Sound and strong financial infrastructure is one of the basic foundation stone for the development of any economy. Banks play an important role in financing the economic needs of the country. They form the core of a nation’s financial system, performing the vital function of financial intermediation and act as a link between the savers and the borrowers. The more efficient a financial system is in resource generation and in its allocation, the greater is its contribution to economic growth (Mohan, 2005). It helps in risk mitigation, innovations and improved profitability. The productivity and efficiency of banks, thus, critically impacts the productivity and efficiency of all economic activity and is a matter of concern for policy makers and economy watcher. Academicians and Researchers have recognized that the measurement of productivity in banking is necessary to improve the financial soundness of banks and is crucial for the well being of the whole economy. Therefore, investigation and measurement of efficiency and productivity in the banking sector assumes high importance and have always been areas of interest for economic research.
In simple words, the productivity is often defined as the output per unit of input employed. The concept of productivity is difficult to be applied in those industries where output cannot be measured easily like service industry. Banking is a service industry engaged in providing a wide array of services like acceptance of deposits, extension of credit, remittance of funds, collection of agency, conduct of foreign exchange business, providing a safe custody and so on. It is difficult task to measure productivity in a multi product industry like banking. (DR. ROSHAN LAL ** DR. RAJNI SALUJA 2013). The various products are accounts, drafts, exchange remittances, cheques, travellers cheques, credit cards, debit cards, services for guarantees, various kinds of loans like housing loan, education loan, car loan etc. Identification and measurement of output in banking is very difficult exercise as it is not possible to bring various services to measure output. However, banking being an important economic activity cannot afford to lose sight of the concept of productivity. Application of the concept in the Indian banking industry becomes all the more difficult, as it gets associated with such diverse aspects like operational cost effectiveness, profitability, customer services, priority sector lending, mobilization of deposits, deployment of credit in rural and backward regions. The difficulty is not in applying the broader concept of productivity as ratio of output and input, but is in measuring output in the form of services.
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