A COMPARATIVE STUDY OF PROFITABILITY OF DIFFERENT GROUPS OF SCHEDULED COMMERCIAL BANKS IN INDIA Dr. Doonger Singh Kheechee Associate Professor, Department of Business Finance & Economics Jai Narain Vyas University, Jodhpur INTRODUCTION Financial system is consisted of financial institutions, financial markets, and financial services. It is an essential and conducive requirement for accelerating the rate of economic growth. There is synchronization between the rate of financial intermediation, capital formation and rate of economic growth. Higher is rate of capital formation, higher will be the rate of economic growth and vice-versa. Commercial Banks are essential ingredients of financial system. About two-third of financial resources are mobilized and dispersed by the active role of commercial banks. In India, the growth of banking industry has witnessed various ups and downs before independence but after independence due to active role of government in framing banking regulations as well as establishment of S.B.I. and other public sector banks has given a very sound base to the banking sector in the country. Banks are helping in cherishing the economic goals as well as have changed class banking to mass banking. The role of public sector banks is more dominating in banking sector of the country. The shares in deposits and advances of banking sector are two-third and remaining one-third is shared by private sector and foreign banks. After the adoption of policy of liberalization, the role of private sector and foreign banks has also increased and the banking sector in India is becoming more competitive and sound in persuading the goal of economic growth but profitability and productivity of commercial banks cannot be said to be very satisfactory. Not only this, there is great divergence in the profitability of public, private and foreign banks. In this article, an attempt has been made to compare the profitability of different categories of banks and to find out the causes of difference in their profitability, so that a mechanism can be evolved for improving the profitability and productivity of commercial banks. THEORITICAL FRAMEWORK The profit is the net of income and cost of funds and the profitability is an index of profit expressed as the rate of return on funds. In order to analyze the profit and profitability in detail, it is essential to have an idea of items of income and expenditure, which are listed here asunder: 62 IJMT, Volume 19, Number 1, January - June 2011
Income o Interest Income Interest on Advances Interest on Investment o Other Income in the form of commission and brokerages Expenditure o Interest on Deposits and Interest on Borrowings o Provisions and Contingencies o Operating Expenses Profit o Operating profit = Income minus Expenditure o Net profit = Operating profit Provisions of Taxes and Contingencies The various ratios used to indicate as cost of funds and returns on funds are : Cost of Deposits = Interest Paid on Deposits / Deposits Cost of Borrowings = Interest Paid on Borrowings / Borrowings. Cost of Funds = (Interest Paid on Deposits + Interest Paid on Borrowings) (Deposits + Borrowings). Return on Advances = Interest Earned on Advances / Advances. Return on Investments = Interest Earned on Investments /Investments. Return on Funds = (Return on Advances + Return on Investments) (Investments + Advances). ANALYTICAL FRAMEWORK PART A: ANALYSIS OF PARAMETERS OF PROFITABILITY In order to ascertain the return on funds to express the profitability of different groups and to have a comparative view of these parameters various ratios by using the above formulae has been calculated for the period from 2003-04 to 2009-10 and are shown in tables along with the mean value and value of standard deviation so that it can be inferred that which bank group is having highest rate of return. (A) RETURN ON FUNDS It is the ratio of interest income to aggregate of investment and advances. The numerical value for the ratio of returns and funds of various bank groups for the period 2003-04 to 2009-10 are shown in following Table No.1. IJMT, Volume 19, Number 1, January - June 2011 63
