NEW COMPETITION AND EMERGING CHANGES IN INDIAN BANKS: AN ANALYSIS OF COMPARATIVE PERFORMANCE OF DIFFERENT BANK GROUPS

NEW COMPETITION AND EMERGING CHANGES IN INDIAN BANKS: AN ANALYSIS OF COMPARATIVE PERFORMANCE OF DIFFERENT BANK GROUPS Dr. R.K.Uppal Principal Investigator UGC Sponsored Major Research Project D.A.V College, Malout, Punjab, India ABSTRACT The post era of banking sector reforms have gave birth to fierce competition in inter and intra bank groups in India. There is a paradigm shift in performance parameters of various types of banks and bank groups. The emerging competition has resulted in new challenges for the Indian banks especially :for public sector banks to retain their share, retain customer base and create a new customer base. In this emerging new competition, present paper concentrate mainly on those factors which influence the relative share of banks in the era of post second banking sector reforms era (2003 to 2008). The paper concludes that the public sector banks are in dominant position in terms of total assets in all scheduled commercial banks. Profitability has recorded deterioration in all the banks as public sector banks witnessed the least profitability along with the highest cost and decreasing spread as a percentage of total assets even succeeded to bring down their NPAs and intermediation cost. Keywords: Emerging Competition, Total Assets, Rural Branches, Public Sector Banks, NPAs and Net Non-Performing Assets Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 223

INTRODUCTION Since the nationalization of banks till first banking sector reforms (1991) the main thrust of the banks was on social banking where profitability was not considered as an important factor of their performance. At that time, bundle of deficiencies were prevailing in Indian banking system such as increasing branches but the most of them witnessed continuous losses, deteriorating productivity and profitability, functioning under highly regulated environment etc. that resulted in deterioration in performance of Indian banks. With the institution of banking sector reforms, competition among the banks has increased as barriers to entry of new private sector banks and foreign banks were reduced. Economies of scale and scope have to be exploited for facing competition. Thus efficiency, as a result, has become critical objective to be aimed at. Although, the reforms have increased openness of the economy and improved freedom to operate in financial markets and various policy measures have introduced to strengthen Indian banking, even then the different bank groups do not seem to be operating at the same level of efficiency and profitability because of some in-built structural characteristics of individual banks. After some period in 1998 the second banking sector reforms were introduced with major areas of recommendation. The computerization of all the banks of Indian banking industry and mergers and acquisitions of banks strengthen their efficiency. Secondly, after the IT Act (2000)was introduced, implementation of computerization along with advanced technology started in all the banks. Again due to globalization and WTO, banking has gone undergone paradigm shift resulting in transformation of whole banking industry. Due to these changes, Indian banking industry is again exploiting to face competition especially public sector banks. By the very nature of ownership, having large network of branches, Public sector banks are facing many problems such as overstaffing, resistance to adopt new technology etc, because they do not have the type of flexibility that is possessed by Indian private sector banks and foreign banks operating in India, hence, they are facing serious challenges from new private sector banks and foreign banks. With the changing times, various policy measures were introduced to improve the performance of the banks but every time, these were not succeeded to the desired level and same with the second banking sector reforms as they are not proving their efficiency in the totally transformed banking environment. Therefore, there is need to introduce new reforms in respect to the changing environment. Hence, there is a need to evaluate the performance of various measures at the early time and then give required dose to improve the gap, if any. REVIEW OF LITERATURE Aggarwal, M. (2005) highlights the performance of three sectors of banks (i.e. public, private and foreign) in the pre liberalization period and the post- liberalization periods in terms of growth rate of their interest income as a %age working funds, non-interest income as a %age working funds, operational expenses as a %age operational income, cost of deposits, spread as a %age working funds, operational productivity etc. The data were collected for the period of 21 years starting from 1980 to 2001 the study of paper reveals that the operational productivity of all the sectors is better in post liberalization period. Aggarwal, A.K., Singh, D. and Chaturvedi, N. (2007-08) analyzed the performance of the banking sector and considered as a proxy for the economy as a whole, due to banks wide spectrum of exposures. The paper argues that to survive and thrive in the long run, banks need to pursuer strategies that enable them to develop resources that are inimitable, rare, durable and superior to competitors, while consolidation and convergence are no doubt necessary to survive, they are by no means sufficient. The most important point is that mergers and acquisitions in the banking sector must be market led rather than prompted by government or regulator. We are sure that our banking institutions, as in the post, shall rise to Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 224

