Trend in the Robust Non-Parametric Technical Efficiency Estimates of Indian and Pakistani Banking Industries

Yaseen Ghulam* and Shabbar Jaffry *Corresponding Author University of Portsmouth, Portsmouth Business School, Department of Economics, Richmond Building, Portland Street, PO1 3DE, UK Email: yaseen.ghulam@port.ac.uk

Abstract This study evaluates the effect of regulatory reforms on the technical efficiency of Indian and Pakistani banking industries. We use newly developed unconditional, hyperbolic quantile estimator of Wheelock and Wilson (Wheelock D. C., and Wilson P. W., 2008, Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations, Journal of Econometrics, 209-225). Contrary to general perception we conclude that technical efficiency of Indian banking had worsen in post reform period, while opposite can be said for Pakistani banking industry. Our results are somewhat consistent and robust to the choice of inputs and outputs. We conclude that improvement in the technical efficiency of Pakistani banking in post reform period is as result of more competitive banking industry and broadening of ownership rather than just banking reforms. JEL classification C14, G21, L32 Keywords Efficiency; Productivity; Indian banking; Pakistani banking; reforms; technical efficiency; banking industry

1. Introduction Empirical research on the measurement of efficiency and productivity of a firm is well established and ever expanding and is increasingly getting very popular within the government, policy makers, less technical management gurus and others. The outcome is being used to reward best performing units and managers. A large and expanding body of literature is already in public domain alongside unpublished consultancy reports that seek to estimate the rate a firm is able to translate a given quantity of inputs into quantity of outputs compared to peer firms in the same industry during a chosen time period. Despite of the fact that the measurement of productivity and efficiency had become a standard practice with huge methodological development in the last few years debate on the appropriate method of efficiency is still not concluded. Two methods of efficiency measurement are popular vis--vis regression based stochastic frontier analysis (SFA) and mathematical linear programming led data envelopment analysis (DEA). DEA is a part of a family of non-parametric estimator while SFA belongs to parametric family with well-established statistical inference ability. Despite its statistical soundness SFA estimator is less straightforward when encountered with multiple outputs alongside assuming priori functional form (translog being the most flexible and popular functional form among applied efficiency researchers). But flexibility of functional form brings costs, which plague the derived results. We had seen a lot of recent developments in the literature in examining the properties of DEA estimator led by Simar and Wilson (1998, 1999a, 1999b, 2000a, 2000b, 2001a, 2001b), Daraio and Simar (2005), Daouia and Simar (2007) and Wheelock and Wilson (2008). A family of non-parametric estimator is in use by applied researcher i.e. DEA ,Free Disposal Hull (FDH), order-m, and conditional and unconditional quantile hyperbolic estimator. This study evaluates the effect of deregulation on Indian and Pakistani banking industry by a family of non-parametric estimators alongside the limitation of each estimator. Ours is the first study using newly developed robust non-parametric estimator to estimate technical efficiency of two emerging developing markets banking industries. The results derived from the study are more robust to the choice of input/output orientation and input/out selection

The structure of the paper is as: next section presents overview of Indian and Pakistani banking industries as well as a discussion of major policy reforms in early and late 1990s. Section 2 provides summary of empirical literature on two countries banking efficiencies analysis. Conceptual framework and estimation techniques are discussed in section 3. The last two sections are dedicated for our estimation results and discussion and conclusions.

2. Developments in the Indian and Pakistani Banking Industries Last two decades had seen a dramatic shift in the way both countries banking industries operate in term of operational decisions such as interest rate setting, credit allocation or strategic decisions such as branch expansion, mergers and acquisition and risk management practices etc. The changes in regulatory practices had resulted in a significant change in the ownership from public to private sector through complete or partial privatisation and in some cases by stock offering in both countries. This has resulted in the rationalisation of branches and headcount and market driven interest rates on deposits and loans. Banks are moving from historical focussed industrial sector to consumer and home finance lending.

Traditionally Indian banking industry had operated through a mix of public, private and foreign ownerships. Despite of the fact that private ownership was allowed in Indian banking industry, public sector banks dominated the market share for the last so many decades. In post reforms period, the dominance of public sector banks had declined significantly but nonetheless still hold a larger share compare to both foreign and domestic private owned banks. Pakistani banking industry on the other hand operated with just two ownerships since nationalisation of banks in 1970s. With domestic private ownership not allowed, banking industry was dominated by public sector banks (holding 95% of the market share) alongside with a number of foreign owned banks with smaller market share and unable to exert any influence in the direction of how the banks operated. Foreign banks concentrated on customers in posh urban localities with perceived better customer service compare to public sector banks with outdated practices. However starting from 1990, series of regulatory reforms were introduced to change the face of traditional banking industry. Domestic private ownership of banks was allowed coupled with selling of most of big public sector banks to private investors. Contrary to Indian government who adopted less aggressive attitude in term of transforming the ownership structure from public to private, Pakistani government had been more proactive in selling the bank ownership. New face banking industries are mix of three ownerships, but private sector banks lead the way in case of Pakistani banking but for Indian banking industry the role of public sector still dominant though with less power compare to pre-reform period (see Table 1)1. This shift in ownership alongside other regulatory reforms was introduced to encourage competition which will lead to greater efficiency in the use of bank resources and credit allocations.

For detail of regulatory reforms and importance of banking industry for both India and Pakistan see Jaffry et al (2009).

