Abstract

This paper investigates the effects of macroeconomic factors on efficiency of banks. The study takes into account primarily PSBs and the SCBs of India. To calculate efficiency part a parametric approach has been employed that is Stochastic Frontier Analysis (SFA) which estimates the stochastic frontier parameters and gives the inefficiency level of the model. The study has taken Profit-inefficiency into consideration and observed that the effect of macroeconomic variables are different for Public Sector Banks and Scheduled Commercial Banks for some of the variables like Per Capita GDP and Broad Money to GDP ratio. Profit-Inefficiency is negatively related to Per Capita GDP for Public Sector Banks but there is a positive relation with Broad Money to GDP ratio. The Scheduled Commercial Banks has an opposite relation that is Per Capita GDP has Positive relation but a negative relation with Broad Money to GDP ratio. This result shows that even if the Technical Efficiency scores are same for different groups of bank, the effect of macroeconomic factors differ between the groups of bank.

Keywords: Bank Efficiency, Stochastic Frontier Analysis, Non Parametric Methods