A STUDY OF PROFITABILITY AND EFFICIENCY OF PRIVATE SECTOR BANKS IN A DEVELOPING ECONOMY: THE CASE OF INDIA Dr RATNA SINHA Head of Department, T.John Institute of Management & Science, Bangalore ABSTRACT Efficiency and profitability are interrelated and it is true that productivity is not the sole factor but it is an important factor which influence to profitability. The key to increase profitability is increase productivity. There has been a considerable improvement in the supervisory system of banking sector as far as recovery, efficiency, assets quality, profitability, and liquidity is concerned. The purpose of this study is to analyze the financial data of five Indian private sector banks for the financial period 2010-11 to 2013-14 with a view to examining profitability and efficiency and overall performance of the banks based on these two categories only i.e. profitability and efficiency. The study found that that there was no statistically significant difference in profitability and efficiency of the selected Indian private sector banks. Due to highest NP margin as well as higher ROA, HDFC was at the first position followed by YES, Axis, ING and ICICI. Due to significantly highest NII and NNII as well as efficiently controlled IE; KM occupied first position followed by HDFC, ICICI, YES and ING. For this we have recommended some suggestions to tackle the challenges faced by the banks particularly Private sector banks. Key words: interest expended, net interest income, net profit margin, return on assets, return on net worth INTRODUCTION Banks are Vital Institutions in any society as they significantly contribute to the development of an economy through facilitation of business. They play the major role in rapid economic development. Any modern financial system contributes to economic development and the improvement in living standards by providing various services to the rest of the economy. These include clearing and settlement systems to facilitate trade, channeling financial resources between savers and borrowers, and various products to deal with risk and uncertainty. The Indian financial system has been regulated mainly by interest rate regulation, credit restrictions, equity market controls and foreign exchange controls. Indian Banking Sector is divided into four categories i.e. Public Sector Banks, Private Sector Banks, Foreign Banks in India and Scheduled Commercial Banks. Banks are considered to be very important financial mediators or institutions because they result into well being of saver as well as investors. Financing facilitates the flow of goods and services and the activities of the government. It also provides a great portion of the medium of exchange to the country. Banks are the backbone of the economy of the country because they play significant role in the effort to attain stable prices, high level of employment and sound economic growth. Hence, measurement of performance of the banking sector is an efficient measure and indicator to judge the soundness of economic activities of the economy. Sound financial health of banking sector is very vital not only to its depositors but is equally significant to the investors also. Improvement of economic efficiency of savers and investors raises overall improvement in living standard of the society at large. As a result, efforts are carried out to analyze the financial performance of the banking sector and manage it www.researchscripts.org 1 editor.researchscripts@gmail.com

effectively. It helps in regulating the level of risk of banking sector. There is a considerable improvement in the supervisory system of banking sector as far as recovery, efficiency, assets quality, profitability, and liquidity is concerned. Such categories help in assessing and examining the performance and financial soundness of the banks. The proposal of this study is to analyze the financial data of five Indian private sector banks for the financial period 20010-11 to 2014-15 with a view to examining profitability and efficiency and overall performance of the banks based on these two categories only i.e. profitability and efficiency. An attempt has also been made to rank the banks on the basis of their profitability and efficiency. Therefore, the objective of the study is to assess profitability and efficiency of Indian private sector banks. To