959 569,690 12,027,396 2,534,205 2,685,742 615,603 13,944,085
Final outputs
Loans 396,918 442,583 119,680 2,388,390 438,093 476,371 116,310 2,594,500 491,928 506,584 134,830 2,764,840 576,176 553,798 154,570 2,970,560
(priority
sectors)*
Loans (non- 779,986 794,280 224,580 4,236,050 927,442 935,851 290,220 4,984,390 1,068,023 1,161,739 324,970 6,330,080 1,189,324 1,353,320 354,060 7,338,780
priority
sectors)*
NPLs 15,880 24,937 2700 132,750 21,615 34,603 4240 186,160 25,743 39,324 6570 209,840 30,985 40,752 8070 218,840
(priority
Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are…
sectors)*
NPLs (non- 11,459 18,375 1550 97,990 21,650 35,633 1360 185,400 34,216 52,135 1740 273,940 50,408 58,408 11,780 308,160
priority
sectors)*
13
409
410 A. Martínez‑Campillo et al.
Notes The table presents Spearman Rho rank-order correlation coefficients (n = 104)
**Significant at the 1% level; *Significant at the 5% level
Based on the average overall efficiency estimates, we The Relation Between Social and Financial Efficiency Scores
located the most efficient public banks in India according
to the regional location of their headquarters to gain a better Next, we searched for a synergy between overall social
insight into how they are distributed among the different and financial performance in Indian public banks by ana-
Indian states. As shown in Fig. 5, the seven globally efficient lyzing the correlation between both variables. The Spear-
banks are headquartered in Gujarat, Maharashtra, Karnataka, man’s coefficient showed that overall social and financial
Rajasthan, Kerala, and Delhi states. All these states are on efficiency scores are positively and significantly correlated
the western side of India, except for the southern state of (ρSOC−FIN = 0.830; p < 0.01). A positive sign suggests the
Kerala. Among them, three banks—Bank of Baroda, State existence of compatibility between them. Moreover, the
Bank of India, and State Bank of Mysore—(11.5% of the coefficient is high and significantly different from zero at
total sampled banks) simultaneously achieved their dual the 1% level, indicating a strong association between both
mission of financial sustainability and social outreach, so variables in Indian public banks.
they can be used as ideal benchmarks for their peers. Spe- In order to obtain a visual picture of this result, we plot-
cifically, their headquarters are in Gujarat, Maharashtra, ted the average overall efficiency measures obtained from
and Karnataka states, respectively, that is, the Indian states the social model against those obtained from the financial
where economic growth and development have been fastest. one for all sampled banks. As Fig. 7 depicts, Indian public
Moreover, two banks—State Bank of Bikaner and Jaipur and banks are dispersed along a line going from the bottom left
State Bank of Travancore—were deemed socially efficient to the top right corner providing further evidence of the syn-
but financially inefficient. They are located in Rajasthan ergy between social and financial efficiency. Specifically, the
and Kerala states, respectively, both of which are among three banks located at the top right corner are socially and
the states that are making most progress in reducing poverty financially efficient (Bank of Baroda, State Bank of India,
and raising living standards. Only one bank—IDBI Bank and State Bank of Mysore), while those in the middle per-
Limited—was rated as financially efficient but socially inef- form relatively low in both efficiency dimensions. No banks
ficient. It is in Maharashtra state. The last globally efficient are located at the bottom right or at the top left corner. This
bank—Punjab and Sind Bank—headquartered in Delhi, that suggests that the commitment to development and poverty
is, the major commercial and banking center of India, is alleviation goals through social banking services to priority
neither socially nor financially efficient. sectors does not conflict with the profit-seeking objectives
Finally, when the efficiency dynamics during the period associated with providing loans to non-priority sectors.
