Efficiency of public sector banks improves with decline in number of private banks: SBI study

Mumbai: A study by State Bank of India has found that public sector banks (PSBs) in India are performing better than private sector banks in terms of efficiency. The study measures efficiency by assessing how well banks use resources to generate output at optimal scale.

In terms of the relative performance of individual banks over the entire sample period from FY6 to FY23, among public sector banks, State Bank of India (SBI) is the leader with a score of 97.88%, followed by Union Bank of India ( UBI) with a score of 92.53%. In the private sector, HDFC Bank tops the list with 97.96%, followed by Axis Bank with 94.43%. Among foreign banks, JP Morgan ranks highest with a perfect score of 1, followed by HSBC Bank with a technical efficiency score of 98.45%.

Increase

The study ‘Impact of decadal reforms on the efficiency and productivity of the Indian banking sector’ conducted by SBI’s economics department assesses banking efficiency using three indicators: technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE). TE measures how effectively banks use inputs to produce products, while PTE isolates the impact of management decisions. SE assesses whether banks operate optimally, given their size and resources.

Public sector banks (PSBs) have generally been more efficient than private banks, except in FY19-23, probably due to mergers and rationalization of businesses, branches and employees. Despite numerous structural changes, PSBs operated with an efficiency of 82.76% as compared to 81.21% for all scheduled commercial banks (ASCBs). State Bank of India (SBI) consistently outperformed all banking groups in all four study periods. Throughout the study period, private banks operated below the 80% efficiency level, mainly due to the impact of DCB Bank and IDFC First Bank, indicating that acquisitions of weaker banks impacted private sector efficiency.

In the case of PSB, both technical performance and its MPI score (an index used to measure productivity growth) have improved over the years. For both the private sector and foreign banks, both efficiency and productivity declined significantly during the study period.