International Journal of Data Envelopment Analysis and *Operations Research*, 2014, Vol. 1, No. 3, 40-48 Available online at http://pubs.sciepub.com/ijdeaor/1/3/1 © Science and Education Publishing DOI:10.12691/ijdeaor-1-3-1 Global Economic Crisis and Productivity Changes of Banks in India: A DEA-MPI Analysis R. Madhanagopal * , R. Chandrasekaran Department of Statistics, Madras Christian College, Chennai, Tamil Nadu, India *Corresponding author: madhan.stat@gmail.com Received July 31, 2014; Revised September 09, 2014; Accepted September 12, 2014 Abstract The present study explores the relationship between Global economic crisis (GEC) and productivity growth of Indian banking sector using data envelopment analysis based malmquist index (DEA-MI) for the study period 2005 to 2012, which are partition into three different period viz., pre-crisis, crisis and post-crisis. The empirical result showed that total factor productivity (TFP) for pre and crisis regressed by 7 and 0.6% respectively and post by a slight progress of 0.3%. Comparing technical and technological efficiency changes over the study periods, during pre-crisis, improvements in productivity of Indian banking sector was influenced by technological innovation whereas it went down and technical efficiency influenced the productivity in crisis and post-crisis periods. This may be due to effect of economic crisis and banks would have struggled for survival and hard to concentrate on new technological innovations. Keywords: productivity changes, Malmquist index, data envelopment analysis, Indian banking sector, Global economic crisis, technical and technological efficiency Cite This Article: R. Madhanagopal, and R. Chandrasekaran, “Global Economic Crisis and Productivity Changes of Banks in India: A DEA-MPI Analysis.” International Journal of Data Envelopment Analysis and *Operations Research*, vol. 1, no. 3 (2014): 40-48. doi: 10.12691/ijdeaor-1-3-1. 1. Introduction Economic status of a country is fully depends on its financial system. Banking sector is predominate and plays a key role in the financial system of modern economy. Growth of banks accelerates financial system positively and contributes more in development of a nation. Many researches bear out countries with well equipped banking system develops very faster than weaken one. Indian financial system was very strong due to many reforms and policy changes undertaken by the rulers of the nation over the years. Liberalization, privatization and globalization policy integrated Indian economy with the global economy, which brought many structural changes in major sectors (primary, secondary and tertiary). Indian banking system also changed with technological innovations like internet banking, mobile banking, Automated teller machine (ATM), tele-banking and anywhere and anytime banking. These technical changes made Indian banks to cut their business boundaries and to penetrate into foreign market. For the past few years’ Indian economy showed fast growth but unexpected global meltdown occurred in 2008- 09 turned it to downwards trend. It was strongly believed that Global economic crisis (GEC) did not affected Indian banking sector directly, due to limited operations outside India and not directly exposed to sub-prime mortgage assets, and also strong policies and regulations coined by both government and central bank of India. However, Indian banks would have affected indirectly, since, Indian economy was linked strongly with global economy and therefore it is impossible to think India to remain immune to the GEC. Crisis affected India in three different ways viz., financial markets, trade flows and exchange rates. Banking sector, external commercial borrowings and equity markets falls under financial sector and Collapse of Lehman Brothers squeeze the liquidity of global market which made companies to shift their credit demands from external to domestic market and a sudden increase of internal credit demand raised inter-bank call money rate. Credit crisis and collapse of large banks in USA increased the risk aversion of Indian banks and eventually harm credit expansion in the domestic market [1]. With this background it was believed, that there would have been an impact of the crisis on productivity changes of Indian commercial banks. Therefore, the present study was focused to explore productivity growth of Indian banking sector during recent global financial crisis. For this purpose, Malmquist productivity index (MPI) based on DEA was used. MPI estimates the growth of Total factor productivity (TFP), which was a combination of product of technical efficiency change (EC) (Catch-up) and technology change (TEC) (Innovation). Further, EC was subdivided into product of Pure technical efficiency change (PTEC) and Scale efficiency change (SEC). These technical changes will provide a clear picture on the source of productive change and also enables to explore main source for efficiency change (either changes due to improvement in management practices or towards optimal size of commercial banks in India).