2011–2014 are analyzed, results indicate that the last years As a robustness check for this finding, Beta and Simplex
of the post-crisis period damaged public banks performance regressions were carried out to make a stronger statistical
in India. Figure 6 shows the annual trend in mean overall point for the above graphical observations (Table 6). When
efficiency scores, indicating that global, social, and finan- overall social efficiency is used as the dependent variable,
cial performance decreased, mainly after 2012. As economic the results of the two regression models show that social and
activity may be a factor influencing efficiency, the figure financial efficiencies are positively and significantly related.
also depicts the annual evolution of Indian GDP per capita If overall financial efficiency is the dependent variable, we
(in USD). On average, the global efficiency of Indian public also find a positive and statistically significant relation in
banks was quite stable, with a slight drop of about 1.4% over both models. Accordingly, higher overall social efficiency
the period. Both financial and social efficiencies dropped scores are coupled with higher overall financial efficiency
by about 2.4 and 5.1%, respectively, and the latter showed scores, thus predicting a synergy between the social and for-
a continuous decline from 2012. Finally, the national econ- profit missions of Indian public banks.
omy also fell by about 0.6% between 2011 and 2013, but it Our results furthermore demonstrate that regional GDP
increased by 8.3% in 2014. per capita and large banks have a significant positive impact
13
Table 5 Average efficiency scores
Rank Bank Bank code Overall efficiency Divisional efficiency
Full model Social model Financial model Production Intermediation
Full model Social model Financial model Full model social model Financial model
1 Bank of Baroda 3 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
State bank of India 18 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
State bank of Mysore 19 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
2 State bank of Bikaner and Jaipur 16 1.0000 1.0000 0.8671 1.0000 1.0000 1.0000 1.0000 1.0000 0.8671
3 IDBI bank limited 10 1.0000 0.8660 1.0000 1.0000 1.0000 1.0000 1.0000 0.8660 1.0000
4 State bank of Travancore 21 1.0000 1.0000 0.7786 1.0000 1.0000 1.0000 1.0000 1.0000 0.7786
5 Punjab and Sind bank 14 1.0000 0.9354 0.9844 1.0000 1.0000 1.0000 1.0000 0.9354 0.9844
6 Corporation bank 8 0.9910 0.9742 0.9355 1.0000 1.0000 1.0000 0.9910 0.9742 0.9355
7 Andhra bank 2 0.9140 0.8696 0.7437 0.9140 0.9140 0.9140 1.0000 0.9503 0.8157
8 Vijaya bank 26 0.8713 0.8222 0.8092 0.9629 0.9629 0.9629 0.9007 0.8466 0.8425
9 State bank of Patiala 20 0.8628 0.8055 0.8061 0.9021 0.9021 0.9021 0.9583 0.8936 0.8960
10 Dena bank 9 0.8474 0.7922 0.8096 0.9515 0.9515 0.9515 0.8932 0.8316 0.8550
11 State bank of Hyderabad 17 0.8044 0.7910 0.5987 0.8044 0.8044 0.8044 1.0000 0.9834 0.7440
12 Canara bank 6 0.7654 0.7654 0.7654 0.7654 0.7654 0.7654 1.0000 1.0000 1.0000
13 Bank of India 4 0.7362 0.7542 0.6449 0.8074 0.8074 0.8074 0.9165 0.9408 0.7972
14 Oriental bank of commerce 13 0.7211 0.6869 0.5739 0.7391 0.7391 0.7391 0.9764 0.9303 0.7772
15 Punjab national bank 15 0.6576 0.6441 0.6137 0.6685 0.6685 0.6685 0.9822 0.9626 0.9102
Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are…
16 UCO bank 23 0.6501 0.6318 0.6355 0.8476 0.8476 0.8476 0.7622 0.7425 0.7466
17 Union bank of India 24 0.6385 0.5319 0.6170 0.6614 0.6614 0.6614 0.9690 0.8030 0.9365
18 Bank of Maharashtra 5 0.6305 0.5612 0.5946 0.6650 0.6650 0.6650 0.9478 0.8421 0.8962
19 Syndicate bank 22 0.6247 0.5686 0.5375 0.6247 0.6247 0.6247 1.0000 0.9100 0.8631
20 United bank of India 25 0.5573 0.5466 0.5262 0.7353 0.7353 0.7353 0.7596 0.7441 0.7177
21 Indian bank 11 0.5561 0.5482 0.4531 0.5561 0.5561 0.5561 1.0000 0.9859 0.8139
22 Allahabad bank 1 0.5433 0.4918 0.5430 0.6282 0.6282 0.6282 0.8615 0.7814 0.8602
