The impact of liberalization on the productive efficiency of Indian commercial banks

We examine the productive efficiency of 70 Indian commercial banks during the early stages (1986–1991) of the ongoing period of liberalization. We use data envelopment analysis to calculate radial technical efficiency scores. We then use stochastic frontier analysis to attribute variation in the calculated efficiency scores to three sources: a temporal component, an ownership component, and a random noise component. We find publicly-owned Indian banks to have been the most efficient, followed by foreign-owned banks and privately-owned Indian banks. We also find a temporal improvement in the performance of foreign-owned banks, virtually no trend in the performance of privately-owned Indian banks, and a temporal decline in the performance of publicly-owned Indian banks. We attempt to explain these patterns in terms of the government's evolving regulatory policies.