Table 1 : Return on Funds 2003-04 8.4 8.2 7.7 8.5 8.2 2004-05 7.3 6.9 7.3 8.0 7.1 2005-06 7.6 7.5 6.6 7.7 7.4 2006-07 8.2 7.5 7.4 8.0 7.6 2007-08 8.7 8.0 8.7 8.5 8.2 2008-09 9.9 8.2 9.5 9.1 8.5 2009-10 8.3 8.1 8.4 9.2 8.4 Mean 8.3429 7.7714 7.9429 8.4286 7.9143.8384.4889.9813.5707.5429 FB = Foreign Banks in India PSB = Public Sector Banks in India (SBI + Associates of SBI + Nationalized banks PrSB = Private Sector Banks SCB = All Scheduled Commercial Banks it has been noted that the return on funds is very high in case of old private sector banks, as the mean value is 8.42. Next is the place of foreign banks whose value is 8.34 and it is lowest in place of public sector banks as it is 7.77 and the overall mean value of all scheduled commercial banks is 7.91. The degree of variation is very low in public sector banks as the value of standard deviation of the ratio on return on funds is.48 and the variation is very high in case of new private sector banks as the value of standard deviation is.98. The variation is also very high in foreign banks as the value of standard deviation is.83. The overall variation in this ratio in case of all the banks is.54. (B) RETURN ON INVESTMENTS It is the ratio of Return on Investments to total investment. The numerical value for the ratio for the period are shown in the Table No.2 64 IJMT, Volume 19, Number 1, January - June 2011
Table 2 : Return on Investment 2003-04 8.5 8.5 6.2 8.1 7.8 2004-05 6.9 8.2 5.2 7.7 7.6 2005-06 7.5 8.2 5.5 7.2 7.7 2006-07 7.6 7.5 6.6 7.2 7.3 2007-08 7.1 6.6 6.4 6.3 6.6 2008-09 7.63 6.95 7.03 6.57 7.01 2009-10 6.39 6.72 6.28 6.18 6.59 Mean 7.3743 7.5243 6.1729 7.0357 7.2286.6669.7849.6298.7209.5070 (C) RETURN ON ADVANCES It is the ratio of Interest Earned on Advances to Total Advances. The numerical value for the ratio for the period are shown in the Table No.3 Table 3 : Return on Advances 2003-04 8.3 7.9 8.8 8.8 7.2 2004-05 7.3 7.0 7.3 8.0 7.3 2005-06 7.6 7.1 7.3 7.9 7.2 2006-07 8.7 7.7 8.3 8.6 7.9 2007-08 9.8 8.6 10.0 9.6 8.9 2008-09 12.61 10.08 11.29 11.82 10.50 2009-10 9.99 9.10 9.56 10.95 9.29 Mean 9.1857 8.2114 8.9357 9.3814 8.3271 1.8185 1.1175 1.4628 1.5004 1.2751 IJMT, Volume 19, Number 1, January - June 2011 65
it has been noted that the return on advances is very high in case of old private sector banks, as the mean value is 9.38. Next is the place of foreign banks whose value is 9.18 and it is lowest in public sector banks as it is 8.21 and the overall mean value of all scheduled commercial banks is 8.32. The degree of variation is very low in public sector banks as the value of standard deviation of the ratio on return on advances is 1.11 and the variation is very high in case of foreign banks as the value of standard deviation is 1.81. The variation is also very high in old private sector banks as the value of standard deviation is 1.5. The overall variation in this ratio in case of all the banks is 1.27. (D) INTEREST INCOME Total Income of banks is composed of Interest Income (interest on advances and on investment) and other income which is in the form of commission and brokerages. The analysis of interest income as a percentage to total income is shown in the following Table No.4 which indicates that the share of interest income in total income is between 70 to 90% in all the categories of banks but there is difference in the share in different categories of banks. Table 4 : Interest Income as a per cent to total Income 2003-04 70.2 79.6 76.2 78.9 78.5 2004-05 70.3 82.7 76.9 88.1 81.9 2005-06 69.6 86.3 78.3 89.5 84.0 2006-07 71.8 87.4 78.0 88.0 84.3 2007-08 69.8 86.7 79.2 87.0 83.6 2008-09 67.1 86.6 81.4 87.1 83.8 2009-10 72.6 86.3 78.4 86.8 84.8 Mean 70.2000 85.0857 78.3429 86.4857 82.9857 1.7540 2.8574 1.6772 3.4706 2.1752 Table No.4 exhibits the ratio of interest income. By comparing the various ratios on the basis of the Mean value of ratios for the period, it has been noted that the ratio of interest income is very high in case of old private sector banks, as the mean value is 66 IJMT, Volume 19, Number 1, January - June 2011
