Public sector banks more efficient than private banks, finds EAC-PM study

Over the 12-year period from 2014-15 to 2025-26, the study found PSBs to be more efficient than their private peers, with a score of 88.53% as against 85.62%. Foreign banks scored the highest, with 88.98%. However, their efficiency score has declined sharply from 95.86% in 2014-15.

DEA refers to data envelopment analysis, a method used to understand performance. It measures the relative efficiency of decision-making units that produce the same goods or services.

Apart from being a part-time member of the EAC-PM, Ghosh is the State Bank of India’s Group Chief Economic Advisor. Parida is an economist in SBI’s Economic Research Department.

The unexpected finding comes days after Finance Minister Nirmala Sitharaman told officials of state-run banks that they had to raise their ‘cool’ quotient in the eyes of the country’s youth without sacrificing the prudence the business requires. The Finance Minister had also said that PSBs “still give the impression of a government bank”.

HSBC, JPMorgan, SBI, HDFC on top

While several banks clocked the maximum efficiency score of 100% in 2025-26, only two maintained that score across the 12 years covered by the paper: HSBC and JPMorgan Chase. As per Ghosh and Parida, the efficiency of foreign banks is better than domestic ones “mostly due to their prevalent business models”.

Among private lenders, HDFC Bank was the most efficient from 2014-15 to 2025-26, with a score of 97.54%. SBI, at 97.49%, was only marginally behind, the leader among PSBs.

Interestingly, IDBI Bank – which the government has been trying to sell for years – has been the seventh-most efficient bank over the last 12 years, with SBI being the only PSB to rank ahead of it.

A variety of factors can affect the efficiency scores of any bank. For instance, the lowest score of any of the 47 banks examined by Ghosh and Parida was for DBS Bank India’s 40.12% in 2021-22. This, the paper said, may be due the merger of Laxmi Villas Bank with DBS Bank India in 2020.

“PSBs are relatively more efficient than private banks except FY19-FY22, which may be due to merger and rationalisation of business, branches, and employees,” the paper added.

The merger of PSBs had begun in early 2017, when the Union Cabinet had approved SBI acquiring its five subsidiary banks and Bharatiya Mahila Bank. Later, in January 2019, the Cabinet approved the merger of Vijaya Bank, Dena Bank, and Bank of Baroda.

But the big PSB consolidation was announced in Match 2020. This led to Oriental Bank of Commerce and United Bank of India being absorbed by Punjab National Bank, Syndicate Bank by Canara Bank, Andhra Bank and Corporation Bank by Union Bank of India, and Allahabad Bank by Indian Bank.

The entire process reduced the number of PSBs to 12.

Future course of action

According to Ghosh and Parida, India should make efforts to consolidate the banks “in such a manner that a few big banks of equal size would be created, without compromising market competition in the industry”. This, they said in their paper, will help in meeting the economy’s demand for loans given the government’s target of becoming a developed nation by 2047.

The paper also noted that apart from technology, the main differentiator for success in the future will be human resources.

“With a dynamic and rapidly changing environment, the skill gap is widening. To address this, banks and financial institutions have to attract, train and retain talent. This is where capacity building will play a major role in the financial sector and future areas on productivity could specifically look at this aspect apart from how digitisation could have impacted productivity,” it said.