Abstract:
Purpose – This paper introduces the concept of policy efficiency of banks as their efficiency in implementing
the government’s policies. It further compares the Indian public sector banks (PSBs) and private sector banks
(PVBs) on two efficiency paradigms, operational efficiency and policy efficiency.
Design/methodology/approach – A three-stage analysis is carried out on data collected for 19 PSBs and 16
PVBs for ten years. Non-radial DEA with slack-based measure (SBM) is used to obtain efficiency scores of the
banks for the two efficiency paradigms. The efficiency scores and the changes in efficiency and Malmquist
index are further analysed by Tobit regression and seemingly unrelated regression (SUR) models.
Findings – PVBs are found to be more operationally efficient than PSBs. On the contrary, PSBs are found to be
more policy efficient. Among the PSBs, the older and larger banks performed better in both the paradigms.
Though Indian banks have become more operational and policy efficient over the years, the rate of
improvement is slowing down.
Practical implications – Results imply that evaluating banks, especially PSBs, only on their operational
efficiency is myopic. Their efficacies must also be measured by the roles they play on social and policy front.
The loss of efficiency of Indian PSBs in a competitive environment should provoke thoughts of reforms. The
study suggests that the proposed merger of PSBs to form large banks might be fruitful.
Originality/value – The study contributes to the literature by introducing the measure of policy efficiency. It
shows that the Indian PSBs are indispensable as vehicles of government policy implementation.