Evaluating of Factors Influencing Bank Operating Efficiency in Private Commercial Banking Sector of Bangladesh

Abstract

This study investigates the effect of bank-specific factors on the operational efficiency of private commercial banks in Bangladesh, analyzing data from ten banks over the period 2014 to 2023. Key internal variables considered include bank size, the ratio of non-performing loans (NPLs) to total loans, total NPL ratio, the loan-to-deposit ratio, loan loss provisions to total loans, interest rate spread, and operating expenses as a share of total income. Macroeconomic indicators such as GDP growth and inflation were also included for broader analysis. To ensure robust results, the study utilizes four econometric models: Pooled OLS, Generalized Least Squares (GLS), Fixed Effects, and Random Effects. Several diagnostic tests—covering heteroskedasticity, autocorrelation, cross-sectional dependence, and unit roots—were conducted to verify the reliability and validity of the models. The findings reveal that only a subset of bank-specific variables—namely bank size, NPL-related ratios, loan loss provisions, and operating expenses— have a statistically significant impact on operational efficiency. This indicates that internal bank management and financial policies play a more decisive role in determining efficiency than macroeconomic conditions. The study contributes to the literature by emphasizing the importance of internal financial indicators in influencing bank performance. Based on these insights, it recommends that private commercial banks in Bangladesh focus on improving operational efficiency by managing NPLs, reducing excessive operational expenses, and optimizing bank size. Targeted efforts to strengthen these areas can enhance the competitiveness and sustainability of the banking sector in a dynamic economic environment.