Discuss in detail the performance of commercial bank in India.

PERFORMANCE OF COMMERCIAL BANKS IN INDIA

*INTRODUCTION:

~ Commercial banks play an important role in the economic development of the nation. Hence, the performance of commercial banks can have a marked influence on the development of an economy.

~ With this fact in view, various reforms were introduced in the banking sector in India.

~ These reforms brought about a remarkable improvement in the performance of commercial banks.

*INDICATORS

~ The performance of a bank can be judged on various indicators.

~ These indicators can be categorised as under:

# PROFITABILITY INDICATORS:

^ The net profit of a bank is an indicator of its profitability.

^ This is influenced by the banks interest income, non-interest income and expenses.

^ The following are the profitability indicators of a commercial bank:

1) Interest Income Ratio: This is the ratio of a bank’s interest income to its total assets. A high interest income ratio indicates greater profitability.

2) Interest Expended Ratio: It is the ratio of interest expenses to total assets. A decline in this ratio brings greater profitability to the bank.

3) Net Interest Margin Ratio: Net interest indicates the difference between interest income and interest expense. So, it is the difference between the revenue generated by interest bearing assets and cost of borrowed funds. A net interest margin ratio is the ratio of this net interest to total assets. The higher the ratio, the greater the profitability. A fall in the ratio signals the bank to reorient its policies to earn higher yields through cheaper mix of funds.

4) Intermediation Cost to Asset Ratio: Is the ratio of intermediation cost (operating expenses cost) to its total assets. A lower ICAR is an indicator of higher profitability and efficiency.

5) Burden Ratio: Is the ratio of non-interest income to non-interest expenses. A higher ratio brings about greater profitability.

6) Return on Assets Ratio: Is the ratio of net profit to total assets. It is the most important indicetor of the bank’s performance. A higher ratio is an indicator of high performance and profitability.

7) Return on Equity Ratio: Is the ratio of net profit to total equity. A higher ratio indicates greater profitability and better efficiency. This enables a bank to raise more funds from the capital markets.

Capital market Indicators: The performance of a bank’s scrip (shares) on the stock market depends on its profitability and it is judged by 2 parameters:

^ Earning per share (EPS) ratio: Net Profit

No of equity shares.

^Price Earning Ratio (P/E) : price of shares

Earning per share

# PRODUCTIVITY INDICATORS:

~ The performance of a bank’s employee (human resource) has an important effect on the bank’s performance in the world of competition.

~ The productivity of the banks can be indicated by:

1) Profit per Employee: Net profit

No. of employees

2) Business per Employee: Net Total Income

No. of employees

~ Higher ratio indicates a productive and efficient staff.

# FINANCIAL STABILITY INDICATORS:

~ Apart from profit, financial stability is also of utmost importance to the banks as it gains the trust and confidence of its depositors.

~ Financial stability can be judged by the CRAR ratio. It is the ratio of capital to risk-weighted assets.

#Quality of Assets:

~ The quality of assets in the bank depends on the level of Non-performing Assets (NPAs).

~ The NPAs are those assets on which the payment of interest / principal amount receivable is in arrears.

~ Higher NPAs indicate the deteriorating quality of assets.

~ They are compared to Total Advances / Total Assets.

~ The ratios used are: Gross NPAs / Gross Advances

: Net NPAs / Net Advances

~ If these ratios are higher, they indicate decreasing performance of assets.

* PERFORMANCE OF PUBLIC SECTOR BANKS, NEW PRIVATE SECTOR BANKS AND FOREIGN BANKS IN INDIA:

~ After the introduction of reforms, there is an overall improvement of performance of all banks.

~ There is greater efficiency and better profitability despite the decline in spread.

~ Comparative performance:



PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

1997-98 88.5 lakhs 785.9 lakhs 529.4 lakhs

2005-06 324.1 lakhs 728.9 lakhs 1012.8 lakhs

Increased, but Declined due to higher base Increased considerably

Comparatively low Effect

# Profits per Employee = Net Profits

Total no.of employees.

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

1997-98 0.7 lakhs 11.4 lakhs 4.5 lakhs

2005-06 2.9 lakhs 6.3 lakhs 26.5 lakhs

Increased Sharply declined due to higher base effect Increased

Enormously

# Business per Branch:

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

Nationalised Banks SBI & Associates

1999-2000 2152 lakhs 2860 lakhs 14989 lakhs 54800 lakhs

2004-2005 4242lakhs 7454 lakhs 21656 lakhs 114768 lakhs

Increased, but comparatively lower Increased Increased

~ Thus the productivity of foreign banks was the highest, followed by the new private sector banks and then the public sector banks.

~ The use of IT, customer care, liberal RBI policies, dedication of employees etc. play a key role in the increased production of Foreign Banks and New Private Banks.

*PROFITABILITY:

# Interest – income Ratio=Interest Income

Total Assets

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

2000-2001 8.8% 8.2% 9.3%

2008-2009 7.26% 8.3% 6.78%

Declined Improved marginally Declined

# Interest –Expended Ratio = Interest Expenses

Total Assets

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

2000-2001 6.0% 6.0% 5.6%

2008-2009 5.14% 5.55% 2.87%

Declined Declined Declined considerably

# Intermediation-Cost Ratio = Operating Costs

Total Assets

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

2000-2001 2.7% 1.7% 3.0%

2008-2009 1.5% 2.2% 2.8%

Declined Increased Declined

# Net Profit Ratio = Net profits

Total Assets

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

2000-2001 0.4% 0.8% 0.9%

2008-2009 0.91% 1.06% 1.68%

Increased Increased Increased

# Spread Ratio = Net Interest

Total Assets

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

2000-2001 2.9% 2.1% 3.6%

2008-2009 2.12% 2.79% 3.91%

Declined Increased Increased

~ Thus, the foreign banks and new private sector banks are efficient and are able to generate greater income.

~ However, the profitability of Public Sector banks is also improving.

*FINANCIAL STABILITY:

~ The capital adequacy ratio (CAR) indicates the financial soundness of a commercial bank.

# CAR RATIO OF BANKS

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

March2001 11.2% 11.5% 12.6%

March2009 12.3% 15.1% 15.1%



ASSET QUALITY:

~ Asset Quality can be judged by the level of Non-Performing Assets (NPAs).

~ A lower level of NPAs indicates better Asset Quality.

~ A better quality of assets indicates greater efficiency.

# GROSS AND NET NPAs OF COMMERCIAL BANKS.

PUBLIC SECTOR NEW PRIVATE SECTOR FOREIGN BANKS

Gross NPAs Net NPAs Gross NPAs Net NPAs Gross NPAs Net NPAs

2008 2.2% 1.0% 2.5% 1.2% 1.8% 0.8%

2009 2.0% 0.9% 3.1% 1.4% 4.0% 1.8%

Declined Increased Increased



*CUSTOMER SERVICE:

~ These services provide customers easy access to banking facilities, thus improving overall customer service.

~ Various financial services are available to customers. These Include:

1) Core Banking Solution: These services include ‘anywhere banking’, ‘everywhere access’ and quick transfer of funds.

2) ATM Facilities: All banks have introduced ATM facilities. The new private sector banks and foreign banks have greater percent of ATMs as compared to public sector banks.

3) Computerization Of Banks: New Private Sector Banks and Foreign Banks have 100% computerization. The proportion of Public Sector Banks branches that achieved full computerization has also increased to 95%.