| Abstract | This study presents two empirical studies on the evaluation of efficiency in banking. The first study presents the evaluation of the efficiency of bank branches of a bank in Thailand, involving 1212 branch employees from 139 branches. The second study presents the evaluation of the efficiency of commercial banks in Thailand, using 7 year data of 15 commercial banks. The performance of the banking sector of Thailand has received a greater attention following the financial crisis of 1997. However, the investigation of the efficiency of the banks, and their performance in general, has not received much attention. The analysis of the efficiency of banks can be linked with better policy formulation that is aimed at improving the performance and competitiveness of the banks (Berger and Hwnplu·ey, 1997). Bank branches remain an important vehicle for the delivery of banking services. The efficiency at which the branches of a bank operate also determines the performance of the bank. The need to integrate the intangible aspects of resource inputs into a service delivery system while evaluating the productivity or efficiency of a service organization has been emphasized (Vuorinen et al., 1998). However, the existing studies on the evaluation of the efficiency of bank branches have not included the intangible aspects of resource inputs. This study proposes a framework to integrate intangible aspects of resource inputs in bank branches while evaluating their efficiency. The framework also proposes the simultaneous benchmarking of different dimensions of performance in an efficiency benchmarking approach. The framework utilizes a Data Envelopment Analysis (DEA) teclmique that has increasingly received attention for its applicability in the evaluation of the efficiency of bank branches as well as that of banks at the firm level. A framework based on the DEA technique is also proposed for the evaluation of the efficiency of the banks in Thailand. A DEA model to incorporate intangible aspects of resource inputs in service production is specified. The model has measures of internal service quality as its outputs. The measurement of internal service quality is based on the notion of variability in a service delivery system and its control tlu·ough various factors that refer to the intangible aspects of the service delivery system. The branch employees perceive internal service quality along various dimensions: team cohesion, organizational-fit, technology-fit, individual knowledge, customer communication, and volume flexibility. Measures of internal service quality of a branch are obtained as perceptual measures of branch performance along these dimensions as perceived by the branch employees. A DEA model referred to as internal service quality efficiency allows benchnrnrking of the branches in terms of their performance in internal service quality. The internal service quality efficiency model is integrated with the operating efficiency and profitability efficiency models for the purpose of simultaneous benclunarking in a multiple dimensions of performance. It is found that the performance of bank branches in terms of internal service quality contributes positively to perceived control of the employees and their job-satisfaction. This particular relationship forms the basis for integrating the internal service quality efficiency model with the operating efficiency and profitability efficiency models. For the simultaneous benclunarking of the performance of the branches along multiple dimensions of performance, a modified DEA model, referred to as overall branch efficiency, is used. The model does not take any inputs and the outputs specified are efficiency scores for internal service quality, operating efficiency and profitability. The evaluation of internal service quality efficiency showed that 73 per cent of the bank branches are relatively inefficient and they can improve internal service quality equiproportionately, along the dimensions identified above, by about 7 percent. It indicates that the branch management should focus on improving organizational-fit and volume flexibility
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where the largest potential for improvement exists. The evaluation of operating efficiency showed that 55 percent of the bank branches are relatively inefficient, and the level of inefficiency is about 9 percent, of which about 1 percent is contributed by inability to operate at an optimal scale of operation. The branch management can reduce the number of employees in the branches and expenses on supplies by about 10 and 13 percent respectively for achieving relative efficiency. Only a small number of branches, 3 of them, are found to be relatively efficient in terms of profitability. The average level of inefficiency, in the profitability efficiency model, is about 3 7 per cent. The inefficient branches can reduce interest and non-interest expenses by about 43 and 37 percent respectively to become profitability efficient. The simultaneous benclunarking of the performance of the branches along internal service quality, operating efficiency, and profitability using the overall branch efficiency model shows that 42 percent of the branches are inefficient. The branches can -improve the performance in internal service quality efficiency, operating efficiency and profitability efficiency equi-proportionately by about 4 percent. The largest potential for improvement exists in profitability efficiency. Further, the internal service quality efficiency of a branch is positively associated with operating efficiency. It is also positively related with service quality and the job-satisfaction of the branch employees. However, no statistically significant relationship is found between operating efficiency and profitability, neither in the case of the relationship between service quality or job-satisfaction with profitability. Hence, an empirical test of the service-profit-chain hypothesis (Heskett et al., 1994) using the DEA measures of performance could validate only a part of the chain concept. In order to evaluate the efficiency of the commercial banks in Thailand, an integrated DEA model is specified, consisting of the input efficiency and revenue generating efficiency models. The first model evaluates the performance of a bank in terms of its ability to be a 'cost leader', and the second model evaluates the performance in terms of being a 'differentiator'. Based on these performance measures, which are similar to business strategies, the performance of the banks can be analyzed in a 'strategic positioning' map. The trend in the performance of the banks over the period considered as well as performance of a particular bank relative to other banks can be analyzed in such a strategic positioning map. It is found that the commercial banks in Thailand had been using excess of capital and labor inputs persistently from 1991 to 1997, and particularly during the period before the financial crisis. The extent of excessive use of capital and labor ranged from 1 to 2.8 percent when compared with relatively efficient banks. The amount of loanable funds held by the banks is relatively seen to be in excess during the period 1994 to 1997. The banks were also holding excess amount of funds in investments in the recent years. The extent of such excessive holding is about 36 percent. The input efficiency scores are found to have deteriorated relatively during the years from 1993 to 1996. The extent of equi-proportionate reduction in the inputs used during this period ranged from 13 to 28 percent. Similarly, the revenue generating efficiency scores indicate that the investments and loans made out could have been increased equi-proportionately by about 6 percent. The analysis of the position of Thai banking industry in the strategic position map shows that, from 1991 to 1995, the industry had gradually shifted to a higher differentiation position from a cost leader position. However, this shift in its position during this period was annulled in 1997, after the on set of financial crisis. |