TABLE OF CONTENT CHAPTER 1: INTRODUCTION 4 1.1 Purpose of the Study...................................4 1.2 Context and Significance of Study.......................4 CHAPTER 2: LITERATURE REVIEW 6 CHAPTER 3: RESEARCH METHODS AND PROCEDURES 11 3.1 Research Objectives...................................11 3.2 Research Questions....................................11 3.3 Hypothesis............................................11 3.4 Data Collection.......................................11 3.5 Research Design.......................................12 3.6 Limitations...........................................12 CHAPTER 4: DATA ANALYSIS AND FINDINGS 13 4.1 Review of Methodology.................................13 4.2 Results of Research Questions.........................13 4.2.1 Business Performance..............................13 4.2.2 Efficiency........................................18 4.2.3 Profit Earning Capacity...........................23 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 28 5.1 Summary of Findings...................................28 5.2 Suggestions...........................................29 5.3 Conclusion............................................29 References 30
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TABLE OF CONTENT
CHAPTER 1: INTRODUCTION 4
1.1 Purpose of the Study.................................................................................................4
1.2 Context and Significance of Study..................................................................................4
CHAPTER 2: LITERATURE REVIEW 6
CHAPTER 3: RESEARCH METHODS AND PROCEDURES 11
3.1 Research Objectives................................................................................................11
3.2 Research Questions.................................................................................................11
LIST OF TABLESTable 4. 1 Business Performance of Nationalised...................................................................14Table 4. 2 Correlation Matrix between Business Performance Variables...............................15Table 4. 3 ANNOVA..............................................................................................................16Table 4. 4 Regression Analysis...............................................................................................17Table 4. 5 Efficiency of Nationalised Banks(rupees in lakhs).................................................18Table 4. 6 Correlation matrix between efficiency variables....................................................20Table 4. 7 ANOVA.................................................................................................................21Table 4. 8 Regression analysis................................................................................................22Table 4. 9 Profit earning capacity of Nationized banks...........................................................23Table 4. 10 Correlation Matrix................................................................................................24Table 4. 11 ANNOVA............................................................................................................25Table 4. 12 Regression Analysis..............................................................................................26
Measuring operational efficiency and profitability of Nationalised Banks in
India
Arpit Jain
Introduction and Statement of Problem: Nationalised banks dominate the banking
system in India. In the post-Independence period, all the nationalised banks are
fanning new branches throughout the country. The Government of India embarked
on a comprehensive banking reforms plan in 1992 to establish a more diversified,
profitable, efficient and resilient banking. A detailed analysis about macro and micro
level studies on banking, it have been concluded that many studies have not found any
significant difference between the efficiency indicators of nationalised banks and other
banks in the post reforms period. The most recent study by Reserve Bank of India also
concluded that in the Indian banking sector, ownership has no definite relationship with
efficiency. The researcher identified this area as research gap and hence, this study.
Research Design: The current study is explorative. 20 nationalized banks were
considered as samples. The study is based on secondary data collected from banking
statistics published by Reserve Bank of India and Indian Banking Association.
Business performance, efficiency, profit earning capacity and profitability were
considered for the study. The study period was
2007-08 to 2010-11. Statistical and econometric tools such as mean, compound growth
rate, correlation, multiple regression, t-test and ANOVA.
CHAPTER 1: INTRODUCTION
1.1 Purpose of the Study
The shape of the Indian Banking Industry has changed due to the World Trade Organization, increasing international risk triggered by Basel III norms (laid down by Basel committee under the supervision of Bank for International Settlements (BIS)), Free Trade Agreements (FTAs) and the Reserve bank of India guidelines. It needs every banker to design innovative banking products and uses information technology to reduce their cost of operation. New concepts like personal banking, retail banking, bankassurance, internet banking, phone banking, mobile banking, and rural banking have emerged. In this situation, the banks have to track their performance to improve their profitability by paying attention to the key influencing factors for its timely correction and for future growth.
