Now Reading: Public sector banks outscore private peers in efficiency: EAC-PM study
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Public sector banks outscore private peers in efficiency: EAC-PM study
Public sector banks (PSBs) have recorded higher technical efficiency than private banks for the first time in years, according to a working paper by the Economic Advisory Council to the Prime Minister…
Public sector banks (PSBs) have recorded higher technical efficiency than private banks for the first time in years, according to a working paper by the Economic Advisory Council to the Prime Minister (EAC-PM). The study measured technical efficiency across 47 banks using Data Envelopment Analysis (DEA) and found PSB efficiency rose to 93.12% in FY26 from 72.46% in FY20, while private banks improved to 86.02% from 78.03% over the same period.
The overall mean technical efficiency of the banking sector climbed to 88.34% in FY26 from 77.99% in FY20. The EAC-PM paper attributes the sharper improvement among PSBs to a decade of reforms including capital infusion, technology upgrades, and consolidation. However, the study notes that takeovers of weaker banks affected the efficiency of acquiring lenders, pointing to a trade-off in consolidation.
DEA measures how effectively banks use inputs such as deposits, employees, and operating costs to generate outputs like advances and other income, rather than profitability or shareholder returns. The paper identifies technology and artificial intelligence as potential drivers for the next phase of efficiency gains.
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The reversal challenges a long-held assumption that private banks are inherently more efficient, a view that shaped policy preferences for decades. The finding is significant because PSBs still account for roughly 60% of banking assets in India, meaning their operational efficiency has outsized implications for credit flow and financial stability. The study's DEA method, however, measures resource-use efficiency, not profitability, which private banks still dominate. The next concrete signal to watch is how the government and the RBI weigh this efficiency data against profitability metrics in future reform decisions, especially regarding further consolidation of weaker PSBs. The next round of bank merger evaluations will test whether the efficiency cost of integrating weaker lenders offsets scale benefits.
Source: bfsi.economictimes.indiatimes.com
This brief was synthesised by AI from the source linked above.