23 Indian overseas bank 12 0.5123 0.4858 0.4615 0.5931 0.5931 0.5931 0.8650 0.8187 0.7794
24 Central bank of India 7 0.4607 0.4179 0.4135 0.5163 0.5163 0.5163 0.8963 0.8097 0.7991
26 Indian public banks (mean) 0.7825 0.7496 0.7197 0.8209 0.8209 0.8209 0.9492 0.9059 0.8699
Full Model refers to global efficiency scores; Social Model refers to social efficiency scores; Financial Model refers to financial efficiency scores. All average efficiency scores for each bank are
based on the annual mean value for the 4-year period 2011–2014
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411
412 A. Martínez‑Campillo et al.
Cumulative percentage
12 100
96.1 100 cantly related (ρGLOB−SOC = 0.950; p < 0.01), as are global
Number of banks
100 100
egories of social and financial
Number of banks
Number of banks
10 88.4 80 10 80
efficiency 84.6
8 69.2 8 69.2
10 60 60
6 6 10
38.5 40 38.5 40
4 8 4 8
2 5 20 2 4 4 20
3
0 0 0 0
Moderate Low Total High Low Moderate Total High
inefficiency inefficiency efficiency Inefficiency inefficiency inefficiency efficiency Inefficiency
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Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 413
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414 A. Martínez‑Campillo et al.
three models for the 104 sampled DMUs. Results indicate that
global, social, and financial efficiency values are positively and
significantly correlated to the efficiency estimates in both the
production (ρGLOB−PROD = 0.935; p < 0.01/ρSOC−PROD = 0.907;
p < 0.01/ρFIN−PROD = 0.889; p < 0.01) and intermediation
stages (ρGLOB−INTERM = 0.581; p < 0.01/ρSOC−INTERM = 0.726;
p < 0.01/ρFIN−INTERM = 0.662; p < 0.01). All correlation coef-
ficients therefore indicate compatibility between the variables
analyzed, although global, social, and financial efficiencies are
more associated with performance in the production stage than
in the intermediation stage. Figure 8 illustrates these relations
in the 26 Indian public banks of our sample, indicating that the
Fig. 7 Scatter plot between social and financial efficiency scores. The
inefficiency of many banks when providing credit to priority
numbers on the scatter plot refer to Bank Codes in Table 5 and non-priority sectors, both globally and in the social and
financial models separately, is mostly caused by their ineffi-
ciency in the production stage.
The Relation Between Overall and Divisional Efficiency In order to provide more rigorous empirical evidence for
Scores these relationships, we applied Beta and Simplex regres-
sions. As shown in Table 8, a higher performance in both the
We first calculate the Spearman’s correlation coefficients production and intermediation stages, that is, a better use of
between overall and divisional average efficiency scores in the inputs to produce deposits and of deposits to deploy credit in
n = 104 DMUs (26 Indian public banks during the 4-year period 2011–2014)
***Significant at the 1% level; **Significant at the 5% level; *Significant at the 10% level
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Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 415
n = 104 DMUs (26 Indian public banks during the 4-year period 2011–2014)
*** Significant at the 1% level; ** Significant at the 5% level; * Significant at the 10% level
1.2
Ovef_Full
0.8
Prodef_Full
0.4 Interef_Full
0.0
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 26
Ovef_Soc Ovef_Fin
Prodef_Soc Prodef_Fin
1.2 1.2
Interef_Soc Interef_Fin
0.8 0.8
0.4 0.4
0.0 0.0
1 3 5 7 9 11 13 15 17 19 21 23 25 1 3 5 7 9 11 13 15 17 19 21 23 25
Fig. 8 Overall and divisional efficiency scores in full, social, and ciency in the intermediation stage, Full full model, Soc social model,
financial models. Ovef Overall efficiency (global, social, or financial Fin financial model. The numbers on the horizontal axis refer to Bank
efficiency), Prodef efficiency in the production stage, Interef effi- Codes in Table 5
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416 A. Martínez‑Campillo et al.