With increased competition in the banking Industry, the Net Interest Margin (NIM) of banks have come down over the last one decade. Hence, it is necessary to improve their operational efficiency while meeting the customer requirements. Product innovations and process re- engineering will be the order of the day. All banks therefore to go for rejuvenating their costing and pricing to segregate profitable and non-profitable business. Banking industry is fragmented in its structure and has restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations. Besides this, increase in the number of foreign players’ poses threat to both public and private sector Banks. Therefore, it is appropriate to know the answer for the following research questions:
1. Is there any possibility of finding the factor influencing the profitability?
2. Is there any possibility of improving the profitability?
3. Is there any avenue to identify the efficient bankers?
1.2 Context and Significance of StudyIn recent days, the growing Universalization and internationalization of banking operations, driven by a combination of factors, such as the continuing deregulation, heightened competition and technological advancements have altered the face of the banks from mere intermediator to provider of quick, efficient and consumer friendly services. The use of mass customization in banks and other service companies can meet the market demand and enhance the competitiveness by customized products that are designed and provided for individual customers to meet their individual needs. Moreover, banks today have to adopt strategies that
embrace both a closer reaction to the customers’ needs and efficiency by custom-tailored services to meet customers’ diversified and changing needs at near mass production price. Therefore, this research paper is to explore the possibility of getting more deposits by efficient and timely service and measure the impact of variables of E-banking products on customer satisfaction and five service quality dimensions namely reliability, responsiveness, assurance, empathy and tangibles have been established based on the need and requirement of the customers.
The study is based on the sound methodology which covering both primary and secondary data. Extensive reviews have been made on the available banking products introduced by banks globally and the growth of deposits of sample banks has been analysed with ten years data of the sample banks of three categories namely, private sector, public sector and foreign banks performed in India. Primary data has been collected by well framed comprehensive questionnaire and monitored on selected sample respondents who are really representatives of the universe.
CHAPTER 2: LITERATURE REVIEW
(Swammy, 2001) Studied the comparative performance of different bank groups
since 1995-96 to 1999-2000. An attempt was made by researcher to identify factors
which could have led to changes in the position of individual banks in terms of their
share in the overall banking industry. He concluded that in many respects
nationalized public sectors banks are much better than private banks, even they are
better than foreign banks.
(Lopoyetum, 2005) in his article elaborated that the profitability performance
of the UCBs can be improved by strengthening the magnitude of burden
ratio. The spread ratio can be increased by increasing the interest receipts faster
than the interest payments. The burden ratio can be lowered by decreasing the
manpower expenses, other expenses and increasing other incomes.
(Bhattacharyya, 1997)measured the technical efficiency of 70 commercial banks
operating in India for the period 1986-91 using Data Envelopment Analysis
(DEA). They used a two-stage approach: in the first stage, they calculated the
radial technical efficiency scores using DEA. In the second stage, they used
stochastic frontier analysis to attribute variation in efficiency scores to three sources
—temporal, ownership, and noise component. They considered advances,
investment, and deposits as outputs while interest expense and operating expense
were taken as the inputs. They found that the public sector banks had much higher
efficiency as compared to the private and foreign banks.
(Ravisankar, 2000) examined the efficiency of the Indian public sector banks in two
phases during the period 1992-95. In the first phase, certain key ratios such as
deposit to establishment expenses and advances to establishment expenses, and
deposits to staff and advances to staff were considered. The banks were
plotted in a two dimensional graph to identify the better performing banks. Their
study considered four input variables—interest expenditure, establishment
expenditure, non- establishment expenditure and six output variables: deposits,
advances, investments, non-interest income, interest spread, and total income.
Their results indicated that the performance of the public sector banks (with the
exception of a few) had improved over the years of study.
