PERFORMANCE EVALUATION OF PUBLIC SECTOR AND PRIVATE SECTOR BANKS A COMPARATIVE STUDY Mrs. N. VIJAYALAKSHMI, Assistant Professor of Commerce (SF) V.H.N.S.N. College, Virudhunagar Dr. G. KARUNANITHI Assistant Professor, PG and Research Dept. of Commerce, Government Arts College, Paramakudi ABSTRACT ing sector helps to stimulation of capital formation, innovation and monetization in addition to facilitation of monetary policy. It is imperative to carefully evaluate and analyses the performance of banks to ensure a healthy financial system and an efficient economy. The growth of such banks is not possible unless they witness some success in the context of customer satisfaction or may it be the net assets held by these banks, efficiency of their management or the networks of each bank both in private as well as the public sector bank. This study is an attempt to evaluate the performance & financial soundness of various public & private sector banks using by CAMEL approach. INTRODUCTION The banking sector performs three primary functions in an economy; first, the operation of the payment system, second, the mobilization of savings and finally the allocation of savings to investment projects. The banking system which constitutes the core of the financial sector plays a critical role in transmitting monetary policy impulses to the entire economic system. An efficient banking structure can promote greater amount of investment which can further help to achieve a faster growth rate of economy. The economic development and financial growth of a country is dependent on the financial strength of its banks. The Indian banking sector has been the backbone of the Indian economy over the past few decades, helping it survive various national and worldwide economic shocks and meltdowns. It has transformed itself into one of the healthiest performers in the world banking industry seeing tremendous competitiveness, growth, efficiency, profitability and stability, especially in the recent years. In the light of the banking crisis in recent years worldwide, CAMEL (capital adequacy, asset quality, management quality, earnings and liquidity) is a useful tool to examine the safety and soundness of banks, and help mitigate the potential risks which may lead to bank failures. OBJECTIVES OF THE STUDY 1. To compare the overall performance of the public sector banks and private sector s with the help of the selected ratios. 2. To suggest some measures for increasing the performance of the banks. www.apjor.com Page 36
RESEARCH METHODOLOGY The study was analytical in nature and based on secondary data covering a period from 2010-11 to 2014-15.The data was collected from the annual reports of each five public & private sector banks in India. The selected public sector banks are; State of India (SBI), Indian bank, Canara bank, of Baroda and Indian Overseas (IOB) and private sector banks are; Axis, Industrial Credit and Investment Corporation of India (ICICI), Karur Vysya (KVB), Tamilnadu Mercantile (TMB), and HDFC. The performance of the banks was measured through different ratios of CAMEL Model. S.No CAMEL Parameters Ratios used in the present study 1. C 1.Capital Risk Adequacy Ratio 2.Debt Equity Ratio 3.Total Advances to Total Assets Ratio 2. A 1.Gross NPA Ratio 2.Net NPA Ratio 3.Total investment to Total Assets Ratio 3. M 1.Total Assets to Total deposits Ratio 2.Asset Turnover Ratio 3. Net Profit Margin Ratio. 