Dynamics of Operational Efficiency in Credit Lending and Recovery of Stressed Assets: An Alternative Approach with Undesirable By-Products

Our study estimates the operational efficiency of Indian banks during 2009–2010 to 2017–2018, considering advances, and recovery of stressed assets as desirable outputs, while NPAs and slippages are undesirable by-products. Our first stage DEA analyses conclude that public sector banks have significant scope to improve their lending and recovery efficiency, while also reducing their stressed assets. Our analyses also reveal that banks are more efficient in managing credit risks for shorter-term loan portfolios and secured loans, while positive economic externalities are more prominent in determining the efficiency of banks in priority sector lending. We also observe that a competitive scenario within the banking sector, overall macroeconomic growth, and low cost of funds play vital roles in improving banks' operational efficiency and reducing credit risk. Our findings suggest that liquid assets might be more beneficial than illiquid collaterals in improving the recovery of stressed assets.