Microeconomics Project Presentation (1).pptx

7/28/2019 Microeconomics Project Presentation (1).pptx

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MicroeconomicsProject PresentationTechnical Efficiency in the Public Sector and Private SectorBanks in India


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Technological and Economic

Efficiency

Technological efficiency occurs when it is not possible to increase

output without increasing inputs

Technological efficiency is an engineering matter

Economic efficiency occurs when the cost of producing a given

output is as low as possible

Economic efficiency depends on the prices of the factors of

production.

Something that is technologically efficient may not be economically

efficient. But something that is economically efficient is always

technologically efficient.


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What is Technical Efficiency?

Definition Conditions under which firms combine inputs to produce agiven output as inexpensively as possible

Input Efficiency A particular allocation of inputs into the productionprocess is technically efficient if the output of one good cannot beincreased without decreasing the output of another good

Output Efficiency Goods must also be produced in combinations thatmatch peoples willingness to pay for them

Production Efficiency - Production efficiency measures whether theeconomy is producing as much as possible without wasting preciousresources. Theoretically, production efficiency will include all of thepoints along the Production Possibility Frontier, but this is difficult tomeasure in practice


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What is Production Possibility

Frontier? The description of the best possible combinations of two goods to

produce using all of the available resources.

Shows the trade-off between more of one good in terms of theother.

Assumes: input endowments given, technology given, time givenand efficient production.

The slope of the Production Possibility Frontier measures themarginal opportunity costof producing one good in terms of the

amount of the other good foregone.

Helps one understand and distinguish between comparativeadvantage and absolute advantage


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Comparative and Absolute

Advantage The person with the lower marginal opportunity cost of an activity has the

comparative advantage at that activity.

This means that the person with the comparative advantage can produce

the activity by giving up the smallest amount of the alternative activity.

Absolute advantage: if your country uses fewer resources to produce agiven unit of output than the other country.

Comparative advantage: if your country can produce the output at a lowermarginal cost in terms of other goods foregone than the other country.

Every country (or person, or economy) has a comparative advantage atsome activity.

Absolute advantage is not important and may not always happen.Sometimes people or countries have the absolute advantage in nothing! Yettrade possibilities still exist.

Its all about comparative advantage.


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A Typical PPF Picture

The production possibilities curve focuses on productive efficiency

and ignores distribution.

The marginal opportunity cost of guns in terms of butter is

increasing as we move down the PPF!

The PPF is typically bowed-out or linear.

It is not bowed-in

Guns

Butter

unattainable

inefficient just attainable

just attainable

A

B

C

D


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Efficiency

Efficiency involves achieving a goal as cheaply as possible.

Efficiency has meaning only in relation to a specified goal.

Any point within the production possibility curve representsinefficiency.

Inefficiency getting less output from inputs which, if devoted to

some other activity, would produce more output.

Any point outside the production possibility curve represents

something unattainable, given present resources and technology.


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An Example

Theprinciple of increasing marginal opportunity coststates that

opportunity costs increase the more you concentrate on an activity.

In order to get more of something, one must give up ever-increasing

quantities of something else.

A

1211

Bu

tter

Guns4 7 90

1 gun

5 pounds ofbutter

5

9

15B

C

D

E

F

14

12

4 guns

1 pound ofbutter


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Shifts In Production Possibility

Curve Society can produce more output if:

Technology is improved.

More resources are discovered.

Economic institutions get better at fulfilling our wants.

Neutral Technological Change

Butter

A

B Guns0

C

D

Biased Technological Change

0

B

A

Butter

Guns

C


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TECHNICAL EFFICIENCY IN PRIVATE

AND PUBLIC BANKS

The Project


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Introduction

It has been well documented in the literature that the

efficiency of banking system is germane to the performance of

the entire economy because only an efficient system

guarantees the smooth functioning of nations payment

system and effective implementation of the monetary policy.