the occasion and show the required flexibility to absorb and adopt. The institutional changes to consolidate their position in the world market. Arora, U. and Verma, R. (2005) studied the performance evolution of public sector banks in the post reforms period on the basis of four parameters that are financial parameters, operational parameters, profitability parameters and productivity parameters and during this period the performance of public sector banks is quite satisfactory. Bhattacharya, (1997) has found public sector banks with the highest efficiency among the three categories of bank groups as foreign and private sector banks have much lower efficiencies. However PSBs started showing a decline in efficiency after 1987, private banks witnessed no change and foreign banks disclosed sharp rise in efficiency. B. Janki, (2002), analyzed in his article that how technology is effecting employee s productivity. There is no doubt, in India particularly PSBs will need to use technology to improve operating efficiency and customer services. Harnessing employee technology synergy is crucial for unleashing productivity and reaching out to the huge base of retail customers, who are also dispersed in rural and semi-urban areas. Banks can use technology to address customer needs and improve their interaction with customer keeping in touch through telephone and Internet. The focus on technology will increase like never before to add value to customer service, develop new products, strengthen risk management, and asset liability management and improve profitability. However technology is only an enabling tool and whether banks actually what they want to achieve will be determined by the drive and motivation of their work force and response of the staff. Garg, M. (1994) studied that Indian scheduled commercial banks have achieved remarkable progress in last two decades under study, particularly in branch expansion in rural areas, deposits mobilization and credit deployment to priority sector and small borrowers but their profits have not kept pace their growth and hence, their share in profits have come down, whereas foreign banks with a much smaller geographical spread and resources base, earn almost as much by way of profits as the 20 nationalized banks put together. There is a lot of difference in the pattern of advances and investments and even lending rates of Indian and foreign banks. Kamakodi, N. (2007) examines how computerization has influenced the banking habits and preference of Indian customers and which factors influence these preferences. Changing of residence, salary account and non-availability of the technology based services were given as the three main reasons for changing the bank Narayanasami, T.S. (2005) stated that rural lending is relatively less risky and more profitable for all classes of commercial banks. Credit plays a catalytic role at the right time in accelerating economic development. Economic reforms have brought about irreversible changes in several sectors of the economy. Indian banking is also in a better position with respect to technology, capital adequacy and credit management, risk bearing capacity, international competitiveness and contribution to the national economy. Ram,T.T (2002) said that business is being completely reinvented because transaction costs are much lower on the Internet than in traditional channels. The banks are rapidly shifting their business functions & customers relationships on to the Web. Satyamurty, (1994) clarified the concepts of profits, profitability & productivity applicable to the banking industry organized by the bank managements that the pressure on the profitability is more due to the factors beyond their control. Shobhana, V.K. and Shanthi, G. (2008) assess the operational efficiency of foreign banks in India using the data for the period 1996-97 to 2004-05. Analysis of clearance is used to find that there is no significant relationship between operational efficiency and variables such as size of assets, branch network and staff strength, 31 foreign banks were selected for the study. It is concluded that state bank of Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 225