4. E 1.Dividend Payout Ratio 2.Return on assets Ratio 3. Interest income to Total income Ratio 5. L Credit Deposit Ratio. I. Capital Adequacy Ratio Capital Adequacy signifies the banks ability to maintain capital with nature and extent of all types of risks and ability of management to identify, measure, monitor and control these risks. It also tells about the ability of bank to absorb a reasonable amount of loss and comply with statutory capital requirements. Currently Reserve bank of India prescribes banks to maintain Capital Adequacy Ratio (CAR) of 10% with regard to credit risk, market risk and operational risk on an ongoing basis, as against 9% prescribed in BASEL framework. Capital Adequacy Ratio (CAR) are a measure of the amount of a bank s core capital expressed as a percentage of its riskweighted assets. Capital Adequacy Ratio is defined as: CAR=(Tier 1 Capital+Tier 2 Capital)/Risk weighted Assets. Tier 1 capital= (Paid up capital +Statutory Reserve + Disclosed Free Reserve)-(Equity investments in subsidiary + Intangible Assets +Current brought forward losses) Tier 2 capital= i.undisclosed Reserve, ii.general loss reserve, iii. Hybrid debts. Camel Rating (2011-15) Capital Adequacy CAR% D/E(times) T.Adv/T.Asst GROUP SBI 12.94 7 1.3 5 65.03 2 4.67 4.5 Indian 13.29 6 1.23 4 61.61 5 5.0 6 of Baroda 13.74 5 1.72 6 62.85 3 4.67 4.5 Canara 12.55 8 1.79 7 62.18 4 6.33 8 IOB 11.37 10 2.69 10 58.87 8 9.33 10 AXIS 14.89 2 1.2 3 59.52 6 3.67 2 ICICI 18.28 1 1.92 7 79.05 1 3.33 1 HDFC 12.07 9 0.72 1 59.35 7 5.67 7 KVB 14.11 4 2.0 9 53.46 10 7.67 9 TMB 14.89 2 0.86 2 54.50 9 4.33 3 www.apjor.com Page 37
On the basis of group averages of three sub-parameters of capital adequacy, the ICICI was stands in the top position with group average of 3.33, followed by AXIS (3.67) and TMB (4.33) were second and third position respectively. The IOB stood at the last position due to its poor performance in CAR and D/E. II. Asset Quality Asset quality reflects the amount of existing credit risk associated with the loan and investment portfolio as well as offbalance sheet activities. The asset quality of banks can be judged by the non-performing assets (NPA) ratio. Camel Rating (2011-15) Asset Quality position Gross NPA Ratio Net NPA Ratio TI/TA GROUP SBI 1.21 2 1.76 7 23.25 2 3.67 2.5 Indian 2.89 9 1.78 8 27.32 5 7.33 8.5 of Baroda 1.26 3 1.35 5 22.15 1 3.0 1 Canara 1.39 4 0.95 4 26.73 4 4.0 4 IOB 3.56 10 2.78 9 25.27 3 7.33 8.5 AXIS 1.48 5 0.40 3 30.62 9 5.67 5 ICICI 2.00 7 0.20 1 32.90 10 6.0 6 HDFC 1.02 1 0.39 2 28.40 8 3.67 2.5 KVB 2.50 8 2.80 10 27.56 6 8.0 10 TMB 1.70 6 1.70 6 28.20 7 6.33 7 On the basis of group averages of sub-parameters of assets quality, of Baroda had the highest group average of (3.0), followed by SBI & HDFC (3.67) and Canara (4.0).KVB (8.0) was positioned last in terms of assets quality. III. Management Quality Several indicators are used to measure the efficiency of the management of the banks. For example Total Assets to Total Deposits Ratio and asset Turnover Ratio can be used to assess how efficiently company is using its assets to earn the revenue. Camel Rating (2011-15) Management Quality Asset Turnover Net Profit Margin Ratio TA/TD Ratio GROUP SBI 129.49 2 9.8 2.5 15.8 3 5.5 4 Indian 78.9 7 9.7 4 12.9 6 5.67 5 of Baroda 76.8 8 7.97 8 10.6 9 8.33 9.5 Canara 101.5 4 8.6 6 11.4 8 6.0 6.5 IOB 97.6 6 7.8 9 10.2 10 6.0 6.5 AXIS 135.53 1 9.8 2.5 16.28 1 1.5 1 ICICI 98.14 5 9.96 1 15.1 4 3.33 2 HDFC 128.57 3 9.5 7 16.04 2 4.0 3 KVB 75.67 9 8.7 5 12.1 7 7.0 8 TMB 72.90 10 7.13 10 13.4 5 8.33 9.5 On the basis of group averages of 3 sub-parameters of Management Quality, AXIS was at the top position with group average of 1.50, followed by ICICI (3.33), HDFC (4.0), SBI(5.5) and BANK OF BARODA & TMB (8.33) were at the last position due to its poor performance. www.apjor.com Page 38