This study seeks to evaluate the effect of regulatory reforms on the Indian and Pakistani banking industries operation efficiency during the early and late 1990s. In the pursuit of getting more reliable estimates of efficiency scores the study uses more robust non-parametric estimator. Evaluation of performance for these two banking industries has become a topic of great interest after a series of reforms were introduced in both countries at the same time. 3.1 Effect of Regulatory Reforms on Banking-Review of Literature Studies in regard to effect of regulatory reforms on the efficiency of Indian and Pakistani banking had been forthcoming in recent years. Some studies such as Bhaumik and Dimova used simple ratios of profitability and noted a catching up phenomenon by initially less profitable banks in post reforms period in particular, after 1999. Bhattacharyya et al (1997) used DEA and concluded efficiency declined during their sample period and contrary to general perceptions public sector banks were more efficient compare to both privately and foreign owned banks. However, this study suffers from curse of dimensionality and strict convexity assumption of the envelope and conclusions drawn from this study may be less reliable to conclude. Studies carried out by Saha and Ravisankar (2000) and Mukherjee (2002) concluded the almost same but also suffers DEA related problems. Studies by Sathye (2003) and Das and Ghosh (2004) during 1992-95 and 1996-99 supported the above conclusion but did not address small sample, convexity and input/output dimension issue. Shammugam and Das (2004) Sansarma (2006) while estimating efficiency and productivity of Indian banks by using parametric SFA estimator concluded that efficiency/productivity did improved in post reforms period and public sector banks outperformed private and foreign owned banks. However, priori functional form and other econometric and theoretical assumptions render the conclusions subject to debate.

Some studies carried out to analyse the effect of regulatory reforms on efficiency/productivity of Pakistani banks are also either inconclusive or can be criticised in term of choice of inputs/outputs or estimator to evaluate the efficiency and productivity. Among those studies carried out for Pakistani banking is Pitti and Hardy (2005) who by using parametric estimator for cost and profit efficiency concluded that banks had become profit efficient and dispersions in efficiency score increased immediately after first wave of reforms and most of the efficiency improvement however was contributed by domestic privately owned banks. Second wave of reforms though contributed a decline in profit efficiency. These conclusions were largely supported by Iimi (2004) for the sample period 1998-2001 in estimating the cost efficiency of Pakistani banking with parametric estimator. DEA based studies of Ataullah et al (2004), Hovercroft and Ataullah (2006) and Jaffry et al (2007) all suggested improvement in efficiency/productivity in post reforms period. However, in all of these above-mentioned studies, no serious effort was made to correct the estimates for the issues highlighted in the following section which costs serious doubts about the conclusions drawn from these studies.

Our study aims to address these issues and use a newly established robust non-parametric hyperbolic -quantile estimator to assess the effect of regulatory reforms on the efficiency of public, private and foreign owned banks of India and Pakistan. 4. Methodology Standard production possibility set consistent with micro economic theory can be represented as: (4.1) Where vector of inputs are presented as and as a upper boundary of and output vector

is representation of production

frontier. Standard practice is to estimate distance from an arbitrary point to (which is boundary of production possibility

curve) along a particular path. Input/output distance function of Shephard (1970) is defined as: (4.2) (4.3) Input distance function measures the distance from to in a direction orthogonal to output vector while output distance function orthogonal to input vector x. Under constant return to scale (CRS), output distance function id reciprocal of input distance function. However, variable return to scale implies significantly different results with the choice of orientation (input or output) particularly with respect to the size of the operation of a firm. Fre et. al. (1985) measured efficiency along a hyperbolic path from a point to and represented as: (4.4) The above unknown true distance function of a production set estimated from a set of realized input/output is replaced with an are

combination of a sample firm. Traditionally

estimator of the production set to obtain an estimator of input/output oriented distance function estimates. Deprins et al (1984) proposed a free disposal hull (FDH) of the observations as: (4.5) Assuming variable return to scale (VRS), DEA estimator is obtained by replacing with convex hull of by:

(4.6) A lot of progress has been made so far to develop asymptotic properties of DEA and FDH estimator. However, both estimators suffer from following problems, which make the estimates derived from these estimators less reliable and statistically meaningless. DEA and FDH estimator convergence is strictly based on the few condition being met such as
2 ( p + q +1) n

for DEA and

1 ( p+q) n

for FDH estimator where n is

number of decision making units (DMU)2 and p is number of inputs and q is number of outputs. Hence in a case where banks is producing 5 outputs using 3 inputs one would need many more observations to get the convergence of DEA and FDH estimator which in our Pakistani and Indian population of banks is not sufficient in pre and post deregulation period. Further similar to typical pattern of high hetrogeniety in the size of the banks, possibility an extreme observation in the sample is the real possibility. Hence results derived from estimator such, as DEA and FDH are likely to be biased upward or upward. Further, a very popular parametric estimator is based on the idea of estimating a composite error response function with error term based on the idea of Aigner et al (1977) and Meeusen and Vanden Broeck (1997). Theoretical research has however, proved that in case of extreme hetrogeniety, in the sample translog functional form can lead to misspecification of model and produces unreliable efficiency estimates (example of such studies highlighting this issue include Cooper and Mclaren (1996), Banks et al (1997), Wheelock and Wilson (2001) and Wilson and Carey (2004). Wheelock and Wilson (2008) noted that extension of translog functional form also does not guarantee robust estimates.

Number of banks in our study.

Under non-parametric approach, production set is estimated by different methods such as Free Disposal Hull (FDH) or convex hull of the FDH, which is also called DEA. These estimators does not require any priori functional form but eventually does not allow increasing return to scale at different scales of operation. Recently a new estimator based on the idea of partial frontier rather than the full envelope has been developed such as order-m and order- (for details of these estimators see Cazal et al (2002) for order-m estimator and Daouia (2003), Aragan et eal (2005) and Daouia and Simar (2007) for conditional order- and unconditional hyperbolic order- quantile where inputs and outputs are adjusted simultaneously (hyperbolic) thus avoiding the priori assumption of input/output orientations. In the following section we provide the summary of derivation order- quantile estimator.
Quantile Estimator for Technical Efficiency Estimates

As per production possibility set in 4.1, we can define statistical model with the assumption that i) production set sample observations function with support vector if is compact and free disposal ii) are realisation of identically . Any point for any can be said to be and that point can be is strictly positive

independently distributed (iid) random variables with probability density

on the frontier of

iii) it is assumed that at the frontier, the density and sequentially lipschits continuous. Now if we assume

as the kth element of y, k=1,.,q and let denote the vector y with the kth element is kth element of y for each k=1,., 1 define (4.7)

deleted. Now let assume function as:

where production set the density function

can be defined by the function

. (4.8)

above implies a probability function

the above function provides the probability of drawing an observation from that weakly dominate DMU operating at Now hyperbolic distance function can be written as:

