Title: Inception, growth and efficiency of small finance banks in India: an empirical study

Authors: Padmasai Arora; Hitesh Arora

Addresses: Keshav Mahavidyalaya, University of Delhi, H-4-5 Zone, Pitampura, New Delhi, 110-034, India ' FORE School of Management, B-18, Qutub Institutional Area, New Delhi, 110-016, India

Abstract: This study traces the origin and operations of small finance banks (SFBs) in India. Using input-oriented data envelopment analysis, efficiency scores are computed for 2017-2018 to 2019-2020. These are regressed on four bank-specific variables to examine their impact on efficiency scores. Results show that small finance banks are operating at extremely low efficiency levels. Regression analysis shows a significant and negative influence of cost of funds on efficiency. The high cost of funds puts the SFBs at a competitive disadvantage. Also, increase in size of SFBs is an important source of inefficiency. Reserve Bank of India's initiative to set up these differentiated banks for greater financial inclusion shall prove futile if their efficiency is not improved on an urgent basis.

Keywords: small finance banks; SFBs; India; efficiency; banking; data envelopment analysis; DEA.

DOI: 10.1504/IJSOM.2025.144759

International Journal of Services and Operations Management, 2025 Vol.50 No.3, pp.287 - 304

Received: 24 Aug 2022
Accepted: 25 Jan 2023
Published online: 03 Mar 2025 *

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