(Ray, 2004)compared the performances of 58 public, private sector, and foreign
banks using a revenue maximization efficiency approach for the period 1992-
2000. Loans, investments, and other incomes were taken as bank outputs.
Their study considered deposits and operating costs as inputs. They argued that
during the period, Indian banks did not have much freedom in trimming costs,
especially the cost of labor. Under the circumstances, revenue maximization best
describes the objective that banks have been focusing during the period. The
results of their study relating to revenue maximization efficiency, technical
efficiency, and allocative efficiency reveal:
Public sector banks are significantly better placed than private sector banks on
revenue maximization efficiency but there is no difference between public sector
banks and foreign banks
Public sector banks are significantly better than private banks in respect of
technical efficiency but not in respect of allocative efficiency
(Sarkar, 2005) used the stochastic cost frontier analysis to examine the efficiency of
the Indian banking system using panel data for the period 1986-2000. They
used a translog specification of the cost frontier to estimate the efficiency of the
individual banks. The dataset related to 27 public sector banks and 23 private
sector banks. Their results indicated that Indian banks, on average, do exhibit the
presence of cost inefficiency in their operations. However, there is a tendency
for inefficiencies to
decline over time. Further, they found that deregulation in the Indian banking
sector resulted in an increase in the cost inefficiency of the Indian banks and a
decline in the rate of inefficiency reduction.
(Das, 2005) examined the output-oriented technical efficiency, cost efficiency,
revenue maximizing efficiency, and profit efficiency of Indian (public, private and
foreign) banks for the period 1997-2003. They considered four inputs for their
study—borrowed funds (deposits and other borrowings), number of employees,
fixed assets, and equity. They included in their study only those banks which had
at least three branches during the entire study period. Their results indicated that
the Indian banks are still not much differentiated in terms of input or output oriented
technical efficiency or cost efficiency. However, they differ sharply in respect of
revenue and profit efficiencies
(Nath, 2005) studied the efficiency of 68 commercial banks operating in India for
the period 1996-99 using the output oriented Charnes et al. (1978) DEA
model. The parameters considered as outputs of the banking industry are: (1)
deposits; (2) net profits; (3) advances given by the banks; (4) non-interest income;
and (5) interest spread which is the difference between the interest earned by the
bank and the interest paid by it. The five input parameters taken are: (1) net worth
of the banks; (2) borrowings of the banks; (3) operating expenses which are the
non-interest related expenses such as sum of establishment expenses; rent, taxes,
and electricity; printing and stationery; advertising; depreciation; director’s fees;
auditor’s fees; law charges; post, telegram and telephone expenses; repair and
maintenance; insurance and miscellaneous other expenses, (4) number of
employees in the country; and (5) number of bank branches in the country
The results of the study indicate that the private commercial banks have the highest
efficiency figures and the least variation, whereas the foreign- owned banks
exhibit the least average efficiency figure and maximum variation. The public
sector commercial banks come in between
(Sinha, 2006)estimated the efficiency of Indian commercial banks using the data
envelopment and free disposal hull approaches respectively. They have taken net
interest income, non-interest income, and loan as the output indicators. Number of
bank branches and borrowed capital were taken as two inputs. The results were
for 1996-97,
1998-99, 2000-01, and 2002-03 respectively. The results suggest an improvement
in the performance if net interest income or non-interest income is taken as the
output indicator but a decline in the performance if loan is taken as the output
indicator
(Sinha, 2006)estimated efficiency of Indian commercial banks (under constant
returns to scale) using the data envelopment analysis. He considered loan as the
output indicator. Number of bank branches and borrowed capital were taken as
two inputs. The results were for 1996-97, 1998-99, 2000-01, and 2002-03
respectively. The results suggest superior performance by the observed private
sector commercial banks as compared to the observed public sector commercial
banks.
(Mohan, 2003) conceptualised ‘lazy banking’ while critically reflecting on
banks’ investment portfolio and lending policy. In a study of institutional finance
structure and implications for industrial growth, Mohan (2004) emphasised on
key lending terms of credit, such as maturity and interest-terms of loans to
corporate sector. The Indian viewpoint alluding to the concepts of ‘credit
culture’ owing to Reddy (2004) and ‘lazy banking’ owing to Mohan (2003a) has an
international perspective since several studies in the banking literature agree that
banks’ lending policy is a major driver of non-performing loans (McGoven,
1993, Christine 1995, Sergio,1996, Bloem and Gorters, 2001).
