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Efficiency of Regional Rural Banks in India: an Application of Data Envelopment Analysis Economic Affairs Vol. 56 No. 2 June 2011 (Page189-198)

Efficiency of Regional Rural Banks in India: An Application of Data Envelopment Analysis

Versha Mohindra1 and Gian Kaur2

1Lecturer, D.A.V. College, Hoshiarpur Punjab, India 2Punjab School of Economics, Guru Nanak Dev University, Amritsar Punjab, India

Email: [email protected] [email protected] Received: 10th February, 2010 Accepted: 15th March, 2011

Abstract The present study attempts to empirically examine the relative efficiency of regional rural banks during the post reform period spanning from 1991-92 to 2006-07 by using non-parametric technique of data envelopment analysis. The aforementioned conclusions portray that over the period from 1992 to 2007, regional rural banks have experienced technical efficiency to the tune of about 78 percent. Thus the banks can on an average decrease their inputs by 22 percent and still can produce the same level of output. The comparative analysis of average OTE scores of all 50 regional rural banks between distinct periods show that the degree of input waste was 24 percent in first-generation reforms period, declined to 20 percent in second-generation reforms period. Therefore, the results imply that technical inefficiency has slowed down in response of deregulatory policies. The decomposition of overall technical efficiency into two components namely pure technical efficiency and scale efficiency provided the evidence that 8 percentage points of overall technical inefficiency is due to managerial in capabilities in utilizing critical inputs, while remaining part of the overall technical inefficiency may be attributed to the choice of sub optimal scale of operation. Besides this, the empirical findings provided the evidence of positive relationship among scale economies and bank size. Keywords: Regional Rural Banks; Technical Efficiency; Pure Technical Efficiency; Scale Economies; Data Envelopment Analysis.

Efficiency of Regional Rural Banks in India: an Application of Data Envelopment Analysis 1. Section Rural finance is a matter of great concern in an agrarian economy like India. The institutional credit accounts for 60 percent of the total credit needs and rest of the 40 percent is provided by noninstitutional sector (informal sector). The informal sector for rural finance is an age old. It consists primarily of rural money lenders, traders, merchants etc. It proved to be avaricious and ruinous for rural India. Realizing the fleeing of rural masses, Government of

India took several initiatives to promote the growth of rural and agriculture sector. Amongst these initiatives, major was the establishment of Regional Rural Banks (RRBs). The basic idea of introducing RRBs was to look after the financial needs of rural sector with professional approach as that of commercial banks in India. RRBs also participated enthusiastically in enhancing poverty alleviation schemes especially for the drought-prone and deserts

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regions. By doing this RRBs became an important and integral part of the rural credit system. This research paper is organized as: Section 2 presents a brief review of literature on the efficiency of RRBs along with the objectives of the present study. Section 3 presents database and measurement of variables. Section 4 discusses the empirical results relating with OTE, PTE and SE of RRBs. Finally, Section 5 sums up the main points emerging from the analysis.

addition to this, we have incorporated wages as a proxy variable which consists in the form of the staff salaries/wages, allowances, bonus, other staff benefits like provident fund, pension fund, gratuity, liveries to staff, leave fare concessions, staff welfare, medical and house rent allowances to staff etc. For the present study, we have considered two measures of outputs which are proxies in terms of advances (Y1) and spread (Y2). Advances include bills purchased and discounted, cash credits, overdrafts and loans repayable on demand and term loans. Spread reflects the net interest income, measured as the difference between interest earned and interest expended for a given period of time. Interest earned includes interest and discount on all types of loans and advances like cash credit, demand loans, overdrafts export loans, term loans, domestic and foreign bills purchased and discounted/rediscounted, interest on balances with RBI and other inter-bank funds, income on investments and others. The interest expended on deposits and borrowings results in the rise of major expenses. Further, all the output and input have been measured in millions. For calculating the efficiencies scores, the analysis has been carried out with real values of the variables (except labor) which have been obtained by deflating the nominal values by the implicit price deflator base (1999-2000 = 100). Further, the input and output variables have been normalized by dividing them by the total assets of individual banks to reduce the effects of random noise due to measurement error in the inputs and outputs. 3.2. Data Base: The study has considered 50 RRBs operating in India during the sample period from 1992 to 2007. We bifurcated the entire study period into distinct viz; first generation reforms period (1991-1992 to 1997-98) and second generation reforms period (1998-1999 to 2006-2007) to study the impact of deregulation on the efficiency of banks since the extent of deregulation was relatively lower in former sub- period relative to later sub- period. All the 50 RRBs are being referred to as B1, B2....B50 respectively in this article. The sample period selected is constrained to the availability of data on the input and output variables considered for the present study. As far as, sample banks are concerned, this study has considered balanced panel data set of 50 RRBs during the period spanning from 1991-1992 to 2006-2007. Only those banks have been considered in the studies which have been continuously operating since 1991-1992 to 2006-2007 so as to make a balanced panel data set. The list of banks included in the sample along with sponsors banks and states has been shown in Appendix Table 1. (Insert Appendix A ).The data on the input and output variables has been taken from Compact disc available on "Statistical Tables relating to Banks in India (including RRBs) 1979 to 2007" available from Reserve Bank of India, Mumbai. Further for the Annual Accounts of Banks, Report on Trend & Progress in Banking, Annual Publications of Reserve Bank of India has been used.

