PERFORMANCE OF COMMERCIAL BANKS IN INDIA: A COMPARATIVE STUDY OF DIFFERENT CATEGORIES OF BANKS

Research Project Report

Submitted to the Punjab Agricultural University in partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION
in

FINANCIAL MANAGEMENT
(Minor Subject: Economics)

By Vinay Behl (L-2006-BS-33-MBA)

Department of Business Management College of Basic Sciences and Humanities PUNJAB AGRICULTURAL UNIVERSITY LUDHIANA- 141004
2008
1

CHAPTER I

INTRODUCTION
It has been around one and a half decade since financial sector reforms were initiated in India. As banks are the major segment of the financial sector in India, reform measures are primarily aimed at improving the performance of the banking sector. The importance of banking system in India is noted by the fact that aggregate deposits stood at 61 percent of Gross Domestic Product (GDP) and bank credit to government and commercial sector stood at 29 per cent and 38 per cent of GDP respectively. An efficient banking system has significant positive externalities, as it increases the efficiency of economic transaction in general. Therefore, one of the important objectives of financial sector reforms was to improve the efficiency of banking system. In this backdrop it is essential to study the efficiency levels of Indian commercial banks to understand the impact of financial sector reforms on its performance. In this research an attempt has been made to study the performance of commercial banks in India: A comparative study of different categories of banks. The concept of banking and Indian banking system have been defined as under: Banking industry in India, during the course of its evolution and growth, has traversed through innumerable twists and turns. The industry has emerged victorious against all odds, by the sheer strength of its teeth. It has braved many challenges, weathered many storms, withstood many onslaughts and has emerged as one of the dynamic and vibrant industry. The secret of success lies in its ability to adapt to changes in most admirable manner. Like an oscillating pendulum, the industry has witnessed extremely opposite and diverse conditions over the years. Whether it is class banking or

2

mass banking, whether private ownership or public sector status, whether state of administered interest rate regime or state of operational freedom, whether bound by antiquated manual process or a scenario witnessing unleashing of technological blitzkrieg – the industry has its own experience to narrate. Banking is an important segment of the tertiary sector and acts as backbone of economic and social progress. The banks have played a stellar role in the development of the nation with its high social content and commitment. The banks render vital services to the masses belonging to the various sectors of the economy like agriculture, industry whether small scale or large scale. The banking system is one of the few institutions that impinge on the economy and affect its performance for better or worse. They act as a development agency and are the source of hope and aspirations of the masses. The banking sector continues to be dominant in our financial system. More than 70 per cent of the financial system’s assets are owned by banking sector. Even within banking sector, the public sector banks own more than 80 per cent of the Commercial Banking assets. Development banks are also owned by the public sector banks.

Indian Banking System and Policy Change After independence, the major development in the Indian banking sector was nationalisation of commercial banks in 1969. In the post nationalisation period there was a rapid expansion of banks in terms of coverage and also in terms of deposit mobilisation. Policies at that time ensured credit flows to certain important sectors of the economy. Importantly, the Government also used banking sector as an instrument to finance its own deficit. While this was facilitated through high Cash Reserve Ratio (CRR) and Statutory

3

Liquidity Ratio (SLR), to keep the borrowing cost of the Government low, the interest rate on bank loan was fixed at lower than market rates. Along with high CRR and SLR, the operational freedom of the banks was curtailed with high priority sector lending norms (as high as 40 per cent of the total lending). While some of these measures were adopted to enhance social welfare, they affected the efficiency of the banking sector adversely. As some of the priority sector loans were not economically profitable the Non Performing Assets (NPA) increased from 14 per cent in 1969 to 35.4 per cent in 1990. Also, due to the expansionary policy pursued by RBI, banks had to open certain number of branches in the rural areas. Many of these branches were economically not viable due to which the number of loss making branches increased which whittled away resources of the banking industry. This affected profitability and the efficiency of banks. Further due to restrictions on the operations of private and foreign banks the dominance of the public sector banks prevailed resulting in lack of competition. In 1991, Indian economy faced a major balance of payment crisis. The foreign exchange resources had almost disappeared. The fiscal deficit was high and the inflation rate reached double digits. To overcome this crisis India introduced economic reforms for many areas of the economy, which included, amongst others, the financial sector reforms. The financial sector reforms in India began as early as in 1985 with the implementation of the recommendations of the Committee to Review the Working of the Monetary System. But the real momentum was given to it in 1992 with the implementation of the recommendations of the Committee on Financial System (CFS). Almost all of the recommendations of the CFS have been implemented in a phased manner. In 1998, another committee, viz., the committee on Banking Sector Reforms (BSR) was

4

constituted. The recommendations of the BSR committee have also been implemented in a phased manner. Important financial sector reforms introduced after 1992 are as follows: Reduction in the statutory pre-emption: This includes reductions in CRR and SLR. At one stage (in 1991) CRR applicable to incremental deposit was as high as 15% and SLR was 38.5 per cent; thus pre-empting 53.5 per cent of incremental deposits. These ratios were reduced in a phased manner since 1992. By 2005, SLR was reduced to 25 per cent and CRR to 4.5 per cent of the total deposit. Interest rate liberalization: Before 1991, interest rates, both on deposits and loans were controlled by RBI. But after liberalization these rates were made market determined in a phased manner. The RBI now directly controls only the interest rates charged on credit to exports, and also there is a ceiling on lending rate on small loans (i.e., up to Rs 2 lacs). On the deposit side, except the interest rate paid on savings deposits, all other interest rates have been deregulated. Increased autonomy and competition: Considerable operational autonomy has been provided to the banks by reducing the government’s stake in banks. Competition has been infused by allowing new private sector banks and more liberal entry of foreign banks (at the end of march 2001, there were 8 new private sector banks, 23 old private sector banks and 42 foreign banks as against 23 foreign banks in 1991). Regulatory Norms: These were aimed at reducing the vulnerability of financial institutions in the face of fluctuations in the economic environment. Important among them is the norm on maintaining a Capital Adequacy Ratio. Following the CFS report the capital adequacy ratio was fixed at 8 per cent. It was increased to 9 per cent following the BSR recommendation. Apart from this, various prudential norms related to income

5

recognition, asset classification, provisioning for bad assets (NPAs) and assigning risk to various types of assets have been introduced. These reforms are expected to have an impact on the operations of banks. With reduced statutory requirements banks will have more funds at their disposal for commercial lending and interest rate liberalisation is expected to bring flexibility and competition into the banking system. Competition is also infused by opening up banking sector for the private and foreign banks. Along with these flexibilities, certain regulatory reforms are also introduced, which are meant to make banks strong enough to face fluctuations in the economy. Overall, these reforms are aimed at improving the performance of banks. Given this background it is important to examine how far such reform measures have been successful in their objective of improving the performance of the commercial banks. While performance of a bank can be measured in various ways, in the present study we use technical efficiency as a measure of the performance of Indian commercial banks.

Commercial Banking in India The beginning of commercial banking in India was made in the 17th Century when the British established agency houses in the country but commercial banking in a systematic form was initiated in the early part of the 19th century when Presidency Banks were established. In 1913, eighteen such commercial banks were functioning. The Imperial Bank of India was set up in 1920 with the merger of three Presidency Bank. In 1955, this bank was nationalized and renamed as the State Bank of India.

6

In 1949, The Banking Regulation Act, 1949, was passed and the Reserve Bank was thus vested with regulatory power over the commercial banks. In 1950-51, there were nearly 430 commercial banks in India but due to mergers and acquisitions, the number reduced to 256 in 1960-61. In 1969, 14 major commercial banks were nationalized. At present there are 27 such nationalized banks including the SBI group. In 1995-96, total number of scheduled commercial banks operating in the country was 271 and number further reduced to 183 in 2006-07. Commercial banks are the most important constituents of banking system. These are the banks which do banking business to earn profit. Some have used the term "commercial bank" to refer to banks which focus mainly on companies. In some Englishspeaking countries outside North America, the term "trading bank" was and is used to denote a commercial bank. These banks raise funds by collecting deposits from businesses and consumers via checkable deposits, savings deposits, and time (or term) deposits. They make loans to businesses and consumers. They also buy corporate bonds and government bonds. Their primary liabilities are deposits and primary assets are loans and bonds. Functions of commercial banks can be divided into three parts namely, primary functions, secondary functions and social and developmental functions.