(Sergio, 1996)) in a study of non-performing loans in Italy found evidence that, an
increase in the riskiness of loan assets is rooted in a bank’s lending policy
adducing to relatively unselective and inadequate assessment of sectoral
prospects. Interestingly, this study refuted that business cycle could be a primary
reason for banks’ NPLs. The study emphasised that increase in bad debts as a
consequence of recession alone is not empirically demonstrated. It was viewed
that the bank-firm relationship will thus, prove effective not so much because it
overcomes informational asymmetry but because it recoups certain canons of
appraisal.
(McGooven, 1993)In a study of loan losses of US banks, argued that ‘character’
has historically been a paramount factor of credit and a major determinant in the
decision to lend money. Banks have suffered loan losses through relaxed lending
standards, unguaranteed credits, the influence of the 1980s culture, and the
borrowers’ perceptions. It was suggested that bankers should make a fairly
accurate personality-morale profile assessment of prospective and current
borrowers and guarantors. Besides considering personal interaction, the banker
should (i) try to draw some conclusions about staff morale and loyalty, (ii) study
the person’s personal credit report, (iii) do trade-credit reference checking, (iv)
check references from present and former bankers, and (v) determine how the
borrower handles stress. In addition, banks can minimise risks by securing the
borrower’s guarantee, using Government guaranteed loan programs, and requiring
conservative loan-to-value ratios.
CHAPTER 3: RESEARCH METHODS AND PROCEDURES
3.1 Research Objectives To evaluate the business performance in relation to profit earning capacity,
efficiency and profitability of nationalized banks.
To evaluate inter-relationship between selected variables among
nationalised banks.
3.2 Research Questions
Whether efficiency expands with business performance?
Is there any possibility of finding the factor influencing the profitability? Whether efficiency raises profit earning capacity?
Is there any possibility of improving the profitability? Is there any avenue to identify the efficient bankers?
3.3 Hypothesis
H01: There is no significant relationship between total business carried
out by nationalised banks and the deposits, investments, advances,
number of offices and number of employees.
H02: There is no significant relationship between Profit earning capacity
of the nationalised banks and other operational expenses met and other
incomes.
H03: There is no significant relationship between Total business per branch
of the nationalized banks and the efficiency factors.
3.4 Data Collection
Data is collected from various bulletins published by the Reserve Bank of India and
the data available on the websites of various banks.
3.5 Research Design
The current study is explorative in nature. 19 nationalized banks were considered
as samples. The study is based on secondary data collected from banking
statistics published by Reserve Bank of India and Indian Banking Association.
The study period was
2007-08 to 2010-11. The following statistical tools had been applied between
the financial parameters of sample Nationalised Banks. They are:
Mean
Standard deviation
Coefficient of variation
Coefficient of correlation
Multiple linear regression
These formulas are applied in Microsoft Excel and SPSS software.
3.6 Limitations
The study is mainly based on the secondary data only and the number of the
employees per bank may differ due their transfer or retirement which could affect
the productivity and profit earning capacity of individual banks.
CHAPTER 4: DATA ANALYSIS AND FINDINGS
4.1 Review of Methodology
The research is majorly based on secondary data gathered from various journals
and bulletins published by various government bodies and banks. Excel and
SPSS were used to analyse the data and make interpretations. Statistical tools
such as coefficient of variation, correlation coefficient and multiple linear
regression are used.
4.2 Results of Research Questions
The focus of all banks in India has shifted their approach to 'cost', determined
by revenue minus profit. This means that all the resources should be used
efficiently to better the efficiency and ensure a win-win situation. To survive in
the long run, it is essential to focus on cost saving. Previously, banks focused on
the 'revenue' model which is equal to cost plus profit. After the banking
reforms, banks shifted their approach to the 'profit' model, which meant that
banks aimed at higher profit maximization.