Mauritius achieved the highest productivity whereas the operational efficiency of common international bank was the lowest. Srivastava, R.M. (2006) concluded that in post nationalization period witnessed an unprecedented expansion of banking industry in India. However accompanied inefficiency and poor financial health to over come this problem and improve he efficiency of banks, various tectonic measures were taken since 1991. This has resulted in improvement in productivity, profitability and strengthening of financial position of the banks so much that they are outshining those of advanced notions.however banks have still o go a long way to sustain their Competitive success. Indian Commercial Banks also need to enhance their system and procedure to international standards and also simultaneously fortify their financial position. Singh, I. & Kumar, P. (2006) analyzed that deposits is a major determinant of spread followed by borrowings and labour. The study again concluded that average technical and allocative efficiency are the highest in foreign banks while of PSBs is although lower than FBs but much better than private sector banks. Singla & Arora (2005) studied the comparative performance of Canara Bank and Indian Bank that both the banks have improved their financial performance during the study period where Canara Bank has an upper hand in growth of deposit, advances and average working funds. In case of productivity it is rising in both the banks but remained much higher in Canara Bank. T. Padamasai (2000) studied that productivity and profitability of five big banks increased throughout the post-reforms period in terms of selected ratios of each parameter, but on account of efficiency, the performance of the top five banks is very dismissal as inefficiency has increased during the study period. He suggested that if the government sells its share in the profit making banks, it would be able to bail out the weak banks. RESEARCH GAP From the review of literature, the researcher concludes that very few studies have been conducted about the comparative performance in the post-liberalization era. The present study is devoted to find out the performance shifting in 2008-09. FOCUS, OBJECTIVES, RESEARCH METHODOLOGY AND DATABASE Objectives To study and analyze the relative share of all bank groups in the total assets of all scheduled commercial banks. To find out the share of performance parameters from total assets of all scheduled commercial banks. Focus Area The present paper focuses on the comparative performance of various bank groups prevailing in India. Research Design A descriptive conclusion research design was used in the present study. The study has been conducted about impact of selected factors on the performance of all the banks. The time period of the study is 2003-04 to 2008-09. Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 226

Sample Design The present paper is concerned with Indian banking industry in whole and it is further divided into four bank groups to analyze their performance in terms of selected parameters. Bank groups are defined as follows: G-I comprises Public Sector Banks (PSBs) 27 Banks G-II comprises Old Private Sector Banks (OPSBs) 15 Banks G-III comprises New Private Sector Banks (NPSBs) 7 Banks G-IV comprises Foreign Banks (FBs) 33 Banks Indian banking industry is going under structural changes mainly due to mergers and acquisitions. It is important to mention here that as IDBI bank was under new private sector banks group but from 2004-05, it is included in other public sector banks group they are now 28 in number. In the old private sector banks, 6 banks are excluded i.e. Bharat Overseas Bank, Development Credit Bank Ltd., Lord Krishna Bank Ltd., The Ganesh Bank of Kurundwad Ltd., The Sangli Bank Ltd., The United Western Bank Ltd. In the list of new private sector banks, there are 7 banks as Bank of Punjab and Centurion Bank are merged under the name Centurion Bank of Punjab from the year 2004-05 and Global Trust Bank has merged into Oriental Bank of Commerce in 2004 whereas Yes Bank has excluded from this group as it is just entered into the industry in 2004-05. From the 33 foreign banks, 2 banks named Credit Lynnoias and Sumitomo Mitsui Banking Corporation have also been included. The time period for the study is taken from 2003-04 to 2008-09 because banks are facing fierce competition and globalization is at the peak to put there are changes in banking industry at large. Therefore, there is a need to evaluate their performance in this totally changes and highly competitive environment. Data Collection Secondary data had been used in present study. 1. Performance Highlights, IBA, Mumbai, Various Issues from 2003-04 to 2008-09. 2. Report on Trend and Progress of Banking in India, Mumbai, 2008-09 3. Indian Banking at a Glance 2009, IBA, Mumbai, 2009 Parameters of the Study For the analysis of the performance firstly, share of the bank groups from the total assets of the Indian banking industry has been calculated and then various factors in terms of various ratios have been studied to examine their impact on the overall performance of these bank groups. Share of different bank groups in the total assets of scheduled commercial banks Share of rural branches from total rural branches of all scheduled commercial banks Share of priority sector advances from total priority sector advances of all scheduled commercial banks Net profits as a percentage of total assets (Profitability) Establishment expenses as a percentage of total expenditure (Establishment Cost) Net non-performing assets as a percentage of net advances Contingent liabilities as a percentage of total liabilities Spread as a percentage of total assets (Spread) Operating expenses as a percentage of total assets (Intermediation Cost) Investments share in total investments of all scheduled commercial banks Despite these ratios, analysis is also made to examine the number of banks who have improved or declined their share in total assets of all scheduled commercial banks in respect of all the changes. For the purpose, Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 227