IV. Earning Quality: s depends on their quality of earnings for performing activities like funding dividends, maintaining adequate capital levels, finding new opportunities for bank to grow, entering new geographic and product markets and maintaining the competitive outlook. Camel Rating (2011-15) Earnings Quality Dividend Payout Ratio Return on Asset Ratio II/TI GROUP SBI 22.92 2 1.82 2 85.41 5 3.0 1.5 Indian 18.84 5 1.01 8 71.60 9 7.33 8 of Baroda 21.33 3 0.86 9 87.38 3 3.0 1.5 Canara 18.70 6 1.46 5 89.47 2 4.33 4 IOB 19.40 4 0.78 10 89.95 1 4.67 5.5 AXIS 18.50 7 1.73 3 85.49 4 4.67 5.5 ICICI 24.30 1 1.69 4 81.70 6 3.67 3 HDFC 18.35 8 1.90 1 79.30 8 5.67 7 KVB 18.05 9 1.40 6 70.60 10 8.33 10 TMB 17.20 10 1.20 7 80.40 7 8.0 9 On the basis of group averages of 3 sub-parameters of Earnings Quality, SBI and of Baroda was at the top followed by ICICI. KVB was at the last position due to poor performance in DPR, ROA. V. Liquidity In case of an adequate liquidity position, the institution can obtain sufficient funds, either by increasing liabilities or by converting its assets to cash quickly at a reasonable cost. Camel Rating (2011-15) Liquidity: Credit Deposit Ratio Avg. Rank SBI 89.56 2 Indian 73.25 8 of Baroda 85.33 5 Canara 40.37 10 IOB 71.48 9 AXIS 91.78 1 ICICI 85.39 4 HDFC 78.87 7 KVB 80.35 6 TMB 88.47 3 Source: Computed from Annual Reports of the s AXIS stood at the top position with average 91.78 followed by SBI (89.56) &TMB (88.47) Canara was placed into last (40.37) in the selected banks. Overall Performance: Composite Ratio C A M E L Avg. Rank SBI 4.67 3.67 5.5 3.0 2 3.768 2 Indian 5.0 7.33 5.67 7.33 8 6.666 8 of Baroda 4.67 3.0 8.33 3.0 5 4.8 4 Canara 6.33 4.0 6.0 4.33 10 6.132 7 IOB 9.33 7.33 6.0 4.67 9 7.266 9 AXIS 3.67 5.67 1.5 4.67 1 3.302 1 ICICI 3.33 6.0 3.33 3.67 4 4.066 3 HDFC 5.67 3.67 4.0 5.67 7 5.202 5 KVB 7.67 8.0 7.0 8.33 6 7.4 10 TMB 4.33 6.33 8.33 8.0 3 5.998 6 www.apjor.com Page 39
CONCLUSION In the process of evaluation of performance of various banks, our study concluded that, The ICICI stood at top position in terms of capital adequacy. In terms of asset quality, the BOB was at topmost position. In context of management quality, AXIS positioned at first. In terms of earnings quality, SBI, BOB obtained the top position. The AXIS was ranked top in liquidity criterion. The overall performance table shows that, AXIS is ranked first followed by SBI. Out of the ten selected banks, three private sector banks of AXIS, ICICI and HDFC, and one public sector banks of SBI are stand in the similar rank during the study period of five years. Generally, the public sector banks are rendering service to all the peoples of rural and urban areas. But, the private sector banks are concentrating only to selected customers in urban areas. They are responsible for rendering service and earn profit to their shareholders. On the basis of analysis of the CAMEL ratios that private banks are growing at a faster pace than public sector banks. REFERENCES 1. http://shodhganga.inflibnet.ac.in/bitstream/10603/2310/11 /11_chapter%202.pdf. (n.d.). Retrieved from www.shodhganga.com. 2. http://www.iba.org.in/ 3. http://www.iob.in/ 4. http://www.jagranjosh.com/articles/what-is-bank-introduction-features-1351930521 5. www.rbi.org.in 6. www.moneycontrol.com 7. www.investmentz.com 8. http://www.allbankingsolutions.com/camels.html 9. www.sbi.co.in State of India Financial Highlights 2011-2015. www.apjor.com Page 40