Does Efficiency Bring Down Default Risk in Indian Banks?

Abstract

Banks are an integral part of a nation’s economy. Therefore, soundness of a bank’s financial health is foremost important for the good economic condition of the country. This article proposes to assess the bank efficiency (BE) and default risk (DR) of banks in India, and to examine the link between BE and DR of banks in India. This study uses the secondary data of 34 banks operating in India for the period from 2016 to 2019 for panel data analysis. BE as technical efficiency of banks and their DR are evaluated using data envelopment analysis and Altman’s Z-score, respectively. The findings of the study indicate no significant association between BE and DR of banks in India. This article is a novel study of its kind and provides surprising result, which indicates encouraging outcome for banks in India. JEL Codes: G30, G33, G38