Role of Commercial Banks in Social-Economic Development The banks have become the foundation of economic and social development of a nation. If any country wants to increase its rate of capital formation, it is very important to build an efficient commercial banking system equipped with an adequate coverage so that, apart from mobilizing savings, it may also be able to foster the banking habits in a

7

society. The commercial banks create the awareness among the rural and urban people about society’s wasteful spending and provide them enough opportunities to make their investment in more generating assets. The commercial banks help the agricultural sector in a number of ways. They open a network of branches in rural areas to provide agricultural credit. They also finance agriculture sector for modernization and mechanization of farms, for providing irrigation facilities, for high yielding seeds and fertilizers for insecticides-pesticides, for developing/improving land etc. They also provide financial assistance for animal husbandry, dairy farming, sheep breeding, poultry farming and horticulture. The Regional rural banks fulfill the credit requirements of almost all types of rural people and help in upliftment of rural areas. Commercial banks play a significant role in economic growth and development of developing countries like India. Banks lubricate the entire monetary and financial system and ensure smooth operation. Commercial banks are the nerve-centre of the capital market, industrial and trading activities of a country. The commercial banks are the most important financial institutions and play an important role in the economic development of a country. The monetary policy of the central bank of the country is a very important instrument of economic policy in a liberalized economy. The monetary policy must be implemented effectively and efficiently to manage the crucial factors of sound health of economy. The effectiveness of the monetary policy depends upon the co-operation of commercial banks. It would not be possible to carry out effective implementation of any monetary policy in the country without the active co-operation of commercial banks. In

8

fact commercial banks constitute the centre-stage of any monetary programme of the Government or the Central Bank of the country. The commercial banks help in developing both internal and external trade of a country. The banks provide loans to retailers, traders, wholesalers for their inventory and also help in transferring of goods from one place to another by providing all types of facilities, such as discounting and accepting bills of exchange, providing overdraft facilities, issuing draft etc. Another crucial role of banks is to finance exim activities and providing foreign exchange facilities to importers and exporters of goods. Commercial banks have been facilitating the flow of foreign receipts and payments. In order to encourage better participation of commercial banks in the area of finance, some countries have established a system of guarantee and ensure banks against fluctuations in exchange values and dangers of non-realisation of payment due to commercial or political reasons. Banks act as bankers for the issue of new capital. They help their customers in marketing of securities and send the dividends to customer’s account directly. They undertake the issue of credit instruments like letters of credit, the acceptance of bills of exchange and documents, acting as a referee to the respectability and financial standing of customers and providing specialised advisory services to the customers. Most of the banks have introduced new technology in their operations. Among the new services introduced during the last few years, the bank guiro, ATMs, credit cards and Bancassurance deserve special mention. The bank guiro is a system by which a bank’s customer with many payments to make, instead of drawing a cheque for each item, may simply instruct his bank to transfer to the bank accounts of his creditors the sum due from

9

him and he writes one cheque debiting his account with the total amount. By providing these diversified services banks help in the overall growth of trade and industry to a great extent. Modern commercial banks have diversified their activities with their entry into new non-traditional areas of business such as mutual funds, merchant banking, portfolio management, corporate counseling, project counseling, hire purchase finance equipment leasing, venture capital and factoring service etc. These new activities by banks and their subsidiaries result in the development of domestic and international business. To sum up, the commercial banks are very important instrument of macroeconomic policy to stabilize economy. They have become an omnibus institution in the modern times to which people of varied interests look for help and success. They give life and sustenance to their customers and, in turn, get vitality and vigour from them, to become an effective tool of social transformation and rejuvenation. A succulent and resilient banking system in a country portends health and vigour whereas a sterile and malevolent system in crippling and strait jacketing of a country’s economy.

Objectives of the study Following were the objectives of the study: 1. To study the trends in the performance of different categories of the banks on the basis of selected parameters. 2. To compare the performance of different categories of the banks.

10

CHAPTER II

REVIEW OF LITERATURE
A large number of studies have been conducted on the topics related to performance of commercial banks in India: A comparative study of different categories of banks. In this chapter an attempt has been made to present in brief, a review of literature available on the studies done so far. The review of past studies has been presented in chronological order to provide a glimpse of work done in this area. Buser et al (1981) studied the capitalization ratio of banks and argued that banks generally have an optimal capitalization ratio and need to remain well capitalized when they have a high franchise value. They confirmed the positive relationship whether we use interest margin or return on assets as a dependant variable and in all specifications. This indicated that well-capitalized banks support lower expected bankruptcy costs for themselves and their costumers, which reduce their cost of capital. Vashisht (1987) critically evaluated the trends and progress of commercial banks in India during the period 1971-1983. The ratio analysis was used to evaluate the performance of commercial banks with respect to different indicators. He analysed that commercial banks did very well with respect to branch expansions, deposit mobilization and priority sector advances. Amandeep (1990) evaluated the profits and profitability of nationalized banks. The study analysed the factors that influence the profitability of banks and suggested that in order to improve the banks’ profitability, the banks need to focus attention on the management of

11

spread,

burden,

establishment

expenses,

income

and

deposit

composition. Berg et al (1992) studied the impact of deregulation on efficiency of different banking sectors. They used the stochastic frontier technique to study the impact and the study showed that financial liberalisation has positively affected the efficiency and productivity of commercial banks and deregulation has significant impact on efficiency. Molyneux and Thornton (1992) explored thoroughly the determinants of bank profitability on a set of countries. They use a sample of 18 European countries during the 1986-1989 period. They found a significant positive association between the return on equity and the level of interest rates in each country, bank concentration and government ownership. Presely (1992) focused on asset and liability management in the banking sector. The literature concerning the asset and liability management for banks strongly suggests that risk management issues and its implications must be concentrated by the banking industry. He concluded from his study that there is a need for greater risk management in relation to more effective portfolio management, and this requires a greater emphasis upon the nature of risk and return in bank asset structure, and greater diversification of assets in order to spread and reduce the bank's risks. Jain (1993) studied the various aspects of bank marketing and suggested the areas where weaker and underdeveloped sections needed support. He highlighted the merging issues relating to bankercustomer relationship and pointed out that disparities in branch expansion and credit deployment should be reduced.

12

Avkiran (1995) studied the financial performance of banks by using combination of financial ratio analysis, benchmarking, measuring performance against budget and concluded that most of the banks registered huge difference with respect to performance as compared to the ideal one. Berger (1995) examined the relationship between the return on equity and the capital asset ratio for a sample of US commercial banks for the 1983-1992 time period. Using the Granger Causality Model, he showed that the return of equity and capital to asset ratio tend to be positively related. He concluded that the relationship between bank concentration and performance in the US depend critically on what other factors are held constant. Angbazo (1997) investigated the determinants of bank net interest margins for a sample of US banks for 1989-2003 period. The results for the pooled sample documents that default risk, the opportunity cost of non-interest bearing reserves, leverage and management efficiency are all positively associated with bank interest spread. Edris (1997) determined the importance of selection factors used by Kuwait business consumers in choosing domestic and foreign banks. Findings of this study showed that the highest – ranking determinant factors of selection a bank in Kuwait by business firms were size of bank assets, personnel efficiency, banking experience, friendliness of staff, reputation, and availability of branches abroad. Bhatia and Verma (1998) determined the factors influencing profitability of public sector banks in India by applying the technique of multiple regression analysis. The analysis revealed that priority sector

13

advances, fixed/current deposit ratio and establishment expenses affected the profitability of public sector banks negatively and net spread influenced the profitability of banks positively and significantly. Barajas et al (1999) documented significant effects of financial liberalization on banks’ interest margins. Although the overall spread has not declined after financial reform, the relevance of the different factors behind the bank spreads were affected by such measures. Another change linked with the liberalization process was the increase of the coefficient of loan quality after the liberalization. Demerguç-Kunt and Huizingha (1999) examined the determinants of bank interest margins and profitability using a bank level data for 80 countries in the 19881995 period. The set of variables included several factors accounting for bank characteristics, macroeconomic conditions, taxation, regulations, financial structure and legal indicators. They reported that a larger ratio of bank assets to GDP and a lower market concentration ratio lead to lower margins and profits. Patel (2000) highlighted the problem of bad loans growing level of non-performing assets in the commercial banks in the post-reformed period. It was observed that it is important for the banks and supervisory authorities to adopt more effective lending practices. It was also emphasized that corporate entities should follow more stringent disclosure and transparency practices and corporate

governance principles. Ben and Goaied (2001) investigated the determinants of the Tunisian banks’ performances during the period 1980-1995. The study used panel data regression analysis

14

to find the underlying determinants of Tunisian banking industry performance. They indicated that the best performing banks are those who have struggled to improve labour and capital productivity, those who have maintained a high level of deposit accounts relative to their assets and finally, those who have been able to reinforce their equity. Abreu and Mendes (2002) investigated the determinants of banks’ interest margins and profitability for some European countries in the last decade. They reported that well capitalized-banks face lower expected bankruptcy costs and this advantage “translate” into better profitability. Although with a negative sign in all regressions, the unemployment rate is relevant in explaining bank profitability. The inflation rate is also relevant. Guru et al (2002) attempted to identify the determinants of successful deposit banks in order to provide practical guides for improved profitability performance of these institutions. The study was based on a sample of seventeen Malaysian commercial banks over the 1986-1995 period. The profitability determinants were divided in two main categories, namely the internal determinants (liquidity, capital adequacy and expenses management) and the external determinants (ownership, firm size and external economic conditions). The findings of this study revealed that efficient expenses management was one of the most significant in explaining high bank profitability. Among the macro indicators, high interest ratio was associated with low bank profitability and inflation was found to have a positive effect on bank performance. Mazhar (2003) discussed the development and performance of domestic and foreign banks in Arab gulf countries. The main contribution of his study was to make financial comparison based on return on assets, return on equity, return on deposits, and