firstly share of all individual bank (82 banks) was computed for 2003-04 and 2008-09 and then two separate categories for each bank group are made that comprises one category for those banks who have improved their share in assets of all scheduled commercial banks and the second category was for those banks with declined share in assets. Similarly, all the factors as defined above were analyzed for every individual bank to count the number of banks under each category that means how many banks have improved that particular factor and how many witnessed decline in respect of bank with improved share in assets and same is in the case of banks with declined share in assets. And finally the numbers of banks were count for each category to examine the change that occurred due to the current changing environment. SHARE OF DIFFERENT BANK GROUPS IN TOTAL ASSETS Public Sector Banks: Share of different bank groups in the total assets of all scheduled commercial banks has been depicted in Table 1. Public sector banks have pre-dominant position in the Indian banking system accounted for about 67.24 pc of the total assets of all scheduled commercial banks at the end of March, 2009. The important point to note is that their share is declining. Among all the 27 public sector banks excluding IDBI Bank, 17 banks have improved their share in total assets of all scheduled commercial banks while 10 banks witnessed decline. Old Private Sector Banks: Old private sector banks have recorded decline in their share of total assets of all scheduled commercial banks during the study period as it is declined from 6.46 pc in 2003-04 to 4.02 pc in 2008-09. Among all 15 old private sector banks, only 2 banks that are Nainital Bank and Federal Bank have improved their share in assets of scheduled commercial banks where others witnessed decline during the study period. Table I: Share of Different Bank Groups in the Total Assets of Scheduled Commercial Banks (Percent) Bank Groups 2003-04 2004-05 2005-06 2006-0 7 2007-08 2008-09 Growth in percentage 2007-08 2008-09 G-I 75.37 75.47 72.33 72.67 69.85 67.24-7.32 10.78 G-II 6.46 5.87 5.43 4.87 4.49 4.02-30.49-37.77 G-III 11.32 12.12 15.00 17.26 17.23 16.94 52.20 49.64 G-IV 6.85 6.54 7.24 8.28 8.41 8.96 22.77 30.80 Source: Performance Highlights, IBA, Various Issues from 2003-04 to 2008-09. New Private Sector Banks: In Indian banking, new private sector banks have gained second position with 16.94 pc share in total assets of all Scheduled commercial banks at the end of March, 2009. Among the 7 new private sector banks, all the 7 banks have improved their share in assets at the end of March, 2009. Foreign Banks: Foreign banks got third position with 8.96 pc share in total assets of all scheduled commercial banks at the end of March, 2009. Among 33 foreign banks, 11 banks have recognized with improved share in assets of all scheduled commercial banks at the end of March, 2009 while 22 banks recorded decline. Among all the bank groups, public sector banks gained dominant position with 67.24 pc share in total assets of the scheduled commercial banks where new private sector banks are in succession with 16.94 pc share at the end of March, 2009. As public sector banks, old private sector banks and some of the foreign banks have recorded significant decline in their share in assets of all scheduled commercial banks, so it is obvious to mention that there is a need to study the factors that contributed to such a phenomenon. In this Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 228

paper, an attempt is made to analyze the various ratios (factors) that have affected the relative share of banks. Factors Influencing the Relative Share of Banks The variations in performance of the banks may be attributed by number of factors such as operational efficiency, location advantages, scale of economies, quality of assets etc. It is interesting to examine whether banks with higher growth in assets or declining share in assets, have differential aspects in terms of various factors selected for study. Share of Rural Branches: Table II shows that nationalized banks have dominant position in their share in total rural branches of all scheduled commercial banks having in 67.79 pc share in 2008-09. Private sector banks have declined the rural branches i.e.6.47 pc in 2002-03 to 6.02 pc in 2008-09. Foreign banks did not have any branches in rural areas. Table II: Share of Different Bank Groups in Rural Branches of All Scheduled Commercial Banks Percent Years SBI SBI Associate Nationalized Private sector FBS 2003-04 19.50 6.99 67. 02 6.47-2004-05 19.31 6.90 66.27 7.50-2005-06 19.38 6.89 66.19 7.52-2006-07 19. 08 6.95 67.79 6.15-2007-08 20.00 7.05 67.92 6.10-2008-09 19.95 7.08 67.79 6.02 - Priority Sector Advances: From table III, it is observed that old private sector banks have the highest share (38.42 pc) in total priority sector advances of all scheduled commercial banks.new private sector banks and foreign banks have 36.42 pc & 33.42 pc share respectively at the end of March, 2009. It is important to note that all bank groups witnessed increase in their share in total priority sector advances of all scheduled commercial banks except G-I. Table III: Share of Different Bank Groups from Total Priority Sector Advances of All Scheduled Commercial Banks Percent Bank Groups 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 G-I 34.27 34.45 35.33 28.15 26.12 24.82 G-II 31.50 31.31 32.16 34.05 36.15 38.42 G-III 22.57 23.16 30.09 32.95 35.14 36.42 G-IV 23.47 25.77 26.88 29.55 31.25 33.42 Profitability: Profitability is a ratio of net profits as a percentage of total assets. Trends in profitability are shown in Table IV (A) where all the bank groups have recorded decline except new private sector banks that shows increase in their profitability during the study period. Foreign banks have dominant position with the highest profitability of 1.99 pc at the end of March, 2009. Old private sector banks witnessed greater decline in their profitability that have declined from 1.16 pc to 0.98 pc at the end of March, 2009. Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 229

