A Comparative Study of the Key Banking Indicators of Public and Private Sector Banks in India

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1 A Comparative Study the Key ing Indicators Public and Private Sector s in India Dr. Savitha Sukumar Assista Pressor, St. Francis College for Women, Hyderabad Abstract In the last few years the Indian banking sector has shown remarkable resilience and has managed to meet the challenges being financial service providers in a globalised competitive environme. They are striving hard to meet evergrowing customer needs and also reaching out to the unbanked sectors the ecomy in order to bring about socio ecomic developme. The use techlogical invation by banks has helped them to improve on their business processes, thus resulting in lower financial and manageme costs. The rece Domestic and iernational ecomic developmes have impacted the asset quality both public and private sector banks in the coury although they have maiained their pritability. In this coext this paper attempts to analyse and compare the key banking indicators these banks using statistical tools with a view to providing an insight io how these banks can bring in competitive advaage in a challenging business environme. INTRODUCTION The Importance the banking system in India has grown over the years as banks play a vital role in the functioning the ecomy by providing credit and liquidity and a range risk manageme services. The Indian ing system consists several public sector banks, private sector banks, foreign banks, regional rural banks, urban and rural cooperative banks, in addition to cooperative credit institutions. According the India Brand Equity Foundation (), The Indian banking sector s assets reached US$. trillion in FY from US$. trillion in FY, with per ce it being accoued by the public sector. Total banking assets in India is expected to cross US$. trillion in FY. The performance the banking sector has been rather subdued in the last few years although the commercial banks in the coury are coinuing to invest in increasing their network and improve their customer reach. There has been a slowdown in balance sheet growth and banks have earned prits due to decrease in their operating expenses rather an increase in their income. There has been a decline in asset quality and the Indian banking industry has exhibited resilience and does appear to be an exceptional underperformer with respect to the global banking trends in terms pritability, liquidity and capital positions according to a rece report the Reserve India. Public and Private sector banks in the coury coinue to face challenges in the areas maiaining asset quality compounded by slow pace ecomic growth, high inflation, high customer expectations, increasing compliance, risk and governance requiremes. The stability these banks assumes a great deal nce as they are an importa constitue the financial system the coury. An analysis key banking indicators these banks will provide an insight io their soundness in terms capital adequacy, asset quality maiained, pritability, liquidity and efficiency their operations. REVIEW OF LITERATURE There have been several research studies relating to the working commercial banks in India. Kasman et al. (); Maudos et al. () and Dumicic et al. () established that the cost funding affects the investme poteial and capital allocation the banks. GarciaHerrero et al., found that the increasing financial iermediation cost affects banks pritability and thus is a reason for decreasing efficiency the banking sector as a whole. According to Brock et al. (), High ierest margin is also considered negatively as it leads to disiermediation. A lot research has been done on determinas margin banks. Variables included in the study were operating cost, > RJCBS: Volume:, Number:, November Page

