Productivity and Cost Efficiency Analysis– A Comparative Study

Abstract

Management always looks after the effectiveness, efficiency and performance of banks and it indicates the success of the strategic
objective, goals of the firms. In the similar manner performance of any economy depends upon the efficiency of its financial system.
The performances of financial system of a country determine its economic growth indicators. Strengthening financial systems has
been one of the central issues facing emerging markets and developing economies. This is because sound financial systems serve as
an important channel for achieving economic growth through the mobilization of financial savings, putting them to productive use
and transforming various risks. Indian financial system is based on the Indian banking industry and its capital market. The Indian
commercial banks are traditionally playing most important role as financial intermediaries. The banks comprise more than threefifth of financial system assets and dominate the whole banking sector in India and played a central role in mobilizing savings in
growth process. While internationally accepted prudential norms have been adopted, with higher disclosures and transparency,
Indian banking industry is gradually moving towards adopting the best practices in accounting, corporate governance and risk
management. Although, the need is to make continuous improvement in cost efficiency and productivity of Indian banking sector,
yet this improvement is also required to measure and compare with the benchmark level to understand how much improvement
has taken place and their individual relative rank with the top performers. Thus, both of these performance measures are major
determinants of competitiveness and profitability of the banking sector. In this way, a study of these sources is crucial for identifying
the productivity level of industry and will be helpful to adopt appropriate measures for decision making units at various levels so as
to improve productivity and cost efficiency. So in the present study an attempt has been made to evaluate the performance of different categories of banks viz. public, private and foreign bank groups in India. For evaluating the performance, twelve financial ratios
have been used. These ratios further have been categorized into two categories viz. productivity and cost efficiency. The period of
study cover the years 2005-06 to 2011-12. From the results, it has been found that during the study period the productivity and cost
efficiency of public sector bank group declined while it has improved in other two groups.