Table IV (A): Trends in Banks Profitability (Net Profit as a Percentage of Total Assets) Percent Bank Groups 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 G-I 1.12 0.87 0.82 0.83 0.89 0.95 G-II 1.16 0.21 0.54 0.70 1.01 0.98 G-III 1.22 1.17 1.00 0.92 1.01 1.23 G-IV 1.58 1.29 1.52 1.65 1.81 1.99 Table IV (B) shows that whether the banks that have succeeded to improve their share in assets and those with declined share, have also improved their profitability or not. In this table numbers of banks are given for each change. Column 2 comprises total number of banks against each bank group under study at the end of March, 2009. Column 3 of the table comprises the number of banks that have improved their share in total assets of all scheduled commercial banks and at the same time improved their profitability whereas column 4 comprises number of banks with improved share in assets but declined profitability. Column 5 and 6 comprises similar information but for those banks who have witnessed decline in their share in total assets of all scheduled commercial banks. Table IV (B): Banks Profitability Bank Groups Number of Banks Share in Assets Share in Assets Profits Profits Profits Profits G-I 27 9-18 - G-II 15 7 6 1 1 G-III 7 3 4 - - G-IV 33 12 7 10 4 Total 82 31 17 29 5 Among all 82 banks, only 29 banks (total of column 5) have improved their profitability while the others recorded decline. Among all the bank groups, foreign banks have dominant position with more improvement in their profitability while the share of total assets has been declined and among these, 7 banks are those having improved their share in assets of all scheduled commercial banks while decline the profitability. In case of 15 old private sector banks, 7 banks have improved their share in assets and profitability of all scheduled commercial banks at the same time. Overall, Profitability situation is deteriorating in all the bank groups except foreign banks which are not a sign of sound efficiency of Indian banking industry. Share of Establishment Expenses from Total Expenditure: Table V (A) shows that share of establishment expenses to total expenditure was in increasing trend in all the bank groups except public sector banks. Public sector banks have witnessed the highest level of establishment expenses as compare to all the bank groups under study although it decreased in 2008-09 as compare to last year and the increase is mainly due to their overstaffing problem. It is the least in new private sector banks i.e. 8.21 pc at the end of March, 2009. Foreign banks are in succession with 14.24 pc level of establishment cost. Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 230

