Investigating the Impact of Non-Performing Assets on Efficiency of Public Sector Banks in India

Abstract

Financial system plays an important role in an economy. The banking sector in India has been undergoing reforms for a long time with the aim to develop competitiveness, increase inclusiveness, create big-sized banks and improve operational efficiency. The present investigation looks at the efficiency of the public sector banks for the period 2012–2018, using data envelopment analysis under the assumption of constant returns to scale. The two-input, two-output model is used to determine the efficiency levels on the basis of Minimum Distance to Strong Efficient Frontier as proposed by Aparicio et al. (2007). In order to capture the effect of non-performing assets (NPAs), efficiency is computed under the restricted (with NPAs not included) and unrestricted model (with NPAs considered as an undesirable output). The study finds that majority of the banks have been consistently performing quite well compared to their peers and overall industry. The correlation in the ranking of banks under the two models shows high and significant value in all the years.