Human Resource Performance in Indian Banks: Some DEA Evidence

Suman Kumar*, Vinay K Nangia** and Santosh Rangnekar***

The present paper aims at evaluating the performance of 26 Public Sector Banks (PSBs) operating in India by using one-stage performance evaluation model on the basis of Human Resource Deployment (HRD). Data Envelopment Analysis (DEA) is employed for computing the efficiency scores for individual PSBs using the cross-sectional data for the financial year 2009-10. The overall performance is derived based on the variable returns to scale technical efficiency scores. The empirical results uphold positive association between HRD and banks performance. Further, the study reveals that on the efficiency front, Corporation Bank, Indian Bank, State Bank of Bikaner and Jaipur and State Bank of Mysore performed well. Corporation Bank seems to set the benchmark. It is recommended that Indian PSBs should pay more attention to proper deployment of human resources to improve their overall performance.

Introduction
The Resource-Based View (RBV) offers a rich theoretical foundation for research about effective deployment of firms resources for generating and sustaining superior returns (Penrose, 1959; Mahoney and Pandian, 1992; and Mahoney and Pandian, 1995). The mobilization and deployment of these resourceshuman, financial and materialin judicious proportion, gives the organization leverage towards the desired end of these resources. Among these resources, human resource is the most important and contributes significantly to the corporates bottom line and competitiveness. In recent times, the role of human resources in organizations has been evolving dramatically. This fact is also largely confirmed in the literature (Pfeffer, 1994; Rainey, 1997; and Judge and Illies, 2002) that people are the most important organizational resource and the key to achieving high organizational performance. The present study attempts to measure the banks performance based on human resource deployment practices.

Literature Review
The fundamental aspects of any organization are to generate more revenue and income per employee by incorporating available resources. Resources that are valuable, rare, inimitable,
* ** Research Scholar, Department of Management Studies, Indian Institute of Technology, Roorkee 247667, Uttarakhand, India; and is the corresponding author. E-mail: sumnraad@gmail.com Professor, Department of Management Studies, Indian Institute of Technology, Roorkee 247667, Uttarakhand, India. E-mail: vinaynangia@gmail.com

*** Associate Professor, Department of Management Studies, Indian Institute of Technology, Roorkee 247667, Uttarakhand, India. E-mail: srangnekar1@gmail.com 2012 IUP . All Rights Reserved. 76 The IUP Journal of Bank Management, Vol. XI, No. 3, 2012

non-substitutable, and non-transferable are sources of sustainable competitive advantage. The RBV of the organization highlights the strategic position of the human capital as an organizational asset that contributes significantly to the overall performance of the organization when adequate investment is made on the human resources. The human resources practices must be properly aligned with the strategic goals of the organization (Inyang, 2010) According to Armstrong (2004), the aim of RBV is to improve resource capabilityachieving strategic fit between resources and opportunities, and obtaining added value from the effective deployment of resources. Liu et al. (2010) quoted RBV as a core theoretical anchor to relate bank resources with performance outcomes. To complement this view, literature also confirmed the strategic importance of organization-specific human capital (Barney, 1991; and Peteraf, 1993). Various studies (Pfeffer, 1994; Huselid, 1995; Delaney and Huselid, 1996; and Becker et al., 1997) have also identified a positive association between strategic human resources of an organization and its performance. Undoubtedly, human resources input plays a significant role in enhancing organizations competitiveness (Barney, 1995). At a glance, substantial studies were carried out on human capital, and their implications on organizational performance were widely covered, and obviously, human capital enhancement results in greater competitiveness and performance (Agarwala, 2003). Subsequently, Farjoun (1994 and 1998), in his studies, concluded that organizations achieve superior returns when they match their human capital profile with physical capital skills. In particular, he termed that leveraging human resources is a profit-generating strategy. Human resource leveraging strategy involves deployment of expert human resources in complex and high-margin projects, which expands the service capacity of the firm without diluting profits and develops the human capital of less experienced professionals. Human capital has a direct impact on the intellectual capital assets that yield higher financial results per employee. According to Chiavenato (2001), employees are the purveyors of activities and knowledge whose most important contributions to the organization are their intelligence and individual talents. There is a growing consensus that effective deployment of human capital is critical to an organizations success (Barney and Wright, 1998; and Akhtar et al., 2008). Carmeli (2004) suggested a behavioral approach in measuring organizations specific human capital by examining its impact on the financial performance of local government authorities in Israel. It is generally acknowledged that the human resource is an organizational asset, and when it is adequately trained and effectively deployed can contribute immensely to the bottom line. Following this, Bailey (1993) contended that human resources are frequently underutilized because employees often perform below their potential and that may hinder organizational performance. Wright and Mcmahan (1992), in their study drawing on Barneys (1991) resource-based theory of the firm, argued that human resources can provide a source of sustained competitive advantage. They (Wright and Mcmahan, 1992) concluded that human resources are not subject to the same degree of imitability as equipments or facilities. Therefore, investments in firmspecific human capital can further decrease the probability of such imitation by qualitatively differentiating a firms employees from those of its competitors. Reed et al. (2009) conducted a study and identified the impact of human resource deployment on bank performance in response to environmental dynamism. Similarly, Mukherjee et al. (2003) obtained empirical results from a study of 27 Indian PSBs and confirmed the linkage between human resource,
Human Resource Performance in Indian Banks: Some DEA Evidence 77