86.48. Next is the place of public sector banks whose value is 85.08 and it is lowest in foreign banks as it is 70.2 and the overall mean value of all scheduled commercial banks is 82.98. The degree of variation is very low in new private sector banks as the value of standard deviation of the ratio on ratio of interest income is 1.67 and the variation is very high in case of old private sector banks as the value of standard deviation is 3.47. The overall variation in this ratio in case of all the banks is 2.17. (E) OTHER INCOME Other Income of the banks is in the form of commission and brokerages which is earned by view of providing various banking services to the customers and for that purpose the operating expenses of banks are increased, therefore, the analysis in the following table is made whether the contribution of other income is more or less than the operating expenses. If percentage of other income to operating expenses will be high, banks profitability will increase and vice-versa. The numerical value of other income as a percentage to operating expenses are shown in the Table No.5 Table 5 : Other Income as a per cent to operating expenses 2003-04 103.1 86.2 102.8 102.3 90.4 2004-05 87.5 82.5 84.4 47.9 68.7 2005-06 91.8 53.0 76.8 39.5 59.7 2006-07 90.9 54.8 87.0 52.8 64.9 2007-08 102.3 70.3 87.0 67.5 78.1 2008-09 121.1 76.4 85.0 70.8 84.0 2009-10 89.6 73.3 95.8 65.4 78.7 Mean 98.0429 70.9286 88.4000 63.7429 74.9286 11.8867 12.8104 8.4475 20.4604 10.9332 it has been noted that the ratio of other income is very high in case of foreign banks, as the mean value is 98.04. Next is the place of new private sector banks whose value is 88.40 and it is lowest in old private sector banks as it is 63.74 and the overall mean value of all scheduled commercial banks is 74.92. IJMT, Volume 19, Number 1, January - June 2011 67
The degree of variation is very low in new private sector banks as the value of standard deviation of the ratio of other income is 8.44 and the variation is very high in case of old private sector banks as the value of standard deviation is 2.46. The overall variation in this ratio in case of all the banks is 10.93. PART B: ANALYSIS OF PARAMETERS OF COST OF BANKING OPERATIONS (A) COST OF FUNDS Cost of funds is the aggregate of cost of deposits and cost of borrowings, therefore, the ratio of cost of funds is calculated as interest paid on deposit plus interest paid on borrowings / deposits plus borrowings. The numerical value for the ratio for the period is shown in the Table No.6. Table 6 : Cost of Funds 2003-04 3.8 5.0 3.7 5.3 4.8 2004-05 3.1 4.2 3.0 4.6 4.0 2005-06 3.2 4.2 3.5 4.5 4.0 2006-07 3.5 4.4 4.5 4.8 4.3 2007-08 3.9 5.3 5.5 5.7 5.3 2008-09 4.2 5.5 6.0 6.1 5.5 2009-10 2.8 5.3 4.4 6.1 5.1 Mean 3.5000 4.8429 4.3714 5.3000 4.7143.4967.5623 1.0828.6856.6203 it has been noted that the ratio of cost of funds is very high in case of old private sector banks, as the mean value is 5.3. Next is the place of public sector banks whose value is 4.84 and it is lowest in foreign banks as it is 3.5 and the overall mean value of all scheduled commercial banks is 4.7. The degree of variation is very low in foreign banks as the value of standard deviation of the ratio of cost of funds is.49 and the variation is very high in case of new private 68 IJMT, Volume 19, Number 1, January - June 2011
sector banks as the value of standard deviation is 1.08. The overall variation in this ratio in case of all the banks is.62. (B) COST OF DEPOSITS It is ratio of interest paid on deposits to total deposits. The numerical value for the ratio for the period is shown in the Table No.7. Table 7 : Cost of Deposit 2003-04 3.6 5.1 4.2 5.4 4.9 2004-05 3.1 4.4 3.4 4.6 4.2 2005-06 2.8 4.3 3.6 4.5 4.1 2006-07 3.2 4.5 4.7 4.9 4.5 2007-08 3.8 5.4 5.9 5.7 5.4 2008-09 4.5 6.3 6.6 6.7 6.2 2009-10 3.2 5.7 5.0 6.3 5.5 Mean 3.4571 5.1000 4.7714 5.4429 4.9714.5653.7506 1.1729.8443.7697 it has been noted that the ratio of cost of deposit is very high in case of old private sector banks, as the mean value is 5.44. Next is the place of public sector banks whose value is 5.10 and it is lowest in foreign banks as it is 3.45 and the overall mean value of all scheduled commercial banks is 4.97. The degree of variation is very low in foreign banks as the value of standard deviation of the ratio of cost of deposit is.56 and the variation is very high in case of new private sector banks as the value of standard deviation is 1.17. The overall variation in this ratio in case of all the banks is.76. (C) COST OF BORROWINGS It is ratio of interest paid on borrowings to total borrowings. The numerical value for the ratio for the period is shown in the Table No.8. IJMT, Volume 19, Number 1, January - June 2011 69