priority and non-priority sectors, would help achieve higher efficient banks are located in the states that have made
global, social, and financial efficiency scores in Indian pub- most progress in promoting human development.
lic banks, since all coefficients are positive and statistically Third The last years of the post-crisis period have eroded
significant in the two regression approaches. the performance of Indian public banks, decreasing their
Once again, global and financial efficiency scores are efficiency, especially their social efficiency. During this
positively and significantly related to the regional economy period, Indian public banks have reported low profitabil-
and large banks, as captured by the two regressions when ity, have been prone to political influence and high NPL
controlling for production efficiency, but negatively and sig- ratios, and have carried the main burden of the govern-
nificantly related to the number of branches, as detected by ment’s development policies (Mohan and Ray 2017), all of
the Simplex regression when controlling for production or which might help to explain the drop in their efficiency. In
intermediation efficiency. The results of the Simplex regres- addition, banking reforms and growing pressure to prove
sion also confirm that branch expansion, controlled for pro- their financial performance seem to have damaged their
duction or intermediation efficiency, positively, and signifi- social performance to some extent. Thus, although in
cantly affects social performance. One more time, whereas general these banks have been quite efficient in providing
social efficiency increases with rural location, as shown by credit to priority sectors, it is crucial that they preserve
the Simplex regression when controlling for intermediation and build on their singular characteristics to avoid further
efficiency, the opposite is true for financial efficiency, as deterioration of their social efficiency in the future.
captured by the two regressions when controlling for pro- Fourth There has been a synergy effect between the social
duction efficiency. and financial efficiency of public banks in India, suggest-
ing that the commitment to development and poverty
alleviation goals through social banking services did not
Conclusions conflict with the profit-seeking objectives associated with
mainstream banking activities. The fear of a so-called
This study aims to evaluate how efficient Indian public banks “mission drift” (Ramus and Vaccaro 2017) resulting from
have been in providing credit to priority (social efficiency) the trade-off between social and financial efficiency is
and non-priority (financial efficiency) sectors during the last therefore ungrounded in the case of Indian public banks
years of the post-crisis period, and to explore the main fac- since they have improved access to finance for vulnerable
tors influencing efficiency. Considering that all efficiency sections of Indian society while maintaining their finan-
measures of banks are relative to other sampled banks, six cial sustainability, showing ethical responsibility towards
main conclusions can be drawn from our research in the all their main stakeholders.
framework of an emerging economy: Fifth Indian public banks have been quite efficient in
both the production and intermediation processes of
First On average, Indian public banks have managed their their social and financial banking activities, although
double bottom-line adequately without being equally effi- their performance has been higher in the latter than in
cient in all the components of their overall performance. the former. Moreover, they have been more efficient in
They have performed relatively well in their different the intermediation stage of their social banking activ-
banking activities as a whole, and hence have been quite ity than in that of their mainstream banking activity, so
efficient at a global level. Moreover, isotonicity has held they have used deposits better when providing credit to
positively and significantly among global, social, and priority sectors than when lending to non-priority sec-
financial performance. Specifically, Indian banks’ effi- tors. Specifically, their inefficiency in both missions has
ciency in their social mission has been slightly higher been more influenced by inefficiencies in the produc-
than in their financial mission, so they have managed tion stage than in the intermediation stage, indicating
their resources better when supporting priority sectors that the transformation of inputs into deposits has been
than when financing non-priority sectors. This is possibly their main weakness. Finally, a higher performance in
because their main goal is not to maximize profits, as in both the production and intermediation stages has led to
traditional commercial banks, but to achieve an ethical- higher levels of global, social, and financial efficiency
social purpose, primarily that of supporting development in Indian public banks.
