An Empirical Analysis of Cost Efficiencies in the Indian Banking Industry

This study analyzes the cost efficiencies of 35 Indian commercial banks over the period 2007 to 2013. We use translog cost function to evaluate economies of scale in the Indian banking sector. Translog cost function is estimated for total cost, operating cost, non-operating cost, interest expenses, and employee cost. We estimate cost efficiencies with respect to output and output is defined in three different ways--total assets, total deposits, and total loans of Indian banks. Estimates of cost elasticity show that Indian commercial banks are reaping economies of scale with respect to total assets, total deposits, and total loans, because with every rupee increase in assets or deposits or loans, cost is rising less than proportionately. We also find that ownership structure of a bank (public sector or private sector) plays a role in determining cost efficiencies in the Indian banking industry.