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(4.9) -quantile distance function can be defined as:

(4.10) the hyperbolic -quantile is defined as:

(4.11) For estimation of defined as: (4.12) with as an indicator function. Now estimator of with to achieve (4.13) and now by computation of becomes univariate issue and an exact solution can be achieved to get the estimator. A non-parametric estimator of the hyperbolic -quantile distance function given by: (4.14) where integer part of represented by denotes by ), is . is obtained by setting =1 . An alternative method is that would and using bisection , strictly positive integers and and jth largest element of set s, which is is is obtained by replacing and corresponding and its empirical analogue is

An estimator of distance to the full frontier, and treating resulting estimator as that given a point

, one can find initial values

bracket the solution so that and then solve for

method. Wheelock and Wilson (2008) developed an algorithm to estimate hyperbolic using the bisection method to estimate -quantile . We use hquan routine by Wilson (2006) FEAR

library to get our -quantile frontier estimates. 5. Data

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Our population of commercial banks covers 19 years of data (1985-2003) on inputs and outputs, encompassing a significant part of the pre and post reform period. The complete data set consists of unbalanced population of 72 Indian (of which 1986: 27 public, 21 private and 16 foreign; 2003: 27 public, 18 private and 17 foreign) and 41 Pakistani (of which 1986: 5 public, 0 private and 14 foreign; 2003: 3 public, 18 private and 10 foreign) banks covering the period 1985-2003. The chosen period covers both pre and post deregulation period and atleast 3 economic cycles (1985-90,1991-99 and 2000-2003). For the purpose of this study we treat loans (consumer, industrial and others), investment (government and private), time deposits, saving deposits, demand deposits and branches as outputs and inputs include number of employees, value of building and equipment measured by fixed assets and capital and reserves. The choice of inputs and outputs is somewhat consistent to Jaffry et al (2009). In subsequent analysis we altered the choice of inputs and outputs in our sensitivity analysis exercise. All the nominal monetary values were converted to real numbers by deflating by CPI alongside deleting few observations which were deemed extreme values compare to all other years figures for a particular banks and share of those deleted observation was 0.5% of the full population of banks. We use BANKSCOPE and other secondary data sources to compile of our data for the analysis. 6. Results

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First we use and present estimates of technical efficiency derived through simple traditional DEA and FDH estimators (Table 2). We estimated efficiency scores for each year of our sample for each bank using that year production frontier. We present both input and output oriented estimates in our subsequent discussion. For Indian banking DEA estimator show roughly 6% technical inefficiency irrespective of input/output orientation with inefficiency going down on the average from 8% to 5% in post reform period. While for Pakistan technical inefficiency estimates based on input orientation are 9% on the average during the sample period. Based on output orientation, we have different conclusion. On the average inefficiency level had gone up from 5% to 11-12% in post reform period in input orientation, while output orientation indicating an increase in efficiency in post reform period. our FDH estimator tells different story i.e. where inefficiency estimates appears to be almost zero with no change in post reform period for both India and Pakistan.

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Small sample size and slow convergence rate may have rendered DEA and FDH estimates doubtful. In our next step, to get meaningful estimates with root-n convergence rate without imposing convexity assumption like DEA we used -quantile estimator and reached on different results for both Indian and Pakistani banking industries. Table 3 & 4 show quantile estimates for 2003. Table 3 presents estimates for Indian banking where banks had been sorted as per their efficiency level (for = 0.90). Estimates show a significant variation in efficiency levels with most efficient bank using only 5.7% of the input amount and producing roughly 17% more output than a bank (a hypothetical) located on = 0.90 quantile frontier along a hyperbolic path from the first bank. Least efficient bank on the contrary used 65% of the input and produced 1.5 times of a bank on -quantile frontier. Not surprisingly, all the estimates are less than 1 which indicates the fact that a very high percentage of banks are located on FDH frontier. We also observe the fact that the choice of does not change the ranking of banks significantly (with efficiency level increasing as the value of increases). Foreign banks appear to be more efficient compared to public and domestic privates sector banks. On the average public sector banks seems to be least efficient banks.

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Similar to India, Pakistani banks also show considerable variation in efficiency levels with most efficient bank consuming 3% of the input and producing 30 times more output than a hypothetical bank on =0.9 quantile frontier along a hyperbolic path. The least efficient bank used 80% of the inputs and produced 1.5 times more output than a bank located -quantile frontier. Contrary to Indian banking, public sector banks appear to be not highly inefficient compare to their counterpart in private and foreign ownership (these results should be interpreted with caution because the fact that by 2003 we had only 3 banks remaining in public ownership with two banks offering specialised products to treasury and women entrepreneurs). Variation in inefficiency however, is more widespread compare to Indian banks. Table 5 shows lower and upper level bootstrap confidence level estimates and difference between lower and upper level estimates appear to be statistically significant. Table 6 presents the results from our robust -quantile estimator. Indian banking industry appears to be not responding to regulatory reforms (efficiency marginally declined in post reform period as compare to prederegulation period). On the contrary, Pakistani banks appears to be responding favourable to regulatory changes where efficiency increased around 7% in post reform period. When -quantile results are compared with other estimator such as order-m in input and output orientation, our conclusions does not change.

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We carried out sensitivity analysis by changing the selection of inputs and outputs. In our model1 we dropped capital and reserves as inputs and kept loans and investment as outputs. In model2, similar to model1 we dropped capital and reserves and replaced it with number of branches while loans and investments treated as outputs. In model3 we dropped fixed assets and capital and reserves from the list of inputs and replaced them with three deposits (fixed, saving and demand deposits) alongside branches and employees, while loans and investment treated as outputs. In all our permutation (Table 7), broad conclusions remains same except for Indian banking, efficiency improved as per model2 contrary to base model (irrespective of orientation). For Pakistan, irrespective of choice of inputs and outputs technical efficiency had declined in post reform period (in particular after second generation of reforms). In subsequent analysis Table 8, we used -quantile hyperbolic estimates to see the effect of regulatory reforms on the efficiency of banks classified by three types of ownerships. For India, foreign and private sector banks appear to be more efficient compared to publicly owned banks in both pre and post reform period. However, public sector banks appear to be trying catching the private sector banks in post reform period. For Pakistan however, for all three types of ownerships, banks improved their efficiency in post reforms period. Further, public sector banks appear to be more efficient compare to both foreign and domestic private banks.