4.2.1 Business Performance
The current section of the study analyses the business performances of
the nationalised banks in relation to expansion of branches, recruitment of
employees, deposits, advances, investments and total business carried out by the
nationalized banks in India during the period 2007-08 to 2011-12.
Table 4. 1 Business Performance of Nationalised
(Rupees in million)
Year No. of offices no of employees deposits advances investments total business
The above table shows the Profit Earning Capacity of nationalised banks
during the period 2004-11. The interest income of all nationalised banks grew
from 1426469 million in 2007-08 to 3412524 million in 2011-12. It registered an
annual growth of 33.67 per cent, with an average of 2264254 million. The other
income of nationalised banks increased from 209794 million in 2007-08 to 3 2 4 6 7 4
million in 2011-12. It registered an annual growth of 15.92 per cent, with an
average of 278129.8 million. The interest expenditure of all nationalised banks grew
from 1010933 million in 2007-08 to 2396879 million in 2011-12. It registered an
annual growth of 18.84 per cent, with an average of 1564608 million. The operating
expenses of all nationalised banks grew from 296700 million in 2007-08 to
574750 million in 2011-12. It registered an annual growth of 14.13 per cent, with an
average of 434345 million. The total income of all nationalised banks grew from
1636262 million in 2007-08 to 3737197 million in 2011-12. It registered an annual
growth of 17.48 per cent, with an average of 2542384 million. The total
expenditure of all nationalised banks increased from 1307633 million in 2003-
04 to 2971628 million in 2011-12. It registered an annual growth of 17.84 per cent,
with an average of 1998953 million. The net profit of all nationalised banks grew
from 328629 million in 2007-08 to 765569 million in 2011-12. It registered an
annual growth of 18.42 per cent, with an average of 35502.63million.
The co-efficient of variation of all variables are relatively high. The group
which has high Coefficient of Variation is said to be more volatile or less
homogeneity.
To sum up the growth rate of interest income and other income is less
than the proportionate growth of interest expenses and operating expenses. It
creates pressure on profit earnings of nationalised banks.
Table 4. 10 Correlation Matrix
II OI IE OE TI TE NPII 1 OI 0.848156 1 IE 0.990287 0.847218 1 OE 0.955628 0.822105 0.906005 1 TI 0.99957 0.863321 0.990265 0.955859 1 TE 0.998157 0.85481 0.996792 0.936975 0.998183 1 NP 0.974832 0.867927 0.937518 0.994661 0.976689 0.961979 1
The above table explains the correlation between the profit earning capacity variables. It is found that interest income, other income, interest expenses, other expenses are positively
correlated to net profit as well as with other variables also. It shows that all the profit earning capacity parameter variables are inter-related to each other
Regression Analysis: The linear regression model, with normal error terms, simply
a. Predictors in the Model: (Constant), TOTAL EXPENSE, OTHER INCOME, OTHER ESPENSE
b. Dependent Variable: NET PROFIT
In order to access the individual factors influences on the profit earning capacity ‘t’ test
had been conducted on the individual regression co-efficient (β). Based on the above
results we reject HO in favour of H1 . Hence it has been concluded that profit earning
capacity of the nationalised banks during the study period were more influenced by
the other operating expenses met, other incomes earnings and total expenses of the
nationalized banks
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS5.1 Summary of Findings
The overall objective of the study is to evaluate the efficiency and profitability
of the 19 nationalised banks in India. The data collected is subdued into suitable
tabulator form for analysis. Quantitative techniques like mean, co-efficient
variation and compound growth rate are applied. Having identified the factors
which are likely to influence the efficiency and profitability, the significance of
the factors so identified have been statistically tested. In order to maintain
sequence and continuity conclusion are presented in chronological order.