and quality of life in India. Sixth Regarding efficiency determinants, there has been
Second The most efficient public banks are headquartered a trade-off between global/financial and social effi-
in Indian states located in the western side of the country. ciency levels with respect to regional wealth, bank size,
Specifically, the most globally and/or financially efficient branch networks, and rural location. Whereas the social
banks are situated in the Indian states where economic performance of Indian public banks tends to increase
development has been fastest, whereas the most socially with lower regional economic development, smaller
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Evaluating the Double Bottom-Line of Social Banking in an Emerging Country: How Efficient are… 417
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418 A. Martínez‑Campillo et al.
Table 8 (continued)
Financial efficiency
Beta Simplex
Estimates (Std. Errors) Estimates (Std. Errors)
n = 104 DMUs (26 Indian public banks during the 4-year period 2011–2014)
***Significant at the 1% level; **Significant at the 5% level; *Significant at the 10% level
size, more branches, and greater rural concentration, their operations to more efficiently manage their double
the reverse is true for global and financial efficiencies. bottom-line. Moreover, further consolidation in the sector
might help eliminate wasteful competition, raise potential
economies of scale, and help Indian public banks to serve a
Practical Implications larger client base. Finally, since their inefficiency is mainly
influenced by inefficiency in the production stage, greater
Overall, the social banking policy launched by the Indian efforts involving, for example, risk-based allocation of inputs
government, by virtue of which public banks have been and improved governance mechanisms, need to be made to
called upon to combine social and for-profit goals when improve bank performance at this stage.
providing their banking services, has helped these entities
to operate competitively by developing efficient solutions Political implications
to meet community needs while achieving financial viabil-
ity. However, since any inefficiency implies a lower per- As the debate over the value of the priority sector lending
formance than might otherwise be possible, this study has scheme intensifies in India, our findings indicate that pub-
practical implications for bank leaders and policymakers. lic banks have performed reasonably well when providing
social and for-profit banking services during the last years
Managerial implications of the post-crisis period, even achieving greater efficiency
in the former. Moreover, both lending schemes have been
Indian public banks have had relative social inefficiency of compatible in terms of performance. So Indian public banks
25% and relative financial inefficiency of 28% during the can look forward to continuing to help “build a better world”
period 2011–2014, which cannot be ignored. If they want to since they are a driving force for a more sustainable society
continue their important social mission of helping weaker and economy, even at a time of poor performance of the
sections of society through the priority sector lending banking system in India.
scheme, as well as engaging in mainstream banking activi- However, since their social efficiency has shown a con-
ties in non-priority sectors, they must reduce their social tinuous decline over time, it would be advisable for policy
and financial inefficiencies in order to both ensure ethically makers in India to try to consolidate the social function of
responsible management with regard to all their stakeholders these institutions as they are vital for socio-economic devel-
and improve their competitiveness in the new international opment in the territories where they work. More specifically,
context. Further steps therefore need to be taken to improve the Indian government could encourage greater efficiency
bank resource allocation mechanisms. Our analysis leads in their dual mission by reducing politically driven lending,
us to suggest that the managers of the Indian banks that seeking better management skills and practices, and promot-
have been underperformers should identify the practices that ing strategic alliances in the sector as a means of coping
are benefiting their more successful competitors and take with the process of globalization and achieving the banks’
on both the staff and technology necessary to streamline double bottom-line.
13
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