15

other financial banking activities as credits and deposits to determine the performance and showed that local and foreign banks in these countries have performed well over the past several years. Moreover, he added that banks in these economies are well capitalized and the banking sector is well developed with intense competition among the banks. Chien and Danw (2004) showed in their study that most previous studies concerning company performance evaluation focus merely on operational efficiency and operational effectiveness which might directly influence the survival of a company. By using an innovative two-stage data envelopment analysis model in their study, the empirical result of this study was that a company with better efficiency does not always mean that it has better effectiveness. Elizabeth and Elliot (2004) studied the correlation between customer service and financial performance among Australian financial institutions. They applied the coefficient of correlation and concluded that all financial performance measures as interest margin, ROA, and capital adequacy are positively correlated with customer service quality scores. Sensarma (2005) examined the efficiency of scheduled

commercial banks for the period 1986-2003. He employed the technique of stochastic frontier analysis to estimate bank-specific cost and profit efficiency and concluded that the cost efficiency of the banking industry increased during the period and profit efficiency underwent a decline.

16

Tektas and Gunay (2005) discussed the asset and liability management in financial crisis. They argued that an efficient asset-liability management requires maximizing bank's profit as well as controlling and lowering various risks, and their study showed how shifts in market perceptions can create trouble during crisis. Drehmann et al (2007) studied the integrated impact of correlated credit risk and interest rate risk on commercial banks in perspective of economic value and capital adequacy. It was

emphasized that by modeling the whole balance sheet of a bank and taking account of the repricing characteristics of all exposures, we cannot only assess the impact of credit and interest rate risk on the bank’s economic value but also on its future earnings and capital adequacy. Based on the above literature, we can say that there are some studies about banks in India and in some other countries also has been done on analyzing the performance by using various techniques like stochastic frontier analysis and panel data regression analysis. In this study an attempt has been made to study the performance of commercial banks in India on the basis of certain indicators such as net profit, operating profit, interest earned, interest expended, spread, establishment expenses etc.

17

CHAPTER III

RESEARCH METHODOLOGY
It is imperative to decide upon and document a research methodology well in advance to carry out the research in the most effective and systematic way. This chapter describes the research methodology adopted to serve the objectives of the study in an effective manner. This chapter consists of the following sections: • • • • • • Conceptual Framework Sample design Collection of data Tools of analysis Hypothetical formulation Limitations of study

These sections are discussed as follows:

18

3.1 CONCEPTUAL FRAMEWORK In this study, ‘Performance of commercial banks in India: A comparative study of different categories of banks’, the performance of different categories of banks was analysed on the basis of certain performance indicators. The following performance indicators were proposed to be included in this study: • • • • • • • • • • Net Profit Operating Profit Interest Earned Interest Expended Spread Establishment Expenses Total Deposits Total Advances Total Volume Return on Assets Three different categories of banks were chosen from Public sector, Private Sector and Foreign Banking Sector. In this research, the performance of different categories of banks have been analysed on the basis of certain performance indicators such as Net Profit, Operating Profit, Total Deposits, Spread, Total Advances, Return on Assets etc. and in order to compare the banks of different categories, various statistical tools have been applied viz., Trend Analysis, Compounded Annual Growth rate, Arithmetic, Standard Deviation, Coefficient of Variation and Test of Significance.

19

3.2 SAMPLE DESIGN The sample for the study consisted of total of six banks from three different categories of banks called strata’s viz., Public Sector, Private Sector and Foreign Banking Sector and each bank was the unit of population. The population for the study comprised of all the commercial banks from public sector, private sector and foreign banking sector. The public sector banks comprised of 20 nationalised banks and 8 banks of the State Bank Group. The private sector banks consisted of 21 old private banks and new 9 private sector banks. The foreign banking sector comprised of 33 foreign banks. Thus, the total of 91 banks was there in population for the study. The sampling technique used was stratified random sampling. The selected banks were – ICICI Bank, AXIS Bank, HDFC Bank, State Bank of India, Punjab National Bank and CITI Bank.

3.3 COLLECTION OF DATA The entire structure of data for the study rests solely on secondary sources of information. The study was carried out for the period from 2001-02 to 2006-07. Data relating to performance indicators i.e. Net Profit, Operating Profit, Interest Earned, Interest Expended, Establishment Expenses, Spread etc. of banks under study has taken from Bank Quest, Credit Information Review, IBA Bulletins, Annual Reports of the banks and websites such as Moneycontrol.com, Money.rediff.com and websites of the banks. Only those banks were selected for the purpose of the study for which data for completed 12 months from 2001-02 to 2006-07 was available. The raw data in the form of various for the sample banks was first recorded in a master table and then subsequent statistical tools for the analysis were applied.

20

3.4 TOOLS OF ANALYSIS Analysis and interpretation of performance indicators was done to compare the different categories of banks selected, which in turn helped in studying the performance of the commercial banks taken under the study. To compare the different categories of banks on the basis of various performance indicators such as net profit, interest earned, establishment expenses, total advances etc. various statistical tools have been applied viz., Trend Analysis, Arithmetic, Standard Deviation, Coefficient of Variation, Compounded Annual Growth rate and Test of Significance. Following were the tools used to analyse the secondary data.

3.4.1 TREND ANALYSIS Trend Analysis is one quantitative method use to determine patterns in data collected over time. It is also used to detect patterns of change in statistical information over regular intervals of time. Trend represents the long term direction of the time series. The method of Least Squares has been used to figure out the trend. It is a mathematical method and used to fit a straight line trend. The straight line trend is represented by the equation

Yc
where:

= a + bX

Yc is the estimated value of the dependent variable X is the independent variable (time in trend analysis) a is the Y-intercept (the value of Y when X=0)

21

b is the slope of the trend line a and b can be calculated as:

a=

∑Y N ∑ XY ∑ X2

b=

where: N represents the number of years (months or any other period) for which data are given.

3.4.2 ARITHMETIC MEAN The Arithmetic Mean is an average. The formula for arithmetic mean is:

A.M. (X ) = X1 + X2 + X3 + ……………………… + Xn n
3.4.3 STANDARD DEVIATION

n = ∑ Xi/n i=1

The Standard Deviation is an absolute measure of dispersion that expresses variation in the same units as the original data. The formula for standard deviation is:

S.D. (σ ) √=(Xi - X )2 / (n-1)
3.4.4 COEFFICIENT OF VARIATION The Coefficient of Variation is one relative measure of dispersion. It relates the standard deviation and the mean by expressing the standard deviation as a percentage of the mean. 22

The unit of measure, then, is “percent” rather than the same units as the original data. The formula for coefficient of variation is:

Coefficient of Variation (C.V.)

=

σ X

3.4.5 COMPUNDED ANNUAL GROWTH RATE The Compounded Annual Growth Rate of the performance indicators such as Establishment Expenses, Spread, etc. can be calculated for a period of six years i.e. 200102 to 2006-07. The formula for calculating compounded annual growth rate (CAGR) is:

CAGR =

[(Final Value / Initial Value)1/n - 1] x 100

3.4.6 TEST OF SGINIFICANCE In order to study the variation of performance between the growth rates of net profit, operating profit, interest earned etc. of different banks with banking industry, the following test of significance was applied:

X - µ t= S

where:

23

X is the mean of the sample
µ is the actual or hypothetical mean of the population n is the sample size S is the standard deviation

3.5 HYPOTHESIS FORMULATION The following are the hypothesis of the study: Null Hypothesis (Ho): There is no significant difference between the performances of different categories of banks on account of various indicators. Alternate Hypothesis (Ha): There is a significant difference between the performances of different categories on account of various indicators.

3.6 LIMITATIONS OF THE STUDY The study has following limitations: 1. The study concentrated only on the analysis of quantitative financial data. The qualitative aspects of performance of banking industry were not covered by the study. 2. The study was primarily dependent on secondary data. In such a case, limitations of secondary data were inherent in the study. 3. The accuracy of the research is limited by the knowledge of the researcher.

24

4. As the study was to be completed in a short time, the time factor acted as a considerable limit on the scope and extensiveness of the study.

CHAPTER IV

RESULTS AND DISCUSSIONS
To meet the first objective of the research, trend analysis of the banks under consideration has been determined by using method of least square. The trend graphs have been plotted of each performance indicator. To determine the second objective, the various statistical tools have applied to compare the performance of the banks under consideration, such as Arithmetic Mean, Standard Deviation, Coefficient of Variation, Compounded Annual Growth Rate and test of Significance. Following is the comparison of the banks on the basis of various performance indicators.

