Since the inception of the financial deregulation programme in 1992, the Indian banking industry has undergone gradual but notable reforms. The important policy changes include, among others, the reduction of statutory pre-emptions in the form of cash reserve ratio (CRR) and statutory liquidity ratio (SLR), deregulation of the administered interest rates and allowance of liberal entry of de novo banks. A key objective of these reforms was to create more diversified, profitable and efficient banking system by limiting state interventions and fostering competition among banks. The principal aim of this study is to measure the performance of the Indian banking industry in the post-reform era. We use mathematical programming based data envelopment analysis (DEA) in three novel ways to measure technical efficiency, cost efficiency, and total factor productivity among commercial banks in India. We also attempt to explore the determinants of bank efficiency in India and investigate into the convergence in efficiency across different ownership groups. The empirical results indicate a significant upward bias in the conventional technical efficiency estimates. The results of β-convergence and σ- convergence show a strong evidence of convergence in cost efficiency, which is due to both catching-up and lagging-behind phenomena. Further, marginal improvement in productivity growth is found among Indian commercial banks during the post deregulation period. The TFP growth of Indian banking industry is mainly driven by technological progress rather than efficiency improvement.

Keywords: Data Envelopment Analysis; Indian Banks; Performance, Convergence, Total Factor Productivity