analyze the profitability of Indian private sector banks, financial ratios such as net profit, return on assets and return on net worth have also been calculated. In order to assess the efficiency of India private sector banks, financial ratios such as Net Income to Total Funds, Non Net Income to Total Funds and Interest Expended to Total Funds have also been used. This Research article is planned as follows: the next section following introduction discusses the review of relevant literature. Third section throws light on methodology. The details of the results and analysis of the available data are described in fourth section and the final section presents the main conclusions. THE LITERATURE REVIEW Study by (Rashmi soni 2012) investigated the effectiveness of the Banks on the basis of net assets and Non performance ratio. On the basis of return and operation factors, they used multi criteria methodology to classify banks on the basis of banks capital adequacy ratio. The study by (Pathak, 2003) focused on financial parameters like deposits, profits, and return on assets and productivity from the view point of Indian Private Sector Banks. The article (virendra koundal 2012) focused on performing assets and Non-Performing assets and the performance of foreign sector banks are better than public sector banks. Similarly, the performance of new private sector banks is better than public sector banks. The paper concludes that although various reforms have produced favorable effects on commercial banks in India and because of this transformation is taking place almost in all categories of the banks. Study by (Balasubramanin, 2007) revealed that private sector banks play an important role in development of Indian economy. After liberalization, the banking industry underwent major changes. The economic reforms have changed the banking sector. RBI permitted new banks to be started in the private sector as per the recommendation of the Narashiman Committee. The study by (Chaudhary & Sharma, 2011) concluded that an efficient management information system should be developed. The bank staff involved in sanctioning the advances should be trained about the proper documentation and charge of securities and motivated to take measures in preventing advances turning into NPA. Private banks must pay attention on their functioning to compete private banks. Banks should be well versed in proper selection of borrower/project and in analyzing the financial statement. The study focused on (Dr. Hemal Pandya, 2014) concludes that before the global recession foreign bank group was performing much better than other banking sectors. Private, Nationalized and SBI bank groups kept on performing almost same, but certainly better than RRBs for all the period of www.researchscripts.org 2 editor.researchscripts@gmail.com

study. But, Indian banks have to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks. From the above study it is found that that different author has approached different ways in varying levels of analysis. It gives an idea on extensive and diverse works on performance measurement of banks. It has been noticed that the studies on performance of banks in various aspects provide divergent results relating to the study period overlap or coincide. The main reason for divergence in the results is use of different method for the measurement of performance of banks. All the studies aimed to analyze the performance of banks in India & abroad with number of factors such as profitability, liquidity, efficiency, assets quality and control. The survey of the existing literature reveals that no specific work has been carried out to examine and ascertain the profitability and efficiency measurement of Indian private sector banks and thereby to assess overall performance thereof. The present study is an attempt in this direction and therefore, aims to enrich the existing literature on performance of banks in India. STUDY METHODOLOGY Objectives of the Study The present study aims: 1 To evaluate profitability and efficiency of Indian private sector banks. 2 To assess overall performance of Indian private sector banks. 3 To give recommendations and suggestions for profitability and efficiency improvement of Indian private sector banks. Sample and Sampling Techniques Looking to the objectives of the present study, there was the need to take a sample covering private sector only and hence a sample of following five banks has been selected using convenient sampling method. 