Efficiency Dynamics of Indian Public Sector Banks post-liberalisation: A DEA and Tobit Analysis (1991-2024)

Abstract

This study examines the operational efficiency and reform-induced performance dynamics of Indian public sector banks in the post-liberalisation era. We use Data Envelopment Analysis (DEA) under Constant and Variable Returns to Scale to evaluate the trends in technical, pure technical, and scale efficiency over the period 1991-2024, with particular emphasis on the impact of large-scale bank mergers. A second-stage Tobit regression model is employed to identify the financial determinants influencing efficiency scores during 1996-2024. The results reveal persistent input-oriented inefficiencies in the pre-merger period, followed by a marked improvement in efficiency and convergence among banks after consolidation. Capital adequacy emerges as the most significant positive determinant of efficiency, highlighting the role of strong capitalisation in enhancing operational performance. In contrast, return on assets exhibits a statistically significant and negative association with efficiency, while bank size shows a negative but statistically insignificant relationship. The findings provide empirical evidence on the effectiveness of banking reforms and consolidation policies in improving the efficiency of public sector banks in India, and offer policy-relevant insights for strengthening resilience, resource allocation, and long-term stability in the public banking system.