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Figures 1 & 2 show the trend in technical efficiency of public, private and foreign owned Indian and Pakistani banks. For Indian banking (figure 1), immediately, after reforms were introduced, public sector banks appear to be responding favourably and efficiency kept improving throughout the 1990s except 1997-99 period, whereas foreign banks appear to be responding to second phase of reforms more favourably. For Pakistan, immediately, after reforms particularly from 1994 onward, all three types of ownership banks improved their performance with domestic (private and publicly owned banks) banks efficiency appear to be converging after second phase of reforms and on the whole appear to be more efficient. 7. Conclusion Estimation of efficiency of a financial institution has been the growing area of research to see the effect of deregulation since late 1980s and mid 1990s. Regression based parametric estimator such as SFA has been used by many researcher due to its nice properties such as fast convergence and flexibility to carry out statistical inferences. But priori assumption of functional form makes the estimator somewhat less satisfactory. DEA based non-parametric estimator can address some of the issues inherent in parametric estimator and had been widely used in banking efficiency estimation partially due to its flexibility and the fact that estimator follow the logic of data speaks itself. But recently, theoretical studies had shown that convexity property of DEA estimator and small sample issues makes this estimator less robust. New estimators such as order-m and conditional -quantile had been developed recently which are based on partial frontier (hence addresses the issue of convex envelope) and is more robust to outlier and dimension issues when it comes to small sample and large number of inputs and outputs (such as in banking studies). This study uses recently developed robust non-parametric unconditional -quantile estimator of Wheelock and Wilson (2008) to estimate the level of technical efficiency in Indian and Pakistani banking industry. We believe that our estimates of efficiency are more robust and can shed light on the effect of regulatory reforms in both countries.

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We conclude that Pakistani banking industry had experienced a some improvement in technical efficiency in post reforms period across all the ownerships. However, we are unable to say the same for Indian banking industry. Similar to some other studies, public sector Indian banks were less efficient compared to domestic private and foreign owned banks. Public sector banks though showed some improvement in efficiency after second generation of reforms. We also noticed a greater level of hetrogeniety in the efficiency levels across three ownerships and it remained even after post reforms years for both Indian and Pakistani banking industries. We conclude that introduction of domestic private banks and full-hearted aggressive reforms had promoted arms length banking which in term improved the resource use. References Aigner, D.J., Lovell, C.A.K. and Schmidt, P.J., 1977. Formulation and estimation of stochastic frontier production function models. Journal of Econometrics, 6, 1, 21-37. Ataullah A., Cockerill T., and Le H., 2004. Financial liberalisation and bank efficiency: a comparative analysis of India and Pakistan. Applied Economics, 36, 1915-1924. Aragon, Y., Daouia, A., Thomas-Agnan, C., 2005. Nonparametric frontier estimation: A conditional quantile-based approach. Econometric Theory 21, 358389. Banks, J., Blundell, R., Lewbel, A., 1997. Quadratic engel curves and consumer demand. Review of Economics and Statistics 79, 527539. Bhattacharyya, A., Lovell C.A.K. and Sahay, P. 1997. The impact of liberalisation on the efficient efficiency of Indian commercial banks. European Journal of Operational Research, 98, 332-345. Bhaumik, S.K., and Dimova, R., 2004. How important is ownership in a market with level playing field? The Indian banking sector revised. Journal of Comparative Economics, 32, pp 165-80. Cazals, C., Florens, J.P., Simar, L., 2002. Nonparametric frontier estimation: A robust approach. Journal of Econometrics 106, 125.

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Cooper, R.J., McLaren, K.R., 1996. A system of demand equations satisfying effectively global regularity conditions. Review of Economics and Statistics 78, 359364 Das, A., Nag, A., and Ray, S., 2004. Liberalisation, ownership, and efficiency in Indian banking: A nonparametric approach. University of Connecticut, Department of Economics, Working Paper Series, 29. Daraio, C., Simar, L., 2005. Introducing environmental variables in nonparametric frontier models: A probabilistic approach. Journal of Productivity Analysis, 24,93121. Daouia, A., 2003. Nonparametric analysis of frontier production functions and efficiency measurement using nonstandard conditional quantiles. Ph.D. Dissertation.Groupe de Recherche en Economie Mathmatique et Quantititative, Universit des Sciences Sociales, Toulouse I, et Laboratoire de Statistique et Probabilits, Universit Paul Sabatier, Toulouse III Daouia, A., Simar, L., 2007. Nonparametric efficiency analysis: A multivariate conditional quantile approach. Journal of Econometrics 140, 375400. Deprins, D., Simar, L., Tulkens, H., 1984. Measuring labor inefficiency in post offices. In: Marchand, M., Pestieau, P., Tulkens, H. (Eds.), The Performance of Public Enterprises: Concepts and Measurements. North-Holland, Amsterdam, pp. 243267. Fre, R., Grosskopf, S., Lovell, C.A.K., 1985. The Measurement of Efficiency of Production. Kluwer-Nijhoff Publishing, Boston. Howcroft B., and Ataullah A., 2006. Total factor efficiency change: an examination of the commercial banking industry in India and Pakistan. The Service Industries Journal, 26,2, 189-202. Iimi A., 2004. Banking sector reforms in Pakistan: economies of scale and scope, and cost complementarities. Journal of Asian Economics, 15, 507528. Jaffry, S. Yassen, G., Pascoe, S. And Cox, J., 2007. Regulatory changes and efficiency of the banking sector in the Indian sub-continent. Journal of Asian Economics, 18, pp. 415-438.