2 NPA s size bank, asset share, banking industry environme and macroecomic conditions. Ho and Saunders () conducted empirical research to establish determinas efficiency, pritability or iermediation costs. Allen () adopted Ho and Saunders model for a set loans with ierdepende demands. Angbazo () iroduced credit risk, ierest rate risk and their ieraction effect in the model for the US banks. Later on Saunders et al. () used twostage regression technique on the ierest spread considering banks in the US and six European couries. Claeys et al. () considered single stage estimation procedure to model banks margin from thirtysix European couries and concluded that conceration, operational efficiency, capital adequacy and risk behaviour were the importa determinas the ierest margin. Maudos et al. (), while modelling NIM for European Union using single stage regression technique, found operating cost ly affecting the NIM. Schwaiger et al. () observed limited impact ierest rate risk on NIM. Kasman et al. () observed merger and acquisition improved banks efficiency while size and managerial efficiency were negatively related to NIM. Brock et al. () modelled the ierest spread for Latin American banks using the same technique. They found that banks operating cost and level NPAs were positively affecting the ierest spread while macroecomic condition caused negative impact on margin. Erop et al. () studied the German ing system and found the exte to which ierest risk exposure was affecting the banks margin. Impact financial crisis on banks margin was tested by Dietrich et al. () by considering the commercial banks Switzerland over a period. After employing two subgroups, viz., a) and b), they concluded that during precrisis era, ownership did t impact banks pritability. But post crisis period, public sector banks became more efficie in comparison to the private banks. Market structure seemed importa during precrisis period and turned out in post crisis. Khan et al. () used a panel data set up to model NIM for the Pakistani banks and found operating cost and cost funding were the main determinas for banking spread in Pakistan. Marginal influence macroecomic variables and market condition on NIM was reported by them. Alexiou, Constais et al. () studied the effects bankspecific and macroecomic determinas bank pritability, using an empirical framework that incorporates the traditional StructureConduct Performance (SCP) hypothesis using panel data approach. Masood et al. () analysed the determinas banks' pritability by investigating the coiegration and causal relationship between total assets (TA) and total equity (TE) Chinese banks for the period.savitha () studied the indicators financial stability select private sector banks in India and outlined challenges and opportunities faced by them. Sutorova and Teply () established that lending rate increases result in increase in capital resources using a sample European banks for the period to. Carlson et al () test the influence the size banks capital surplus on lending as capital requiremes change. In addition, there is empirical evidence that better capitalised banks make the provision credit more stable in a dowurn, and preserve longterm lending relationships (Albertazzi and Marchetti (), Kapan and Miiu (), Gambacorta and Mistrulli ()). These studies have shown that higher capital surpluses lead to a lower reduction in credit supply following a shock. Moreover, well capitalised banks can also shield their lending from monetary shocks as they have easier access to ninsured funding (Jimenez at all ()). There are several poteially fsetting impacts higher capital requiremes for banks. On the positive side, capital strengthening may provide inceives for the bank to reduce its probability default by monitoring its borrowers Nguyen () s can reduce moral hazard by investing in less risky assets (Berger and Bowman ()and mitigate the inceives to develop risky and complex products ( deramon et al ()). On the negative side, banks may increase risktaking activities and conceal them from supervisors to restore pritability (Mariathasan and Merrouche () Fraisse et al () using a sample French banks found that a perceage poi increase in capital requiremes leads to a perceage reduction in lending due to reductions in the size the loans provided to customers. > RJCBS: Volume:, Number:, November Page

3 OBJECTIVE OF THE STUDY To analyse the key banking indicators Public and private sector banks in India with respect to o CAR, Operating Expenses as a % Total Expenses and ROA o Ierest Income, Other Income and Total Income o Ierest Expended, Operating Expenses and Total Expenses o Operating Prit, Provisions & Coingencies and Net Prit o Total Assets, Gross NPA and Net NPA o Net NPAs to Net Advances, Business Per Employee and Prit Per Employee o Deposits, Investmes and Advances, o NIM and evaluate their consistency performance. To develop and test the hypotheses relating to the nce ces in key banking indicators public and private sector banks To develop and test the hypotheses relating to the nce correlation Net NPAs to Advances public sector and private sector banks Scope the Study: The prese research is conducted by considering the performance Public and private sector banks in India for the period. The study focusses on establishing the consistency performance these banks on the basis key banking indicators. METHODOLOGY Suitable Hypotheses relating to performance Public and Private sector banks on the basis key banking indicators such as deposits, investmes, advances, total assets, gross NPA, net NPA, business per employee, prit per employee, ierest income, ierest expenditure, net prit, NIM and net NPA to advances the banks were developed and tested using oneway ANOVA. The consistency performance the banks was judged using coefficie variation. The correlation between Advances and Net NPA s public and private sector banks was computed and the t test was used to establish the nce the association. Sources Data: To evaluate the performance private sector banks information was collected from published annual reports and financial statemes the banks included in the sample for the period to and from RBI publications. Sample: The sample selected for the purpose the study includes Public sector and Private sector banks. The sample includes the following banks. Table : List Public and Private Sector s considered for the Study S.No. PUBLIC SECTOR BANKS Allahabad Andhra Baroda India Maharashtra Canara Ceral India Corporation Dena Indian Indian Overseas Orieal Commerce Punjab & Sind Punjab National Syndicate UCO PRIVATE SECTOR S.No. BANKS City Union TamilNadu Mercaile The Catholic Syrian Dhanalaxmi Ltd The Federal The Jammu & Kashmir The Karnataka The Karur Vysya The Lakshmi Vilas Nainital RBL The South Indian > RJCBS: Volume:, Number:, November Page