The opening up of the financial sector in 1990 followed by

RBIs reform program which intended to create a viable,

competitive and efficient banking system in India that resulted

in entry of many private banks both Indian and increased the

competition among the commercial banks in India


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Usage of Efficiency of Banks

Society benefits when a countrys banking system becomesmore efficient, offering more services at a lower cost

The information obtained from banking efficiency analyses

can be used either to inform government policy by assessing the effects of

deregulation, mergers, or market structure on efficiency

to address research issues by describing the efficiency of anindustry, ranking its firms, or checking how measured efficiencymay be related to the different efficiency techniques employed

Or to improve managerial performance by identifying bestpractices and worst practices associated with high and lowmeasured efficiency, respectively, and encouraging the formerpractices and while discouraging latter


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Data Envelopment Analysis

Model (DEA) DEA is a technique to assess the efficiency of production units (in

this case, the banks) relative to a set of similar units operating in thesame business environment (here, the banking industry).

It can identify the benchmark units in comparison to the peers todetermine the best practice.

A bank is said to be technically efficient if it produces more outputsusing less input resources.

In particular, there are several different approaches of measuring

output, usually classified into two broad approaches: the production approach

the intermediation approach.

The present study adopts an intermediation approach.


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Efficiency Analysis 2003-2008

As mentioned before, It is extremely difficult to measure

output against all Input Parameters, Banks were measured

across following Input parameters

Borrowings

Deposits Fixed assets

Net worth

Operating Expenses

Output was measured against following parameters

Advances and Loans

Investments

Net Interest Income

Non-Net Interest Income


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Efficiency Analysis 2003-2008

Private Public

%age efficient

banks52.60% 60.00%

Efficient banks

Borrowings 90.00% 76.67%

Deposits 68.00% 38.33%

Fixed assets 24.00% 38.33%

Net worth 38.00% 53.33%

Operating

expenses28.00% 51.67%

Inefficient banks

Advances &

loans68.89% 55.00%

Investments 53.33% 55.00%

Net interest

income33.33% 37.50%

Non-interest

income68.89% 40.00%

It was found that 59.2% of the samplebanks were efficient, and 40.8% of thesample banks were inefficient. Also,60.0% of the public banks and 52.6% ofthe private banks were efficient.

For the efficient private banks,borrowings and deposits were properly-

utilized, while fixed assets, net worth,and operating expenses were under-productive. Finally, for the efficientpublic banks, borrowings and net worthwere properly-utilized, while depositsand fixed assets were under-productiveinputs.

For the inefficient private banks,advances & loans, investments, andnon-interest income were under-produced outputs. For the inefficientpublic banks, advances & loans andinvestments were the under-producedoutputs.


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Conclusion

The results of the study show that there was not much of a

difference in the efficiency of public and private banks. There were,

however, some significant differences in terms of utilization/

underutilization of inputs and under-production of outputs.

Net worth was found to be under-productive for efficient private,

while it was properly utilized by public banks.

The banks may need to streamline funds to optimize their return on

net worth.

Fixed assets were found to be under-productive for efficient public

and private banks. This may be due to capacity considerations.


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Conclusion Contd

Operating expenses were found to be very under-productive

for efficient private. Thus, great reduction in expenses would

be desirable.

Advances and loans and investments were found to be under-produced in inefficient public and private banks.

Public and private banks may need to pursue more aggressive

loans and investment policies.


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Study Limitations

The sample size considered for the study is limited, and the

study period considered is a five-year period only

Also, the study used data envelopment analysis (assuming

constant returns to scale) to compute the bank efficiencyscores, using only five input variables and four output

variables.

In general, the efficiency scores computed using dataenvelopment analysis could be very sensitive to changes in the

data, and depend heavily on the number and type of inputs

and output factors considered


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Appendix - Sample Size

Public Banks

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Canara Bank

Corporation Bank

Dena Bank

IDBI Bank

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab National Bank

Punjab & Sind Bank

State Bank of India

Syndicate Bank

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

Private Banks

Axis Bank

Catholic Syrian Bank

City Union Bank

Development Credit Bank

Dhanalakshmi Bank

Federal Bank

HDFC Bank

ICICI Bank

Indus Ind Bank

ING Vysya Bank

Jammu & Kashmir Bank

Karnataka Bank

Karur Vysya Bank

Kotak Mahindra Bank Ltd

Lakshmi Vilas Bank Ltd

Bank of Rajasthan

Ratnakar Bank Ltd

South Indian Bank

Tamilnad Mercantile Bank Ltd

Documents

Microeconomics Project Presentation (1).pptx