Table 8 : Cost of Borrowing 2003-04 4.3 2.3 1.5 2.8 2.4 2004-05 3.5 2.6 1.4 2.7 1.7 2005-06 4.5 2.5 3.1 3.1 3.0 2006-07 4.7 3.4 3.1 3.4 3.6 2007-08 4.5 3.5 3.1 4.6 3.6 2008-09 4.07 3.04 3.52 4.44 3.37 2009-10 1.58 1.37 1.96 1.94 1.57 Mean 3.8786 2.6729 2.5257 3.2829 2.7486 1.0869.7325.8772.9572.8669 it has been noted that the ratio of cost of borrowing is very high in case of foreign banks, as the mean value is 3.87. Next is the place of old private sector banks whose value is 3.28 and it is lowest in new private sector banks as it is 2.52 and the overall mean value of all scheduled commercial banks is 2.74. The degree of variation is very low in public sector banks as the value of standard deviation of the ratio of cost of borrowing is.73 and the variation is very high in case of foreign banks as the value of standard deviation is 1.08. The overall variation in this ratio in case of all the banks is.86. (D) ANALYSIS OF PARAMETERS OF DIFFERENCE BETWEEN RETURN OF FUNDS AND COST OF FUNDS: SPREAD The difference between return on funds and cost of funds has been termed as spread. It measures the efficiency of banks where it is high banks, are efficient and vice-versa. The numerical value of spread is shown in the Table No.9. 70 IJMT, Volume 19, Number 1, January - June 2011
Table 9 : Spread (Return on Fund Cost of Fund) 2003-04 4.6 3.2 4.0 3.1 3.3 2004-05 4.0 3.2 3.5 3.3 3.2 2005-06 4.3 3.3 3.1 3.2 3.3 2006-07 4.8 3.2 3.2 3.3 3.3 2007-08 4.8 2.7 3.2 2.8 2.9 2008-09 6.10 3.07 3.77 3.34 3.40 2009-10 5.49 3.02 3.99 3.12 3.31 Mean 4.8700 3.0986 3.5371 3.1657 3.2443.7144.1989.3859.1861.1625 it has been noted that the ratio of spread is very high in case of foreign banks, as the mean value is 4.87. Next is the place of new private sector banks whose value is 3.53 and it is lowest in public sector banks as it is 3.09 and the overall mean value of all scheduled commercial banks is 3.24. The degree of variation is very low in old private sector banks as the value of standard deviation of the ratio of spread is 1.8 and the variation is very high in case of foreign banks as the value of standard deviation is.71. The overall variation in this ratio in case of all the banks is.16. SUMMARY AND CONCLUSION Analysis of parameters of Return of Funds shows that:- 1. Returns on Funds are very high in private sector banks as well as in Foreign Banks and very low in public sector banks. 2. The Return on Investment as a component on return on fund is very high in case of public sector banks as well as in foreign banks and very low in new private sector banks. It shows that the management of portfolio of securities is very efficient in public and foreign banks and is less efficient in private sector banks. 3. The return on advances is very high in case of private sector and foreign banks and is very low in public sector banks. It shows that the management of loan portfolio is very efficient in private sector and foreign banks and very less efficient in public sector banks. IJMT, Volume 19, Number 1, January - June 2011 71
4. The interest income which is composed of interest on advances and interest on securities is very high in private sector banks as well as public sector banks and very low in foreign banks. 5. The share of other income in the total income is very high in case of foreign banks as they deal in foreign exchange transactions as well as it is also high in private sector banks as various financial services are rendered by private sector banks but it is not very high in public sector banks. It shows that the financial services rendered by public sector banks are not as large as in private sector and foreign banks. The spread i.e. the difference of return on funds and cost of funds is very high in case of foreign banks as well as new private sector banks and very low in public sector banks. This shows that the foreign banks and private sector banks are very efficient in managing their banking business in comparison to public sector banks. Analysis of parameters of cost of banking operations shows that :- 1. It is very high in case of old private sector banks and public sector banks and very low in foreign banks showing that foreign banks are very efficient in having high degree of operational efficiency in getting deposits and borrowing funds. 