Application of a Slack-Based DEA Approach to Measure Efficiency in Public Sector Banks in India with Non-Performing Assets as an Undesirable Output

Ignoring the presence of non-performing assets makes efficiency measurement inappropriate and incomplete. Thus, the present study considers non-performing assets as an undesirable output and applies the slack-based efficiency model to measure the efficiency of public sector banks in India during 2004–2005 to 2018–2019. A two-metric performance assessment of sample banks is carried out using mean efficiency and the non-performing assets management ratio. This study is extended to investigate determinants of bank efficiency using a fixed effects model and dynamic panel data regression on the contextual variables. Results show that profitability as measured by return on equity (ROE) and priority sector exposure have had no impact on efficiency. However, cost of deposits and capital adequacy ratio have a significant negative impact on the efficiency of public sector banks in India. Most importantly, the study finds a decline in efficiency in recent years, indicating a necessity of serious efforts for revamping these state-owned banks.