Financial Liberalization and Bank Efficiency: A Comparative Analysis of India and Pakistan

Posted: 23 Mar 2004

See all articles by Ali Ataullah

Ali Ataullah

The Open University

Hang Le

Nottingham Trent University - Division of Economics

Abstract

This paper provides a comparative analysis of evolution of technical efficiency in commercial banking industry in India and Pakistan during 1988-1998, a period characterised by far-reaching changes in financial sector brought about by financial liberalisation. Data Envelopment Analysis is applied to two alternative input-output specifications to measure technical efficiency, and to decompose technical efficiency into its two components, pure technical efficiency and scale efficiency. We also check the consistency of our estimated efficiency scores by examining their relationship with three traditional non-frontier measures of bank performance. In addition, we examine the relationship between bank size and technical efficiency. Our main findings are: (1) technical efficiency of overall commercial banking industry improved in both the countries; (2) public sector banks in India witnessed improvement in both pure technical efficiency and scale efficiency, (3) public sector banks in Pakistan witnessed improvement in scale efficiency only; (4) pure technical efficiency and scale efficiency of private sector banks, foreign and domestic, in both the countries improved after liberalisation; (5) due to high non-performing loans, banks are more efficient in generating loans and advances than in generating income from these assets, and (6) importance of size has declined after the implementation of financial liberalisation.

Keywords: Financial Liberalisation, Technical Efficiency, Data Envelopment Analysis, India, Pakistan, Financial Liberalization

JEL Classification: F23, G21

Suggested Citation

Ataullah, Ali and Le, Hang, Financial Liberalization and Bank Efficiency: A Comparative Analysis of India and Pakistan. Available at SSRN: https://ssrn.com/abstract=508602

Ali Ataullah (Contact Author)

The Open University ( email )

The Faculty of Business and Law
Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

Hang Le

Nottingham Trent University - Division of Economics ( email )

Burton Street
Nottingham NG1 4BU
United Kingdom

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