Chapter 3. An Analysis of the Performance of the Indian Banking Sector

Transcription

1 Chapter 3 An Analysis of the Performance of the Indian Banking Sector The Indian Banking system has been undergoing a series of changes from the last decade of the 20th century after the liberalisation of the Indian economy and adoption of Basel norms as described in the earlier chapters. Various changes in the capital structure owing to the implementation of Basel Norms are likely to impact the performance of the banks. It leaves us with an immediate quest to look into the performance of the Indian Banks in the post reform era. 3.1.Research Objective In this section we will study the performance of the Indian Banking sector in terms of profitability, productivity and asset quality across the three regulatory regimes (pre- Basel, Basel I and Basel II) as mentioned in Chapter 2. We try to comparatively assess the changes in the financial and social performance indicators of the banks across the different ownerships and across the different regimes Data and Time Period The time period is divided into three eras as described in Chapter 2. We had reduced the sample size to 62 scheduled commercial banks operating in India due to the non availability of complete data for the other banks. The 62 scheduled commercial banks divided across the four ownership structures: Nationalised banks(20), Private sector banks(21), Foreign banks(13) and the State bank of India and its accociates(8). The different measures for the performance indicators of the profitability, productivity and asset quality are described in table 3.1 below. 24

2 Table 3.1 Financial Performance indicators and their measures Performance Indicator Profitability Productivity Asset Quality Measure Return on Assets (ROA) Return on Equity (ROE) Operating Profit Ratio (OPRTA) Business per employee(bpe) Net NPA/Net Advances(NPANA) 3.3. Analysis of the Financial Performance Indicators We have analysed each of the financial performance indicator measures separately. An overview of the analysis is presented in the sections below Profitability An overview of the profitability is described graphically in figure 3.1 (a-c). We have calculated the mean of the performance indicators for the three eras separately. There was an increase in the operating profit ratio (ratio of operating profit to total assets), return of assets and return on equity from pre-basel era to Basel I era but a decrease from Basel I era to Basel II era for the nationalised banks. In the domestic private sector banks, we observe that there was a decrease in the operating profit ratio and return on equity and an increase in the return on assets from pre-basel era to Basel I era. However there was an increase in mean of all the three performance indicators from Basel I era to Basel II era. For the foreign banks, there was a significant increase in all the three profitability indicators from pre-basel to Basel I era and marginal reduction in operating profit ratio from Basel I era to Basel II era and marginal increase in case of the other profitability indicators. For the SBI group, we observed no variation in the operating profit ratio, increase in the return on assets and marginal decrease in the return on equity from pre-basel era to Basel I era. However there was a decrease in the operating profit ratio, marginal increase in case of return on assets and decrease in the return on equity from Basel I era to Basel II era. The operating profit ratio and the return on assets 25

3 OPRTA were highest for the foreign banks. However the SBI group had the highest return on Equity. The Return on equity was lowest for the Foreign Banks. The highest ROE for the SBI group can be accounted for lower equity capital in their balance sheet. Operating Profit to total Assets Pre Basel Basel I Basel II Nationalised Banks Private Sector Banks Foreign Banks SBI & Associates Figure 3.1a An Overview of Operating Profit ratio over the three regimes 26

4 ROA Return on Assets Pre Basel Basel I Basel II Nationalised Banks Private Sector Banks Foreign Banks SBI & Associates Figure 3.1b An Overview of Return on Assets over the three regimes 27

5 ROE Return on Equity Pre Basel Basel I Basel II Nationalised Banks Private Sector Banks Foreign Banks SBI & Associates Figure 3.1c An Overview of Return on Equity over the three regimes 28

6 BPE Productivity We have measured the productivity in terms of Business per Employee (BPE). An overview of the same is illustrated graphically on the basis of the mean BPE for the three different eras in Figure 3.2. We observe a significant increase in the BPE of the foreign banks from pre Basel to Basel I era and further increase from Basel I era to Basel II era. However there was marginal increase in the BPE of the nationalised banks, domestic private sector banks and SBI group over the three eras. 70 Business Per Employee Pre Basel Basel I Basel II Nationalised Banks Private Sector Banks Foreign Banks SBI & Associates Figure 3.2 An Overview of Business Per Employee over the three regimes 29

7 NPANA Asset Quality We have analysed the mean of the ratio of Net Non Performing Assets to Net Advances (NPANA) as a measure for the asset quality in a bank's portfolio across the three eras. The results are illustrated graphically in Figure 3.4. There was significant decrease in NPANA from pre-basel era to Basel I era across all the categories of the banks. It reduced to a greater extent from Basel I era to Basel II era for the domestic private sector banks and the nationalised banks but increased in case of the foreign banks. However we observed marginal increase in NPANA for SBI and its associates between Basel I and Basel II. Net NPAs to Net Advances Pre Basel Basel I Basel II Nationalised Banks Private Sector Banks Foreign Banks SBI & Associates Figure 3.3 An Overview of the Ratio of Net NPAs to Net Advances over the three regimes 30