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Jaffry, S. Yaseen, G., and Cox, J., 2009. Trends in efficiency in response to regulatory reforms: the case of Indian and Pakistani commercial banks, Paper Submitted to European Journal of Operational Research. Jaffry, S. Yaseen, G., and Cox, J., 2008. Labour use efficiency in the Indian and Pakistani commercial banks. Journal of Asian Economics, 19, pp. 259293. Meeusen, W. and van den Broeck, J., 1977. Efficiency estimation from CobbDouglas production functions with composed error. International Economic Review, 18, 2, 435 - 444. Mukherjee A., Nath P., and Pal M.N., 2002. Performance benchmarking and strategic homogeneity of Indian banks. International Journal of Bank Marketing, 20/3, pp 122-39. Patti, B.E., and Hardy, D.C., 2005. Financial sector liberalization, bank privatization, and efficiency: Evidence from Pakistan. Journal of Banking and Finance, 29, 8-9, 2381 2406. Saha, A., and Ravisankar, T.S., 2000. Rating of Indian commercial banks: A DEA approach. European Journal of Operational Research, 124, 187-203. Sathye M., 2003. Efficiency of banks in a developing economy: The case of India. European Journal of Operational Research, 148, 662-71. Sensarma, R., 2006. Are foreign banks always the best? 717 735. Shanmugam, K.R., Das, A., 2004. Efficiency of Indian commercial banks during the reform period. Applied Financial Economics, 14, 9, 681686. Simar, L. and Wilson, P.W. 1998. Sensitivity analysis of efficiency scores: How to bootstrap in nonparametric frontier models. Management Science, 44(11), 4961. Simar, L. and Wilson, P.W. 1999a. Some problems with the Ferrier/ Hirschberg bootstrap idea. Journal of Efficiency Analysis, 11, 6780. Simar, L. and Wilson, P.W. 1999b. Of course we can bootstrap DEA scores! But does it mean anything? Logic trumps wishful thinking. Journal of Efficiency Analysis 11, 9397. Simar, L. and Wilson, P.W. 2000a. A general methodology for bootstrapping in nonparametric frontier models. Journal of Applied Statistics 27, 779802. Comparison of state-owned, private and foreign banks in India. Economic Modelling, 23,

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Simar, L. andWilson, P.W. 2000b. Statistical inference in nonparametric frontier models: The state of the art. Journal of Efficiency Analysis 13, 49 78. Shephard, R.W., 1970. Theory of cost and production function. Princeton: Princeton University Press. Simar, L. and Wilson, P.W. 2001a. Testing restrictions in nonparametric efficiency models. Communications in Statistics, 30, 159184. Simar, L. and Wilson, P.W. 2001b. Aplicacion del Bootstrap para Estimadores D.E.A., in La Medicion de la Eficiencia y la Productividad, edited by A. Alvarez, Madrid: Piramide, 2001. Translation of Performance of the Bootstrap for DEA Estimators and Iterating the Principle, Discussion Paper No. 0002, Institut de Statistique, Universite Catholique de Louvain, Louvain-la-Neuve, Belgium. Wheelock, D.C., and Wilson, P.W., 2008, Non-parametric, unconditional quantile estimation for efficiency analysis with an application to Federal Reserve check processing operations, Journal of Econometrics, Volume 145, Issues 1-2, July 2008, Pages 209-225 Wheelock, D.C., Wilson, P.W., 2001. New evidence on returns to scale and product mix among US commercial banks. Journal of Monetary Economics 47, 115132. Wilson, P.W., 2007. FEAR: A software package for frontier efficiency analysis with R. Socio-Economic Planning Sciences (in press).

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Table 1 Banking Structures of Indian and Pakistani Banking Industries

Pakistan Structure of banking system (values in billion Pakistani rupees and shares in %) 1990 2003 banks value share banks value share Assets Private 59 -Domestic 1122 47 -Foreign 277 12 Public 980 41 Total 2380 100

17 17 7 24

33 33 465 499

7 7 93 100

32 17 15 5 37

1339

India

Source: Jaffry et al (2008) (values in billion Indian rupees and shares in %) 1990 2003 banks value share banks value share Assets Private 46 259 9 -Domestic 23 107 4 -Foreign 23 152 8 Public 28 2569 91 Total 74 2828 100 Source: Jaffry et al (2008)

70 30 5 27 97

2500 1200 40

15 7 1300

14665 85 17165 100

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Table 2: Indian and Pakistani Banking: Traditional Non-Parametric Technical Efficiency Estimates
DEAi DEAo FDHi FDHo Indian Banking 1.064 1.056 1.000 1.000 1.085 1.075 1.000 1.000 1.108 1.103 1.000 1.000 1.073 1.065 1.000 1.000 1.088 1.079 1.000 1.000 1.090 1.086 1.000 1.000 1.062 1.060 1.000 1.000 1.082 1.080 1.001 1.000 1.061 1.056 1.004 1.002 1.054 1.049 1.003 1.001 1.038 1.043 1.001 1.000 1.044 1.044 1.000 1.000 1.041 1.040 1.001 1.000 1.036 1.036 1.000 1.000 1.047 1.048 1.000 1.000 1.071 1.073 1.002 1.000 1.052 1.059 1.002 1.000 1.038 1.040 1.000 1.000 1.055 1.055 1.000 1.000 DEAi DEAo FDHi FDHo Pakistani Banking 1.062 0.941 1.000 1.000 1.068 0.941 1.000 1.000 1.027 0.974 1.000 1.000 1.027 0.973 1.000 1.000 1.036 0.933 1.000 1.000 1.052 0.964 1.000 1.000 1.063 0.949 1.000 1.000 1.103 0.929 1.000 1.000 1.097 0.905 1.000 1.000 1.098 0.912 1.000 1.000 1.132 0.889 1.000 1.000 1.123 0.906 1.000 1.000 1.109 0.900 1.000 1.000 1.115 0.902 1.000 1.000 1.100 0.905 1.000 1.000 1.125 0.885 1.000 1.000 1.115 0.896 1.004 0.994 1.124 0.888 1.000 1.000 1.156 0.864 1.000 1.000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 198591 199203 199297 199803 198503