service quality and service performance. Hitt et al. (2001) also found a positive linear link between leveraging human capital and financial performance among law firms. Aligning the organizations can create a conducive environment for integrating human resources management with business strategy, since the human resources supply the energies for driving organizational strategies. Human resources management can help an organization to allocate its human resources more effectively, promote operating creativity and innovation (Walker, 1980; and Dyer, 1983), enhance organizational morale, financial performance, and overall organizational performance (Huang, 1998; and Anderson et al., 2007). Thus, it is generally agreed that better quality management of human resources is the main factor contributing to bank performance, but only a few studies offer insights into the independencies among human resource deployment and diversification strategies, especially in service and knowledge-based firms like banking sector (Farjoun, 1998; and Hitt et al., 2001). These interdependencies may have important implications for financial performance of banks. In view of this, the present study strives to fill this gap by examining the association of human resource deployment with the performance of select Indian banks through DEA analysis.

Research Design
Data Source, Sample and Methodology
For the purpose of this study, data were obtained from the Statistical Tables Relating to Banks in India, a publication of RBI and Performance Highlights of Public Sector Banks for the FY 2009-10, a publication of Indian Banks Association. This study focuses on 26 PSBs functioning in India. DEA technique using DEAP version 2.1 was employed to measure the performance of selected banks. Basically, DEA is a data-oriented approach which uses a set of input and output indicators to measure performance. In this study, Variable Returns to Scale (VRS) is used because Constant Returns to Scale (CRS) totally ignores the scale of operations and possibly leads to an identification of very unrealistic benchmarks (Munksgaard et al., 2005). A VRS frontier allows best practice level of outputs to inputs to vary with size of the bank. On the other hand, an output-oriented analysis provides information on how much Data Multiple Units (DMUs) are augmented (Barros and Athanassiou, 2004). In this study, we use the output maximization assumption, i.e., which output level is necessary for a bank to be efficient while maintaining current input level (Mostafa, 2007). It is always safe to assume VRS. It also helps in determining whether banks have been operating at Constant/Optimal Returns to Scale (CRS/ ORS), Increasing Returns to Scale (IRS) or Decreasing Returns to Scale (DRS). Although at present 27 PSBs are operating in India, we have considered only 26 banks because it would be better to analyze these banks which have been functioning for the last several years. Industrial Development Bank of India (IDBI) is not included in the selected banks because it entered public sector only a few years back.

Input and Output Variables

The determination of inputs and outputs is a very important task. The selection of inputs and outputs depends on the type of performance required (Sherman and Rupert, 2006). Manandhar and Tang (2002), in their study, revealed that the inputs and outputs are specified according to
78 The IUP Journal of Bank Management, Vol. XI, No. 3, 2012

