A STUDY ON EFFICIENCY OF INDIAN PUBLIC AND PRIVATE SECTORBANKS

International Journal of Accounting and Financial Management Research (IJAFMR) ISSN 2249-6882 Vol. 3, Issue 2, Jun 2013, 33-46 TJPRC Pvt. Ltd. A STUDY ON EFFICIENCY OF INDIAN PUBLIC AND PRIVATE SECTORBANKS N. SESHADRI 1, D. PRADEEP KUMAR 2 & T. NARAYANA REDDY 3 1 Assistant Professor, Department of Management Studies, Madanapalle Institute of Technology and Science, Madanapalle. Andhra Pradesh, India 2 Professor and Head, Department of Management Studies, Madanapalle Institute of Technology and Science, Madanapalle. Andhra Pradesh, India 3 Assistant Professor, Department of Humanities, JNTUA College of Engineering Anantapur, Andhra Pradesh, India ABSTRACT A stable and efficient banking sector is an essential precondition to increase the economic level of a Country. The banking industry plays a key role in the development offinancial needs facilitating to individuals and companies in their business regular operations. These services and operations will have direct impact on bank efficiency. The objective of this paper is to evaluate the efficiency of banks in developing country, India. Input and output variables will influence the efficiency of banks, and it will impact the growth rate of industry and economy. The measurement of efficiency is done using Data Envelopment Analysis with input oriented model and Scale efficiency. DEA is capable of handling multiple inputs and outputs and the source of inefficiency can be analyzed and quantified for every bank evaluated. The aim of this paper is to estimate and compare the efficiency of banks in both Public and Private sectors. The efficiency scores for these two groups of banks, i.e., Public sector banks and Private sector banks are measured. This paper recommends the banks that they equip themselves with abilities to enhance the scale efficiency by considering output and input and continue to obtain efficiency gain and make the Indian banks internationally competitive. KEYWORDS: Data Envelopment Analysis, Scale Efficiency, Public and Private Sector s INTRODUCTION In the earlier societies functions of a bank were done by the corresponding institutions dealing with loans and advances. Britishers brought into India the modern concept of banking by the start of of England in 1694. In 1708, the of England was given the monopoly for the issue of currency notes by an Act. In nineteenth century various banks started operations, which primarily were receiving money on deposits, lending money, transferring money from one place to another and bill discounting.ing in India has a very old origin. It started in the Vedic period where literature shows the giving of loans to others on interest. The interest rates ranged from two to five percent per month. The payment of debt was made moral obligation on the heir of the dead person. Modern banking in India began with the rise of power of the British. To raise the resources for attaining the power the East India Company on 2 nd June 1806 promoted the of Calcutta. In the mean while two other banks of Bombay and of Madras were started on 15 th April 1840 and 1 st July, 1843 respectively. In 1862 the right to issue the notes was taken away from the presidency banks. The government also withdrew the nominee directors from these banks. The bank of Bombay collapsed in 1867 and was put under the voluntary liquidation in 1868 and was finally wound up in 1872. The bank was however able to meet the liability of public in full. A new bank called new of Bombay was started in 1867. On 27 th January 1921 all the three presidency banks were merged together to form the Imperial by passing the Imperial of India Act, 1920. The bank did not have the right to issue the notes but had the permission to

34 N. Seshadri, D. Pradeep Kumar & T. Narayana Reddy manage the clearing house and hold Government balances. In 1934, Reserve of India came into being which was made the Central and had power to issue the notes and was also the banker to the Government. The Imperial was given right to act as the agent of the Reserve of India and represent the bank where it had no braches. In 1955 by passing the State of India 1955, the Imperial was taken over and assets were vested in a new bank, the State of India. After the independence the major historical event in banking sector was the nationalization of 14 major banks on 19 th July 1969. The nationalization was deemed as a major step in achieving the socialistic pattern of society. In 1980 six more banks were nationalized taking the total nationalized banks to twenty. INTRODUCTION TO BANKING EFFICIENCY s are the economic backbone of any country and determine the strategic strength and direction. Efficiency of the banking sector is the prime motto of any government for which they constantly monitor it at periodic intervals. But measuring banking efficiency has taken several stages in its objectivity, relevance and appropriateness over a period of time and is still evolving. Earlier though, Tyagarajan (1975), Rangarajan and Mampilly (1972) and Subramanyam (1993) have examined various issues relating to the performance of Indian banks, none of these studies have examined the efficiency of bank service provision in India. Some recent studies did measure the efficiency in service provision of Indian banks but they suffer from certain limitations as indicated in this paper. The main impetus was the appointment of the (second) Narsimham Committee (1997) by the Government of India, with a mandate to suggest a programme of banking sector reforms so as to strengthen India s banking system and make it internationally competitive. Indian banking sector was well developed even prior to its political independence in 1947.The system expanded rapidly after nationalization of major commercial banks in late 1969 and now ranks in the top quarter among developing countries (Khanna, 1995, p. 265). At the top of the banking system is the Reserve of India, which is responsible for prudential supervision of banks, non-banks and for performing other central banking functions. There were two successive nationalization s of banks in India, one in 1969 and the other in 1980 and as a result public sector banks occupy a predominant role in Indian financial system. 