INDIA'S FINANCIAL LIBERALIZATION: Empirical Estimate of X-Efficiency and its Correlates for Banks in India

The principal objective of this study is to examine the efficiency of the public sector banks in India for the period of 1986-1999. The main focus of the study is on the cost efficiency of banks and its determinants and also on the examination as to what extent have financial liberalization of early 1990s and the policy reforms led to an improvement in the efficiency levels of the public sector banks. Cost efficient frontier approach is utilized for obtaining the X- efficiency scores. The study employs the translog cost function to estimate the X ? efficiency (which incorporates both technical and allocative efficiency, and hence gives the overall efficiency) of banks which addresses the question whether a firm produces as efficiently as it possibly can, given its size. The conventional translog cost function plus input share equations with pooled time-series cross-sectional observations are used to estimate the stochastic cost frontier using the parametric approach. In particular, the study uses the Distribution Free Approach to measure the X ? efficiency of banks and hence the findings rest on the assumptions of DFA method.