2. As far as cost of deposits is concerned it is also very high in all private sector and public sector banks and very low in foreign banks. 3. The cost of borrowing is very high in foreign banks and private sector banks. Analysis of spread shows that:- 1. It is very high in case of foreign and new private sector banks and is very low in public sector banks due to the difference of cost of funds. REFERENCES 1. Abrol, Prem Nath: Commercial Banking, Anmol Publication, Delhi, 1987 2. Aggarwal, B.P.: Commercial Banking in India after Nationalization, (Delhi, Classic Publication, 1981) 3. Bajwa, K.S.: Productivity in Banks, Indian Banking today and tomorrow, April 1983, PP.8-13 4. Bhanot, S.P.: Profitability of Banks, Indian Banking today and tomorrow, Aug. 1988, PP.3-7 5. Chakravarthy, J.K.: Profitability of Banks: An Empirical Attempt for identification of variables of income and expenditure of Scheduled Commercial Banks for profit planning, paper presented to Bankers Economist Meet, Punjab National Bank, New Delhi, 1986 72 IJMT, Volume 19, Number 1, January - June 2011
6. Chandan C. L. and Rajput Pawan Kumar (2002) Profitability Analysis of Banks in India: A Multiple Regression Approach, Indian Management Studies Journal, Vol.6, pp.119-129. 7. Das Gupta, M. and Mukherjee C.: Portfolio Management of the Commercial Banks, Indian Journal of Economics, 57 (4), April, 1979, PP. 421-38 8. Das, A.1999. Profitability of Public Sector Banks: A Decomposition Model Reserve Bank of India Occasional Papers 20,1 9. Demirguc, Kunt and Harry Huizinga. 1998. Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence, World Bank 10. Deshpande, D.D.: Bank Profitability Analysis: Need to take into account loss of interest on CRR and penalties on CRR / SLR, Banks Economists Meet, Punjab National Bank, New Delhi, 1986 11. Dhananjayan R.S. and Selvarajan V.: Profitability of 14 Nationalized Banks: Examination of recent trends, southern economists, Oct. 15, 1983, PP. 9 3 12. Dimitris, N., Chorafas: Bank Profitability from cost control to pricing financial products and services (Butterworths and Co. Ltd., 88 Kinsway, London, 1989) 13. Divatia, V.V. and Venkatachalam T.R.: Operational Efficiency and Profitability of Public Sector Banks, Reserve Bank of India Staff Occasional Paper, June, 1978 14. Divatia, V.V.: Cost of Banking services, Report of the study group on banking costs, Reserve Bank of India Bulletin, April, 1978 15. Ganesh K.: Monitoring Profitability in Banks, The Commerce, July, 1979, PP.25-27 16. Kamal Nayan: Commercial Bank in India, Performance evaluation (Deep and Deep Publications, 1985) 17. Ketkar Kusum W, Noulas Athanasios G and Agarwal Man Mohan (2003) An Analysis of Efficiency and Productivity Growth of the Indian Banking Sector, Finance India, Vol. XVII, No. 2, pp.511-513. 18. Magen,S.D.: The Cost of Funds to Commercial Bank: An Econometric Analysis, (Dunellen, New York) 19. Mittal, Manish and Aruna Dhade.2007. Profitability and Productivity in Indian Banks: A Comparative Study, AIMS International, Volume 1, Number 2, May, 137-152 20. Murthy, P.V.: Cost and Profitability of Public Sector Banks Mohit Publications, New Delhi, 1996 21. RamMohan, T.T.2002. Deregulation and Performance of Public Sector Banks, February 2 22. Sensarma, R. 2006. Are Foreign Banks always the best? Comparison of State- Owned, Private and Foreign Banks in India, Economic Modeling, April 23. The Reserve Bank of India, Statistical Tables Relating to Banks in India Various years IJMT, Volume 19, Number 1, January - June 2011 73
24. The Reserve Bank of India, The Report on Trend and Progress of Banking in India, Various years 25. Verghese, S.K.: Profits and Profitability of Indian Commercial Banks in the Seventies, National Institute of Bank Management, Bombay, 1983 26. Vipin Shah: Cost and Efficiency in Banking (Printice Hall Publishers, Jaipur, 1987) 74 IJMT, Volume 19, Number 1, January - June 2011