1 Indian banking is particularly interesting because of the diversity of bank ownership forms. Lastly, there is little reliable empirical research on bank efficiency in India although Bhattacharya et al. 2 (1997), Chatterjee (1997) 3 and Saha et al. (2000) have examined various issues relating to the performance of Indian banks. This study analyses the measurement techniques of relative efficiency of Indian banks subsequent to the period used by the studies. Beginning from 1992, Indian banks were gradually exposed to the rigours of domestic and international competition. Newly opened banks from the private sector and entry and expansion of several foreign banks resulted in greater competition in both deposit and credit markets. Consequent to these developments, there has been a consistent decline in the share of public sector banks in total assets of commercial banks. It is also important to note that public sector banks have responded to the new challenges of competition, as reflected in the increase in the share of these banks in the overall profit of the banking sector. From the position of net loss in the mid-1990s, in recent years the share of public sector banks in the profit of the commercial banking system has become broadly appropriate with their share in assets, indicating a broad convergence of profitability across various bank groups 3. This suggests that, with operational flexibility, public sector banks are competing relatively effectively with private sector and foreign banks. The market discipline imposed by the listing of most public sector banks has also probably contributed to this improved performance. Public sector bank managements are now probably more familiar to the market consequences of their activities (Mohan, 2005) 4.

A Study on Efficiency of Indian Public and Private Sector s 35 Efficiency of Indian banks Improvements in efficiency of the banking system are expected to be reflected, inter alia, in a reduction in operating expenditure, interest spread and cost of intermediation in general. At a more disaggregated level, it is evident that 5 Indian banks have improved their efficiency in the post reform period as evidenced from the declining trend in per unit cost of output, irrespective of the choice of outputs. Typically, small and medium banks had high NIM until 1997. 6 thereafter, (net interest margin) NIM for big banks recorded a rise. Contextually, it may be mentioned that banks in most developed countries and several emerging economies have NIM (as a percentage to total assets) of around 2 per cent. This provides some indication that competition in banking still has some way to go in India Sathya (2001) 7 compared productive efficiency of publicly owned, privately owned and foreign owned banks operational in India in the year 1997/1998 and reported that private sector commercial banks as a group is paradoxically lower than that of public sector and foreign banks. These studies differ from each other in at least two ways: (i) the time period captured in the analysis and (ii) the input-output variables used in the DEA model. Shanmugam and Das (2004) on the other hand investigated the efficiency of Indian commercial banks during the reform period; 1992-1999 using a parametric methodology. 8 They observed that the state and foreign banks are more efficient than their counterparts namely, nationalized and privately owned domestic banks.it is important to take stock of the special features of the banking sector in India, in order to put the efficiency issues in perspective.the public sector banks control over 80 percent of banking business. The banking system has developed well over the years in terms of its geographical coverage, deposit mobilization and credit expansion. Foreign banks have started a number of ATMs in metropolitan centers in recent years. The banking services that were mostly confined to metropolitan areas were expanded to the rural areas. Thus, while at the end of 1964 only 10 per cent of the commercial banks were located in rural areas, the proportion increased to 45 per cent thirty years later. The share of advances to activities in the priority sector increased substantially after nationalization 10. OBJECTIVES Identify the factors that contribute most to the efficiency of the banks. To determine the efficiency of banks from groups of Indian Public and Private Sector s and suggest improvements to increase their efficiency Hypotheses H 01 : There is no significant relationship between cost of deposits and efficiency of public sector banks. Ho 2 : There is no significant relationship between cost of deposits and efficiency of private sector banks. Ho 3 : There is no significant relationship between Net interest margin and efficiency of public sector banks. Ho 4 : There is no significant relationship between Net interest margin and efficiency of private sector banks. Ho 5 : There is no significant relationship between Net intermediation cost to Total Assets and efficiency of public sector banks. Ho 6 : There is no significant relationship between Net intermediation cost to Total Assets and efficiency of private sector banks. Ho 7 : There is no significant relationship between ROE and efficiency of public sector banks. Ho 8 : There is no significant relationship between ROE and efficiency of public sector banks.