4 Union India United India Vijaya State India (SBI) IDBI Axis Developme Credit HDFC ICICI IndusInd Kotak Mahindra YES RESULTS AND DISCUSSION The performance banks was evaluated on the basis key banking indicators such as CAR, Operating Expenses as a % Total Expenses, ROA, Ierest Income, Other Income Total Income, Ierest Expended, Operating Expenses, Total Expenses, Operating Prit, Provisions & Coingencies Net Prit, Total Assets, Gross NPA, Net NPA, Net NPAs to Net Advances, Business Per Employee, Prit Per Employee, Deposits, Investmes, Advances and NIM. The Capital to Risk Weighted Assets Ratio (CRAR) was used to judge the soundness banks. It is defined as the ratio banks capital in relation to its curre liabilities and risk weighted assets. Capital adequacy ratio (CAR) is one the measures which ensure the financial soundness banks in absorbing a reasonable amou loss. Regulation capital is importa in order to reduce bank failures, to promote stability, safety and soundness the banking system, and reduce losses to the bank depositors. The Basel Committee on ing Supervision (BCBS) stipulates from time to time, rules relating to capital requiremes s. BCBS iroduced the capital measureme system commonly referred to as Basel I in with focus on credit risk banks. In, Basel II guidelines were published and besides credit risk, market and operational risks gained importance. The Basel III guidelines published in are being implemeed from and will be fully effective by March. As per the RBI guidelines, banks are required to compute and disclose capital adequacy ratio under the Basel III Regulations from the quarter ended June, the Bench mark requireme being %. A ratio below the minimum indicates that the bank is t adequately capitalized to expand its operations. CAR = Tier I capital + Tier II capital / Risk weighted assets Tier I Capital funds include paidup equity capital, statutory and capital reserves, and perpetual debt instrumes eligible for inclusion in Tier I capital. Tier II capital is the secondary bank capital which includes items such as undisclosed reserves, general loss reserves, subordinated term debt, amongst others. The consistency Key banking indicators namely CAR, public and private sector banks is preseed in Tables, and. The CAR ensures that the banks do t expand their business without having adequate capital. Among Public sector banks Dena was the most consiste with a coefficie variation.% and among private sector banks the most consiste was Nainital with a coefficie variation.%. Operating expenses includes paymes and provisions to employees, re, taxes and lighting, expenses on priing and stationary, depreciation, directors and auditors fees and expenses legal charges, repairs and insurance and voluary retireme expenditure. The decline in operating expenses is one the key reasons for prit generation by banks as their income did t show spectacular growth in the last few years. SBI among public sector banks and Axis among private sector banks remained most consiste in term operating expenses with low coefficies variation. Return on assets (ROA): Returns on asset ratio is the net income (prits) generated by the bank on its total assets (including fixed assets). The higher the proportion average earnings assets, the better would be the resulting returns on total assets. > RJCBS: Volume:, Number:, November Page

