INTRODUCTION
To start with Indian commercial banking was dominated by private ownership; profit and return to investments were its performance indicators. This was the scenario prior to 1969. Subsequently, commercial banks were nationalized adding to their list additional objectives of optimizing social benefit and geographical expansion to meet the growing needs of people. Globalization opened gates to increased competition by the entry of foreign banks. The changes that are taking world wide continued to give shocks to the banking system which resulted in an expansion of banking services both in range, volume and non-performing assets.
Gauging efficiency of commercial banks is an important issue to bank management and the policy maker. Before this task is initiated a commercial bank has to be modeled appropriately to meet the needs and objectives of the analyst. To model a commercial bank two approaches followed mostly are the intermediation and production approaches. Under the intermediation approach financial institutions are viewed intermediate funds between depositors and borrowers (Piyu, Y., 1992). Banking business has to satisfy both the users and suppliers of bank funds. The intermediation approach is also known as the asset approach. In production approach a commercial bank’s resources produce services to the customers (Berg et.al, 1991; Berg et.al. 1993; Parson et.al, 1993;
Shaffnit et.al, 1997). The basic difference is that in production approach deposits are treated as output, where as it has input status in intermediate approach. The user cost approach or profit approach models a commercial bank differently. According to user cost approach a financial product is an input or output on the basis of its net contribution to bank’s revenue. If returns on a financial product exceed the opportunity cost then it is treated as output