The technical efficiency of South Asian commercial banks and the effects of income diversification

A banking sector demonstrates its efficiency by providing a higher rate of return on deposits and lower interest rates on loans made possible through cost savings of efficient operations. Duplication of these efficient operations may help to attain sustainable economic growth in developing South Asian economies. In this paper, we analyzed three types of efficiency: the overall technical efficiency (OTE), the pure technical efficiency (PTE) and scale efficiency (SE) of commercial banks of South Asian countries, over the period 2000-2014. We further examined the impact of income diversification on bank efficiency. In the first stage analysis, using data envelopment analysis, we found that the OTE and PTE are the major source of inefficiency in South Asian commercial banks, while the SE is relatively higher. In the second stage, the panel Tobit Model regression results prove that income diversification has a positive and significant relationship with all three types of efficiencies OTE, PTE, and SE. Our results are robust in the use of alternative regression models.