Cost Efficiency of Indian Banking: an Operations Research Approach

The concept of cost efficiency was introduced by Farrell (1957) as the ratio of factor minimal cost to the actual cost. Unlike technical efficiency, the cost efficiency measure takes into consideration changes in input mix also. The Farrell cost efficiency measure was extended by Fare et.al (1984) for the case of multiple inputs and outputs. Solving one linear programming problem for one production unit, the factor minimal cost can be calculated which is called in this study as ?Farrell Cost Efficiency?. This is a very restrictive measure since it requires the knowledge of input prices and these prices are assumed to be constant. This book describes the concepts of various types of market efficiencies of decision making units (DMU?s) such as price efficiency, Farrell cost efficiency, Economic efficiency, Input technical efficiency and Input Associative efficiencies. The study aims at evaluating the cost efficiencies of 77 Indian commercial Banks employing a wide variety of inputs in order to produce a spectrum of outputs.