Examining the impact of demonetization on banking efficiency: Evidence from bootstrapped estimates after consideration of undesirable outputs

Abstract

The recent demonetization announced in India led to a massive flow of deposits in banks, which called for efficient disbursement of available funds. Realizing its implication for the financial sector, researchers explored the possible impact of demonetization on the performance, profitability, and efficiency of Indian banks. However, these studies overlooked the non-performing assets, which are a serious concern for banks and have emerged as an undesirable output of the credit creation process. To fill this research gap, the present study investigates the impact of demonetization on the efficiency of domestic banks with due consideration of such undesirable assets. To get bias-free efficiency estimates, bootstrapped data envelopment analysis has been done. The study period has been divided into two sub-periods viz., pre-demonetization period and post-demonetization period. The results indicate that the efficiency of the majority of banks remains unaffected by demonetization. Only 13 banks have got a significant impact, out of which eight banks exhibited better efficiency while five banks were found to be less efficient during the post-demonetization period. However, these changes have been contributed to bank-specific factors, and demonetization cannot be accounted for the same. The findings are useful to banks, regulators, and policymakers.