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%.