Introduction: Parameter1: Banks Network

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Jonathan Blair
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The article discusses about the relative performance of new private sector banks vis-à-vis the public sector banks of India during the period 2009-11 on many key aspects such as the banks network,

1 The article discusses about the relative performance of new private sector banks vis-à-vis the public sector banks of India during the period on many key aspects such as the banks network, banks growth, productivity, capital adequacy, asset quality, management quality, earnings quality and liquidity. The above period is chosen since it is very important to know how different banks fared after sub-prime mortgage crisis of Further it also helps us to understand if another recession hits the corner who will be in a better position to survive it. For this Data Envelopment Analysis (DEA) has been done for a pool of 12 banks which comprises of 5 new private sector banks and 7 public sector banks of India to better understand the above argument. Introduction: The private sector banks of India have made significant progress in the last few years. It was in mid 90's when some new private sector banks entered into the foray and in the period between these banks have grown by leaps and bounds. They have increased their incomes, margins, asset sizes and outperformed their public sector counterparts in many areas. The new private sector banks include Axis, Development Credit, HDFC, ICICI, Indusind, Kotak Mahindra and Yes Bank whereas the public sector banks consists of 19 nationalized banks, IDBI bank and State Bank group. The performance of the two sectors is being judged on eight key parameters that enable banks to achieve better bottom line and remain competitive in a highly volatile and regulatory environment. Parameter1: Banks Network Today banks follow a willful strategy of building a network of branches and ATMs with effective penetration so that they can continue to enlarge their geographical coverage of centres with potential for growth. The banks try to deeply entrench across the country with significant density 1 / 8

2 in areas conducive to the growth of their businesses. Fig.1 % YoY growth in Banks network (Source: RBI) The private sector banks are spreading its wings at a much faster rate than public sector banks. The customer base of these banks has grown manifold since they are able to provide innovative services to the customers at a much faster pace. This is leading them to capture more market share and eating up some of the share of their public sector counterparts. Parameter2: Banks Growth Every bank aspires to grow and its growth can be judged by various parameters like growth in balance sheet size i.e. asset base, improvement in the bottom line and many others. % Growth in Balance Sheet Size % Growth in Total Income / 8

3 New Private Sector Banks 10.86% 23.51% -2.19% 14.63% Public Sector Banks 17.93% 19.21% 3 / 8

4 12.46% 16.71% Fig.2 % Growth in banks Balance Sheet & Income (Source: RBI) The public sector banks asset base and income grew at a decent rate in the last 2 years whereas there was a great fluctuation in case of new private sector banks mainly due to recession. But the growth of these banks was phenomenal during that shows their ability to recover fast after such a catastrophe. Parameter3: Productivity Productivity can be considered as one measure of efficiency of banks. Productivity growth is important to the banks because it means that the firm can meet its obligations to employees, shareholders, and governments (taxes and regulation), and still remain competitive in the market place. It is a ratio of what is produced to what is required to produce. In the banking scenario productivity can be measured by profit per employee, business per employee. Fig.3 Productivity (Source: RBI) These ratios can be misleading since banks can improve these ratios by trimming their 4 / 8

5 employees during recessionary environment. This is evident since asset base and profit levels declined during for new private sector banks but still the above ratios showing a continuous increasing trend. This was only possible when there is large lay-off of employees which is actually what had happened with these banks during the period It was only in 2010 when the business started to pick up back again they started to hire. Overall public sector banks scores higher when it comes to employee retention which is also evident from the graph. Parameter4: Capital Adequacy Capital Adequacy signals the banks ability to maintain capital commensurate with the nature and extent of all types of risk and the ability of management to identify, measure, monitor and control these risks. It also tells about the ability of bank to absorb a reasonable amount of loss and still complies with statutory Capital requirements. Currently Reserve Bank of India (RBI) prescribes banks to maintain Capital Adequacy Ratio (CAR) of 9% with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8% prescribed in BASEL framework. Fig.4 Capital Adequacy Ratio (BASEL-II) (Source: RBI) The Capital Adequacy ratio (BASEL-II) of new private sector banks is way above RBI s minimum requirement of 9%. This shows that these banks are in comfortable position to absorb losses since they have more capital to cover for their risk weighted assets. Or on the other hand they have less risky assets in their portfolio for a fixed capital base. Parameter5: Asset Quality 5 / 8

Asset Quality reflects the amount of existing credit risk associated with the loan and investment portfolio as well as off-balance sheet activities.

6 Asset Quality reflects the amount of existing credit risk associated with the loan and investment portfolio as well as off-balance sheet activities. Loan & Investment Portfolio: The asset quality of banks can be judged by the non-performing assets (NPA) ratio. Non-performing assets (NPA) are assets which fail to make either interest or principal payments for more than 90 days. RBI has set guidelines to classify NPA into different categories like sub-standard, doubtful or loss assets. There are two effects of NPA on bank financial statements: 1) Loss incurred due to non-payment of principal and interest by borrowers 2) Reduction of capital base due to its allocation to provision for doubtful assets It is mandatory for all banks to have their asset base well diversified so that risk can be mitigated. It has been seen that this practice has been followed by both private and public sector banks meticulously. Fig.5 Asset Quality (Source: RBI) However there is huge difference in asset qualities of public & new private sector banks. The main reason being that public sector banks have higher NPAs in services sector. The NPAs in other sectors like Agriculture, Industry and Personal Loans are almost similar for these banks. The asset quality of a bank directly affects its credit rating for example recently Moody 6 / 8