2. Section- A Brief Reviews of Literature A scan of the existing literature on the efficiency of Indian banks provides that there exists various studies that analyzed the efficiency of Indian commercial banks using most popularly used parametric technique of Stochastic Frontier Analysis (SFA) and non-parametric technique of Data Envelopment Analysis. To the author' knowledge, there is virtually no study except Reddy (2005) and Khankhoje (2008) which analyzed the performance of RRBs by using frontier and data envelopment analysis approach respectively. The present study is an attempt in this direction which aims to enrich the already scant literature on the performance evaluation of RRBs using Data Envelopment Analysis. The present study has two important objectives. The first is to measure technical and scale efficiency of RRBs operating during the period (1992 to 2007). The study covers balanced panel data set of 50 RRBs operating in India during the study period. The study has applied two most popular DEA models namely CCR and BCC model to accomplish the objective. Secondly, the study has explored the relationship between bank size and scale economies to see whether the size of the assets influences the level of scale economies or not. 3. Section 3.1. Measurement of Input and Output Variables in Banking: The first step in measuring the efficiency is to specify inputs and outputs of the firms under consideration. The present study followed an intermediation approach to select input and output variables. The major advantage of intermediation approach over the production cost approach and user- cost approach; method is the inclusion of interest costs in total costs and it assigns monetary value to specific input and output variable.

For the calculation of efficiency measures, the inputs are loan able funds (X1), fixed assets (X2) and labor (X3). Loan able funds measure as the sum of deposits and borrowings at the end of the financial year. Deposits include demand deposit, saving bank deposit and term deposit. Borrowings include borrowing/ refinance obtained from the Reserve Bank of India, commercial banks (including co-operative banks) and other institutions and agencies like Industrial Development Bank of India (DBI) Export Import (EXIM) Bank of India, National Agriculture Bank of India (NABARD) etc. The input variable of fixed assets comprises premises and other fixed assets, include furniture and fixtures. In

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Appendix A1: List of Sample Banks Sr. No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. Code No. B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11 B12 B13 B14 B15 B16 B17 B18 B19 B20 B21 B22 B23 B24 B25 B26 B27 B28 B29 B30 B31 B32 B33 B34 B35 B36 B37 B38 B39 B40 B41 B42 B43 B44 B45 B46 B47 B48 B49 B50 Bank Name Arunachal Pradesh Rural Bank Aurangabad Jalana Grameen Bank Baitarani Gramya Bank Ballia Kshetriya Grameen Bank Chikmagalur Kodagu Grameen Bank Devipatan Kshetriya Grameen Bank Dhenkanal Gramya Bank Durg Rajnandgaon Grameen Bank Ellaquai Dehati Bank Etawah Kshetriya Grameen Bank Faridkot Bathinda Kshetriya Grameen Bank Gurgaon Grameen Bank Hadoti Kshetriya Grameen Bank Himachal Grameen Bank Jammu Rural Bank Jhabua Dhar Kshetriya Grameen Bank Kamraz Grameen Bank Kisan Grameen Bank Kosi Kshetriya Grameen Bank Krishna Grameen Bank Kshetriya Kisan Grameen Bank Langpi Dehangi Rural Bank Mahakaushal Kshetriya Grameen Malwa Grameen Bank Manipur Rural Bank Marathwada Grameen Bank Mewar Anchalik Grameen Bank Mizoram Rural Bank Nagaland Grameen Bank Nainital Almora Kshetriya Grameen Bank North Malabar Grameen Bank Pandyan Gramya Bank Parvatiya Grameen Bank Prathama Bank Puri Gramya Bank Rani Lakshmi Bai Kshetriya Grameen Bank Ratlam Mandsaur Kshetriya Grameen Bank Ratnagiri Sindhudurg Grameen Bank Bank Rewa Sidhi Grameen Rushikulya Gramya Bank Samastipur Kshetriya Grameen Bank Sharda Grameen Bank Solapur Grameen Bank South Malabar Grameen Bank Surguja Kshetriya Grameen Bank Thane Grameen Bank Tripura Grameen Bank Uttar Banga Kshetriya Grameen Bank Vidisha Bhopal Kshetriya Grameen Bank Visweshwaraya Grameen Bank Sponsor Bank State Bank of India Bank of Maharashtra Bank of India Central Bank of India Corporation Bank Punjab National Bank Indian Overseas Bank Dena Bank State Bank of India Central Bank of India Punjab and Sind Bank Syndicate Bank Central Bank of India Punjab National Bank Jammu and Kashmir Bank Bank of Baroda Jammu and Kashmir Bank Punjab National Bank Central Bank of India State Bank of India UP State Cooperation Bank State Bank of India United Commercial Bank State Bank of Patiala United Bank of India Bank of Maharashtra Bank of Rajasthan State Bank of India State Bank of India Bank of Baroda Syndicate Bank Indian Overseas Bank State Bank of India Bank of Baroda Indian Overseas Bank Punjab National Bank Central Bank of India Bank of India Union Bank of India Andhra Bank State Bank of India Allahabad Bank Bank of India Canara Bank Central Bank of India Bank of Maharashtra Union Bank of India Central Bank of India State Bank of Indore Vijaya Bank State Arunachal Pradesh Maharashtra Orissa Uttar Pradesh Karnataka Uttar Pradesh Orissa Chattisgarh Jammu and Kashmir Uttar Pradesh Punjab Haryana Rajasthan Himachal Pradesh Jammu and Kashmir Madhya Pradesh Jammu and Kashmir Uttar Pradesh Madhya Pradesh Karnataka Uttar Pradesh Assam Madhya Pradesh Punjab Manipur Maharashtra Rajasthan Mizoram Nagaland Uttranchal Kerala Tamilnadu Himachal Pradesh Uttar Pradesh Orissa Uttar Pradesh Madhya Pradesh Maharashtra Madhya Pradesh Orissa Bihar Madhya Pradesh Maharashtra Kerala Chattisgarh Maharashtra Tripura West Bengal Madhya Pradesh Karnataka