4.1 NET PROFIT Table 4.1: Net Profit of the Commercial Banks (Rs. crores)
Years Banks ICICI Bank Mar' 02 258 Mar' 03 1206 Mar' 04 1637 Mar' 05 2005 Mar' 06 2540 Mar' 07 3110 Mean S.D. C.V. (in %) 51.24 C.G.R (in %) 51.55 t-value

1792.67

918.57

0.161*

25

% change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change 325 562 2432 297 134

367.44 193 44.03 438 47.47 3105 27.67 842 49.82 391 20.31

35.74 271 40.41 602 37.44 4379 41.03 1108 31.59 572 46.29

22.48 324 19.56 853 41.69 4304 -1.71 1410 27.26 600 4.90

26.68 485 49.69 1116 30.83 4406 2.37 1439 2.06 706 17.67

22.44 659 35.88 1382 23.84 4541 3.06 1540 7.02 900 27.48 582.33 191.25 32.84 18.54 1.594* 1150.17 352.51 30.65 18.33 0.264* 3861.17 799.75 20.71 10.99 1.146* 781.33 379.16 48.53 29.27 0.608* 344.33 178.76 51.92 30.48 2.201*

Trend Graph of Net Profit
6000 5000 Value in crores 4000 3000 2000 1000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.1 Trend Growth in Net Profit

26

Net Profit is one of the most driving and motivating force for every business concern. Profits must be earned to: a) pay the dues to stakeholders, b) expand or diversify the business Table 4.1 showed Net Profit for all the commercial banks taken under study through 2001-02 to 2006-07 and provided that the maximum average net profit amounting to Rs.3,861.17 crores was earned by State Bank of India followed by ICICI Bank and Punjab National Bank was amounting to Rs.1,792.67 crores and Rs.1,150.17 crores, respectively. The minimum average net profit amounting to Rs.344.33 crores was earned by the AXIS bank followed by the CITI Bank and HDFC Bank amounting to Rs.582.33 crores and Rs.781.33 crores, respectively. The maximum standard deviation of net profit was noticed in ICICI Bank followed by State Bank of India and HDFC Bank. The major reason behind high standard deviation of ICICI Bank was of steep increase in the net profit from the 2001-02 to 2002-03. The minimum standard deviation was of CITI Bank. The coefficient of variation revealed the consistency and it was maximum in the case of AXIS Bank (51.92%) followed by the ICICI Bank (51.24%) and HDFC Bank (48.53%), respectively. The least coefficient of variation was noticed in the State Bank of India (20.71%) and it also showed the maximum consistency. The laudable compounded annual growth rate of net profit has been attained by ICICI Bank (51.52%0 followed by AXIS Bank (30.48%) and HDFC Bank (29.27%), respectively and the minimum growth rate has been noticed by State Bank of India (10.99%). The reason for high growth rate of ICICI Bank was due to sharp increase of 968 per cent in interest earned during the period of the study and moreover, the bank is gaining market share in private banking, retail banking, credit cards and most of the other verticals in which it is present whereas, there

27

was only 32.47 per cent increase in interest earned of State Bank of India during the period of the study. The t-values in the table 4.2.1 revealed that there was no significant difference between the performances of all the banks taken under study and the banking industry on account of various indicators. In figure 4.1, the growth in percent of trend showed that all the banks performances increased and decreased over the time period of the study and the maximum fluctuations was recorded in case of ICICI Bank. In the year 2001-02 highest growth in percent of trend was recorded by the HDFC bank (128.57%) followed by the AXIS Bank (150.56%) and CITI Bank (105.01%), respectively and the least was recorded by ICICI Bank (55.72%) but it has shown the highest growth in the next year i.e. 2002-03 and this was due to sharp increase of 335 per cent in interest earned in the year 2002-03. In the year 2005-06, each bank has shown similar growth in percent of trend and it also showed the maximum increased and decreased over the period of the study.

4.2 OPERATING PROFIT Table 4.2: Operating Profit of the Commercial Banks (Rs. Crores)
Banks ICICI Bank % change AXIS Bank % change HDFC Bank 545 407 Years Mar' 02 545 Mar' 03 1250 129.36 319 -21.62 623 Mar' 04 1988 59.04 435 36.36 839 Mar' 05 3077 54.78 562 29.20 1153 Mar' 06 3949 28.34 867 54.27 1587 Mar' 07 4749 20.26 1166 34.49 2628 1229.17 716.28 58.27 36.88 1.041* 626.00 297.90 47.59 27.55 3.263 Mean S.D. C.V. (in %) 56.95 C.G.R (in %) 52.25 t-value

2593.00

1476.78

0.162*

28

% change SBI % change PNB % change CITI Bank % change 853 1474 6045

14.31 5188 -14.18 1540 4.48 868 1.76

34.67 5860 12.95 1997 29.68 1233 42.05

37.43 9786 67.00 2603 30.35 1172 -4.95

37.64 11151 13.95 2881 10.68 1577 34.56

65.60 10249 -8.09 2932 1.77 2180 38.24 1313.83 457.76 34.84 20.17 1.564* 2237.83 599.62 26.79 17.29 0.619* 8046.50 2396.96 29.79 16.84 0.748*

Trend Graph of Operating Profit
12000 10000 8000 6000 4000 2000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Value in crores

Fig. 4.2 Trend Growth in Operating Profit Every economic identity should generate sufficient profits from its primary operations. The operating profit refers to the pure profit of the firm generated by the operations of the firm. It is calculated by total income less total expenditure.

29

Table 4.2 showed Operating Profit for all the commercial banks taken under study through 2001-02 to 2006-07 and provided that the maximum average net profit amounting to Rs.8,046.50 crores was earned by State Bank of India followed by ICICI Bank and Punjab National Bank was amounting to Rs.2,593 crores and Rs.2,237.83 crores, respectively. The minimum average net profit amounting to Rs.626 crores was earned by the AXIS bank followed by the HDFC Bank and CITI Bank amounting to Rs.1,229.17 crores and Rs.1,313.83 crores, respectively. The maximum standard deviation of operating profit was noticed in State Bank of India followed by ICICI Bank and HDFC Bank. The reason behind high standard deviation of State Bank of India was because of lot many variations in the operating expenses occurred during the period of study. The minimum standard deviation was of AXIS Bank. The coefficient of variation revealed the risk and it was maximum in case of HDFC Bank (58.27%) followed by the ICICI Bank (56.95%) and AXIS Bank (48.53%), respectively. The least coefficient of variation was noticed in the Punjab National Bank (26.79%) and it also showed the maximum consistency. The laudable compounded annual growth rate of operating profit has been attained by ICICI Bank (43.55%) followed by HDFC Bank (30.05%) and AXIS Bank (19.22%), respectively and the minimum growth rate has been noticed by State Bank of India (9.22%). The highest growth in ICICI Bank was due to combined effect of rise in provisions and contingencies and net profit that increased from Rs.43.95 crores to Rs.1,638.68 crores and Rs.1,206.16 crores to Rs.3,110.22 crores, respectively. The tvalues in the table 4.2 revealed that there was no significant difference between the performances of all the banks except AXIS Bank and the banking industry on account of various indicators. AXIS Bank only showed the significant difference.

30

In figure 4.2, the growth in percent of trend showed that all the banks performances increased and decreased over the time period of the study and State Bank of India has increased and decreased very quickly as compared to rest of the banks under consideration, this was due to huge fluctuation in the provisions and contingencies through out the period of the study. 4.3 INTEREST EARNED Table 4.3: Interest Earned of the Commercial Banks (Rs. Crores)
Banks ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change 1910 6648 29810 1703 1179 Mar' 02 2152 Mar' 03 9368 335.32 1465 24.26 2023 18.79 31087 4.28 7485 12.59 1979 3.61 Years Mar' Mar' 04 05 8894 -5.06 1586 8.26 2549 26.00 30460 -2.02 7779 3.93 2280 15.21 9410 5.80 1924 21.31 3093 21.34 32428 6.46 8460 8.75 2203 -3.38 Mar' 06 13784 46.48 2888 50.10 4475 44.68 35795 10.38 9584 13.29 3064 39.08 Mar' 07 22994 66.82 4560 57.89 6889 53.94 39491 10.33 11537 20.38 4384 43.08 2636.67 867.14 32.89 16.78 3.537 8582.17 1598.93 18.63 10.78 0.533* 33178.50 3424.63 10.32 5.55 2.427* 3455.33 1775.05 51.37 31.42 1.556* 2267.00 1158.44 51.10 29.29 2.767 Mean S.D. C.V. (in %) 56.91 C.G.R (in %) 45.23 t-value