the performance dimension considered. The input and output variables for the present study were identified from the earlier research of similar nature. Miller and Noulas (1996), in their analysis of large US banks, proved that the pure Technical Efficiency (TE) is positively related to bank size and bank profitability. Again, Seiford and Zhu (1999) examined the performance of the top 55 US banks using output variable like profits and indicated that large banks show better performance on profitability. Likewise, Drake and Howcroft (2002) analyzed the relative efficiency by using DEA method of UK clearing bank branches and examined the relationship between the size and efficiency of banks. In similar studies of 174 banks in Italy, Favero and Papi (1995) found that besides other input variables, the number of employees is used as one input variable and investment as output variable besides other output variables for measuring the bank performance. Chen and Yeh (1998) took the data of 34 Taiwanese banks and used number of employees and number of branches as input variables, besides other input variables and investments, and interest income as output variables, besides other output variables, for measuring the efficiency of banks. In the study of 68 Indian banks, Mukherjee et al. (2002) also selected input variables like number of employees, number of branches and output variables like advances and interest income for measuring the performance of Indian banks. Sakar (2006), while analyzing 11 banks of Turkey, also opted for input variables like number of branches and employee per branch and output variables like ROA or Return on Assets and interest income for measuring the banks performance. Ray and Das (2010) also selected labor as input and investment and other income as output for measuring the performance of 70 Indian banks. Likewise, Das and Ghosh (2009) also measured the performance of 85 Indian banks by taking the number of employees as input and advances and investment as output. Hence by taking evidences from these prior studies, in the present study number of employees and number of branches of selected banks were taken as input variables and profit per employee, return on assets, interest income, advances and investments of selected banks were taken as output variables for further analysis (Figure 1). Figure 1: Proposed Performance Evolution Model
Input Variables Number of employees Output Variables Profit per employee Bank Performance

Number of branches

Return on assets Interest income Investments Advances

Sample Size Adequacy

DEA results are influenced by the size of the sample. The size of the sample utilized in the present study is based on the various thumb rules available in the DEA literature. Cooper et al. (2007) provide two such rules that can be expressed as n > max {m s; 3 (m + s)} where n = number of sample units, m = number of inputs, and s = number of outputs. Given
Human Resource Performance in Indian Banks: Some DEA Evidence 79

m = 2 and s = 5, the sample size (n = 26) used in the study exceeds the desirable size as suggested by the above-mentioned rules of thumb (Raab and Lichty, 2002).

Results
Output-oriented BCC DEA model was administered to attain the objectives of the present study. The outcome of the employed model is discussed in this section. The relative efficiency Table 1: CRSTE, VRSTE, Scale, Returns to Scale and Peer Count of DMUs for the FY 2009-10
S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Name of the Bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank CRSTE 0.389 0.692 0.408 0.381 0.333 0.357 0.306 1.000 0.622 1.000 0.551 0.310 0.676 0.974 0.332 0.283 0.439 0.566 1.000 0.598 0.503 0.700 0.323 0.344 0.383 0.298 VRSTE 0.646 0.778 0.968 0.815 0.366 0.895 0.584 1.000 0.634 1.000 0.846 0.533 0.831 0.981 0.906 1.000 0.448 0.612 1.000 0.607 0.508 0.704 0.538 0.541 0.858 0.354 Scale 0.602 0.890 0.422 0.467 0.911 0.400 0.524 1.000 0.981 1.000 0.651 0.581 0.813 0.993 0.366 0.283 0.979 0.926 1.000 0.985 0.990 0.995 0.600 0.636 0.446 0.840 Returns to Scale DRS DRS DRS DRS DRS DRS DRS CRS DRS CRS DRS DRS DRS DRS DRS DRS DRS DRS CRS DRS DRS DRS DRS DRS DRS DRS Peer Count 0 0 0 0 0 0 0 22 0 21 0 0 0 0 0 16 0 0 6 0 0 0 0 0 0 0

Source: Statistical Tables Relating to Banks in India (2009/2010), Reserve Bank of India 80 The IUP Journal of Bank Management, Vol. XI, No. 3, 2012