5 ROA = Net prits / Avg. total assets With regard to ROA, Canara among public sector banks and AXIS bank among private sector banks remained most consiste. Ierest Earned: Includes ierest and discou on all types loans and advances like cash credit, demand, loans, overdraft, export loans, term loans, domestic and foreign bills purchased and discoued including rediscouing, overdues and ierest subsidy. Besides Ierest on Investmes and balances with RBI and ierbank funds. Other Income includes commission, exchange and brokerage, prit on sale investmes, prits on revaluation investmes, prits on Sale land, Building and other assets, prits on exchange transactions, income by way dividend and other miscellaneous income. With regard to ierest Income, Allahabad was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. As regards other income Punjab & Sind was consiste among public sector banks while TamilNadu Mercaile was consiste among private sector banks. With regard to Total Income, Allahabad was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. Ierest Expended: Includes ierest paid on deposits from banks and other institutions, ierest on RBI/Ier bank borrowings, ierest on participation certificates, penal ierest. Total Expenses is the sum total Ierest Expended and Operating Expenses With regard to ierest Expended, IDBI was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. As regards operating expenses Punjab & Sind was consiste among public sector banks while ICICI was consiste among private sector banks. With regard to Total Expenses, IDBI was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. Operating Prit and Net Prit: Are indicators the pritability banks. Provisions and Coingencies include provisions made for bad and doubtful debts, provisions for taxation, provision for diminution in the value investmes, transfers and coingencies and other similar items. With regard to operating prit, Corporation was consiste among public sector banks and Federal was consiste among private sector banks. As regards other provisions and coingencies Union was consiste among public sector banks while Nainital was consiste among private sector banks. With regard to net prit, SBI was consiste among public sector banks and City Union was consiste among Private sector banks. Total Assets: Includes the cash and balances with the RBI, balance with banks and money at call on short tice, investmes, advances, fixed assets and other assets. Net NPA: Means Gross NPA (Balance in Ierest Suspense Accous + ECGC Claims Received and help pending adjustme + Part Payme Received and kept in Suspense Accou + Provisions help for Loan Losses) With regard to Total Assets, Union was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. As regards Gross NPAs SBI was consiste among public sector banks while Federal was consiste among private sector banks. With regard to Net NPAs, SBI was consiste among public sector banks and Karnataka was consiste among private sector banks. Net NPA Ratio, Business per employee and prit per employee were used to judge efficiency performance. Nonperforming asset (NPA) ratio: The Net NPA ratio was used to judge the quality Assets. The Net NPA to loans (advances) ratio is used as a measure the overall quality the bank's loan book. An asset becomes nperforming when the ierest and /or instalme principal is delayed and t received before a stipulated time. NPA s are those assets for which ierest is overdue for more than days (or mohs). Net NPAs are calculated by reducing cumulative balance provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad quality loans. NPA ratio = Net nperforming assets / Loans given. > RJCBS: Volume:, Number:, November Page