1. HDFC Bank Ltd (HDFC) 2. ICICI Bank Ltd (ICICI) 3. Axis Bank (AB) 4. ING Vysya Bank Ltd (ING) 5. YES Bank (YES) Hypothesis of the Study The following hypothesis has been formulated and tested in this study: H 0 =there is no significant difference in profitability and efficiency of Indian private sector banks. H 1 =there is significant difference in profitability and efficiency of Indian private sector banks. Period of the Study The study has been undertaken for the period of five years 2010-11 to 2014-15. On the source of various study, financial ratios such as Net Profit, Return on Assets and Return on Net Worth have been selected with a view to evaluating profitability of Indian private sector banks; while in order to assess the efficiency, financial ratios such as Net Income to Total Funds, Non Net Income to Total Funds and Interest Expended to Total Funds have been selected. Five year average has been calculated with the help of simple arithmetic mean. Rank to average so computed for each ratio in various categories i.e. profitability and efficiency has been given and then composite rank to www.researchscripts.org 3 editor.researchscripts@gmail.com

group mean for each category has been given. To assess overall performance, composite rank for each category has been taken together and average of ranks so taken has been calculated with the help of simple arithmetic mean and final ranking has been given. The hypothesis of the study has been tested with the help of ANOVA. RESULT AND ANALYSIS Table 1 Profitability of the Indian Private Sector Banks Net Profit (NP) 2014 2013 2012 2011 2010 Mean Rank HDFC 17.19 15.97 15.34 16.21 14.82 15.906 1 ICICI 13.87 12.94 11.46 9.89 7.85 11.202 5 AXIS 14.27 13.72 14.07 14.16 13.2 13.884 3 ING 7.56 11.72 14.01 16.87 16.82 13.396 4 YES 13.82 13.61 13.66 15.56 16.3 14.59 2 Return on Assets (ROA) HDFC 184.1 154 128.74 549.91 472.23 297.796 2 ICICI 661.77 596.04 531.56 480.15 460.12 545.928 1 AXIS 247.64 204.25 174.18 148.78 228.81 200.732 4 ING 310.35 287.85 252.68 198.23 297.6 269.342 3 YES 197.48 161.94 132.49 109.29 90.96 138.432 5 Return on Net Worth (RONW) HDFC 19.79 18.74 17.36 15.6 13.89 17.076 3 ICICI 14.44 13.96 12.47 11.01 9.1 12.196 5 AXIS 12.92 14.35 14.2 14.29 16.4 14.432 4 ING 12.91 17.83 18.52 19.65 20.74 17.93 2 YES 22.71 22.39 20.89 19.16 15.46 20.122 1 Composite Profitability NP ROA RONW Group Mean Rank HDFC 1 2 3 2 1 ICICI 5 1 5 3.666667 4.5 AXIS 3 4 4 3.666667 4.5 ING 4 3 2 3 3 YES 2 5 1 2.666667 2 Source: Computed from Annual Reports Table 1 depicts profitability of the selected banks of Indian private sector. Profitability was measured with the financial ratios such as NP, ROA and RONW. As far as NP was concerned HDFC was on the top position, followed by YES, AXIS, ING and ICICI. In case of ROA, ICICI occupied the first position, followed by HDFC, ING, AXIS and YES. YES led the selected banks in case of RONW, followed by ING, HDFC, AXIS and ICICI. On the basis of group mean of three profitability ratios, HDFC was at the top position with group mean of 2, followed by YES with group mean of 2.66, ING with group mean of 3 and AXIS and ICICI jointly shared the fourth position with group mean of 3.66. www.researchscripts.org 4 editor.researchscripts@gmail.com

Table 2 Efficiency of the Indian Private Sector Banks Net Interest Income/Total Funds (NII) HDFC 4.2 4.32 4.23 4.24 6.13 4.624 2 ICICI 2.79 2.6 2.29 2.1 3.72 2.7 5 AXIS 5.24 5.1 5.29 5.8 12.29 6.744 1 ING 3.55 2.75 3.54 3.96 4.04 3.568 3 YES 3 2.57 3.67 3.91 4.37 3.504 4 Non Net Interest Income/Total Funds (NNII) HDFC 1.82 1.91 1.94 1.83 0.01 1.502 3 ICICI 4.24 4.6 5.05 6.18 4.28 4.87 2 AXIS 4.88 5.42 6.12 8.93 6.82 6.434 1 ING 1.15 1.07 0.18 0.07 0.08 0.51 5 YES 1.65 1.46 0.04 0.03 0.18 0.672 4 Interest Expended/ Total Funds (IE) HDFC 5.15 5.26 4.88 3.76 3.84 4.578 2 ICICI 4.19 4.43 4.41 3.79 4.27 4.218 1 AXIS 5.83 6.39 6.12 4.68 4.17 5.438 3 ING 7.5 7.31 7.15 5.78 6.11 6.77 5 YES 7 7.03 7.07 5.86 5.34 6.46 4 Composite Efficiency NII NNII IE Group Mean Rank HDFC 2 3 2 2.333333 2 ICICI 5 2 1 2.666667 3 AXIS 1 1 3 1.666667 1 ING 3 5 5 4.333333 5 YES 4 4 4 4 4 Source: Computed from Annual Reports Table 2 depicts efficiency