Table V (A): Share of Establishment Expenditure in Total Expenditure Percent Bank 2003-04 2004-05 2005-06 2006-07 2007-08 Groups 2008-09 G-I 18.52 19.51 18.99 14.94 13.05 12.89 G-II 13.79 14.21 15.90 14.84 12.16 14.96 G-III 5.87 7.79 8.19 9.69 8.34 8.21 G-IV 11.14 12.35 13.76 14.76 14.57 14.24 Bank Groups Number of Banks Table V (B): Establishment Cost Share in Assets Share in Assets Establishment Cost Establishment Cost Establishment Cost Establishment Cost G-I 27 3 21 2 1 G-II 15 7 2 5 1 G-III 7 5 1 1 - G-IV 33 12 7 6 8 Total 82 27 31 14 10 Table V (B) reflecting that among all 82 banks, 21 banks in public sector banks have succeeded to reduce their establishment cost along with their improved share in assets also. Among the old private sector banks, 7 banks which have increased the establishment cost and total assets at the same time. All the new private sector banks have recorded increase in their establishment cost at the end of March, 2009 mainly because they are at establishment stage. Among the foreign banks, most of the banks i.e. 12 banks have witnessed increase in their establishment cost while 12 are those having improved their share in total assets of all scheduled commercial banks and 6 banks are those which declined share in assets of scheduled commercial banks. Overall, majority of the banks have recorded increase in their establishment cost so needs to improve their policies to control these cost as these contributes to reduction in profits. Net Non-Performing Assets (NPAs) to Net Advances: Table VI (A) exhibits that bank group-wise, all the bank groups have recorded declining trend where old private sector banks have the least non-performing assets i.e. 0.52 pc at the end of March, 2009. Foreign banks has 0.54 pc level of non-performing assets whereas new private sector banks have recorded the highest level of non-performing assets i.e. 1.26 pc although witnessed decline in old private sector banks from 5.38 pc in 2003-04 to 0.52 pc in 2008-09. Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 231

Table VI(A): Net Non-Performing Assets as Percentage of Net Advances Percent Bank 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Groups G-I 2.68 1.95 1.01 1.12 0.99 0.88 G-II 5.38 3.75 2.20 1.37 0.66 0.52 G-III 0.82 1.26 0.80 1.13 1.20 1.26 G-IV 7.56 3.13 2.97 1.55 0.77 0.54 Table VI (B) reflects that among the total 82 banks, 60 banks (total of column 4 and 6) have recorded decline in their level of non-performing assets. 7 banks in the foreign banks have recorded increase in their non-performing assets and decline the total assets. In public sector banks have been 2 banks which are increased the non performing assets and also increased the total assets. It is important to note that all public sector banks and old private sector banks with improved and declined share in assets of scheduled commercial banks have succeeded to bring down their non-performing assets.overall, non-performing assets have better position as majority of the banks have succeeded to decrease their non-performing assets. Table VI (B) Net Non-Performing Assets (NPAs) Banks Number of Banks Assets Assets NPAs NPAs NPAs NPAs G-I 27 2 21 2 2 G-II 15 1 10 2 2 G-III 7 5 1 1 0 G-IV 33 2 17 7 7 All Scheduled 82 10 49 12 11 Commercial Banks Off-Balance Sheet Activities: Contingent liabilities reflect the extent of fee-based activities, which have involved relatively less risk as compared to non-fee based activities. From Table VII (A),it is observed that all bank groups have recorded increase in their contingent liabilities where foreign banks have the highest level of contingent liabilities which have extremely exceeded from total liabilities i.e. from 665.84 pc in 2003-04 to 2012.20 pc in 2008-09 and in old private sector banks also increased their contingent liabilities near about double i.e.28.21 percent to 54.26 percent. These liabilities were the least in public sector banks i.e. 48.20 pc in 2008-09. Table VII (A): Contingent Liabilities as Percentage of Total Liabilities Percent Bank 2003-04 2004-05 2005-06 2006-07 2007-08 Groups 2008-09 G-I 33.06 38.55 41.80 43.08 45.54 48.20 G-II 28.21 46.02 43.61 45.36 48.09 54.26 G-III 158.80 173.19 188.35 216.63 224.62 235.02 G-IV 665.84 1035.33 1267.03 1816.56 1915.18 2012.20 Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 232