1.081 1.075 1.000 1.000 1.048 0.954 1.000 1.000 1.052 1.052 1.001 1.000 1.117 0.898 1.000 0.999 1.053 1.052 1.002 1.001 1.110 0.907 1.000 1.000 1.050 1.052 1.001 1.000 1.123 0.890 1.001 0.999 1.063 1.060 1.001 1.000 1.091 0.919 1.000 1.000

23

Table 3: Indian Banking: Robust Non-Parametric Technical Efficiency Estimates 2003

Bank Ownership Mashreq Bank foreign State Bank of India public Abu.dhabi CommercialBank foreign Bank of America foreign Oman International Bank foreign Bank of Bahrain and Kuwait foreign Bank of Nova Scotia foreign Nainital Bank private Bank of Tokyo Mitsubishi foreign Credit Lyonnais foreign Citibank foreign Societe Generale foreign Ratnakar Bank Ltd private BNP Paribas foreign ABN Amro Bank foreign Deutsche Bank foreign HSBC India foreign Sangli Bank Ltd private Punjab National Bank public Catholic Syrian Bank Ltd private Lakshmi Vilas Bank Ltd private Bharat Overseas Bank Ltd private Standard Chartered Bank foreign Punjab Sind Bank public Lord Krishna Bank Ltd private United Western Bank Ltd. private City Union Bank Ltd. private South Indian Bank Ltd private Bank of Rajasthan Ltd private Canara Bank public State Bank of Saurashtra public Bank of India public Dhanalakshmi Bank Ltd private State Bank of Indore public American Express Bank foreign Federal Bank Ltd private Central Bank of India public Tamilnad Mercantile Bank Ltd private State Bank of Mysore public ING Vysya Bank Ltd private Karnataka Bank Ltd private Karur Vysya Bank Ltd private UCO Bank public Syndicate Bank public Bank of Baroda public Indian Overseas Bank public State Bank of Bikaner and Jaipur public State Bank of Travancore public Allahabad Bank public State Bank of Hyderabad public Jammu and Kashmir Bank Ltd private Oriental Bank of Commerce Ltd. public Union Bank of India public Bank of Maharashtra public United Bank of India public Corporation Bank Ltd. public a=0.85 0.022 0.068 0.078 0.093 0.067 0.086 0.117 0.095 0.127 0.091 0.167 0.099 0.141 0.202 0.199 0.189 0.271 0.295 0.288 0.300 0.318 0.291 0.341 0.330 0.258 0.331 0.270 0.388 0.327 0.345 0.372 0.392 0.277 0.370 0.408 0.422 0.420 0.372 0.409 0.461 0.440 0.402 0.456 0.458 0.394 0.506 0.519 0.497 0.458 0.467 0.543 0.459 0.498 0.517 0.538 0.570 a=0.90 0.057 0.100 0.103 0.108 0.111 0.131 0.151 0.162 0.162 0.169 0.210 0.217 0.240 0.248 0.253 0.271 0.292 0.330 0.341 0.341 0.351 0.354 0.379 0.382 0.383 0.410 0.419 0.419 0.424 0.426 0.445 0.450 0.451 0.453 0.457 0.459 0.462 0.473 0.475 0.492 0.500 0.507 0.509 0.511 0.513 0.525 0.536 0.542 0.542 0.550 0.555 0.561 0.570 0.578 0.592 0.610 a=0.95 0.118 0.135 0.156 0.126 0.219 0.226 0.171 0.201 0.312 0.250 0.232 0.500 0.314 0.318 0.293 0.322 0.442 0.470 0.590 0.418 0.520 0.529 0.416 0.480 0.757 0.474 0.641 0.556 0.489 0.675 0.756 0.724 0.491 0.669 0.512 0.555 0.530 0.576 0.681 0.565 0.582 0.609 0.589 0.650 0.676 0.680 0.602 0.624 0.721 0.619 0.607 0.596 0.685 0.711 0.732 0.675

24

Dena Bank Andhra Bank State Bank of Patiala Vijaya Bank

public public public public

0.497 0.599 0.573 0.551

0.622 0.623 0.633 0.650

0.714 0.701 0.689 0.784

25

Table 4: Pakistani Banking: Robust Non-Parametric Technical Efficiency Estimates 2003

Bank Ownership Rupali Bank Foreign Allied Bank of Pakistan Ltd. Private Habib Bank AG Zurich Private Bank of Tokyo Foreign Bank of Punjab Private First Women Bank Ltd. Public Deutsche Bank A.G. Foreign Hong Kong & Shanghai Bank Foreign National Bank of Pakistan Public Habib Bank Ltd. Public Bank of Khyber Private Bank Alhabib Private Muslim Commercial Bank Ltd. Private Askari Commercial Bank Private Bank Alfalah Private PICIC Commercial Bank Private Albaraka Islamic Inv Bank Foreign Bank Indosuez Foreign Standard Chartered Bank Foreign Metropolitan Bank Ltd. Private Citibank N.A. Foreign American Express Bank Ltd. Foreign Algemene Bank Nederland Foreign United Bank Private Union Bank Ltd. Private KASB Private Prime Commercial Bank Ltd. Private Soneri Bank Private Bolan Bank Private Saudi Pak Private Faysal Bank Private a= 0.85 0.034 0.126 0.148 0.107 0.186 0.148 0.259 0.240 0.165 0.172 0.290 0.263 0.316 0.312 0.324 0.296 0.243 0.186 0.348 0.333 0.372 0.332 0.390 0.303 0.472 0.401 0.553 0.620 0.572 0.579 0.578 a= 0.90 0.034 0.140 0.194 0.200 0.211 0.257 0.270 0.276 0.286 0.299 0.300 0.324 0.338 0.338 0.351 0.354 0.355 0.357 0.379 0.392 0.395 0.411 0.419 0.420 0.477 0.550 0.558 0.626 0.670 0.697 0.804 a= 0.95 0.051 0.207 0.306 0.278 0.269 0.277 0.484 0.671 0.491 0.657 0.379 0.415 0.580 0.684 0.505 0.442 0.500 0.404 0.509 0.561 0.677 0.521 0.445 0.527 0.652 0.891 0.689 0.825 0.804 0.719 0.958