11100.33

6317.44

0.014*

31

Trend Graph of Interest Earned
40000 35000 30000 Value in crores 25000 20000 15000 10000 5000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.3 Trend Growth in Interest Earned The major chunk of a banks’ income flows in from interest earned which comprises the following as per schedule 13 of Banking Regulation Act 1949, a) Interest/discount on advances/bills, b) Income on investments, c) Interest on balances with Reserve Bank of India and others. All banks intend to maximum the interest income by improving credit deposit ratio and extending long-term loans especially in the deregulated environment when the interest rate witnessed a declining trend. Table 4.3 represented the position as regards interest earned and provided that the maximum average interest earned amounting to Rs.33,178.50 crores was earned by State Bank of India followed by ICICI Bank and Punjab National Bank was amounting to Rs.11,100.33 crores and Rs.8,582.17 crores, respectively. The minimum average interest earned amounting to Rs.2267 crores was earned by the AXIS bank followed by the CITI Bank and HDFC Bank amounting to Rs.2,636.67 crores and Rs.3,455.33 crores, 32

respectively. The maximum standard deviation of Interest Earned was noticed in State Bank of India followed by ICICI Bank and HDFC Bank. The minimum standard deviation was noticed by AXIS Bank. The coefficient of variation revealed the risk and it was maximum in case of ICICI Bank (56.91%) followed by the HDFC Bank (51.37%) and AXIS Bank (51.10%), respectively. The least coefficient of variation was noticed in State Bank of India i.e. 10.32 per cent, and it was the highest consistent performer because it manages all aspects of its business much better than other banks do. The compounded annual growth rate revealed that splendid performance was recorded by ICICI Bank (48.53%) followed by HDFC Bank (26.29%) and AXIS Bank (25.34%), respectively and the minimum growth rate has been noticed by State Bank of India i.e. 4.81 per cent. The reason for high growth rate of ICICI Bank was due to sharp increase of 316 per cent in advances during the period of the study whereas, there is only 179 per cent increased in advances of State Bank of India during the period of the study. The tvalues in the table 4.3 revealed that only AXIS Bank and CITI Bank were having significant difference between their performances and the banking industry on account of various indicators. Rest of the banks under consideration showed no significant difference. In figure 4.3, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and out of these, ICICI Bank has shown the maximum fluctuations over the time period. As in the year 2001-02, the highest growth rate was recorded in case of HDFC Bank (164.14%) followed by AXIS Bank (161.62%) and CITI Bank (125.16%), respectively. The least growth was recorded by ICICI Bank (80.49%) whereas, in 2002-03, the highest growth

33

was recorded by ICICI Bank (154.98%) much higher than the other banks taken under study and this was due to tremendous increase of 335 per cent in interest earned in the year 2002-03. From period 2003-04 to 2006-07, ICICI Bank, HDFC Bank, AXIS Bank and CITI Bank were all showing the similar fashion in growth of percent of trend whereas State Bank of India and Punjab National Bank were showing the similar fashion in growth of percent of trend.

4.4 INTEREST EXPENDED Table 4.4: Interest Earned of the Commercial Banks (Rs. Crores)
Banks ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change 4353 20729 1074 980 Years Mar' 02 1559 Mar' 03 7944 409.56 1142 16.53 1192 10.99 21109 1.83 4361 0.18 Mar' 04 7015 -11.69 1021 -10.60 1211 1.59 19274 -8.69 4155 -4.72 Mar' 05 6571 -6.33 1193 16.85 1315 8.59 18483 -4.10 4453 7.17 Mar' 06 9597 46.05 1810 51.72 1929 46.69 20159 9.07 4917 10.42 Mar' 07 16358 70.45 2993 65.36 3179 64.80 23437 16.26 6023 22.49 4710.33 631.16 13.40 6.04 1.156* 20531.83 1566.89 7.63 1.25 3.279 1650.00 737.36 44.69 21.97 2.536* 1523.17 712.29 46.76 22.56 2.692 Mean S.D. C.V. (in %) 53.96 C.G.R (in %) 41.93 t-value

8174.00

4410.72

0.127*

34

CITI Bank % change

1103

1030 -6.62

924 -10.29

752 -18.61

1006 33.78

1696 68.59

1085.17

294.31

27.12

5.51

7.069

Trend graph of Interest Expended
25000

20000 Value in crores

15000

10000

5000

0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.4 Trend Growth in Interest Expended Among the expenses incurred by a bank, interest expended the leading amount of expenses. As per schedule 15 of Banking Regulation Act 1949, the interest expended comprises of a) Interest on deposits, b) Interest on Reserve Bank of India/Inter Bank Borrowings and others The study of interest expended as presented in table 4.4 revealed that amount of average interest expended to the tune of Rs.20,531.83 was maximum in case of State Bank of India followed by ICICI Bank, Rs.8,174 crores, and Punjab National Bank, Rs.4,710.33 crores, respectively and minimum has been noticed in case of CITI Bank Rs.1,085.17 crores. The maximum standard deviation of interest expended was noticed in

35

ICICI Bank followed by State Bank of India and HDFC Bank. The minimum standard deviation was noticed by CITI Bank. The coefficient of variation of 53.96 per cent is highest in case of ICICI Bank followed by the AXIS Bank (46.76%) and HDFC Bank (44.69%), respectively. The least coefficient of variation was noticed in State Bank of India i.e. 7.63 per cent, and it was a more consistent performer as it manages all aspects of its business much better than other banks do. The compounded annual growth rate revealed that splendid performance was recorded by ICICI Bank (48.08%) followed by AXIS Bank (20.50%) and HDFC Bank (19.87%), respectively and the minimum growth rate has been noticed by State Bank of India i.e. 2.07 per cent. The t-values in the table 4.4 depicted that half of the banks namely, AXIS Bank, State Bank of India and CITI Bank were having significant difference between their performances and the banking industry on account of various indicators, and remaining half of the banks under consideration, namely, ICICI Bank, HDFC Bank and Punjab National Bank showed no significant difference. In figure 4.4, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and out of these, ICICI Bank has shown the maximum fluctuations over the time period. As in the year 2001-02, the highest growth rate was recorded by ICICI Bank (165.17%) much higher than the other banks taken under study and this was due to tremendous increase of 409.55 per cent in interest expended in the year 2002-03. From period 2003-04 to 200607, ICICI Bank, HDFC Bank, AXIS Bank and CITI Bank were all showing the similar fashion in growth of percent of trend whereas State Bank of India and Punjab National Bank were showing the similar fashion in growth of percent of trend.

36

4.5 SPREAD Table 4.5: Spread of the Commercial Banks (Rs. Crores)
Years Banks ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change 807 2295 9531 629 199 Mar' 02 593 Mar' 03 1424 140.13 322 61.81 831 32.11 9977 4.68 3124 36.12 950 17.72 Mar' 04 1879 31.95 565 75.47 1338 61.01 11186 12.12 3625 16.04 1356 42.74 Mar' 05 2839 51.09 732 29.56 1778 32.88 13944 24.66 4006 10.51 1451 7.01 Mar' 06 4187 47.48 1078 47.27 2546 43.19 15635 12.13 4667 16.50 2058 41.83 Mar' 07 6635 58.47 1567 45.36 3710 45.72 16054 2.68 5515 18.17 2688 30.61 1551.67 647.12 41.70 27.09 1.512* 3872.00 1037.37 26.79 17.65 0.109* 12721.17 2619.09 20.59 12.67 1.216* 1805.33 1058.98 58.66 42.99 0.834* 743.83 464.79 62.49 50.05 2.752 Mean S.D. C.V. (in %) 68.56 C.G.R (in %) 56.71 t-value

2926.17

2006.22

0.232*

37

Trend Graph of Spread
18000 16000 14000 Value in crores 12000 10000 8000 6000 4000 2000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.5 Trend Growth in Spread Spread Management focuses on maintaining an adequate spread (gap) between interest earned and interest expended to ensure an acceptable profit margin regardless of interest rate fluctuations. Mathematically, spread can be expressed as: Spread = Interest earned – Interest expended The analysis of data contained in table 4.5 indicated that the mean spread of Rs.12,721.17 crores was again highest in case of State Bank of India followed by Punjab National Bank, Rs.3,872 crores, and ICICI Bank, Rs.2,926.17 crores, respectively and lowest has been noticed in case of AXIS Bank Rs.743.83 crores. The maximum standard deviation of spread was noticed in State Bank of India followed by ICICI Bank and HDFC Bank. The minimum standard deviation was noticed by AXIS Bank. The coefficient of variation of 68.56 per cent was highest in case of ICICI Bank followed by

38

the AXIS Bank (62.49%) and HDFC Bank (58.66%), respectively. The least coefficient of variation was noticed in case of State Bank of India (20.59%), and it was a more consistent performer. It manages all aspects of its business much better than other banks do. The analysis of compounded annual growth rate reveals that ICICI Bank was leading by recording a growth rate of 49.67 per cent followed by AXIS Bank (41.15%) and HDFC Bank (34.50%0, respectively and the minimum growth rate has been noticed by State Bank of India i.e. 9.10 per cent. The t-values in the table 4.5 revealed that only AXIS Bank was having significant difference between their performances and the banking industry on account of various indicators, and rest of the banks showed no significant difference. In figure 4.5, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and this increase or decrease was not huge in all the banks over the time period taken under study. During the period 2001-02, the highest growth of 546.54 per cent was recorded by ICICI Bank followed by AXIS Bank (244.17%) and HDFC Bank (206.23%), respectively. The minimum growth of 97.06 per cent was recorded by Punjab National Bank. The reason for the maximum growth of ICICI Bank was because of huge percentage increase in spread of 140.13% during 2002-03. In the years from 2002-03 to 2006-07, all the banks taken under study showed similar growth in percent of trend.