36 N. Seshadri, D. Pradeep Kumar & T. Narayana Reddy Research Methodology Data Collection The data is collected from the year wise publication of bank websites and issues of Statistical Tables Relating to s in India by RBI, the central bank of the country. This publication provides various details such as liabilities and assets, deposits, advances, investment and expenses of commercial banks in India. It also provides consolidated financial statement and balance sheet and financial report of selected ratios of scheduled commercial banks operating in India. Method of Sampling The s are selected based on market capitalization. Totally 15 banks are selected in which 8 Public and 7 Private Sector banks havechosen for the study. The public sector banks are State of India, Andhra, Allahabad, Indian, Punjab National, Canara bank, of India and Indian Overseas. Private Sector s are selected for the study viz., ICICI, Axis, Indus land bank, Kotak Mahindra, Development Credit and ING. Reference Period The period of datais 11 years.(from2001to 2011.) Plan of Analysis The key financial ratios are calculated and are used for evaluating the individual bank Performance and Comparison of Private and Public Sector banks efficiency. Data Envelopment Analysis tool(non- Parametric model) has been used for evaluating Individual efficiency. Correlation analysis is used for measuring relation between dependent variable (efficiency of banks) and their independent variables (input and output factors). In the DEA methodology, formerly developed by Charnes, Cooper and Rhodes (1978) (CCR), efficiency is defined as a weighted sum of outputs to a weighted sum of inputs, where the weights structure is calculated by means of mathematical programming and constant returns to scale (CRS) are assumed. The Outputs considered are: Ratio of net interest income to total assets (Net interest margin), Return on Equity. The Inputs considered are: Cost of deposits Ratio of Intermediation cost to total assets. The method of DEA model applied for analysis of data is Basic remedial model with Input Oriented. The analysis was carried out in the following steps.the banks were grouped into two categories namely Public and Private s. Result Analysis: Public Sector s The efficiency of public sector banks in the year 2001 varied from.71 to 1 with average efficiency of.93 as shown in the table 1. Canara bank has the least efficiency of.71 and other 4 banks namely Andhra, Allahabad, of India and Indian have the highest efficiency of 1. Many banks have an efficiency index in the range of.86 to.97 indicating relatively inefficiency of these banks.