Banks Table VII (B) : Contingent Liabilities Number of Banks Assets Contingent Contingent Liabilities Liabilities Assets Contingent Contingent Liabilities Liabilities G-I 27 14 10 2 1 G-II 15 6 3 4 2 G-III 7 3 2 1 1 G-IV 33 13 12 5 3 All Scheduled Commercial Banks 82 36 27 12 7 Table VII (B)exhibits that among the public sector banks, 10 banks have recorded improvement in their total assets but decline the level of contingent liabilities.among the old private sector banks, 3 banks have improved their share in total assets.in the new private sector banks have 3 banks which have improved their share in assets and also improved their contingent liabilities. In case of foreign banks, 13 banks have improved their level of contingent liabilities and share in total assets. Overall, majority of the banks witnessed improvement in their level of contingent liabilities. Spread: Spread contributes to profits in the similar direction as increase in spread leads to rise in profits and vise-versa. Table VIII (A) shows all the bank groups, foreign banks have recorded the highest spread with 3.60 pc rates in 2003-04 which increased from 3.89 pc in 2008-09. Public sector banks are in succession with 2.12 pc spread but witnessed decrease as it was 2.98 pc in 2003-04. Old private sector banks and new private sector banks have recorded improvement in their spread level. Table VIII (A): Spread as Percentage of Total Assets (Percent) Bank Groups 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 G-I 2.98 2.91 2.85 2.65 2.24 2.12 G-II 2.57 2.66 2.74 2.83 2.43 2.53 G-III 2.10 2.17 2.15 2.34 2.40 2.58 G-IV 3.60 3.34 3.52 3.74 3.79 3.89 Table VIII (B) shows that among all 82 bank, 21 banks have recorded increase in interest spread and have improved their share in assets of all scheduled commercial banks. From new private sector banks 4 banks have recorded increase in their spread and total assets while 2 banks IndusInd Bank & Kotak Mohindra Bank witnessed decline in spread but all 7 new private sector banks improved their share in total assets of all scheduled commercial banks. Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 233

Table VIII(B): Spread Banks Number of Banks Assets Number of Banks with Assets Spread Spread Spread Spread G-I 27 2 25 - - G-II 15 5 10 - - G-III 7 4 2 1 - G-IV 33 10 7 8 8 All Scheduled 82 21 44 9 8 Commercial Banks Overall, interest spread has improved in majority of the banks both improved share in assets and declined share. Intermediation Cost: Intermediation cost indicates the extent of operating expenses to total assets that reflects the competitive efficiency. In Table-IX (A), the maximum average has been observed in foreign banks i.e. 20.25 pc whereas it was the lowest in public sector banks with 9.10 pc intermediation cost level in 2008-09. Table IX (A): Intermediation Cost (Operating Expenses as Percentage of Total Assets) (Percent) Bank 2003-04 2004-05 2005-06 2006-07 2007-08 Groups 2008-09 G-I 8.21 9.23 9.82 9.17 9.15 9.10 G-II 9.99 11.86 13.21 10.97 9.65 8.65 G-III 19.79 23.97 21.85 20.00 18.42 17.32 G-IV 23.70 27.62 25.39 22.88 21.97 20.25 Table IX (B) reflects that all the bank groups, foreign banks (7 banks) were more pronounced to record decline in their intermediation cost and 7 banks which have increased the intermediation cost and also increase the total assets. Whereas 21 public sector banks have increased their intermediation cost and also increased their share of total assets. Table IX (B): Intermediation Cost (Intr. Cost) Banks Number of Banks Assets Assets Intr. Cost Intr. Cost Intr. Cost Intr. Cost 1 2 3 4 5 6 G-I 27 21 3 3 - G-II 15 10 3 1 1 G-III 7 5-2 - G-IV 33 7 11 8 7 All Scheduled 82 43 17 14 8 Commercial Banks Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 234

