Total factor productivity growth and its decomposition : an assessment of the Indian banking sector in the 'true' liberalised era

Assessments of the performance of Indian commercial banks are not new in the literature. However, most of the earlier studies consider relatively partial measures such as technical efficiency of the banks in assessing their performance. We have considered overall (Malmquist) total factor productivity improvement achieved by 68 Indian commercial banks from 1998-99 to 2006-07, the true liberalised era in some senses, and decomposed it into the three of its economically meaningful components, namely technical change, technical efficiency change and scale (efficiency) change factor using Data Envelopment Analysis (DEA) methodology. Our results suggest that public-sector banks are, on an average, adjusting themselves to the changing environment better and improving their performance relative to their counterparts under private and foreign ownership. The latter were widely believed to do better under the new regime because of their relatively more flexible operating systems as well as better market orientation. This finding clearly has important policy implications in determining the government’s attitude towards overall market-orientation of the Indian banking sector. To be specific, the government should more cautiously approach liberalising the banking sector and should not blindly invite more foreign players to it. The lesson becomes particularly more relevant at a time when we are witnessing a severe global crisis which, although began with the bursting of the US housing market bubble, gathered momentum from a series of bankruptcies of the so-called “too big to fail” banks with Lehman Brothers in the lead. JEL Classification: C43, D24, G28 Key Words: Total Factor Productivity; Technical Change; Technical Efficiency Change; Scale (Efficiency) Change Factor; Data Envelopment Analysis; Liberalisation