Abstract
In this paper we use data from the years 1997–2003 to evaluate the size efficiency, as distinct from scale efficiency, of Indian banks. Following Maindiratta [Maindiratta A (1990) J Econ 46:39–56] we consider a bank to be “too large” if breaking it up into a number of smaller units would result in a larger output bundle than what could be produced from the same input by a single bank. When this is the case, the bank is not size efficient. Our analysis shows that many of the banks are, indeed, too large in various years. We also find that often a bank is operating in the region of diminishing returns to scale but is not a candidate for break up.
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Notes
For alternative interpretations of definitions see Cooper and Ijiri (1983, pp. 157–158).
Berger et al. (1993) discuss in details the issues relating to measurement of scale and scope economies in banking.
See Ray and Hu (1997) for an application of this concept to airlines data.
For a detailed a definition of mix efficiency as a component of an input-oriented non-radial measure of technical efficiency, see Cooper et al. (2000, pp. 138–139).
Varian (1992, p. 15) also noted that constant returns to scale may be violated when we want to scale operations by non-integer amounts.
This is further refined and extended by Banker et al. (2004).
For a detailed discussion of the alternative approaches and their implications for the choice of corresponding inputs, see Berger and Humphrey (1997).
Total credit is adjusted for non-performing loans.
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The paper has benefited from extensive and valuable comments from Bill Cooper on several earlier versions of the manuscript. The usual disclaimer about any remaining errors applies.
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Ray, S.C. Are some Indian banks too large? An examination of size efficiency in Indian banking. J Prod Anal 27, 41–56 (2007). https://doi.org/10.1007/s11123-006-0022-6
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DOI: https://doi.org/10.1007/s11123-006-0022-6