Determinants of Cost Efficiency of Commercial Banks in India

The paper examines the determinants of cost efficiency of commercial banks in India by employing the Stochastic Frontier Approach (SFA) and the Tobit regression technique for the period 1992-2006. Empirical results reveal that cost efficiency of banks in India decreased during the study period. Among the three groups of banks, foreign banks seem to be relatively efficient, followed by private domestic banks and public sector banks. The Tobit regression results reveal that the earning capacity of banks is the main determinant factor of efficiency, followed by diversified and strategic non-interest income activities.