A Study on Efficiency of Indian Public and Private Sector s 37 The efficiency of banks in the year 2002 varied from.86 to 1 with average efficiency of.95, SBI has the least efficiency of.86 and other 3 banks namely of India, Indian and Punjab National have the highest efficiency of 1. The efficiency of banks in the year 2003 varied from.88 to 1 with average efficiency of.96 as shown in the table 1. Indian bank and Indian Overseas bank have the least efficiency of.88 and Andhra bank, Canara bank, Allahabad bank and Punjab National have the highest efficiency of 1. Years SBI ALBK Table 1: Efficiency of Public Sector s from 2001-2011 Andhra of India Name of the s Canara Indian Overseas Indian Punjab National Average Efficiency of Public banks 2001 0.86 1 1 1 0.71 0.92 1 0.97 0.93 2002 0.86 0.92 0.95 1 0.92 0.98 1 1 0.95 2003 0.89 1 1 0.99 1 0.88 0.88 1 0.96 2004 0.83 0.89 1 0.92 0.93 0.97 1 0.95 0.94 2005 0.89 1 1 0.83 0.92 1 0.97 0.95 0.95 2006 0.92 0.95 0.94 0.85 0.94 1 1 1 0.95 2007 0.85 1 0.97 0.87 0.95 1 0.99 1 0.96 2008 0.84 0.94 0.97 0.94 0.87 1 1 0.98 0.94 2009 0.87 0.96 0.96 1 0.93 0.92 1 1 0.96 2010 0.81 0.92 1 0.88 0.96 0.86 1 1 0.93 2011 0.84 0.95 0.97 0.92 1 0.87 1 1 0.94 The efficiency of banks in the year 2004 varied from.83 to 1 with an average efficiency of.94 as shown in the table 1. SBI has the least efficiency of.83 and 2 banks namely Andhra bank and Indian bank have the highest efficiency of 1. Remaining banks have efficiency index rangesfrom.92 to.97,it indicate relatively inefficiency of these banks. The efficiency of banks in the year 2005 varied from.83 to 1 with average efficiency of.95 as shown in the table 1. of India has the least efficiency of.83 and 3 banks namely Allahabad bank, Andhra bank and Indian overseas bank have the highest efficiency of 1. Other banks have an efficiency index range of.89 to.97 indicating relative inefficiency of these banks.the efficiency of banks in the year 2006 varied from.85 to 1 with an average efficiency of.95 as shown in the table 1. of India has the least efficiency foe.85 and 3 banks namely Indian Overseas bank, Indian bank and Punjab National bank have the highest efficiency of 1. Many other banks have efficiency index ranges of.92 to.95 indicating relative inefficiency of these banks. The efficiency of banks in the year 2006 varied from.85 to 1 with an average efficiency of.96 as shown in the table 1. State bank of India has the least efficiency of.85 and 3 banks namely Allahabad bank, Indian Overseas bank and Punjab National banks have the highest efficiency of 1. Many other banks have efficiency ranges of.87 to.99 indicating relative inefficiency of these banks. The efficiency of banks in the year 2008 varied from.84 to 1 with an average efficiency of.94 as shown in the table 1. State bank of India has the least efficiency of.84 and 2 banks namely Indian Overseas bank and Indian bank have the highest efficiency of 1. Many other banks have efficiency ranges of.87 to.98 indicating relative inefficiency of these banks.the efficiency of banks in the year 2009 varied from.87 to 1 with an average efficiency of.96 as shown in the table 1. Indian Overseas bank has the least efficiency of.87 and 3 banks namely of India, Indian bank and Punjab National bank have the highest efficiency of 1. Many other banks have efficiency ranges of.92 to.96 indicating relative inefficiency of these banks.the efficiency of banks in the year 2010 varied from.81 to 1 with an average efficiency of.93 as shown in the table 1. State bank of India has the least efficiency of.81 and 3 banks namely Andhra bank, Indian bank and Punjab

38 N. Seshadri, D. Pradeep Kumar & T. Narayana Reddy National bank have the highest efficiency of 1. Many other banks have efficiency ranges of.86 to.96 indicating relative inefficiency of these banks. The efficiency of banks in the year 2011 varied from.84 to 1 with an average efficiency of.94 as shown in the table 1. State bank of India has the least efficiency of.84 and 3 banks namely Canara bank, Indian bank and Punjab National bank have the highest efficiency of 1. Many other banks have efficiency ranges of.87 to.97 indicating relative inefficiency of these banks. In the year wise analysis for the Public sector banks,we find that there is not much variation in their individual bank efficiency and average efficiency of all Public sector banks from year 2001 to year 2011. Here we find that the average efficiency of all Public Sector banks varied with lowest average efficiency of.93 to highest average efficiency of.96 in the analysis we found that the years which have lowest average efficiency are 2001, 2010 and the years which have highest average efficiency are 2003, 2007 