scores of the DMUs under consideration are presented in Table 1 as it includes CRSTE, VRSTE, Scale, Returns to Scale and Peer count . The VRS scores measure pure Technical Efficiency (TE) only. However, for comparative purposes, the CRS scores, which are composed of nonadditive combination of pure TE and scale efficiencies, have also been included. A ratio of the overall efficiency scores to pure TE scores also provides a scale efficiency measurement. As shown in Table 1, the CRSTE scores range from 0.283 to 1.00 with an average of 0.530 and standard deviation of 0.147, while the BCC model (VRS) scores range from 0.35 to 1.00 with an average of 0.729 and standard deviation of 0.130. The explicit implication of the abovementioned results is that the Indian PSBs on an average have the potential to increase their traditional outputs (profit per employee, return on assets, interest income, investments and advances) by about 27.1% with the same level of inputs (number of employees and number of branches) currently being utilized. Table 1 also reveals that out of 26 banks, during the FY 2009-10, only Corporation Bank, Indian Bank, State Bank of Bikaner and Jaipur and State Bank of Mysore are efficient with VRSTE efficiency score of 1. This indicates that only 15% of PSBs in the sample are fully efficient. The resource utilization process of these banks is functioning well and no input goes waste. In the remaining 85% of PSBs, some degree of inefficiency is observed, the average of which ranges from 1.19 to 65.4% for the FY 2009-10. The average efficiency of the inefficient banks like Vijaya Bank has to increase the output potential by 65.4% at constant input, which is not an easy task. Further, peer group count, which indicates the closest efficient banks and inefficient banks, is presented in Figure 2. It is found that out of 26 banks in the dataset, only 4 are efficient. The Figure 2: Peer Count for the FY 2009-10
25 20 15 10 5 0

Corporation Bank

Indian Bank

State Bank of Bikaner and Jaipur

State Bank of Mysore

Human Resource Performance in Indian Banks: Some DEA Evidence

81

peer count number can be considered as a measure of the extent to which the performance of an efficient bank can be useful for non-efficient bank (Bergeandhal, 1998). A bank which appears frequently in the reference set is likely to be a bank which is efficient with a large number of factors. Figure 2 elucidates that Corporation Bank appeared frequently (22 times) and thus became the peer bank, followed by Indian Bank (21 times), State Bank of Bikaner and Jaipur (16 times) and State Bank of Mysore (6 times).

Sensitivity Analysis
At the individual bank level, DEA also provides rich diagnostic information through sensitivity analysis. Table 2 includes the results of the sensitivity analysis for each bank in the dataset. Table 2 shows the amount of slack in each of the controllable input and output observations for each bank. Slack variables are used to identify the sources of inefficiency. The slack is computed by comparing the inputs and outputs of each bank with the inputs and outputs of its efficient reference set of banks. The Corporation Bank, Indian Bank, State Bank of Bikaner and Jaipur and State Bank of Mysore with 0% slack in their input and output variables are efficient banks (Mostafa, 2010). Table 2: Percentage Improvement in Each Variable of Inefficient Bank
S. PercentNo. age of No. of Offices 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
82

Percentage of No. of Employee 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 644.441 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Percentage of Profit per Employee 0.000 0.000 0.000 2.519 0.000 0.000 2.436 0.000 0.000 0.000 0.000 3.249 0.000 0.000 0.000 0.000 0.000 0.000

Percent- Percentage of age of Interest Return Income on Assets 0.000 73.285 3006.641 1086.265 0.000 270.023 0.000 0.000 64.755 0.000 0.000 0.000 0.000 488.825 0.000 0.000 471.314 0.000 4.108 7.047 2.529 0.000 1.621 2.699 0.000 0.000 3.824 0.000 7.276 0.000 3.653 1.799 3.130 0.000 4.094 4.653

Percentage of Investments 19.102 12025.861 26149.784 20323.478 3373.962 14842.854 6766.638 0.000 3959.750 0.000 8967.866 17357.300 15170.998 0.000 15819.774 0.000 13881.517 9916.430

Percentage of Advances 4249.619 0.000 0.000 0.000 5942.609 0.000 5191.096 0.000 0.000 0.000 7531.274 24765.189 9748.472 6022.085 4885.470 0.000 4137.106 5130.794

739.142 414.059 501.582 679.074 574.673 244.195 1667.828 0.000 310.536 0.000 265.342 404.001 480.000 234.657 1400.155 0.000 0.000 135.054

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Table 2 (Cont.)
S. PercentNo. age of No. of Offices 19. 20. 21. 22. 23. 24. 25. 26. 0.000 0.000 72.536 0.000 821.345 701.250 887.793 626.310 Percentage of No. of Employee 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Percentage of Profit per Employee 0.000 0.000 0.000 0.000 2.318 0.145 0.000 2.511 Percent- Percentage of age of Interest Return Income on Assets 0.000 2348.509 0.000 7061.184 0.000 0.000 143.779 697.438 0.000 1.231 2.529 0.507 0.000 0.000 4.250 0.000 Percentage of Investments 0.000 18549.548 20392.634 40757.360 24399.901 814.478 6558.833 0.000 Percentage of Advances 0.000 24501.087 14058.370 64950.364 14.246 5880.468 0.000 20494.760