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4. Section- Results and Discussions 4.1 Temp Poral Pattern of Efficiency Scores: Section 4 provides the results of input that how much input quantities should be reduced to produce the current level of outputs. Further, the analysis will also explore the sources of inefficiencies. Table 1 (Insert Table A1 ) presents the results of average OTE [the term overall technical efficiency (OTE) and technical efficiency (TE) have been used interchangeably in this study] scores with standard deviation of RRBs during the period from 1992 to 2007, divided into sub-periods. The results have been obtained through running CCR model separately for each year). The empirical findings reported that average OTE has turned out to be 78 percent for RRBs with standard deviation measure of .031. This implies that the overall technical inefficiency [OTIE (%) = (1- OTE) X 100] of banks came out to be almost 22 percent. Thus, the banks can curtail their input expenditures on loan able funds, fixed assets and labor by 22 percent by adopting best practices.

Table A1: Average Technical Efficiency Scores of Regional Rural Banks in India Year 1991 -92 1992 - 93 1993 - 94 1994 - 95 1995 - 96 1996 - 97 1997 - 98 1998 - 99 1999 - 2000 2000 - 01 2001 - 02 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 1991-92 to 1997-98 Average SD 1998- 99 to 2006-07 Average SD 1991-92 to 2006-07 Average SD TE 0.765 0.76 0.747 0.726 0.771 0.762 0.763 0.797 0.811 0.81 0.809 0.748 0.819 0.797 0.811 0.821 0.761 0.022 0.803 0.023 0.782 0.031

The comparative analysis of average OTE scores of all 50 regional rural banks between distinct periods show that the degree of input waste was 24 percent in first generation reforms period, declined to 20 percent in second generation reforms period. Therefore, the results imply that technical inefficiency has showed down in second generation reforms period to first generation reforms period. 4.2 Soures of Overall Technical (IN) Efficiency: Temporal Trend: As mentioned earlier that OTE can be decomposed into two collectively exhaustive components viz; PTE and SE. PTE refers to managers' capability to utilize resources more efficiently and get maximum possible returns, while SE refers to increasing/decreasing the scale of operations to an optimal level where constant returns to scale holds. Like OTE, PTE also indicates the wastage of resources but PTE is devoid of scale effects unlike OTE.

TableB1: Average Pure Technical Efficiency and Scale Efficiency Scores of Regional Rural Banks in India Year 1991 - 92 1992 - 93 1993 - 94 1994 - 95 1995 - 96 1996 - 97 1997 - 98 1998 - 99 1999 -2000 2000 - 01 2001 - 02 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 1991-92 to 1997-98 Average SD 1998- 99 to 2006-07 Average SD 1991-92 to 2006-07 SD Average PTE 0.930 0.885 0.891 0.910 0.890 0.878 0.930 0.943 0.912 0.956 0.923 0.925 0.942 0.952 0.958 0.889 0.902 0.021 0.933 0.023 0.920 0.027 Average SE 0.818 0.851 0.831 0.791 0.855 0.855 0.814 0.843 0.885 0.848 0.874 0.803 0.865 0.833 0.844 0.921 0.831 0.024 0.857 0.034 0.846 0.032

Note: TE denotes technical efficiency. 1991-92 to 1997-98 shows firstgeneration reforms period and 1998-99 to 2006-07 shows secondgeneration reforms period and 1991-92 to 2006-07 denotes entire study period. SD denotes standard deviation. Source: Authors' calculations

Note: PTE denotes pure technical efficiency and SE denotes scale efficiency. 1991-92 to 1997-98 shows first-generation reforms period and 1998- 99 to 2006-07 shows second-generation reforms period and 1991-92 to 2006-07 denotes entire study period. SD denotes standard deviation. Source: Authors' calculations

PTE and SE scores have been obtained through running BCC model for each year separately. Table 2 (Insert TableB1) summarizes the average PTE and SE scores with standard deviation during the period from 1992 to 2007, divided into sub-periods considered in