6 As regards the Net NPA ratio, SBI was the most consiste among Public Sector s reflecting good asset quality and IndusInd was consiste among private sector banks Business Per Employee: This is the ratio total business to the number employees. Total business is defined as the sum Advances and Deposits the bank. As regards this, Canara was most consiste among Public Sector s and YES was most consiste among private sector banks Prit Per Employee: Prit per employee is the ratio net prit after tax to the number employees the bank. As regards prit per employee, the most consiste was Vijaya was most consiste among Public Sector s and YES was most consiste among private sector banks. Deposits: The ability banks to provide releva financing is depende on its ability to mobilise deposits. The transformation deposits io productive capital is the key to financial iermediation. Domestic deposits are a reliable and cheap source funds for banks for developme. s which finance most their loans with deposits, ten stand firm against liquidity crunches and are financially stable visavis those which make use market funding. Deposits may be from banks and also others including demand deposits n bank sector, saving and term deposits. Investmes: Investmes in the bank balance sheet indicate assets purchased by the bank with a view that these will yield income in the future or appreciate and can be sold at a higher price. A unique feature investme bank is that a large proportion the investmes are made in pursuance the requireme to maiain a certain level liquid assets. Investmes in India are made by banks in governme securities, other approved securities, shares, debeures, in subsidiaries and joi veures, gold, commercial paper. Investmes outside India can be in foreign governme securities, subsidiaries and joi veures abroad. Besides banks are required to classify their investme portfolio under three categories: a) Held to Maturity b) Available for Sale c) Held for Trading. Advances: Advances refer to the loans given to banks customers which could be retail or corporate clies. The growth in Advances coupled with prevailing ierest rates is what drives the banks ierest income. Advances will include Bills discoued and purchased, cash credits, overdrafts and loans repayable on demand, term loans. Advances secured by tangible assets, covered by bank /governme guaraee and advances to priority sector and public sector. With regard to Deposits, Allahabad was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. As regards Investmes Allahabad was consiste among public sector banks while ICICI was consiste among private sector banks. With regard to Advances, United India was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. Net ierest margin (NIM): the performance banks is largely depende on the NIM for the year. The ce between ierest income and ierest expense is kwn as net ierest income. It is the income, which the bank earns from its core business lending. As such, NIM is the net ierest income earned by the bank on its average earning assets. These assets comprises advances, investmes, balance with the RBI and money at call. NIM = (Ierest income ierest expenses) / average earnings assets With regard to NIM, Orieal Commerce was consiste among public sector banks and Dhanalaxmi was consiste among Private sector banks. Table : Coefficie variation (%) key banking indicators Public Sector s Opex as Public Sector s CA R (%) % Of Total Expense s RO A (%) Ieres t Incom e Other Incom e Total Incom e Ierest Expende d Operatin g Expenses Total Expense s Operatin g Prit Provisions & Coingenci es Allahabad Andhra Baroda India Maharashtra > RJCBS: Volume:, Number:, November Page

7 Canara Ceral India Corporation Dena Indian Indian Overseas Orieal. Commerce Punjab & Sind Punjab National Syndicate UCO Union India United India Vijaya State India IDBI Table : Coefficie variation (%) key banking indicators Public Sector s Net Gr Busi Tot Ne NPAs Pri Net oss ness Public Sector al t To t Per Dep Investm Pro N Per s Ass NP Net Emp osits es fit P Emp ets A Adva loyee A loyee nces Allahabad. Andhra. Baroda. India. Maharashtra. Canara. Ceral India Corporation.. Dena. Indian Advance s NI M > RJCBS: Volume:, Number:, November Page

8 Indian Overseas Orieal Commerce Punjab & Sind Punjab National.... Syndicate. UCO. Union India United India.. Vijaya. State India. IDBI Table : Coefficie variation (%) key banking indicators Private Sector s Opex Tota as % Ie Oth Tota Ier Oper C R l Oper Private Sector Of rest er l est ating A O Exp ating s Total Inco Inc Inco Expe Expe R A ense Prit Expe me ome me nded nses s nses City Union Tamilnad Mercaile The Catholic Syrian Dhanlaxmi Ltd.... Provisio ns & Coing encies The Federal The Jammu &.. Kashmir The Karnataka The Karur Vysya > RJCBS: Volume:, Number:, November Page

9 The Lakshmi... Vilas Nainital RBL The South Indian Axis Developme... Credit HDFC ICICI IndusInd Kotak Mahindra YES Table : Coefficie variation (%) key banking indicators Private Sector s Net Busin Tot Gr Ne NPAs Prit Net ess Private Sector al oss t to Per Dep Invest Pro Per s Ass NP NP Net Empl osits mes fit Empl ets A A Adva oyee oyee nces City Union Tamilnad Mercaile The Catholic Syrian Dhanlaxmi Ltd Adva nces NI M The Federal The Jammu & Kashmir. The Karnataka The Karur Vysya The Lakshmi Vilas > RJCBS: Volume:, Number:, November Page