From old private sector banks, as 3 banks have recorded increasing intermediation cost but witnessed decline in their share in assets of scheduled commercial banks and 5 banks among the new private sector banks have increasing intermediation cost and increase their share in assets of scheduled commercial banks. Overall, public sector banks and foreign banks reflected good efforts to bring down their intermediation costs. Investments Share: Table X exhibits that public sector banks and old private sector banks have recorded declining share in total investment of all scheduled commercial banks while new private sector banks and foreign banks witnessed increase in their share. Public sector banks were at dominant position among all the bank groups with 65.24 pc share in total investment of all scheduled commercial banks and new private sector banks are in succession with 24.23 pc share as foreign banks are following new private sector banks with 9.25 pc share where both these bank groups have improved their share from 10.12 pc and 5.13 pc in 2003-04 respectively. Table X: Share of Different Bank Groups in Total Investments of All Scheduled Commercial Banks (Percent) Bank Groups 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 G-I 78.52 79.03 73.10 69.95 67.93 65.24 G-II 6.23 5.37 5.27 4.71 4.56 4.23 G-III 10.12 10.67 15.46 17.89 19.08 24.23 G-IV 5.13 4.94 6.18 7.52 8.40 9.25 IMPLICATIONS OF THE STUDY The current study is mainly concerned with the analysis of comparative performance of specific bank groups during the period of 2003-04 to 2008-09 that reflects the impact of new competitive environment on the banks performance in terms of various selected variables. As the study reflects the number of banks that have improved or declined their share in assets of all scheduled commercial banks in respect of all the selected variables, so provides important analysis to judge the banks with poor performance which further help to make some policy measures to improve their performance. The study will be more beneficial for the bankers and policy makers to make some important decisions and to make policy measures to improve their performance. The study will be more helpful to the academicians and researchers for further study in this respect. It is the need of the time to conduct comprehensive studies about the following themes. 1. Comparative study of individual banks for all selected variables both for traditional banks and for e-banks. 2. Comparative performance evaluation of each bank in sensitive sectors. 3. Performance evaluation of banks separately in domestic and branches working at abroad. 4. Comparative performance of segment-wise rural, semi-urban and metropolitan branches of each bank. CONCLUDING REMARKS 1. The setting up of a new competitive environment has resulted in new challenges for the public sector banks to retain their share. Ongoing changes in the structure of Indian banking are clearly visible. While the share of public sector banks in the total assets of the banking sector has shown a Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 235

steady decline, the new private sector banks have succeeded in enhancing their position. Similarly, old private sector banks as a group have also increased their share, although marginally. 2. The foreign banks too have been facing stiff competition from the new private banks. Some of the top foreign banks have also lost their individual shares. 3. In the face of growing competition, the policy changes and the operational environment in respect of the Indian banking industry, there has been an increased focus on profitability, although other social objectives continue to be important. Consequently, most of the banks in public sector have shown a significant improvement in their profit performance. While foreign banks and other private sector banks continue to earn higher profit rates, the differential in the profit performance among different bank groups has narrowed down substantially. 4. The profit performance has been quite varied among different bank groups and within each group in respect of individual banks as well. Generally, new private sector banks and foreign banks have fared better than public sector banks and old private sector banks. It is important to note that new private sector banks performed better than foreign banks in most of the years of the study period. This reflects the favorable effects of the adoption of the new technology. 5. An interesting feature is that a number of banks that have enhanced their share in the total assets of the banking sector have witnessed a deterioration in the profit performance. This was especially so in the case of new private sector banks. 6. Interest rate spread has exhibited a decline over the years in case of public sector banks and Indian private banks. The spread was the lowest in case of new private sector banks and the highest in respect of foreign banks. 7. In the face of new competition and recognizing the need to undertake cost reduction, public sector banks have brought about reduction in the wage bill component, while this has shown an increase in the case of foreign banks and new private sector banks between 2003-04 and 2008-09. This also reflects efforts towards the adoption of cost saving and more efficient new technology. In comparison, a majority of the foreign banks had to face increasing wage cost. 8. Foreign banks as well as the new private banks had the advantage of large sized branches when compared to public sector banks and old private sector banks. in addition, the requirement in respect of priority sector loans for foreign banks was also less when compared with Indian banks. 9. Operating expenses of SCBs has shown a steady decline in recent years. While all the public sector banks were able to bring down the cost of intermediation, a number of foreign banks showed an increase in such costs. Further operating expenses were the highest in the case of foreign banks and the lowest in the case of new private sector banks. 10. While the level of NPA of public sector banks remain high, a noteworthy development has been their significant reduction in relation to net advances in recent years. NPA as a proportion of net advances showed deterioration in the case of foreign banks in most years of the period under review. 11. The superior profit performance of foreign banks is perhaps attributable to a greater share of income generated from fee based activities, which is also reflected in the extent of off balance sheet liabilities. CONCLUSION From the comparative analysis, it may be concluded that although most of the banks have succeeded to bring down their non-performing assets and costs, but still they are facing deterioration in their profitability. Most of the public sector banks even with the highest share in assets, rural branches, priority sector advances and investments of all scheduled commercial banks, still have to face competition in terms of new challenges from new private sector banks and foreign banks as their cost is the highest along with continuous deterioration in profits and spread. Therefore, there is a need to make some Internationally Indexed Journal www.scholarshub.net Vol II, Issue -1 January 2011 236

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