and 2009. Private Sector s From the above table the efficiency of Private sector banks in the year 2001 varied from.81 to 1 with average efficiency of.93 as shown in the table 2. ING has the least efficiency of.81 and other 3 banks namely Axis, City and Kotak Mahindra bank have the highest efficiency of 1. Many banks have an efficiency index in the range of.87 to.93 indicating relative inefficiency of these banks. The efficiency of Private sector banks in the year 2002 varied from.81 to 1 with average efficiency of.94 as shown in the table 2. ING has the least efficiency of.81 and 1 banks namely Axis, City and Kotak Mahindra bank have the highest efficiency of 1. Many banks have an efficiency index in the range of.90 to.98 indicating relative inefficiency of these banks. Year ICICI Axis Table 2: Efficiency of Private Sector banks, 2001-2011 City bank Names of Private sector banks Kotak Indus Mahindra Land Development credit bank ING Average Efficiency of Private s 2001 0.9 1 1 0.93 1 0.87 0.81 0.93 2002 0.98 1 1 0.91 1 0.9 0.81 0.94 2003 0.56 1 1 1 0.31 0.86 0.75 0.78 2004 0.89 0.91 1 1 1 0.76 0.76 0.9 2005 0.64 0.92 0.96 1 0.87 0.66 0.79 0.83 2006 0.77 0.96 0.95 1 0.82 0.71 0.82 0.86 2007 0.67 0.87 1 0.93 0.65 0.78 0.8 0.81 2008 0.62 0.9 1 0.84 0.79 0.84 0.81 0.83 2009 0.62 0.88 1 0.78 0.77 0.81 0.79 0.81 2010 0.62 0.91 1 0.82 0.99 0.75 0.81 0.84 2011 0.62 0.91 1 0.84 0.82 0.77 0.81 0.82 The efficiency of Private sector banks in the year 2004 varied from.76 to 1 with average efficiency of.90 as shown in the table 2. Development Credit bank and ING bank have the least efficiency of.76 and other 3 banks namely City, Indus Land bank and Kotak Mahindra bank have the highest efficiency of 1. Many banks have an efficiency index in the range of.89 to.91 indicating relative inefficiency of these banks. The efficiency of Private sector banks in the year 2005 varied from.64 to 1 with average efficiency of.83 as

A Study on Efficiency of Indian Public and Private Sector s 39 shown in the table 2. ICICI has the least efficiency of.64 and Indus Land bank have the highest efficiency of 1. Many banks have an efficiency index in the range of.66 to.96 indicating relative inefficiency of these banks. The efficiency of Private sector banks in the year 2006 varied from.71 to 1 with average efficiency of.86 as shown in the table 2. Development Credit bank has the least efficiency of.76 and Indus Land bank have the highest efficiency of 1. Many banks have an efficiency index in the range of.77 to.96 indicating relative inefficiency of these banks.the efficiency of Private sector banks in the year 2007 varied from.65 to 1 with average efficiency of.81 as shown in the table 2. Kotak Mahindra bank has the least efficiency of.65 and City has the highest efficiency of 1. Many banks have an efficiency index in the range of.67 to.93 indicating relative inefficiency of these banks. The efficiency of Private sector banks in the year 2008 varied from.62 to 1 with average efficiency of.83 as shown in the table 2. ICICI bank has the least efficiency of.62 and City has the highest efficiency of 1. Many banks have an efficiency index in the range of.79 to.90 indicating relative inefficiency of thesebanks.the efficiency of Private sector banks in the year 2009 varied from.62 to 1 with average efficiency of.81 as shown in the table 2. ICICI bank has the least efficiency of.62 and City has the highest efficiency of 1. Many banks have an efficiency index in the range of.77 to.88 indicating relative inefficiency of these banks.the efficiency of Private sector banks in the year 2010 varied from.62 to 1 with average efficiency of.84 as shown in the table 2. CICI bank has the least efficiency of.62 and City has the highest efficiency of 1. Many banks have an efficiency index in the range of.75 to.99 indicating relative inefficiency of these banks. The efficiency of Private sector banks in the year 2011varied from.62 to 1 with average efficiency of.82 as shown in the table 2. ICICI bank has the least efficiency of.62 and City has the highest efficiency of 1. Many banks have an efficiency index in the range of.77 to.91 indicating relatively inefficiency of thesebanks.in the year wise analysis for the Private sector banks, we find that there is much variation in their individual bank efficiency and average efficiency of all Private sector banks from year 2001 to year 2011. Here we find that the average efficiency of all Private Sector banks varied with lowest average efficiency of.78 in the year 2003 and highest average efficiency of.93 in the year 2001. Comparison of Public and Private Sector s Efficiency Looking at the table closely we observe the average Efficiencies of Public