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the study. The mean PTE score estimated to be 92 percent with standard deviation measure of 0.027. The result indicates that 8 percentage points of 22 percent mean technical inefficiency (TIE) is due to the incapability of the management to utilize the resources. The rest part of the OTIE may be attributed to the fact that the banks are operating at below the optimal level. As mentioned earlier, SE of banks can be measured as the ratio of OTE to PTE. The value of SE equal to 1 indicates that a DMU is operating at most productive scale size and value of less than one indicates that a DMU is not operating at optimal scale. The mean SE score turned to be 84 percent with standard deviation measure of 0.032 which implies that average scale inefficiency (SIE) in tune of about 15 percent is due to the choice of sub-optimal level of operation. The results also show that scale inefficiency (SIE), the main responsible factor for OTIE rather PTIE. The comparative analysis of average PTE and SE between different periods indicate that pure technical inefficiency was in tune of about 9.8 percent in first generation reforms period declined to 6.7 percent in second generation reforms period. This in turn infers that the degree of managerial in capabilities has declined by 3.1 percent during these periods. On the other hand, scale inefficiency in tune of about 16.9 percent in first generation reforms period declined to 14.3 percent in second generation reforms period. The level of the scale operation of banks has improved during these periods. 4.3 Inter Bank Comparison of Efficiency Scores: Table 3 ( Insert TableC1) provides us the average OTE scores for each bank in first generation reforms period, second generation reforms period and entire study period. It is apparent from the empirical findings that using CCR input oriented DEA model, 34 banks viz; B3, B5, B6, B7, B9, B10, B13, B18, B19, B20, B22, B23, B24, B25, B27, B28, B29, B30, B32, B33, B34, B35, B36, B37, B38, B40, B41, B42, B43, B44, B45, B46, B48, B49, and B50 have experienced an improvement in efficiency. Except 34 banks, the remaining banks viz; B1, B2, B4, B8, B11, B12, B14, B15, B16, B17, B21, B26, B31, B34, B39, and B47 have registered reduction in TE from first-generation reforms period to second-generation reforms period. Therefore, the results indicate positive impact of the reforms on the efficiency of banks. The bank with efficiency score equal to one is considered to be the most efficient amongst the banks. And the bank with efficient score less than one is deemed to be relatively inefficient. In first-generation reforms period, B31 is the best practice bank while B20 Bank turned out to be the best performer bank during second- generation reforms period. Further, using the VRS technology (BCC model), only fifteen banks viz; B2, B4, B8, B11, B12, B13, B14, B15, B21, B31, B32, B34, B39, and B48 registered fall in efficiency from first-generation reforms period to second-generation reforms period. Except fifteen banks, rest of all the banks viz; B1, B2, B3, B5, B6, B7, B9, B10, B16, B17,

B19, B20, B22, B23, B24, B25, B26, B27, B28, B29, B30, B33, , B36, B37, B38, B40, B41, B42, B43, B44, B45, B46, B47, B49, and B50 experienced an improvement in efficiency scores. Therefore, it is apparent that most of the banks are favorably affected by the deregulatory policies. So, somewhat positive impact of high degree of liberalization has been witnessed in this case. In first-generation reforms period, B11, B31 and B35 emerged to be the best practice banks while in second-generation reforms period, B7, B24 and B49 turned out to be the best practice banks. The comparison of CCR and BCC model gives us the estimates of scale efficiency which further replicates the influence of size on technical efficiency. Table 3 also represents that out of 50 banks, only two bank namely B11 and B31 are found to be operated at optimal level having efficiency score equal to one while remaining banks are scale inefficient banks in first-generation reforms period. In second-generation reforms period, 20 banks experienced fall in efficiency from first-generation reforms period to second-generation reforms period, while remaining 30 banks noticed an improvement in efficiency. Thus, somewhat negative impact of reforms has been witnessed in this period. Similarly, TE scores of entire banking industry have been calculated as an average of TE scores of 50 banks in various periods and subperiods. It is apparent from Table 4 that OTE of RRBs came out to be 76 percent in first-generation reforms period increased to 80 percent in second-generation reforms period. Similar trend has been witnessed in case of BCC model as per VRS technology. In first-generation reforms period, average PTE of RRBs is 90 percent increased to 93 percent in second-generation reforms period. In case of scale efficiency scores, increasing trend has been witnessed from 83 percent in first-generation reforms period to 85 percent in second-generation reforms period which signifies favorable impact of deregulatory policies.

4.4 Bank Wise Temporal Pattern of Efficiency Analysis Table 4 (Insert TableD1) presents inter temporal comparison of efficiency of banks and depicts the best practice banks in each year. As already mentioned, that those bank with efficiency score equal to one is considered to be the most efficient amongst the banks. And those banks which have efficiency score less than one is deemed to be relatively inefficient. B24 dominated during the entire study period, as this bank captured twelve times the position on the frontier. B49en bank is found to be operating eleven times on the frontier. B11 and B31 Bank are found to be operating ten times on the frontier. These banks are considered as best practice banks and the poor performing banks should follow their practices in their working processes.

