The Assessment of Operational Efficiency of Commercial Banks in India Using Cost to Income Ratio Approach

During the last two decades, financial institutions worldwide have witnessed a lot of stress in managing their margins in wake of the new risks, challenges and increase in the competition posed to them by the factors of liberalization and deregulation. The key to create value and achieve competitive edge lies in the better operational efficiency and productivity of these institutions under such conditions. Since long, banks have been using various ratios to assess their operational performance. Among these, cost to income ratio (CIR) has seen wider acceptability for its simplicity and intuitive nature. The current paper analyses cost to income ratio of commercial banks operating in India with the objective to explore a benchmark cost to income ratio (CIR) which could be used to differentiate banks for their operational efficiency. A comparative analysis has also been undertaken to examine the impact of size and ownership features of banks on their cost to income ratio (CIR). The study as a whole reveals that banks operating in India operate under competitive CIR ratio well in line with the international operational efficiency standards. Also, it is found that size and ownership characteristics influence strongly in determining the operational efficiency of banks operating in India.