Source: Statistical Tables Relating to Banks in India (2009/2010), Reserve Bank of India

Discussion
In this study, the data pertains to FY 2009-10, and the number of PSBs selected for the study are 26. Efficiency is measured on VRSTE, CRSTE and Scale with the efficiency score of 1; the Corporation Bank, Indian Bank, State Bank of Bikaner and Jaipur and State Bank of Mysore were the star performers, undoubtedly. These banks had consistent performance. From Table 1, it is very clear that the performance of Bank of Baroda, Punjab National Bank and State Bank of India was very good in FY 2009-10 with VRSTE efficiency scores of 0.968, 0.981 and 0.906 respectively; and with VRSTE efficiency scores of 0.366 and 0.354, Bank of Maharashtra and Vijaya Bank came under the category of inefficient banks. This study revealed that the profit per employee in case of top performer banks such as Corporation Bank, Bank of Baroda, State Bank of India, State Bank of Mysore, Punjab National Bank, State Bank of Bikaner and Jaipur and Indian Bank is high and the ratio of number of employees/number of offices is also high; therefore, profitability is directly related to the size in terms of number of branches. In a similar study, Seiford and Zhu (1999) found that the performance of the top 55 US banks using DEA approach indicated that relatively large banks exhibit better performance. Likewise, Drake and Howcroft (2002) also examined the relationship between size and efficiency in the case of UK clearing bank branches using DEA method. Therefore, it may be concluded that human resource deployment largely determines banks performance. This fact is also confirmed by the studies of Chen and Yeh (1998), Mukherjee et al. (2002), and Sakar (2006), which found a positive association between number of branches, number of employees and performance of the banks. Next, the present study observed that volume of output variables was also found to be sufficient for Corporation Bank, Indian Bank, Bank of Baroda, State Bank of India, State Bank of Bikaner and Jaipur, State Bank of Mysore and Punjab National Bank. So, there is no need of further increase in the volume of output variables for better performance of the aboveHuman Resource Performance in Indian Banks: Some DEA Evidence 83

mentioned banks. In the case of other inefficient banks, the percentage of output variables may be increased for improving their performance according to the requirements of the individual banks. The results further reveal that Corporation Bank, State Bank of Bikaner and Jaipur, and State Bank of Mysore were found most efficient on constant returns to scale (CRSTE 1, VRSTE 1, scale 1), whereas the rest 23 banks were found on decreasing returns to scale. This deduction provides a comprehensive view of banks efficiency on selected input and output variables by using DEA.

Conclusion and Implications

The present study tries to link human resources deployment with performance of banks. For this purpose, the performance of 26 PSBs were analyzed using the data for the FY 2009-10. On the basis of the experience of various earlier studies on banks, using DEA analysis, the inputs like number of employees and number of offices and outputs like profit per employee, return on assets, interest income, investment and advances are selected. The empirical results indicate that efficiency scores for the PSBs range from 0.35 to 1.00 with an average 0.729, implying that banks have the potential to increase their traditional outputs like profit per employee, return on assets, interest income, investment and advances by 27.1% with the same level of inputs. Hence, through this study, it can be concluded that there is an impact of human resources deployment on the performance of the Indian banking organization. This fact deduces that performance of organizations not only depends on the number of employees and number of branches, but the way the human resources are being deployed. Like other studies, the present study has also several limitations, because it is not always possible to ever become efficient because several inputs and outputs are not under the full control of management. The first and major constraint of the study is that the variables which are linked with human resource deployment were only selected. Secondly, the present study is confined only to DEA results; however, some scholars have suggested other ways of calculating firm efficiency. Sengupta (1995) suggests that competitiveness or efficiency can better be evaluated through the analysis of average efficiencies across time. Similarly, Avkiran (1999) also suggested that assessment of banks operational performance through DEA should be complemented by ratio analysis that measures the financial performance of the bank. Therefore, future researches can be continued by incorporating the aforesaid limitations of the present study. Despite some constraints, this study provides a novel way of measuring firm performance considering RBV through DEA technique. H

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