As far banks with minimum efficiency scores are concerned, B1 Bank found to be the bank with minimum technical efficiency score

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Table C1: Average Dea Efficiency Scores of Regional Rural Banks on Individual Basis for Different Periods. Rank Code Firstgeneration Reforms B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11 B12 B13 B14 B15 B16 B17 B18 B19 B20 B21 B22 B23 B24 B25 B26 B27 B28 B29 B30 B31 B32 B33 B34 B35 B36 B37 B38 B39 B40 B41 B42 B43 B44 B45 B46 B47 B48 B49 B50 B50 Average SD 0.742 0.831 0.610 0.940 0.810 0.609 0.859 0.873 0.510 0.775 1.000 0.969 0.690 0.967 0.928 0.744 0.602 0.537 0.563 0.751 0.955 0.492 0.640 0.978 0.602 0.799 0.665 0.669 0.899 0.643 1.000 0.813 0.795 0.908 0.814 0.577 0.690 0.659 0.774 0.714 0.489 0.670 0.757 0.965 0.548 0.778 0.845 0.728 0.856 0.773 0.773 0.756 0.022 Technical Efficiency Secondgeneration Reforms 0.649 0.795 0.820 0.785 0.883 0.666 0.986 0.736 0.551 0.779 0.944 0.833 0.732 0.776 0.848 0.716 0.584 0.705 0.709 0.986 0.803 0.717 0.735 0.983 0.667 0.781 0.772 0.687 0.952 0.808 0.978 0.885 0.940 0.878 0.863 0.685 0.777 0.817 0.685 0.885 0.797 0.758 0.863 0.981 0.686 0.794 0.787 0.755 0.979 0.950 0.950 0.803 0.023 Entire Study Period 0.690 0.811 0.728 0.853 0.851 0.641 0.931 0.796 0.533 0.777 0.968 0.893 0.714 0.860 0.883 0.728 0.592 0.632 0.645 0.883 0.869 0.619 0.694 0.981 0.638 0.789 0.725 0.679 0.929 0.736 0.988 0.854 0.877 0.891 0.842 0.638 0.739 0.748 0.724 0.810 0.663 0.719 0.817 0.974 0.625 0.787 0.812 0.743 0.926 0.873 0.873 0.782 0.031 Firstgeneration Reforms 0.878 0.949 0.843 0.997 0.914 0.862 0.974 0.971 0.817 0.918 1.000 0.995 0.882 0.989 0.972 0.883 0.789 0.795 0.792 0.887 0.965 0.723 0.852 0.995 0.885 0.944 0.872 0.763 0.970 0.841 1.000 0.916 0.944 0.971 1.000 0.831 0.865 0.824 0.886 0.901 0.825 0.888 0.875 0.973 0.843 0.927 0.909 0.922 0.969 0.907 0.907 0.902 0.021 Pure Technical Efficiency Secondgeneration Reforms 0.899 0.911 0.971 0.931 0.934 0.884 1.000 0.919 0.965 0.954 0.985 0.950 0.857 0.866 0.947 0.883 0.830 0.875 0.899 0.992 0.931 0.990 0.888 1.000 0.997 0.948 0.925 0.891 0.998 0.926 0.990 0.915 0.993 0.948 0.995 0.881 0.879 0.884 0.837 0.952 0.944 0.928 0.957 0.990 0.877 0.945 0.945 0.903 1.000 0.963 0.963 0.933 0.023 Entire Study Period 0.890 0.928 0.915 0.960 0.925 0.874 0.989 0.942 0.900 0.938 0.991 0.969 0.868 0.920 0.958 0.883 0.812 0.840 0.852 0.946 0.946 0.873 0.873 0.998 0.948 0.946 0.902 0.835 0.986 0.889 0.995 0.916 0.972 0.958 0.997 0.859 0.873 0.858 0.859 0.930 0.892 0.911 0.921 0.983 0.862 0.937 0.929 0.912 0.986 0.939 0.939 0.920 0.027 Firstgeneration Reforms 0.840 0.875 0.723 0.942 0.879 0.709 0.882 0.898 0.608 0.846 1.000 0.974 0.778 0.977 0.954 0.846 0.753 0.676 0.701 0.836 0.989 0.701 0.745 0.983 0.681 0.845 0.763 0.874 0.921 0.762 1.000 0.887 0.840 0.935 0.814 0.694 0.798 0.801 0.872 0.791 0.593 0.757 0.865 0.991 0.644 0.839 0.933 0.788 0.879 0.855 0.855 0.831 0.024 Scale Efficiency Secondgeneration Reforms 0.702 0.875 0.846 0.845 0.945 0.760 0.986 0.802 0.571 0.814 0.958 0.879 0.855 0.897 0.895 0.809 0.705 0.808 0.784 0.993 0.860 0.723 0.827 0.982 0.668 0.822 0.830 0.772 0.953 0.873 0.988 0.965 0.945 0.926 0.868 0.762 0.885 0.924 0.820 0.929 0.843 0.817 0.899 0.992 0.781 0.842 0.838 0.831 0.979 0.986 0.986 0.857 0.034 Entire Study Period 0.762 0.875 0.792 0.888 0.916 0.738 0.941 0.844 0.587 0.828 0.976 0.921 0.822 0.932 0.921 0.825 0.726 0.750 0.747 0.924 0.916 0.713 0.791 0.982 0.673 0.832 0.801 0.817 0.939 0.825 0.993 0.931 0.899 0.930 0.844 0.732 0.847 0.870 0.843 0.869 0.734 0.791 0.884 0.992 0.721 0.841 0.879 0.812 0.935 0.929 0.929 0.846 0.032