7 downgraded State Bank of India (SBI) credit rating due to its low asset quality. Off-Balance Sheet (BS) activities: These are activities of banks which are not recorded on its balance sheet. It is very important to consider the effect of these items since it can have disastrous effect on banks business. Fig.6 Off- Balance Sheet Exposure (Source: RBI) The Off-Balance Sheet (BS) activities under the purview of New Private Sector banks are astoundingly large as compared to public sector banks. The main reason being the liability of these banks on outstanding derivative contracts like Interest rate swaps, currency options and interest rate futures. This makes their business highly susceptible to market risk but these banks generally get involved in these activities because it gives them huge opportunity to earn commission, exchange, brokerage fees and also to make profit on exchange transactions. Parameter6: Management Efficiency Sound management is a key element to bank performance but is very difficult to measure since it is primarily a qualitative factor. However several indicators can be used to measure the efficiency for example ratio of non-interest exp to total assets which explains the management controls on operating expenses. Similarly efficiency ratios like Asset Turnover ratio can be used to assess how efficiently company is using its assets to earn the revenue. 7 / 8

Efficiency new or not Quality quality is only private bottom mainly the (Source: or sector earnings. quantity line.

8 Fig.7(a) Management Efficiency (Source: RBI) Fig.7(b) The eventually over and Parameter7: This affect increase efficiency parameter the the Management last sustainability lead 3 Earnings ratios years to reflects asset enhanced of which base. Efficiency new or not Quality quality is only private bottom mainly the (Source: or sector earnings. quantity line. due The to RBI) banks a and combination asset are trend turnover better earnings of than of decrease both public but sectors also in non-interest the banks factors is which decreasing income that may Fig.8 The a) management b) that This Parameter8: funds the or Liquidity maturity manner through risk banks above becomes Earnings The management of at and reflects risk interest share inability a sale have two reasonable is rates Liquidity which essentially Quality two-dimensional: graphs of of other assets expense to (liability fee practices. is adequacy meet options good (Source: income signifying price at important financial dimension) is fair for less (asset The to is of banks. market RBI) earn risk more the inadequacy commitments for comparison dimension). new of institutions money and banks value. being total private the like unable income risk of volatile current sector liquidity as of interest exchanges, they being which fund banks interest and fall unable income a portfolio prospective due, bank have a rate commissions, way through to causes due better environments. of liquidate good assets to sources ratios available better liquidity since brokerages assets at since: of appropriate it risk liquidity cash reflects in liability which a flows timely etc. and is Fig.9 The more itself Similarly from earning banks DEA Data measure and here multiple average Banks Rank Yes 1 Punjab credit Liquidity from the (Source: deposits (C-D) RBI) 2 multiple the using which Analysis envelopment on to Rankings but inputs outputs of interest deposits have the DEA all may on outputs investment efficiency the a considered that were create pool income received. above other analysis inconsideration. includes of Net of liquidity short-term deposit received. hand mentioned but multiple Interest for (DEA) The higher of seven evaluation may problems. any higher (I-D) decision-making Income, The investments also ratio inputs public bank a ratio linear higher this A create also were comparative signifies & Fee sector ratio outputs programming indicates this equity liquidity Income. which good banks ratio units the over capital, have proportion analysis that good problems. amount and (DMUs) The the as methodology the higher five labour, it data period is increases bank of when new of Therefore investment 12 used liquidity. loan-assets the loanable doesn t Indian private there banks which this banks it hold are opportunity sector funds is since analysis essential created multiple used cash has and banks. they being to with done is the by of inputs earn HDFC Bank National for the done The the 3 Kotak 4 State 5 Axis 6 Bank 7 ICICI 8 Indian 9 of Mahindra Baroda of India Bank Fig.10 Conclusion It Indian main a) than b) which Canara Allahabad 11 Bank 12 can be of Banks c) d) India concluded Bank References Research Performance the Greece, their public Rankings IDBI, Books:- Post-Reform most reasons New The Kusum Amit Kyriaki Satish reflected Pune banking Liberalization South-Eastern operating credit-deposit Return of Papers:- private Kumar P. the Kosmidou W. Measures for system Goyal, Ketkar public Era, their higher Dwivedi sector efficiency that Equity better IIMA Performance Period, since counterparts sector And and & Europe most interest banks investment-deposit and Nations, (ROE) Research Suhas Constantin performance past banks. of was D. The have Journal the income. says Kumara was higher L May new during Analysis shown Ketkar, & that higher Zopounidis, Publications, Of 13 World for were: Charyulu, Economics the private -17, better most Performance of ratio due period Congress Top sector 2008, of net banks Measurement Efficiency 5 the better March new interest Banks 1 Washington banks new (2008) are private asset and 2011 the private have income This India Profitability most quality. sector Indian Of shown DC. sector HDFC Accounts margin hit a banks way Banking during better banks. of Performance SBI is and Indian were very and recession. ICICI performance Industry fee good Economic higher Banks income AXIS In The Annual Mahindra Indian Websites:- 1) 2) 3) 4) This article Bank New Public Bank, Reports Bank Private Management has Sector Allahabad been ( ):- Sector Banks:- authored Bank, Banks:- by State Timothy Bank by Bank ICICI of W. India, of Bank, Koch India Bank Axis and (SBI), of Bank, S. Baroda Punjab Scott HDFC MacDonald National Bank, Bank, Yes Bank, Canara Kotak Bank, in the personal views of the author. Shubham Jain from from NITIE, Mumbai. These are 8 / 8

TITLE: Financial Performance of Indian New Private and Public sector banks. Authors:

TITLE: Financial Performance of Indian New Private and Public sector banks Authors: 1) Mr. Roopak Kumar Gupta Faculty, Dept. of Management Studies Amity University Noida Ph: 09873434291 e-mail: gupta.roopak@gmail.com