of the selected banks of Indian private sector. Efficiency was measured with the financial ratios such as NII, NNII and IE. As far as NII was concerned AXIS was on the top position, followed by HDFC, AXIS, YES and ICICI. In case of NNII, AXIS occupied the first position, followed by ICICI, HDFC, YES and ING. ICICI led the selected banks in case of IE, followed by HDFC, AXIS, YES and ING. On the basis of group mean of three efficiency ratios, AXIS was at the top position with group mean of 1.66. HDFC was at the second position with group mean of 2.33, while ICICI was at the third place with group mean of 2.66. YES was at the fourth place with group mean of 4, while ING was at the last place with group mean of 4.33. Table 3 Overall Performance of Indian Private Sector Banks Group Mean of Composite Profitability Group Mean of Composite Efficiency Mean Rank HDFC 2 2.333333 2.166667 1 ICICI 3.666667 2.666667 3.166667 3 AXIS 3.666667 1.666667 2.666667 2 KV 3 4.333333 3.666667 5 YES 2.666667 4 3.333334 4 www.researchscripts.org 5 editor.researchscripts@gmail.com

For the purpose of assessment of the overall performance of Indian private sector banks, composite rating and results have been calculated and presented in Table 3. The study found that HDFC was at the first position with overall composite ranking average of 2.16, followed by AXIS with 2.66, ICICI with 3.16, YES with 3.33 and ING with 3.66. Table 4 ANOVA Result Source of Variation Sum of Squares Degree of Freedom Mean Square F- Value Between Groups 9.95E-14 1 9.95E-14 1.1191E-13 Within Groups 7.11111 8 0.888889 Total 7.11111 9 For determining whether there was any significant difference between the means of profitability and efficiency ratios, ANOVA: Single factor has been applied on the data shown in Table 3. The ANOVA result has been presented in Table 4. The ANOVA result revealed that the calculated value of F was less than the critical value of F (5.317655) for 1, 8 degree of freedom at 5% level of significance. It meant that there was no statistically significant difference in profitability and efficiency of Indian private sector banks. CONCLUSIONS Findings As far as profitability was concerned, 1. Due to highest NP margin as well as higher ROA, HDFC was at the first position followed by YES, ING, AXIS and ICICI. It showed greater earning quality of HDFC which reflected the quality of its profitability and its ability to maintain quality and earning consistently. It revealed consistency of future earnings too. 2. Despite highest RONW and better NP margin, YES was at the second position due to the lowest ROA. Lowest ROA showed that the productivity of funds management was lower. 3. Average ROA and RONW helped ING to share third position because of competitive NP margin. 4. Regardless of competitive NP margin, AXIS was jointly at the fourth place with ICICI due to the lower ROA as well as RONW. It showed inefficient utilization of assets. 5. Despite the highest ROA, ICICI was at the bottom due to lowest NP margin as well as least RONW. As far as efficiency was concerned, 1. Due to significantly highest NII and NNII as well as efficiently controlled IE; AXIS occupied first position followed by HDFC, ICICI, YES and ING. It showed AXIS s adherence with set norms, ability to plan and respond to changing environment and administrative capability. 2. Higher NII and under controlled IE, HDFC was at the second place despite below average NNII. 3. Though the lowest IE and competitive NNII, ICICI was at the third place because of lowest NII. The lowest IE showed efficient control. 4. With quite lower NNII and higher IE, YES had fourth rank despite average NII. 5. KV was at the bottom due to lowest NNII and the highest IE despite average NII. As far as overall performance was concerned, 1. The study found that HDFC was at the first with overall composite ranking average of 2.16, followed by AXIS with 2.66, ICICI with 3.16, YES with 3.33 and ING with 3.66. It showed www.researchscripts.org 6 editor.researchscripts@gmail.com

