Estimation of Production Function of Public Sector Banks

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Economics I - Project|
Estimation of Production function of Public Sector Banks



2.1General Approach:4
2.2Data Collection:4
2.3Data Processing:5
2.3.1Nature of Banks:5
2.3.2Nature of Variables:5
2.3.3Assumptions in the treatment of Variables:5
2.4Data Analysis:5
2.4.1Objective of the Analysis5
2.4.2Production Function Relationship:5
3.Data analysis and Results9


The structure of the banking industry has undergone sweeping changes in the past two decades. In response to heightened competition from non-bank financial firms enabled by technological progress among other factors, banks have been expanding both the scale and scope of their operations, largely through consolidations. This merger wave coincides with extensive deregulation, which has removed restrictions on product offerings and interstate banking. These changes have motivated many studies. The estimation of bank productivity and returns to scale is of particular interest because of its broad practical applications and important policy implications The Banking Sector is characterized by multiple inputs and outputs that are associated with various attributes, such as different types of deposits, loans, number of accounts, classes of employees and location of branches. Transformation in terms of moving from high operating cost, low productivity and high spread to being more efficient, productive and competitive has been an important challenge for the banking sector in India. Recent years have witnessed substantial research efforts that have been devoted to measuring the efficiency and productivity of the banking industry. However, assessment of performance of banks has been a problematic one because of the unresolved questions concerning inputs and outputs. In the absence of any coherent definitions, researchers have used a variety of inputs and outputs, mostly based on an intermediation or production approach. The study of the Indian banking sector is of special interest for multiple reasons. Besides being one of the fastest-growing emerging economies of the world, India has one of the largest state-owned banking systems and generates employment of around 1 million people. Secondly, the vast network of around 70,000 commercial bank branches provides the base of the finance-led growth and development process in India. Thus the issue of efficiency and productivity of banks in India is particularly important.

In the aforementioned context we define productivity as a concept that involves the transformation of resources into final goods and services. Production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs. It indicates the highest output that a firm can produce for every specified combination of inputs. This function is an assumed technological relationship, based on the current state of engineering knowledge; it does not represent the result of economic choices, but rather is an externally given entity that influences economic decision-making. Almost all economic theories presuppose a production function, either on the firm level or the aggregate level. In this sense, the production function is one of the key concepts of mainstream neoclassical theories. In micro-economics, a production function is a function that specifies the output of a firm for all combinations of inputs. 2. Methodology

3.1 General Approach:
This section describes the general approach taken for the analysis of the Production function of the Public Sector Banks (PSBs) in India. A bank for its operation takes several inputs and generates several outputs. For e.g. the typical inputs are Employees, Capital for operation, Reserve & Surplus, number of Branches, number of ATMs of a bank...
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