Loan Quality, Ownership and Efficiency of Indian Banks: A Bootstrap Truncated Regression Approach

Many prior studies on Indian banking efficiency have typically regressed nonparametric estimates of production efficiency on environmental variables in a two stage process. However, Simar and Wilson (2007, 2011) have demonstrated that the studies that use such conventional approaches are invalid due to complicated and unknown serial correlation among estimated efficiencies. Using the data envelopment analysis bootstrap procedure suggested by these authors, for the first time, we analyse the technical efficiency of Indian banks and regress the bootstrap scores on a set of environmental variables using a truncated regression. Banks that are on efficiency frontier as per conventional analysis are actually away from the frontier when bootstrap scores are used. Contrary to many prior studies, state ownership was found to have significant negative impact on efficiency.