10 Nainital RBL The South Indian Axis Developme Credit HDFC ICICI IndusInd Kotak Mahindra YES Suitable Hypotheses relating to key banking indicators public and private sector banks included in the sample were developed and tested using Oneway ANOVA. Table : Hypotheses Relating to Key ing Indicators Public and Private Sector s S. N o. Hypoth eses Public Sector s Private Sector s H deposits H investm es F critical at % level nce Calcula ted F value Sig. Accepted/Rej ected F critical at % level nce Calcula ted F value Sig. Accepted/Rej ected H There > RJCBS: Volume:, Number:, November Page

11 is Advanc es H Total Assets H Gross NPAs H There is net NPAs H There is Busines s Per Employ ee H There is Prit Per Employ Accepted... > RJCBS: Volume:, Number:, November Page

12 ee H Ierest Income H Ther e is Ierest Expendi ture H Net Prit H NIM H Net NPA to Advanc es... Accepted... From the table it can be observed that there is a ce with respect to the key banking indicators public and private sector banks except for Prit per Employee and the ratio Net NPA to Advances Public Sector s. The nce correlation Net NPA to Advances public sector and private sector banks was analyzed using the t test. > RJCBS: Volume:, Number:, November Page

13 The rank correlation between the Advances and the Net NPAs each the public sector and Private sector banks was computed using Spearman s rank correlation test r = D (N N) The correlation coefficie was used to determine the value t using the following formula t = r* N r Where r is the correlation coefficie and N is the number years. Null Hypothesis (H ): correlation between Advances and Net NPAs. Alternate Hypothesis (H A ): correlation between Advances and Net NPAs Table : Hypothesis Relating to Correlation between Advances and Net NPAs Public Sector s Rank Correl ation r t Critica % Level Signifi cance With df Calcu lated t Accepted/ Baroda... Accepted Mahar ashtra... Canara... Ceral India... Corpor ation... Private Sector s Tamiln ad Mercan tile Rank Correl ation r t Critica % Level Signifi cance with df Calcu lated t Accepted/... Accepted Dhanal axmi Ltd... Accepted The Federal... The Jammu & Kashmi r... Accepted The Karnata ka... > RJCBS: Volume:, Number:, November Page

14 Indian Overse as... Accepted Syndic ate... Accepted UCO... Accepted United India... Accepted Vijaya... State India... The Karur Vysya... The Laksh mi Vilas... Accepted Nainita l... Accepted RBL... Develo pme Credit... YES... CONCLUSION The analysis conducted has provided an insight io the key banking indicators public and private sector banks included in the sample. It has helped in ideifying the banks which have performed well as well as those which are struggling with respect to the parameters outlined. Both public and private sector banks coinue to face a number challenges in today s business scenario. Public sector banks are faced with rising stressed assets since and consolidation the Indian public sector banks is a key challenge. Infusion capital is a much needed initiative for the public sector banks as they coinue to deal with corporate governance and operational inefficiencies. Political will is the need the hour to help public sector banks reap the benefits consolidation. While scale and manageme bandwidth coinue to hau public sector banks the regulator s initiative can facilitate corporate governance reforms and help them deal with low capital, high NPAs and poor manageme quality. Private Sector s coinue to face a number challenges in today s Business scenario. The areas where they are faced with problems include staff quality and capabilities, managing brand image and reputation, clie segme focus and providing customised advice and solutions to meet high customer expectations. These banks also face increasing compliance risk and governance requiremes. The strict KYC and Ai Money Laundering (AML) standards along with tax transparency have resulted in increased costs and complexity for these banks. Increasing transaction costs have impacted pritability banks. Besides expenses on due diligence and scrutiny via transaction surveillance system in order to build customer confidence have increased cost operations these banks. Clie reteion remains a key focus area for private banks. The success the banking sector in the coming years is heavily depende on the developme a suitable mechanism to rectify, restructure and recover stressed assets along with a framework accouability to the stakeholders. > RJCBS: Volume:, Number:, November Page

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