Source: Authors' calculations

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TableD1: Average Dea Efficiency Scores and Returns-to-Scale of Regional Rurals Banks: 1991-92 to 2006-07 SE Minimum Level of TE 0.508 0.497 0.354 0.378 0.3 0.311 0.318 0.454 0.456 0.469 0.5 0.393 0.385 0.354 0.805 0.819 0.835 0.794 Tripura Grameen Bank 0.744 Thane Grameen Bank 0.702 Langpi Dehangi Rural Bank 0.644 0.466 0.532 0.576 0.469 0.500 0.424 0.439 Arunachal Pradesh Rural Bank Arunachal Pradesh Rural Bank Ellaquai Dehati Bank 0.403 0.61 0.510 40 41 36 41 40 39 43 34 41 Solapur Grameen Bank 0.659 0.373 36 1 2 1 6 1 1 3 0 4 1 0.79 0.461 42 2 6 13 8 8 8 8 9 8 7 12 8 0.692 0.483 42 1 7 Rushikulya Gramya Bank 0.561 0.605 42 0 8 Rewa Sidhi Grameen Bank 0.682 0.598 41 2 7 B11, B12, B14, B21 B26, B31, B49 B4, B11, B12, B14 B17, B21, B31, B49 B4, B11, B12, B14 B21, B24, B31 B4, B11, B14, B21 B24, B31 Minimum Level of PTE Minimum Level of SE No. of Banks Best having RTS IRS DRS CRS Practice Banks

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0.818 0.851 0.831 0.791 0.855 0.855 0.814 0.843 0.885 0.848 0.874 0.803 0.865 0.833 Langpi Dehangi Rural Bank Arunachal Pradesh Rural Bank Nagaland Grameen Bank Samastipur Kshetriya Grameen Bank Sharda Grameen Bank Arunachal Pradesh Rural Bank Baitarani Gramya Bank Langpi Dehangi Rural Bank Samastipur Kshetriya Grameen Bank Samastipur Kshetriya Grameen Bank Ellaquai Dehati Bank Ellaquai Dehati Bank South Malabar Grameen Bank Surguja Kshetriya Grameen Bank Devipatan Kshetriya Grameen Bank Samastipur Kshetriya Grameen Bank Samastipur Kshetriya Grameen Bank Ellaquai Dehati Bank Ellaquai Dehati Bank B4, B5, B11, B12, B14, B15, B24, B29, B31, B34 ,B35, B44 B11, B12, B24 , B29 B31, B34, B35, B44 B1, B11, B20, B24, B29, B31, B32, B44, B1, B7, B11, B15, B20, B24, B29, B33, B49 B1, B7 , B11, B20, B24, B29, 33, B49 B1, B7, B20, B24, B29, B31, B44, B49 Langpi Dehangi Rural Bank B1, B7, B20, B24, B31, B44, B47, B49 Rani Lakshmi Bai Kshetriya Grameen Bank Rani Lakshmi Bai Kshetriya Grameen Bank Tripura Grameen Bank Rani Lakshmi Bai Kshetriya Grameen Bank Tripura Grameen Bank Uttar Banga Kshetriya Grameen Bank Vidisha Bhopal Kshetriya Grameen Bank Visweshwaraya Grameen Bank Hadoti Kshetriya Grameen Bank Ellaquai Dehati Bank Arunachal Pradesh Rural Bank Ellaquai Dehati Bank Arunachal Pradesh Rural Bank Arunachal Pradesh Rural Bank 0.299 0.362 B3, B7, B29, B41, B44, B47, B49 B7, B11, B24, B29, B5, B36, B37, B40, B44, B47, B49, B50 B7, B20, B24, B29, B31 B44, B49, B50 0.333 0.543 43 36 0 10 7 4 B7, B20, B24, B29, B44 B49, B50 B21, B33, B44, B50 0.844 0.921 0.846 0.032 Arunachal Pradesh Rural Bank Arunachal Pradesh Rural Bank Jhabua Dhar 0.831 Kshetriya Grameen Bank, /Kamraz Grameen Bank Jhabua Dhar 0.855 Kshetriya Grameen Bank Arunachal Pradesh 0.564 Rural Bank

Year

TE

PTE

1991-92

0.765

0.930

1992 - 93 0.760

0.885

1993 - 94 0.747

0.891

1994 - 95 0.726

0.910

1995 - 96 0.771

0.890

1996 - 97 0.762

0.878

1997 - 98 0.763

0.930

B49 1998 - 99 0.797

0.943

Efficiency of Regional Rural Banks in India: an Application of Data Envelopment Analysis

195

1999 - 00 0.811

0.912

2000 - 01 0.810

0.956

2001 - 02 0.809

0.923

2002 - 03 0.748

0.925

2003 - 04 0.819

0.942

2004 - 05 0.797

0.952

2005 - 06 0.811

0.958

2006 - 07 0.821

0.889

Average SD

0.782 0.030

0.920 0.027

Note: TE denotes technical efficiency, PTE denotes pure technical efficiency and SE denotes scale efficiency. RTS shows returns-to-scale, IRS denotes increasing returns-to-scale, DRS denote diminishing returns-to-scale and CRS denotes constant returns-to-scale. SD denotes standard deviation. Source: Authors' calculations

