Operational Performance Modelling of Indian Banks: A Data Envelopment Analysis Approach

Abstract

The rising level of non-performing loans (NPLs) posits risk on the operational working of the banking sector. The study focuses on developing an operational performance model for banks by considering the NPLs. The study uses non-parametric methodology to develop a non-oriented and non-radial Data Envelopment Analysis (DEA) model with NPLs as undesirable output. The dataset of 39 Indian commercial banks for period of 5 years is selected for the study. The findings of the study prove that considering risk into performance modelling leads to an unbiased efficiency indicator. Also, the non-parametric test confirms the relationship between operational efficiency and ownership. The study uses non-orientation modelling results to reveal inefficient sources within under-performing banks. As per the findings, slack variable analysis reveals two problem areas: ‘fixed assets’ and ‘NPLs’. A higher focus on improving utilization of fixed assets as well as controlling the level of rising NPL (risk) is highly significant for benchmarking performance. Overall, the study supports the business decision to control excess inputs and outputs for banks to achieve the efficient frontier. Significant managerial implications are linked to findings of the study focusing towards performance improvement of banks.