26

Table 5: Hyperbolic Quantile Efficiency and Bootstrap CI Estimates (2003)

Indian Banking Bank Mashreq Bank State Bank of India Type

lo

hi

Pakistani Banking Bank Type Foreign Private Private Foreign Private Public Foreign Foreign Public Public Private Private Private

lo

hi

foreign 0.057 0.055 0.058 Rupali Bank public 0.100 0.095 0.104 Allied Bank of Pakistan

Abu.dhabi Commercial Bank foreign 0.103 0.097 0.108 Habib Bank AG Zurich Bank of America Oman International Bank Bank of Bahrain and Kuwait Bank of Nova Scotia Nainital Bank Bank of Tokyo Mitsubishi Credit Lyonnais Citibank Societe Generale Ratnakar Bank Ltd BNP Paribas ABN Amro Bank Deutsche Bank HSBC India Sangli Bank Ltd Punjab National Bank Catholic Syrian Bank Ltd Lakshmi Vilas Bank Ltd Bharat Overseas Bank Ltd Standard Chartered Bank Punjab Sind Bank Lord Krishna Bank Ltd United Western Bank Ltd. City Union Bank Ltd. South Indian Bank Ltd Bank of Rajasthan Ltd Canara Bank State Bank of Saurashtra Bank of India Dhanalakshmi Bank Ltd State Bank of Indore American Express Bank foreign 0.108 0.102 0.114 Bank of Tokyo foreign 0.111 0.105 0.117 Bank of Punjab foreign 0.131 0.123 0.141 First Women Bank Ltd. foreign 0.151 0.139 0.163 Deutsche Bank A.G. private 0.162 0.148 0.176 Hong Kong & Shanghai National Bank of foreign 0.162 0.149 0.175 Pakistan foreign 0.169 0.154 0.183 Habib Bank Ltd. foreign 0.210 0.187 0.233 Bank of Khyber foreign 0.217 0.193 0.242 Bank Alhabib Muslim Commercial private 0.240 0.211 0.270 Bank

foreign 0.248 0.217 0.279 Askari Commercial Bank Private foreign 0.253 0.220 0.286 Bank Alfalah Private

foreign 0.271 0.233 0.308 PICIC Commercial Bank Private Albaraka Islamic Inv foreign 0.292 0.248 0.336 Bank Foreign private 0.330 0.274 0.387 Bank Indosuez Standard Chartered public 0.341 0.283 0.405 Bank private 0.341 0.282 0.405 Metropolitan Bank Ltd. private 0.351 0.286 0.415 Citibank N.A. Foreign Foreign Private Foreign

private 0.354 0.292 0.420 American Express Bank Foreign Algemene Bank foreign 0.379 0.304 0.455 Nederland Foreign public 0.382 0.310 0.454 United Bank private 0.383 0.310 0.461 Union Bank Ltd. private 0.410 0.325 0.495 KASB Private Private Private

private 0.419 0.334 0.501 Prime Commercial Bank Private private 0.419 0.326 0.509 Soneri Bank private 0.424 0.332 0.512 Bolan Bank public 0.426 0.332 0.516 Saudi Pak public public private public foreign 0.445 0.450 0.451 0.453 0.457 0.345 0.345 0.351 0.348 0.349 0.545 Faysal Bank 0.554 0.558 0.558 0.563 Private Private Private Private

0.03 4 0.14 0 0.19 4 0.20 0 0.21 1 0.25 7 0.27 0 0.27 6 0.28 6 0.29 9 0.30 0 0.32 4 0.33 8 0.33 8 0.35 1 0.35 4 0.35 5 0.35 7 0.37 9 0.39 2 0.39 5 0.41 1 0.41 9 0.42 0 0.47 7 0.55 0 0.55 8 0.62 6 0.67 0 0.69 7 0.80 4

0.034 0.034 0.140 0.140 0.194 0.194 0.200 0.200 0.211 0.211 0.257 0.257 0.270 0.270 0.276 0.276 0.286 0.286 0.299 0.299 0.300 0.300 0.324 0.324 0.338 0.338 0.338 0.338 0.351 0.351 0.354 0.354 0.355 0.355 0.357 0.357 0.379 0.379 0.392 0.392 0.395 0.395 0.411 0.411 0.419 0.419 0.420 0.420 0.477 0.477 0.550 0.550 0.558 0.558 0.626 0.626 0.670 0.670 0.697 0.697 0.804 0.804

27

Federal Bank Ltd Central Bank of India Tamilnad Mercantile Bank Ltd State Bank of Mysore ING Vysya Bank Ltd Karnataka Bank Ltd Karur Vysya Bank Ltd UCO Bank Syndicate Bank Bank of Baroda Indian Overseas Bank State Bank of Bikaner & Jaipur State Bank of Travancore Allahabad Bank State Bank of Hyderabad Jammu and Kashmir Bank Ltd Oriental Bank of Commerce Ltd. Union Bank of India Bank of Maharashtra United Bank of India Corporation Bank Ltd. Dena Bank Andhra Bank State Bank of Patiala Vijaya Bank Indian Bank

private 0.459 0.353 0.567 public 0.462 0.351 0.568 private public private private private public public public public public public public public 0.473 0.475 0.492 0.500 0.507 0.509 0.511 0.513 0.525 0.536 0.542 0.542 0.550 0.361 0.358 0.368 0.371 0.375 0.387 0.386 0.383 0.389 0.398 0.386 0.395 0.394 0.597 0.589 0.617 0.633 0.635 0.648 0.644 0.643 0.661 0.682 0.688 0.696 0.702

private 0.555 0.399 0.714 public public public public public public public public public public 0.561 0.570 0.578 0.592 0.610 0.622 0.623 0.633 0.650 0.742 0.400 0.403 0.401 0.419 0.427 0.422 0.426 0.421 0.434 0.462 0.722 0.736 0.750 0.773 0.811 0.818 0.821 0.840 0.863 1.032