Versha Mohindra and Gian Kaur

in the years 1991-92, 2003-04, 2004-05, and 2005-06 and 2006-07 respectively Similarly, B36 Bank captured minimum technical efficiency score in the years 1998-1999 and 1999-2000. B9 Bank found to be the bank with minimum technical efficiency score in the years 1996-97, 1997-98 and 2002-03. Further, B16 Bank found twice to be the bank with minimum pure technical efficiency score in the year 2004-05 and 2005-06. B1 Bank registered on four occasions the minimum scale efficiency score in the years 1991-92, 2003-04, 2004-05 and 2005-06 while B9 Bank also noticed four occasions minimum scale efficiency score during the years 199697, 1997-98, 2002-03 and 2006-07. Therefore, the results signify that the banks having most of times the minimum efficiency scores are not yet progressive in nature. So, these banks will have to incorporate substantial changes in their policies to keep in line with international standards. After analyzing it is evident that most of the banks included in the sample are operating at below their optimal level and experiencing increasing returns to scale.

banks which have total assets exceeding Rs. 1000 millions as shown in Table 5 (Insert TableE1). The large RRBs group experienced the highest level of 88 percent scale economies. Followed by 84 percent of small banks and 79 percent of medium banks. Accordingly these banks' groups will have to change their scale of operation by 12 percent, 16 percent and 21 percent respectively. To get the position on the frontier. Finally, the empirical findings suggest that large banks have performed better than that of its counterpart groups in terms of exhausting scale economies. In other words, scale economies are positively associated with the size of the banks.

4.5 Bank Size and Scale Economies In order to look at the relationship between bank size (in terms of total assets) and scale economies of RRBs, the present study has trifurcated the sample of 50 RRBs into three groups viz; small, medium and large. Small segment consists of those banks which have total assets less than or equal to Rs. 500 millions. Those banks which have total assets exceeding Rs. 500 millions, but less than or equal to Rs.1000 millions have been bunched together in the segment of medium banks. A large bank consists of those

5. Section- Summary and Conclusion Over the years, RRBs have proved to be the most active agencies in the process of strengthening rural economy by purveying credit and mobilizing deposits from rural areas through their vast network even in the remotest areas of the country. Though the regional rural banks have faced a great threat initially, the introduction of financial sector reforms and other policy initiatives (including recapitalization) by Government of India, Reserve Bank of India and other agencies concerned for strengthening the financial position of regional rural banks have resulted in perceptible improvement in the functioning of these banks. Evidence from the above, regional rural banks are thus required to devote utmost attention to their performances to meet global aspirations. This study is an attempt in this direction to analyze the performance of banks in terms of technical, pure technical and scale efficiency during the post-reforms period spanning from 1991-1992 to 20062007 by using non-parametric technique of data envelopment

Tabble E1: Scale Economies and Number of Regional Rural Banls with Respect to Assets Size (1991-92 to 2006-07) Small (0 to 500) Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Average Number of RRBs 36 34 31 24 17 12 10 5 4 3 2 2 2 1 1 1 Average Scale Economies 0.786 0.819 0.796 0.764 0.836 0.832 0.878 0.860 0.911 0.890 0.797 0.810 0.867 1.000 1.000 0.650 0.844 Medium (500 to 100) Number of RRBs 8 9 11 13 16 15 12 12 10 9 7 6 4 3 2 2 Average Scale Economies 0.873 0.894 0.835 0.722 0.819 0.811 0.792 0.843 0.896 0.868 0.886 0.763 0.846 0.656 0.542 0.651 0.794 Large (1000+) Number of RRBs 6 7 8 13 17 23 28 33 36 38 41 42 44 46 47 47 Average Scale Economies 0.935 0.952 0.962 0.911 0.908 0.895 0.801 0.840 0.879 0.839 0.876 0.808 0.867 0.841 0.854 0.938 0.882

196

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Efficiency of Regional Rural Banks in India: an Application of Data Envelopment Analysis

analysis. The present study followed an intermediation approach to select input and output variables. The inputs vector contains three inputs viz; loan able funds, fixed assets and labor while output vector contains two outputs viz; advances and spread. The aforementioned conclusions portray that over the period from 1992 to 2007, regional rural banks have experienced technical efficiency to the tune of about 78 percent. Thus the banks can on an average decrease their inputs by 22 percent and still can produce the same level of output. The comparative analysis of average OTE scores of all 50 regional rural banks between distinct periods show that the degree of input waste was 24 percent in first generation reforms period, declined to 20 percent in second generation reforms period. The results imply that technical inefficiency has showed down in response of deregulatory policies. The decomposition of overall technical efficiency into two components namely pure technical efficiency and scale efficiency provided the evidence that 8 percentage points of overall technical inefficiency is due to managerial in capabilities in utilizing critical inputs, while remaining part of the overall technical inefficiency may be attributed to the choice of sub optimal scale of operation. The empirical findings also provided the evidence of positive relationship among scale economies and bank size. The analysis also shows that most of the banks included in the sample are operating at below their optimal level and tend to enjoy scale economies. Thus, the results suggest that there is decisive need to allow the regional rural banks to grow out and face the realities of the world. These banks have to equip themselves with suitable strategies by analyzing their strengths and weakness in comparison with others players in the market. Among the various options explored included merger/amalgamation, change of sponsor banks, balance sheet strengthening and methods for improving profitability of regional rural banks. These options are just complementary to each other and are not mutually exclusive, but. In addition, banks should take concrete steps to improve managerial efficiency and increase their size through their technical efficiency and scale economies. Only then regional rural banks can capable of meeting the growing requirements of rural India.