and Private sector banks varied year by year from 2001 to 2011. The Public sector banks have higher the average efficiency for all the years and there is not much variation in the average efficiency between the years from 2001(.93) to 2011 (.94). The Private sector banks have less efficiency in all years except 2001 where the highest average efficiency is 0.93 which is equal to lowest average efficiency of Public sector banks in the same year. The highest average efficiency of Public Sector banks is.96 and lowest average efficiency is.93. The spread of Public sector banks average efficiency is.03 which is very low and it shows steady performance efficiencyfor all years. Table 3: Efficiency Index S. No Year Private s Public banks 1 2001 0.93 0.93 2 2002 0.94 0.95 3 2003 0.78 0.96 4 2004 0.90 0.94 5 2005 0.83 0.95 6 2006 0.86 0.95 7 2007 0.81 0.96 8 2008 0.83 0.94 9 2009 0.81 0.96 10 2010 0.84 0.93 11 2011 0.82 0.94

40 N. Seshadri, D. Pradeep Kumar & T. Narayana Reddy Figure 1: Comparative Efficiency of Public and Private Sector s The Private sectors banks have lesseraverage efficiency in all the years of study when compared with public sector banks. The Private sector banks average efficiency varied with highest average efficiency 0.93 and lowest average efficiency 0.78. The spread of Private sector banks average efficiencyis 0.15 which is higher than the spread of public sector banks average efficiency (.03). It indicates that the year wise variations and volatility of average efficiency in private sector banks are high. The Figure 1 shows comparative average efficiency of Public and Private sector banks in the period 2001 to 2011. The x- axis represents years and y- axis represents average efficiency of banks. We observe that public and private sector banks average efficiency curves in the initial years are same, in the year 2003 onwards the private sector banks average efficiency is less than the public sector banks average efficiency. Input and Output Analysis From the above analysis we can identify the easily that the public sector banks have the higher efficiency than Private sector banks from the selected multiple inputs and outputs. Further, we can know the factors which affect the efficiency of banks when considering the inputs 1. Cost of deposits 2. Ratio of Intermediation cost to total assets and outputs 1. Ratio of net interest income to total assets 2. Return on equity.looking at the table 4 closely, we observe that the average ratio of cost of deposits (Interest paid on deposits / Deposits) of all public and private sector banks from 2001-2011, when comparing these two,public banks have higher cost of deposit ratio than the private sector banks for all years, and we observe that public sector banks interest payment on Fixed deposit is higher than the private sector banks. Table 4: Cost of Deposits - Input 1 Year Public Sector s Private Sector s 2001 0.0679 0.0611 2002 0.0750 0.0619 2003 0.1537 0.0989 2004 0.0523 0.0627 2005 0.0522 0.0518 2006 0.0568 0.0554 2007 0.0574 0.0573 2008 0.0679 0.0640 2009 0.0854 0.0731 2010 0.0607 0.0591 2011 0.0626 0.0590

A Study on Efficiency of Indian Public and Private Sector s 41 Figure 2: Cost of Deposits of Public and Private Sector s- Input 1 Looking at the table 5, Output 1, the ratio of net interest income to total assets (interest earned / total assets) of public and private sector banks, here we observe that the both sector banks are in the same direction but there is a slight differences in their earnings on interest income to total assets for all years. When comparing the input1 and output 1, the output1 (the ratio of net interest income to total assets) is higher than the input 1 (ratio of cost of deposits) for public and private sector banks. Table 5: Net Interest Income to Total Assets -Output 1 Years Public Sector s Private Sector s 2001 0.0875 0.0803 2002 0.0860 0.0822 2003 0.0742 0.0809 2004 0.0755 0.0677 2005 0.0699 0.0653 2006 0.0682 0.0678 2007 0.0704 0.0688 2008 0.0738 0.0766 2009 0.0762 0.0874 2010 0.0713 0.0746 2011 0.0702 0.0736 Figure 3: Net Interest Income to Total Assets Output 1 Looking at the table 6, Input 2 Average ratio of intermediation cost to total assets (Operating expenditure to total assets) of public sector banks have lowest (0.0189) in the year 2008 and highest (0.0328) in the year 2004, In the private sector banks have the lowest (0.0249) in the year 2005 and highest (0.0379) in the year 2002. The operating expenditure in