8 3.4. An Analysis of the Social Performance Indicators One of the major function of the Indian banking sector is to provide funds for the development of the economy. Many schemes have been introduced by the government for this purpose in consultation with the RBI for this purpose. The idea of financial inclusion is being majorly implemented via the different regulatory schemes of the banks. The expansion of rural branches of the banks is a step towards achieving the goal of financial inclusion and also help in the development of the rural areas. The regulatory norm on the priority sector lending was prevalent in the Indian banking sector even before the process of liberalization. However, the liberalization process changed the definition of the priority sector by including many sectors into it. Presently the priority sectors include: agriculture, micro and small enterprises, education, housing and export credit. Although there is no prior evidence of the impact of Basel regulations on the social performance of the banks, yet it forms an important indicator of bank performance from the point of view of the Indian banking sector. A glimpse into a couple of social performance indicators across the four ownerships would provide us with a better understanding of the financial performance of the Indian banking sector and give us new perspectives about the variation across the different ownerships Priority Sector Advances to Total Advances The advances to the priority sector at discounted rates is not something that is best for business for the banks. From a rational point of view, the banks would try to minimize these advances since these are advances with high probability of default together with low rates of return. However, given the impositions of the government, a bank is forced to issue advances to these sectors. As per the requirement of RBI, the banks are required to issue a certain proportion of their Adjusted Net Bank Credit (ANBC) 15 to the priority sectors. The set of 15 Adjusted Net Bank Credit is Net Bank Credit added to investments made by banks in non-slr bonds (in held-to-maturity (HTM)) or it is the credit equivalent of off-balance-sheet exposures, whichever is higher. 31

9 priority sectors that a bank had to pertain to were different for the domestic banks (Nationalised banks, SBI and associates, domestic private sector banks) and the foreign banks. The domestic banks were required to hold 40% of their ANBC in the form of priority sector advances while the foreign banks were required to hold 32% of their ANBC in the form of priority sector advances. However, as per the RBI regulation of 2012 (RBI, 2013), the foreign banks with more than 20 branches in India were to maintain a minimum of 40 % of their ANBC in the form of priority sector advances. The priority sector advances for the domestic banks comprised of agricultural advances (minimum of 18% of ANBC); advances to small scale industries; advances to weaker sections (minimum of 10% of ANBC) and differential rate interest scheme. The priority sector advances for the foreign banks comprised of small scale industries (minimum of 10% of ANBC); exports (minimum of 12% of ANBC) along with the advances to agriculture and advances to weaker sections. However, this definition of the bank ownership based priority sector was also modified by the RBI regulation of Currently all the foreign banks with more than 20 branches in India are taken under the same purview of the domestic banks with the same priority sector advances requirements. In this section we study the ratio of priority sector advances to total advances (PSATA) during the study period. A comprehensive result of such an analysis is presented in Table 3.2.The data for the priority sector advances as a proportion of ANBC was not available and hence we measure it on the basis of PSATA. The priority sector advances for the SBI and its associates and the nationalised banks were higher than that of the private sector banks and the foreign banks. The foreign banks were observed to have the least PSATA. This very fact can be accounted for the better financial performance of the foreign banks and the private sector banks compared to that of the SBI and its associates and the nationalised banks. 32

10 Table 3.2. Ownership wise- Priority Sector Advances to Total Advances Bank ownership SBI & Associates Nationilised Banks Private Sector Banks Foreign Banks

11 3.4.2 Rural branches The volume of business generated by the rural branch of a bank is expected to be significantly lower than that generated by a branch in a metropolitan city. However, setting up of rural branches is important for the development of rural areas. The number of rural branches of the scheduled commercial banks in India as of October 2013 based on the ownership is presented in Table 3.3 below. Table 3.3: Ownership wise number of Rural branches of the banks in 2013 Ownership Number of Rural Branches SBI and Associates 6697 Nationalised Banks Private Sector Banks 1602 Foreign banks 7 The number of rural branches of the nationalised banks and the SBI group are significantly higher than that of the private sector banks and the foreign banks. Since these branches generate less business compared to that of the branches in metropolitan cities or the urban branches, it partly explains the better performance of the private sector banks and the foreign banks in comparison with the nationalised banks or the SBI group. However, from the purview of social development, it is the nationalised banks and the SBI group which have outperformed the domestic private sector banks and the foreign banks. 3.5 Conclusion The performance of the banks across the different ownerships were not uniform during the study period. The variations across the financial performance indicators of the three regimes were most notable in case of the foreign banks. The variations were more noticeable in the transition from Pre-Basel regime to Basel I regime compared to that from Basel I to Basel II regime. The change in the capital structure of the banks as discussed in Chapter 2 and these 34

12 findings pose the direct question of the impact of the capital adequacy norms on the performance of the banks. The nationalised banks and the SBI group was found to outperform the domestic private sector banks and the foreign banks in their social performance. However, efficiency is also an important performance indicator of the banks. Due to the non availability of reliable and complete data of efficiency of the banks, we shall first measure the efficiency of the banks in the Indian banking sector before proceeding to analyse the impact of the capital adequacy norms on the performance of the banks. 35