28

Table 6: Indian and Pakistani Banking: Robust Non-Parametric Technical Efficiency Estimates
order orderm cqua cqua m5i 5o n ni cquano Indian Banking 0.32 0.444 0.281 9 0.310 0.520 0.27 0.388 0.179 9 0.258 0.474 0.28 0.399 0.168 2 0.269 0.442 0.29 0.398 0.172 3 0.272 0.426 0.30 0.394 0.178 7 0.290 0.412 0.30 0.390 0.182 4 0.269 0.425 0.30 0.377 0.215 4 0.262 0.440 0.31 0.394 0.194 7 0.270 0.436 0.34 0.400 0.228 8 0.292 0.436 0.33 0.387 0.205 5 0.287 0.450 0.33 0.377 0.215 2 0.270 0.447 0.33 0.389 0.224 4 0.291 0.464 0.35 0.412 0.235 9 0.331 0.457 0.38 0.411 0.219 9 0.338 0.445 0.38 0.418 0.207 6 0.356 0.437 0.36 0.423 0.201 4 0.346 0.441 0.36 0.445 0.223 0 0.369 0.468 0.35 0.440 0.223 5 0.372 0.484 0.35 0.445 0.221 5 0.377 0.470 0.30 0.399 0.196 0 0.276 0.449 0.35 0.412 0.216 3 0.325 0.453 0.33 0.393 0.217 8 0.290 0.448 0.36 0.430 0.216 8 0.360 0.457 0.33 0.407 0.209 3 0.307 0.451 orderm orderm cquan 5i 5o cquan cquani o Pakistani Banking 0.610 0.634 0.620 0.599 0.610 0.637 0.583 0.575 0.594 0.580 0.595 0.582 0.563 0.581 0.577 0.588 0.569 0.545 0.563 0.614 0.576 0.581 0.570 0.590 0.169 0.465 0.715 0.620 0.154 0.498 0.697 0.572 0.146 0.395 0.656 0.590 0.161 0.362 0.606 0.528 0.183 0.396 0.629 0.542 0.214 0.351 0.658 0.532 0.196 0.418 0.612 0.405 0.212 0.422 0.586 0.410 0.218 0.370 0.642 0.397 0.210 0.382 0.678 0.383 0.246 0.361 0.663 0.425 0.241 0.350 0.544 0.442 0.237 0.347 0.593 0.451 0.233 0.320 0.695 0.395 0.196 0.328 0.693 0.381 0.181 0.323 0.722 0.377 0.158 0.337 0.644 0.411 0.128 0.312 0.528 0.408 0.150 0.333 0.563 0.439 0.175 0.412 0.653 0.541 0.201 0.349 0.629 0.410 0.227 0.372 0.618 0.418 0.174 0.325 0.641 0.402 0.191 0.372 0.638 0.458

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 198591 199203 199297 199803 198503

29

Table 7: Indian and Pakistani Banking: Robust Non-Parametric Technical Efficiency Estimates
model model model model model 1 2 3 1 2 model3 Indian Banking Pakistani Banking 0.453 0.580 0.347 0.688 0.806 0.544 0.471 0.578 0.301 0.728 0.807 0.557 0.482 0.565 0.292 0.566 0.693 0.390 0.418 0.577 0.309 0.529 0.724 0.437 0.442 0.608 0.331 0.607 0.716 0.464 0.418 0.644 0.306 0.517 0.641 0.432 0.443 0.631 0.316 0.550 0.694 0.417 0.435 0.608 0.316 0.604 0.737 0.478 0.505 0.629 0.345 0.578 0.661 0.420 0.505 0.631 0.342 0.592 0.696 0.416 0.493 0.645 0.345 0.580 0.701 0.396 0.480 0.627 0.350 0.608 0.755 0.468 0.492 0.606 0.353 0.585 0.696 0.401 0.529 0.613 0.391 0.547 0.652 0.375 0.522 0.610 0.386 0.543 0.647 0.393 0.484 0.599 0.349 0.540 0.637 0.359 0.480 0.575 0.332 0.513 0.634 0.307 0.472 0.545 0.320 0.478 0.609 0.310 0.474 0.509 0.331 0.471 0.546 0.314 0.447 0.598 0.315 0.598 0.726 0.489 0.600 0.347 0.553 0.664 0.485 0.624 0.342 0.591 0.708 0.493 0.575 0.352 0.515 0.621 0.474 0.599 0.335 0.570 0.687 0.463 0.386 0.430 0.343 0.415

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 198591 199203 199297 199803 198503

30

Table 8: Indian & Pakistani Banking: Robust Non-Parametric Technical Efficiency Estimates
1985-91 1992-03 1992-97 1998-03 1985-03 Public 0.479 0.457 0.436 0.479 0.465 India Private 0.254 0.363 0.326 0.400 0.323 Foreign 0.193 0.238 0.259 0.217 0.222 Public 0.375 0.307 0.307 0.307 0.332 Pakistan Private NA 0.440 0.473 0.407 0.440 Foreign 0.430 0.337 0.373 0.300 0.371

31

Fig 1: Indian Banking Efficiency Estimates by Ownership

0.600 0.550 0.500 0.450 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050
19 85 19 8 19 6 87 19 88 19 89 19 90 19 9 19 1 92 19 93 19 9 19 4 95 19 9 19 6 97 19 9 19 8 99 20 00 20 0 20 1 02 20 03

Efficiency

Public

Private

Foreign

Fig 2: Pakistani Banking Efficiency Estimates by Ownership

0.550 0.500 0.450 0.400
Efficiency

0.350 0.300 0.250 0.200 0.150 0.100

19 85 19 8 19 6 87 19 8 19 8 89 19 9 19 0 91 19 9 19 2 93 19 94 19 9 19 5 96 19 9 19 7 98 19 9 20 9 00 20 0 20 1 02 20 03

Public

Private

Foreign

32