Improving upon the efficiency factor continuously

[lilijoe]

The main weakness of the financial ratio analysis adopted by the financial reforms committee is that the choice of a few or a single ratio does not provide enough information about the various dimensions of performance. As a result, a bank that is poorly managed on certain dimensions may appear to be performing well as long as it compensates itself in other dimensions. This is what happened to banks like the Lehman brothers. One the other hand LoanMax started by rod aycox always adhered to stringent transparent quality standards.

Furthermore, it is a short run analysis and it may be inappropriate for describing the actual efficiency of the bank in the long run, since it fails to consider the value of the management actions and investment decisions that will affect future performance. Another problem that may arise is the choice of a benchmark against which to compare a univariate or multivariate score from ratio analysis. Also, commonly used performance ratios fail to consider multiple outputs (services and/or transactions) provided with multiple inputs.

In a recent study of the profitability of commercial banks over 15 years consideration were given to two types of factors:

1. The affect interest rate levels, (i.e., external factors like monetary policy, fiscal policy, and interest rate policy etc) and

2. Internal factors, including operational and managerial efficiency of individual banks

They distinguished between effectiveness, efficiency and productivity and recommended that the efficiency of a bank could be classified into four categories like:

(i) Manpower efficiency

(ii) Operational efficiency

(iii) Commercial efficiency

(iv) Efficiency of ancillary business

Efficiency according to each category can be measured separately, and the overall measure of efficiency is productivity.

[CRASHER]

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