Are Small Finance Banks in India Scale Efficient - A DEA Approach

Abstract

This paper is an attempt to examine the scale efficiency and its determinants of small finance banks in India operating in the country since 2017. Since these banks are set up with an objective of financial inclusion by spread of banking services to the hitherto neglected and unbanked regions of the country, their healthy performance is crucial. The 21st Century shifted attention to efficiency analysis of productive units as a measure of performance. The present study uses non parametric Data Envelopment Analysis (DEA) technique to assess efficiency. The study found further possibilities of improvements in scale efficiency of banks. Besides, most of the banks are found to be performing at sub optimally large scale which therefore requires these banks to scale down their operation. Further, (Credit to Deposit) CD ratio, financial inclusion, and inflation were found to be the major drivers of scale efficiency of these banks. The study provides appropriate recommendations based on these findings.

Keywords: Small Finance Banks, Scale Efficiency, Financial Inclusion, Most Productive Scale Size, Data Envelopment Analysis (DEA)

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