39

4.6 ESTABLISHMENT EXPENSES Table 4.6: Establishment Expenses of the Commercial Banks (Rs. Crores)
Banks ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change 163 1316 5153 109 51 Years Mar' 02 147 Mar' 03 403 174.15 85 66.67 152 39.45 5688 10.38 1476 12.16 189 15.95 Mar' 04 546 35.48 121 42.35 204 34.21 6447 13.34 1654 12.06 252 33.33 Mar' 05 737 34.98 177 46.28 276 35.29 6907 7.14 2121 28.23 244 -3.17 Mar' 06 1082 46.81 240 35.59 487 76.45 8123 17.61 2115 -0.28 294 20.49 Mar' 07 1616 49.35 381 58.75 777 59.55 7932 -2.35 2352 11.21 376 27.89 253.00 69.63 27.52 16.93 8.662 1839.00 378.24 20.57 12.85 0.032* 6708.33 1085.25 16.18 9.87 1.661* 334.17 232.26 69.50 47.55 2.466* 175.83 110.34 62.75 47.27 5.726 Mean S.D. C.V. (in %) 63.64 C.G.R (in %) 54.61 t-value

755.17

480.59

0.865*

40

Trend Graph of Establishment Expenses
9000 8000 7000 Value in crores 6000 5000 4000 3000 2000 1000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.6 Trend Growth in Establishment Expenses In banking parlance, establishment expenses refer to the amount expended on employees in the form of salaries and provisions (contribution to gratuities funds, provident funds and pension funds etc. Establishment cost is inseparable part of any banking organization. The analysis of data contained in table 4.6 indicated that the mean establishment expenses of Rs.6,708.33 crores was again highest in case of State Bank of India followed by Punjab National Bank, Rs.1,839 crores, and ICICI Bank, Rs.755.17 crores, respectively and lowest has been noticed in case of AXIS Bank Rs.175.83 crores. The maximum standard deviation of establishment expenses was noticed in State Bank of

41

India followed by ICICI Bank and Punjab National Bank. The minimum standard deviation was noticed by CITI Bank. The coefficient of variation of 69.50 per cent is highest in case of HDFC Bank followed by the ICICI Bank (63.64%) and AXIS Bank (62.75%), respectively. The least coefficient of variation was noticed in case of State Bank of India (16.18%), and it also showed the maximum consistency. The analysis of compounded annual growth rate revealed that ICICI Bank was leading by recording a growth rate of 49.23 per cent followed by AXIS Bank (39.91%) and HDFC Bank (38.82%), respectively and the minimum growth rate has been noticed by State Bank of India i.e. 7.47 per cent. As we have seen in the table 4.6 that the average establishment expense was maximum in case of public sector banks i.e. State Bank of India and Punjab National Bank but the compounded annual growth rate of public sector was much less than that of private sector i.e. ICICI Bank, AXIS Bank and HDFC Bank and foreign banking sector i.e. CITI Bank. This happened because of private banks are employing personnel with professional skill and experience in large number whereas, in public sector they are about to overstaffed. The t-values in the table 4.6 revealed that AXIS Bank and CITI Bank were having significant difference between their performances and the banking industry on account of various indicators, and rest of the banks showed no significant difference. In figure 4.6, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and this increase and decrease was very minute in all the banks over the time period taken under study. In the year 2001-02 highest growth in percent of trend was recorded by the HDFC bank (573.68%) followed by the AXIS Bank (242.86%) and ICICI Bank (210%),

42

respectively and the least was recorded by State Bank of India (99.85%). From the year 2002-03 to 2006-07, public sector banks and foreign banking sector showed similar trend and all the private sector banks showed similar trend.

4.7 TOTAL DEPOSITS Table 4.7: Total Deposits of the Commercial Banks (Rs. Crores)
Years Banks Mar' 02 32085 Mar' 03 48169 50.13 12287 16964 38.06 17654 22376 26.75 270560 3E+05 9.45 64123 75813 18.23 15242 17743 16.41 Mar' 04 68108 41.39 20954 23.52 30408 35.90 318618 7.60 87916 15.96 20465 15.34 Mar' 05 99819 46.56 31712 51.34 36354 19.55 367047 15.20 103167 17.35 21484 4.98 Mar' 06 165083 65.38 40113 26.49 55797 53.48 380046 3.54 119685 16.01 27912 29.92 Mar' 07 230510 39.63 58785 46.55 68298 22.40 435521 14.60 139859 16.86 37875 35.69 23453.50 7535.54 32.13 18.56 4.631 98427.17 25786.36 26.20 16.78 0.269* 344652.50 55578.63 16.13 9.79 1.525* 38481.17 18035.75 46.87 31.87 1.624* 30135.83 15807.10 52.45 36.24 2.051* Mean S.D. C.V. (in %) 65.09 C.G.R (in %) 48.92 t-value

ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change

107295.67

69839.49

0.053*

43

Trend Graph of Total Deposits
450000 400000 350000 Value in crores 300000 250000 200000 150000 100000 50000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.7 Trend Growth in Total Deposits Acceptance of deposits is the primary activity of banking system. More and more deposits should be mobilized at cheaper rates of interest to enhance advances. The various types of deposits mobilized by banks are: a) term deposits, b) saving fund deposits, c) current deposits, d) recurring deposits, e) miscellaneous deposits. The analysis of data contained in table 4.7 indicated that the mean total deposits of Rs.3,44,652.50 crores was again highest in case of State Bank of India followed by, ICICI Bank Rs.1,07,295.67 crores, and Punjab National Bank, Rs.98,427.17 crores, respectively and lowest has been noticed in case of CITI Bank i.e. Rs.23,453.50 crores. The maximum standard deviation of total deposits was noticed in ICICI Bank followed by State Bank of India and Punjab National Bank. The minimum standard deviation was noticed by CITI Bank. The coefficient of variation of 65.09 per cent was highest in case

44

of ICICI Bank followed by the AXIS Bank (52.45%) and HDFC Bank (46.87%), respectively. The least coefficient of variation was noticed in case of State Bank of India (16.13%), and it also showed the maximum consistency. The analysis of compounded annual growth rate revealed that ICICI Bank was leading by recording a growth rate of 39 per cent followed by AXIS Bank (29.88%) and HDFC Bank (25.35%), respectively and the minimum growth rate has been noticed by State Bank of India i.e. 8.27 per cent. ICICI Bank was showing highest growth rate because it was focusing on growth, taking on slightly more risk than other banks. The t-values in the table 4.7 revealed that only CITI Bank was having significant difference between their performances and the banking industry on account of various indicators, and rest of the banks under consideration showed no significant difference. In figure 4.7, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and this increase and decrease was not huge in all the banks over the time period taken under study. In the year 2001-02 highest growth in percent of trend was recorded by the ICICI bank (352.16%) followed by the AXIS Bank (157.51%) and HDFC Bank (137.83%) respectively and the least was recorded by State Bank of India (102.37%). The reason for huge growth in percent of trend of ICICI Bank in the year 2001-02 was because of huge growth 617.43 per cent of total deposits during the period of study. From the year 200203 to 2006-07, all the public sector banks i.e. State Bank of India and Punjab National Bank, foreign banking sector i.e. CITI Bank and the private sector banks i.e. ICICI Bank, AXIS Bank and HDFC Bank showed similar growth in percent of trend.