42 N. Seshadri, D. Pradeep Kumar & T. Narayana Reddy the private sector banks have higher than the public sector banks for all the years, due to this the efficiency of banks in private sector banks have less than the public sector banks.looking at the Figure 4, for comparing the ratio of intermediate cost to total asset of Public and Private sector banks here we find that that the ratio of intermediate cost to total asset of Private sector banks have higher than the Public sector banks for all years except in the year 2004.Looking the table 7, we observe that output 2, return on equity (net profit / capital + reserves and surplus) of public sector banks have higher than the private sector banks, here we found that net profit of public sector banks have higher than the net profit of public sector banks. Here the public sector banks have the higher return on equity (.2523) in the year 2002 and lowest (.1432) in the year 2011. Table 6: Ratio of Intermediation Cost to Total Assets - Input 2 Year Public Sector Private Sector 2001 0.0195 0.0360 2002 0.0203 0.0379 2003 0.0266 0.0342 2004 0.0328 0.0269 2005 0.0257 0.0249 2006 0.0231 0.0291 2007 0.0210 0.0260 2008 0.0189 0.0257 2009 0.0192 0.0301 2010 0.0214 0.0314 2011 0.0210 0.0260 Figure 4: Ratio of Intermediation Cost to Total Assets: Input 2 Table 7: Return on Equity - Output 2 Year Public Sector s Private Sector s 2001 0.2180 0.0630 2002 0.2523 0.1826 2003 0.2040-0.0032 2004 0.1870 0.0213 2005 0.1809 0.1101 2006 0.1840 0.0975 2007 0.1855 0.0802 2008 0.1789 0.0947 2009 0.1698 0.1292 2010 0.1516 0.1448 2011 0.1432 0.2252

A Study on Efficiency of Indian Public and Private Sector s 43 Figure 5: Return on Equity - Output 2 Here in the private sector banks have higher return on equity (0.2252) in the year 2011 and lowest (-0.0032) in the year 2003. When comparing the ratio of intermediation cost to total asset as input lower than the output return on equity in Public sector banks which increase the average efficiency. Correlation between the Variables of s Efficiency and s Efficiency Table 8: Correlation between Efficiency of Public, Private s and their Factors Cost of Deposits Input 1 Net interest margin Output 1 Ratio of intermediation cost to total assets Input 2 Return on equity - Output 2 Public s Efficiency Private s Efficiency t-cal Result (t-table at 0.20 L.o.s at 9d.f =1.383) Public sector banks 0.447-1.499 Ho 1 is rejected Private sector banks - -0.402-1.317 Ho 2 is accepted Public sector banks -0.236 - -0.729 Ho 3 is accepted Private sector banks - 0.049 0.147 Ho 4 is accepted Public sector banks 0.064 0.192 Ho 5 is accepted Private sector banks - 0.503 1.745 Ho 6 is rejected Public sector banks 0.173-0.527 Ho 7 is accepted Private sector banks - 0.089 0.268 Ho 8 is accepted Higher the value of r, greater is the relationship between factors of efficiency andbanks efficiency. From the analysis it is observed that Ho1 is rejected as t calculated value of 1.499 is more than t table at 0.20 level of significance at 9 d.f Therefore it is inferred that there is significant relationship between cost of deposits and public sector banks efficiency of India.Ho 6 is rejected as t table (1.499) at 0.20 level of significance at 9 d.f.it is inferred that there is significant relationship between Net intermediation cost to Total Assets and efficiency of private sector banks. The public sector banks efficiency has negligible positive association with the ratio of intermediation cost to total assets which is not significant statistically where as the private sector banks efficiency is statistically significant relationship with ratio of intermediation cost to total assets. Public banks efficiency is negatively correlated to net interest income to total assets while the private banks efficiency is

44 N. Seshadri, D. Pradeep Kumar & T. Narayana Reddy negatively correlated to cost of deposits. It is inferred that the private banks are spending unduly on increasing the deposits. NetInterest Margin of public sectors banks is not sufficient enough as it has negative relationship with their efficiency. Cost of deposits is positively correlated to public sector banks efficiency and ratio of intermediation cost to total assets is positively correlated to private sectorbanks efficiency. FINDINGS The above analysis shows that different critical parameters were responsible for influencing average efficiency of Public and Private Sector banks; we find that the causes for increasing the average efficiency of Public sector banks and causes for decreasing the average efficiency of Private sector banks. The overall average efficiency of Public sector banks have higher than the Private sector banks for all years, except in the year 2004 the average efficiency are equal for both the banks. Cost of deposits of public sector banks have higher than the private sector banks, it represent the interest payment on fixed deposits are higher in Public sector