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CN, pp. 63-125. 4. Bhatt, N. and Y.S.P. Thorat, 2001. "India's Regional Rural Bank: The Institutional Dimension of Reforms", Journal of Microfinance, 3(1):65-88. 5. Bose, S. 2005. "Regional Rural Banks: The Past and the Present Debate", Macro Scan, URL: http://www.macroscan.com/ fet/jul05/fet2007RRB_Debate.htm 6. Charnes, A. W.W. Cooper and E. Rhodes, 1978. "Measuring the Efficiency of Decision Making Units", European Journal of Operational Research, 2: 429-444. 7. Coelli, T.J. 1996. "A Guide to DEAP Version 2.1: A Data Envelopment Analysis (Computer) Program", Center for Efficiency and Productivity Analysis (CEPA), Working Paper 96/08. 8. Deagirikar, A.B. 1997. "Financial Sector Reforms and RRBs, Impact of Financial Liberalization Policy in India", edited by Dr. B.M. Jani, Himalayan Publishing House: New Delhi, pp.60-64. 9. Gupta and Sodhi, 1995. "Economic Liberalization and Rural Credit", Kurukshetra, (XLIII):10, pp. 27-30. 10. Horseman, S.B. 2002. "Performance of Regional Rural Banks", Anmol Publications Pvt.Ltd: New Delhi. 11. Jagadeesha, D.M. S. Murthy; H.G.Sadath; Ali Khan and Arun Rao, 1990. "Performance of Tungabhadra Grameen Bank (Regional Rural Bank) in Karnataka- An Economic Analysis", Agricultural Banker, 13(3): 35-41. 12. Kannan, R. 2004. "Regional Rural Banks", URL: http:// www.geocities.com/learning/banking2/rrb.html 13. Kaur, G. and Jyoti, 2005-06. "Technical Efficiency and Scale Economies of Commercial Banks in Pre-and PostLiberalization Period", Indian Journal of Quantitative Economics, Vol. 20-21. 14. Khankhoje, D. and M. Sathye, 2008. "Efficiency of Rural Banks: The Case of India", International Business Research, (1):2, pp. 140-149. 15. Kumar, B. P. 1995 "Regional Rural Bank: An Analysis with Reference to Andhra Pradesh Vis-à-Vis India", Kurukshetra, (XLIII)10:43-47. 16. Milma, A.P. and L. Hjalmarsson, 2002. "Measurement of Inputs and Outputs in the Banking Industry", Tranzanet Journal, 3(1):12-22. 17. Mudgil, K.K. and Y.S.P. Thorat, 1995. "Restructuring of Rural Financial Institutions: The Regional Rural Banks' experience in India", Paper presented at the Conference on Finance against Poverty, pp. 27-28. 18. Noulas, A. G. and K. W. Katkar, 1996. "Technical and Scale Efficiency in the Indian Banking Sector", International Journal of Development Banking, 14(2):19-27. 19. Parmar, G.D. 1986. "Performance of Banaskantha Mehsana Grameen Bank in Gujarat State", Agricultural Banker, 11(3):24-29.

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20. Pati, A.P. 2005. "ns: New Delhi. Regional Rural Banks in Liberalized Environment with Special Reference to North East India", Mittal Publicatio 21. Patnaik, U. K. and S. Rao, 1989. "Impact of SVGB on Beneficiary Households", Agricultural Banker, 11(4):22-24. 22. Prasad, T. S. 2003. "Regional Rural Banks: Performance Evaluation", Kurukshetra, 51(10):20-24. 23. Ray, S.C. 2004. "Data Envelopment Analysis: Theory and Techniques for Economics and Operations Research", Cambridge University Press: New York. 24. Reddy, A. A. 2006. "Productivity Growth in Regional Rural Banks", Economic and Political Weekly, XLI (11): 1079-1085. 25. Sangwan, S.S. 1989. "Viability of Rural Credit Structure: A Case Study of Regional Rural Banks", Pranjan, 18(2): 213-223.

26. Sensarma, R. 2005. "Cost and Profit Efficiency of Indian Banks during 1986-2003: A Stochastic Frontier Analysis", Economic and Political Weekly, XL(12):1198-1209. 27. Singh, J. P. 1992. "Performance of Regional Rural Banks- A case study of GSP-ASR Regional ural Bank.Strataegic Management of Rural Sector", Akashdeep Publishing House: New Delhi. 28. Sudhakar, H.R. J.V. Venkataraman and G.N. Nagaraj (1984), "An Evolution of Performance of Regional Rural Banks in Mysore District, Karnataka", Financing Agriculture, 16(2)28-30. Various Issues of Report of Trend and Progress in Banking 29. Yadappanavar, A. and B. R. Nath, 2003. "Development Strategies of RRBs - A Successful Case Study of Aurangabad and Jalna Gramin Bank in Maharashtra ­ A Report", Anvesak,33(13):24-45.

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