45

4.8 TOTAL ADVANCES Table 4.8: Total Advances of the Commercial Banks (Rs. Crores)
Years Banks Mar' 02 47035 Mar' 03 53279 13.28 5352 7180 34.16 6814 11755 72.51 120806 1E+05 14.03 34369 40228 17.05 11385 12629 10.93 Mar' 04 62095 16.55 9363 30.40 17744 50.95 157933 14.65 47224 17.39 15259 20.83 Mar' 05 91405 47.20 15603 66.65 25566 44.08 202374 28.14 60412 27.93 18111 18.69 Mar' 06 146163 59.91 22314 43.01 35061 37.14 261641 29.29 74627 23.53 24455 35.03 Mar' 07 195865 34.00 36876 65.26 46945 33.90 337336 28.93 96596 29.44 32861 34.37 19116.67 7474.02 39.10 23.74 2.808 58909.33 21437.33 36.39 23.07 0.287* 202974.67 75860.31 37.37 23.22 0.626* 23980.83 13758.06 57.37 46.21 1.394* 16114.67 10885.58 67.55 47.33 2.031* Mean S.D. C.V. (in %) 54.87 C.G.R (in %) 35.16 t-value

ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change

99307.00

54493.19

0.163*

46

Trend Graph of Total Advances
350000 300000 250000 Value in crores 200000 150000 100000 50000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.8 Trend Growth in Total Advances Advances are the major product of banking system. The advances must gain momentum if the banks are to improve its operating performance. A bank sanctions advances in various forms like: a) bank overdrafts, b) cash credits, c) discounting of bills, d) term loans and others. The analysis of data contained in table 4.8 indicated that the mean total deposits of Rs.2,02,974.67 crores was recorded highest in case of State Bank of India followed by, ICICI Bank Rs.99,307 crores, and Punjab National Bank, Rs.58,909.33 crores, respectively and lowest has been noticed in case of AXIS Bank i.e. Rs.16,114.67 crores. The maximum standard deviation of total deposits was noticed in State Bank of India followed by ICICI Bank and Punjab National Bank. The minimum standard deviation was noticed by CITI Bank. The coefficient of variation of 67.55 per cent was highest in

47

case of AXIS Bank followed by the HDFC Bank (57.37%) and ICICI Bank (54.87%), respectively. The least coefficient of variation was noticed in case of Punjab National Bank (36.39%), and it also showed the maximum consistency. The analysis of compounded annual growth rate revealed that AXIS Bank and HDFC Bank are leading by recording a growth rate of 38.03 per cent followed by ICICI Bank (26.90%) and CITI Bank (19.37%), respectively and the minimum growth rate has been noticed by State Bank of India i.e. 18.71 per cent. ICICI Bank was showing highest growth rate because it was focusing on growth, taking on slightly more risk than other banks. The t-values in the table 4.8 revealed that only CITI Bank was having significant difference between their performances and the banking industry on account of various indicators, and rest of the banks under consideration showed no significant difference. In figure 4.8, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and the fluctuations were very minute in all the banks over the time period taken under study. In the year 2001-02 highest growth in percent of trend was recorded by the AXIS Bank (458.42%) followed by the ICICI Bank (194.71%) and HDFC Bank (166.36%), respectively and the least was recorded by Punjab National Bank i.e. 121.14 per cent. The reason for huge growth in percent of trend of AXIS Bank in the year 2001-02 was because of huge growth 589.01% of total advances during the period of study. From the year 2002-03 to 2006-07, all the public sector banks i.e. State Bank of India and Punjab National Bank, foreign banking sector i.e. CITI Bank and the private sector banks i.e. ICICI Bank, AXIS Bank and HDFC Bank showed similar growth in percent of trend.

48

4.9 TOTAL VOLUME Table 4.9: Total Volume of the Commercial Banks (Rs. Crores)
Years Banks Mar' 02 79120 Mar' 03 1E+05 28.22 17639 24144 36.88 24468 34130 39.49 391366 4E+05 10.86 98942 1E+05 17.28 26627 30372 14.06 Mar' 04 130204 28.35 30317 25.57 48152 41.08 476552 9.83 135140 16.46 35724 17.62 Mar' 05 191224 46.86 47315 56.07 61920 28.59 569422 19.49 153838 13.84 39595 10.84 Mar' 06 311246 62.77 62427 31.94 90857 46.73 641687 12.69 160739 4.49 52367 32.26 Mar' 07 426375 36.99 95662 53.24 115242 26.84 772857 20.44 185048 15.12 70736 35.08 42570.17 14988.85 35.21 20.56 3.728 141624.67 28631.26 20.22 12.87 0.663* 547627.50 130676.55 23.86 14.55 1.013* 62461.50 31736.73 50.81 36.68 1.527* 46250.67 26663.02 57.65 39.88 2.044* Mean S.D. C.V. (in %) 60.14 C.G.R (in %) 41.58 t-value

ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change

206602.83

124252.90

0.042*

49

Trend Graph of Total Volume
800000 700000 600000 Value in crores 500000 400000 300000 200000 100000 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Fig. 4.9 Trend Growth in Total Volume Total Volume of the business refers to the sum total deposits and advances. Mathematically, Volume of Business = Deposits + Advances. It is said high volume of business leads to reduced cost per unit and improves profit. Those banks are efficient which create more advances from a given volume of deposits. The analysis of data contained in table 4.9 indicated that the mean total volume of Rs.5,47,627.50 crores was recorded highest in case of State Bank of India followed by, ICICI Bank Rs.20,602.83 crores, and Punjab National Bank, Rs.1,41,624.67 crores, respectively and lowest has been noticed in case of CITI Bank i.e. Rs.42,570.17 crores. The maximum standard deviation of total deposits was noticed in State Bank of India followed by ICICI Bank and HDFC Bank. The minimum standard deviation was noticed by CITI Bank. The coefficient of variation of 60.14% is highest in case of ICICI Bank 50

followed by the AXIS Bank, 57.65%, and HDFC Bank, 50.81%, respectively. The least coefficient of variation was noticed in case of Punjab National Bank, 20.22%, and it also showed the maximum consistency. The analysis of compounded annual growth rate reveals that AXIS Bank was leading by recording a growth rate of 32.62% followed by ICICI Bank, 32.48%, and HDFC Bank, 29.54%, respectively and the minimum growth rate has been noticed by Punjab National Bank i.e. 11.02%. The t-values in the table 4.9 revealed that only CITI Bank was having significant difference between their performances and the banking industry on account of various indicators, and rest of the banks under consideration showed no significant difference. In figure 4.9, the growth in percent of trend has shown that all the banks, under consideration, performances increased and decreased over the period of the study and the fluctuations were very minute in all the banks over the time period taken under study. In the year 2001-02 highest growth in percent of trend was recorded by the ICICI Bank i.e. 237.83%, followed by the AXIS Bank and HDFC Bank, 196.68% and 144.74% respectively and the least was recorded by Punjab National Bank i.e. 98.98%. The reason for huge growth in percent of trend of ICICI Bank in the year 2001-02 was because of huge growth 438.89% of total advances during the period of study. From the year 200203 to 2006-07, all the public sector banks i.e. State Bank of India and Punjab National Bank, foreign banking sector i.e. CITI Bank and the private sector banks i.e. ICICI Bank, AXIS Bank and HDFC Bank showed similar growth in percent of trend.

51

4.10 RETURN ON ASSETS Table 4.10: Return on Assets of the Commercial Banks (Rs. Crores)
Years Banks Mar' 02 0.25 Mar' 03 1.13 352.00 0.93 0.98 5.38 1.24 1.44 16.13 0.7 0.83 18.57 0.77 0.97 25.97 1.51 2.88 90.73 Mar' 04 1.31 15.93 1.12 14.29 1.42 -1.39 1.07 28.92 1.08 11.34 3.55 23.26 Mar' 05 1.19 -9.16 0.86 -23.21 1.66 16.90 0.94 -12.15 1.12 3.70 2.84 -20.00 Mar' 06 1.02 -14.29 0.97 12.79 1.52 -8.43 0.89 -5.32 0.99 -11.61 3.07 8.10 Mar' 07 0.91 -10.78 0.89 -8.25 1.52 0.00 0.81 -8.99 0.95 -4.04 1.86 -39.41 2.62 0.71 26.97 -1.57 1.134* 0.98 0.11 11.39 3.34 3.052 0.87 0.11 13.17 2.34 2.624 1.47 0.13 8.68 3.89 4.076 0.96 0.08 8.72 -1.46 3.966 Mean S.D. C.V. (in %) 35.63 C.G.R (in %) 18.89 t-value

ICICI Bank % change AXIS Bank % change HDFC Bank % change SBI % change PNB % change CITI Bank % change

0.97

0.34

0.972*

52

Trend Graph of Return on Assets
3 2.5 2 1.5 1 0.5 0 Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07 No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank

Value in crores

Fig. 4.10 Trend Growth in Return on Assets Return on Assets measures the relationship between the net profits and assets. It is defines as the ratio of net profit after tax to total assets. It shows the efficiency with which banks deploy their assets. In the table 4.10, the mean analysis showed that the maximum return of 2.72% is recorded by CITI Bank followed by HDFC Bank and Punjab National Bank, 1.47% and 0.98% respectively. The maximum standard deviation was again recorded highest by CITI Bank followed by ICICI Bank and HDFC Bank, respectively. The minimum was recorded by the AXIS Bank. The reason for showing maximum mean return by CITI Bank was due to the bank’s strategy of expanding its portfolio of services has paid off handsomely. The coefficient of variation was maximum shown by ICICI Bank which revealed that there was more risk involved and the minimum return was noticed by 53

HDFC Bank and it also showed that it was more consistent. The reason for the highest coefficient of variation in ICICI Bank was because from the year 2001-02 to 2003-04, the return kept on increasing, then started decreasing from 2004-05 to 2006-07 and this is due to percentage increase in total assets was more than the percentage increase in net profit in the later years of the study. The maximum compounded annual growth rate is in case of ICICI Bank i.e. 24.08% followed by Punjab National Bank and CITI Bank, 3.57% and 3.54% whereas AXIS Bank recorded the least with negative growth rate, -0.73%,. The reason for this was that percentage increase in total assets is much more than the percentage increase in net profit during the period of the study. The t-values in the table 4.10 revealed that only ICICI Bank and CITI Bank are having no significant difference between their performances and the banking industry on account of various indicators, and rest of the banks under consideration showed significant difference. In figure 4.10, the growth in percent of trend has shown that all the banks, taken under study, performances has increased and decreased over the period of the study and there were huge fluctuations in all the banks over the time period taken under study. The maximum fluctuation was recorded by CITI Bank and these fluctuations were all because of the change in percentage of net profits is different from that of change in total assets in each time period.