banks than Private sector banks. Net interest income to total asset ratio of public sector banks have higher than Private sector banks, i.e. interest income in public sector banks is higher than the private sector banks with comparing their total assets of the banks. Ratio of Intermediation cost to total assets of Private sector banks have higher than the Public sector banks, i.e. the operating cost of Private sector banks have higher than the Public sector banks with their corresponding total assets. ROE of Public sector banks have higher than the private sector banks, it means that profit after interest and taxes of public sector banks have higher than the private sector banks with their corresponding numberof shares outstanding. From the analysis it is observed that public sector banks efficiency is independent of the ration of intermediation cost to total assets while the private sector banks efficiency is independent of net interest income to total assets and return on equity. Public banks efficiency is negatively correlated to net interest income to total assets while the private banks efficiency is negatively correlated to cost of deposits. It is inferred that the private banks are spending unduly on increasing the deposits. Cost of deposits is positively correlated to public sector banks efficiency and ratio of intermediation cost to total assets is positively correlated to private sector banks efficiency. SUGGESTIONS The Publicand Private sector banks have the major source of funding from the long-term fixed deposits and looking to the alternative funding area which minimize cost of fixed deposits. The interest income to total assets ratio of Public and Private sector banks have to be augmented for extending credit facilities to valuable customers and for offering first class credit and investment made on the deposit base to increase interest income for every one rupee of deposit. Provide better advisory and customer friendly services by offering mutable credit facilities to increases the interest income and reducing the operating cost. The return on equity ratio of Public and Private sector banks has to be increased, to decreasing in the operating and non-operating expenditure which maximize the profits and return on equity. The Intermediate cost to total asset ratio is a key determinant factor that is influencing the efficiency of banks in both Public and Private sector, in which the operating expenditure is to be minimized.

A Study on Efficiency of Indian Public and Private Sector s 45 The public sector banks have to spend more on mobilizing deposits as this would directly increase their efficiency. The private sector banks have to reduce their spending on deposit mobilization. REFERENCES 1. Rakesh Mohan, Deputy Governor of the Reserve bank of India, at the 21 st Annual General Meeting and Conference of Pakistan Society of Development Economists,Islamabad,21 December 2005. 2. Debnath,R.M.and Shankar. R. (2008) Measuring performance of Indian s: Int.J.Business Performance Management,volume.10.no1,2008. 3. DrMilindSathye :efficiency of s in a Developing Economy: The case of India, efficiency: DEA analysis, Indian banks (pp.3) 4. Battacharya, Lovell and Sahey (1997) in their study of Indian Commercial s reports that approximately tenpercent of their sample in DEA- efficient 5. For example, see Bhattacharyya et al. (1997), Chatterjee (1997) and Saha and Ravishankar (2000). Sahoo, Sengupta, and Mandal: Productive Performance Evaluation of the ing Sector in India Using Data Envelopment Analysis 6. Defined as the sum of squares of the market shares of individual banks. Decreases in the index generally indicate a loss of pricing power and an increase in competition 7. I have discussed the details of financial sector reforms in India elsewhere; see Mohan (2005). 8. Total operating cost can be broken down into labor cost and cost of physical capital. To create per unit cost measure, we deflate the operating cost and its two components by either (i) the total earning assets (deposits plus investments), which is justified by the asset approach in measuring banking outputs, or (ii) the aggregate of advances and deposits, which can be justified by the value-added approach in measuring banking outputs. 9. Definitions of small, medium and big banks are as follows: small banks are those with asset upto Rs.50 billion; medium banks are those with asset exceeding Rs.50 billion and upto Rs.100 billion; big banks are those with asset exceeding Rs.100 billion but and upto Rs.200 billion; and large banks are those with asset exceeding Rs.200 billion. 10. See Sathya (2001) for a demonstration of the change in efficiency scores when inputs are changed.