that there was no significant difference in overall performance among Indian private sector banks under the study. 2. HDFC s first position was the result of the best profitability position and greater efficiency (reflected by control over IE and better NNI). 3. The best efficiency position overruled poor profitability performance and helped AXIS to remain at the second place. Decrease in profitability was observed due to significant increase in provision and contingencies during the study period. 4. ICICI s third position was due to its well managed assets i.e. ROA and greater efficiency in controlling IE. 5. Second position in profitability (due to greater RONW and NP margin) did not help much YES to improve its ranking because of poor efficiency position with the fourth position and hence YES was at the fourth rank. 6. Low NP margin and inefficient control over IE as well as low NNII kept ING at the bottom. The study found that that there was no statistically significant difference in overall performance based on profitability and efficiency of the selected Indian private sector banks. Suggestions To improve profitability and efficiency, it is suggested that 1. HDFC should carry out measures to increase NNII as its contribution is comparatively very low in income generation. Return from shareholders perspective should also be paid attention. 2. AXIS should control its operating expenses as well as selling, administrative and miscellaneous expenses to increase NP margin. Control over IE would also be of equal importance to improve efficiency performance. 3. ICICI should carry out rigorous steps to control operating overheads which have been observed to be the highest among the banks under the study. Moreover, steps would be required to be initiated to improve NII which has also been observed to be the lowest among the selected banks. 4. YES should focus on efficient utilization of its assets by carrying out measures to increase NNII. Control over significant rise in IE during the study period would also be of great concern to improve efficiency. 5. ING should take measures to curb IE which has been observed to be very high as compared to Interest earned during the study period. Steps to improve NNII would also help to improve profitability performance. Conclusion It can be concluded that periodical scanning of the profitability and efficiency facilitates the banks to examine overall performance as well as diagnose their financial health and alert supervisory bodies, investors, clients, stakeholders and researchers to take preventive measures for its sustainability. Further Scope For The Study The study is limited to the period of five years only, which can be extended. As it comprises of only two parameters i.e. profitability and efficiency; parameters like capital adequacy, liquidity, recovery, assets quality can be added. Comparative study between public and private sector banks can also be carried out since it focuses only on selected Indian private sector banks. www.researchscripts.org 7 editor.researchscripts@gmail.com

REFERENCES 1. Soni, rashmi( 2012), Managerial Efficiency- Key Driver towards the Profitability of Indian Commercial Banks in Turbulent Time, www.hgsitebuilder.com/files/ writeable /uploads/.../file/ijars204. 2. Pathak, B. (2003). A comparison of the financial performance of private sector banks 18(4) 203, p 1345-1356. Finance India, 18(4), 1345-1356. 3. Koundal, Dr. Virendra,(2012) Performance of Indian Banks in Financial System Indian researchj ournals.com /pdf/ijssir/2012/september/21. 4. Balasubramanin, S. K. (2007). Financial Performance of Private Sector Banks in India An Evaluation SSRN,. Retrieved July 30, 2014, from SSRN: http://ssrn.com 5. Chaudhary, K., & Sharma, M. (2011). Performance of Indian Private Sector Banks and Private Sector Banks: A Comparative Study. International Journal of Innovation, Management and Technology, 2 (3), 249-256. 6. Pandya, dr. Hemal (2014), Identifying major determinants of Profitability for selected nationalized banks in India, ijbarr.com/downloads/2014/vol2-issue4/13.pdf 7..Singla, H. K. (2008). Financial Performance of Banks in IndiaVol. VII, pp.50-62. Journal of Bank Management, VII, 50-62. 8. Spathis, K., & Doumpos, M. (2002). Assessing Profitability Factors in the Greek Banking System: A Multi Criteria Methodology. International transaction in Operational Research, 9 (1), 517-524. 9. Yadav, A. S. (2014). Banking Sector in Post-Recession Era: A Study of Comparative Performance of Different Bank Groups in India. The International Journal Of Business & Management, 2 (7), 165-171. www.researchscripts.org 8 editor.researchscripts@gmail.com