54

CHAPTER V

SUMMARY
The research project ‘Performance of Commercial Banks in India: A comparative study of different categories of banks’ was undertaken with the following objectives: 1. To study the trends in the performance of different categories of the banks on the basis of selected parameters. 2. To compare the performance of different categories of the banks. The performance of different categories of banks was analysed on the basis of certain performance indicators such as Net profit, Operating profit, Interest expended, Spread, Return on Assets etc. The study was carried out for six years period from 200102 to 2006-07. Only those banks were chosen for which completed data of 12 months for the study period was available. The selected banks were – ICICI Bank, AXIS Bank, HDFC Bank, State Bank of India, Punjab National Bank and CITI Bank. To achieve the first objective, the growth of percent of trend has been done by applying the method of least square and to achieve second objective, various statistical tools have been applied such as Coefficient of Variation, Compounded Annual Growth Rate and Test of Significance.

5.1 Findings of the study 1. The maximum average net profit is captured by State Bank of India followed by the ICICI Bank and Punjab National Bank whereas, in case of compounded annual growth rate, ICICI Bank recorded the highest value followed by AXIS Bank and HDFC Bank and the high growth rate of ICICI Bank was due to sharp increase of 968

55

per cent in interest earned during the period of the study and moreover, the bank is gaining market share in private banking, retail banking, credit cards and most of the other verticals in which it is present. All the banks showed insignificant difference. 2. The maximum average operating profit was recorded by State Bank of India and the minimum was recorded by AXIS Bank. In case of compounded annual growth rate, the major chunk was captured by ICICI Bank followed by HDFC Bank and AXIS Bank. This means net profits in public sector banks have arisen on account of recovery of ‘provisions and Contingencies’. 3. The interest earned growth rate was maximum in case of ICICI Bank followed by HDFC bank and AXIS bank and the minimum was recorded by State Bank of India. This high growth rate of ICICI Bank was all due to maximum increase in advances during the period of the study than other banks. Only AXIS Bank and CITI Bank were having significant difference between their performances and the banking industry on account of various indicators. 4. The interest expended was also increased at fastest rate in private banks viz.; ICICI Bank, AXIS Bank and HDFC Bank because the growth rate in deposits was highest in private sector banks as compared to public sector banks and foreign banking sector. AXIS Bank, State Bank of India and CITI Bank were having significant difference between their performances and the banking industry on account of various indicators. 5. Establishment expenses being major item of expenses has grown at a lesser rate in public sector banks than in public sector banks and foreign banking sector and this is because private banks are employing personnel with professional skill and experience

56

in large number whereas, in public sector they are about to overstaffed. AXIS Bank and CITI Bank were having significant difference between their performances and the banking industry on account of various indicators, and rest of the banks showed no significant difference 6. As regards total deposits, though State Bank of India because of its vast network, was leading in total deposits but the growth rate analysis revealed that ICICI Bank topped the chart followed by AXIS Bank and HDFC Bank whereas, least growth has been recorded in case of State Bank of India. The reason for high growth in ICICI Bank was due to its prima facie focus on growth, taking on slightly more risk than other banks and same was the case with total advances. 7. The maximum average return on assets has been noticed in CITI bank. The reason for showing maximum mean return by CITI Bank was that the bank’s strategy of expanding its portfolio of services has paid off handsomely and moreover, bank is investing huge in computers and infrastructure. ICICI Bank and CITI Bank showed insignificant difference.

5.2 Suggestions 1. As the growth in total deposits, total advances and total volume was very low in case of public sector banks viz.; State Bank of India and Punjab National Bank, it is recommended that public sector banks should adopt the policies and practices of private sector banks. 2. The growth rate of public sector banks viz.; State Bank of India and Punjab National Bank were the lowest in every performance indicator taken under

57

consideration. It is recommended that these banks must go for higher disposable incomes, higher consumption and they must have greater appetite for risk. 3. Banks that are able to innovate to keep up with emerging market trends are likely to be more successful and will establish long-term leadership positions. So every bank must do this. 4. To attain higher growth, the banks must focus on every segment especially, rural, retail and agri credit areas because there are ample of opportunities lying for one’s growth.

5.3 Scope for further study There is ample scope for subsequent studies in this dynamic sector of the economy. The studies may be taken by studying other variables and furthermore studies may be undertaken to analyze the impact of new products on the performance of banks. Still more, studies may be conducted on the qualitative aspects and analysis scaling techniques. On the basis of findings of the study, it is purposed that micro level studies on the various variables be conducted in order to facilitate SWOT analysis of each bank.

58

REFERENCES
Abreu M and Mendes V (2002) Commercial bank interest margins and profitability: evidence from E.U. countries. Porto Working Paper Series.

Amandeep (1990) Profit and profitability of Indian nationalised banks. Ph.D. thesis. Panjab University, Chandigarh, India.
Angbazo L (1997) Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. J Banking Fin 21: 55-87.

Anonymous (2007) Publications. http://www.rbi.org.in/scripts/PublicationsView. aspx? id =9899 Avkiran N K (1995) Developing an instrument to measure customer service quality in branch banking. Int J Bank Mktg 12: 10-18.
Barajas A, Steiner R and Salazar N (1999) Interest spreads in banking in Colombia 1974- 96. IMF Staff Papers 46: 196-224. Ben N S and Goaied M (2001) The determinants of the Tunisian deposit banks’ performance. Appl Financial Econ 11: 317-19.

Berg S A, Forsund F R and Jansen E (1992) Technical eficiency of Norwegian banks: the non-parametric approach to efficiency measurement. J Productivity Analysis 2: 127-42.
Berger A (1995) The relationship between capital and earnings in banking. J Money Credit Banking 27: 404-31.

Bhatia S and Verma S (1998) Factors determining the profitability of banks in India: an application of multiple regression model. Prajnan 27: 433-45.
Buser S, Chen A and Kane E (1981) Federal deposit insurance, regulatory policy, and optimal bank capital. J Fin 35: 51-60.

Chien T and Danw S Z (2004) Performance measurement of Taiwan commercial banks. Int J Productivity Performance Mgmt 53: 425-34.
Demerguç-Kunt A and Huizingha H (1999) Determinants of commercial bank interest margins and profitability: some international evidence. World Bank Econ Rev 13: 379-408.

59

Drehmann M, Sorensen S and Stringa M (2007) The integrated impact of credit and interest rate risk on banks: an economic value and capital adequacy perspective. http://ssrn.com/abstract=966720 (Abstr). Edris T A (1997) Services considered important to business customer and determinants of bank selection in Kuwait: a segmentation analysis. Int J Bank Mktg 15: 126-33. Elizabeth D and Elliot G (2004) Efficiency, customer service and financial performance among Australian financial institutions. Int J Bank Mktg 22: 319-42.
Molyneux P and Thornton J (1992) The determinants of European bank profitability. J Banking Fin 16: 1173-78. Guru B, Staunton J and Balashanmugam. (2002) Determinants of commercial bank profitability in Malaysia. University Multimedia Working Papers.

Jain A K (1993) Marketing challenge for commercial banks of India: a managerial appraisal. Ph.D. thesis. University of Rajasthan, Jaipur, India. Presely J R (1992) The problem of risk management in banking in oil-rich Gulf economies. Int J Bank Mktg 10: 77. Mazhar M I (2003) Development and performance of domestic and foreign banks in GCC countries. Managerial Fin 29: 42-71. Patel U R (2000) Outlook for Indian financial sector. Econ Political Wkly 35: 3933-38. Sensarma R (2005) Cost and profit efficiency of Indian banks during 1986-2003: a stochastic frontier analysis. Econ Political Wkly 40: 1198-209. Tektas A and Gunay G (2005) Asset and liability management in financial crisis. J Risk Fin 6: 135-49. Vashisht A K (1987) Performance appraisal of commercial banks in India. Ph.D. thesis. Himachal Pradesh University, Shimla, India.

60

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.