a. Business performance: Right from the second phase of economic
liberalisation the Public Sector Banks in India aimed at reduction of
manpower and improving their operation feasibility. The Branch expansion
growth was considered significant. Deposit mobilization, granting advances and
business expansion of PSBs are gathered momentum with a view to compete with
global players. The difference between growth rate of deposit mobilization and
advance granted is more. It has been concluded that deposits and number of
employees did not directly influenced the business performance.
b. Efficiency: With the presence of international banks in India, nationalised
banks are in verge to improve their standards. Adoption of technological
innovations resulted fostering of the efficiency of employees and branch
performances. Even though efficiency of banks improved over the period of
study, Indian PSBs are far behind to the performance of global banks.
c. Profit Earning Capacity: RBI as an apex body which controls and fixes
interest rate. Interest income of all Nationalised banks constantly increased
throughout the period due to increase in granting loans and advances. Similarly
the interest expenses too. Non-interest income was highly volatile, but the
operating expenses steadily increased throughout the period. In general the
proportionate growth rate of total income (17.84 %) was almost equal to the
growth rate of total expenditure (17.96%), which is not a very good sign as the
growth rate of total income should be higher. It been concluded that net profit
earning of the nationalised banks was directly influenced by operational factors
and except in the case of other income and operating expenses.
5.2 Suggestions
In view of the foregoing issues, it may be meaningful to suggest the
following strategies for the nationalized banks for enhancing operational efficiency
and profitability.
a. Business expansion through setup branches paves way bringing out large
geographical area customer coverage by the banks. Thereby exploring the
unexplored segment of clients is possible
b. Even though efficiency of banks improved over the period of study, Indian banks
are far behind to the performance of global banks. Banks have to take steps to
improve the efficiency by adopting new technologies
c. Added thrust is required for enhancing the non-interest income. This can
significantly improve profitability. Non-interest income can be improved through
undertaking more of fee based activities, besides the traditional fund based
activities like providing credit. In this regard, it may be pointed out that higher
investments in technology would help to improve the non-interest income of banks
d. It is desirable that all the nationalised banks can be brought under a single Act so
that the corporate governance regimes do not have to be different just because the
entities are covered under multiple Acts of the Parliament
5.3 Conclusion
Banking industry in India was all poised for a major leap in year 2004. Banking
sector witnessed some major positive changes. Going by the performance for
the year 2008-09, Indian nationalised banks have not just survived the crisis but
appear to have emerged even stronger from the recession and even gone ahead and
posted reasonable profits. The profitability of the nationalized banks is expected to
remain under pressure due to increased cost of borrowing, declining interest
spreads, and lower fee income due to slowdown in retail lending. Profit levels
are also likely to be impacted by mark-to-mark provisions on investment
portfolios and considerably lower profit on sale of investments, as compared with
previous years. Moreover the efficiency factors such as business, deposit and
advances per employee improved over the period of study from 2007to 2012.
References
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Das. (2005). Liberalisation, Ownership and Efficiency in Indian Banking—A Nonparametric Analysis”, Economic and Political Weekly, March 19.
Nath. (2005). “Efficiency Benchmarking of Indian Commercial Banks in the Deregulated Financial Environment”, in Ranjan Ghosh and Chiranjib Neogi (Eds.), Theory and Application of Productivity and Efficiency— Econometric and DEA Approach, Macmillan.
Ravisankar, S. a. (2000). “Rating of Indian Commercial Banks: A DEA Approach”, European Journal of Operational Research, Vol. 124, No. 1, pp. 187-203.
Ray, R. a. (2004). “Liberalisation, Ownership and Efficiency in Indian Banking—A Nonparametric Analysis”, Economic and Political Weekly, March 19.
Sarkar, K. a. (2005). “Deregulation, Ownership, and Efficiency Change in Indian Banking: An Application of Stochastic Frontier Analysis”, in Ranjan Ghosh and Chiranjib Neogi (Eds.), Theory and Application of Productivity and Efficiency— Econometric and DEA Approach, Macmillan.
Sinha. (2006). “Intermediation Cost Efficiency: A Tale of Two Bank Groups”, The Icfai Journal of Bank Management, February, Hyderabad