Abstract

This paper investigates the cost efficiency of Indian public and private sector banks over the period 1990-2008 with unbalanced panel data by employing non-parametric data envelopment analysis technique (DEA). In this paper, an attempt is also made to examine the determinants of cost efficiency of banks by employing panel data least square regression model. The study found that private sector banks are more efficient than public sector banks with average cost efficiency score 73.4 for public sector banks  as of 76.3 for the private sector banks in the country.  The findings of this study suggest that the dominant source of cost inefficiency among Indian commercial banks is allocative efficiency rather than technical inefficiency. The study has examined the impact of merger activity on the cost efficiency of Indian banks by employing OLS model and found the positive and significant impact of merger activity on efficiency. Among other factors associated positively and significantly with the efficiency are the size and profitability of banks and suggesting that banks with higher ROA exhibits higher efficiency scores.

Key words: Efficiency, DEA, profitability, banks, regression, mergers.