ASSOCHAM Eco Pulse Study

Banking Sector in Emerging Economies October 2008

Prepared by: GAURAV SHARMA ASSOCHAM RESEARCH BUREAU

Indian banking sector at sixth position among emerging economies: AEP

The Indian banking sector though stands unhurt by the ongoing international financial crisis, has got a long way to go in competing with the banks of other emerging economies of the world. It ranks at sixth position in terms of efficiency, productivity and soundness among the 11 emerging economies, stated an Assocham Eco Pulse (AEP) study.

The AEP “Banking Sector in Emerging Economies” reports that Malaysia has topped among the emerging economies as measured on the basis of financial health indicators. It was followed by Korea and China at second and third place respectively. India fell at sixth position following Russia (fourth) and Chile (fifth), whilst Brazil (seventh), Mexico (eighth), Thailand (ninth), Philippines and Indonesia (joint tenth) were down below India in the rankings as per the analysis.

Among the BRIC nations, the banking sector of India stands at third position lagging behind China and Russia. “Even as India is second fastest growing economy in terms of GDP, its banking sector falls at sixth place among the worlds’ emerging economies. We need to pursue the financial sector reforms more diligently in order to come up to the level of other developing economies”, said Mr. Sajjan Jindal, President, Assocham.

While India ranks favorably in terms of income ratios at fourth position, it is the cost ratios and profitability ratios which have led India falling to overall sixth rank among the 11 emerging economies. India is ranked at sixth and seventh position in terms of cost ratios and profitability ratios respectively.

The AEP study analyzed the standing of Indian banking sector vis-à-vis other emerging economies based on eight financial parameters relating to cost, income and profitability taken for the financial year 2006-07. The efficiency, productivity and soundness of the banking sector was determined by taking into consideration various financial ratios including cost ratios (Cost to Income ratio, Ratio of Personnel Expenses to Earning Assets, Ratio of Non-Labour Cost to Total Earning Assets), income ratios (Net Interest

Margins, Ratio of other Operating Income to Total Income) and profitability ratios (Return on Assets and Return on Equity). BANKING SECTOR EFFICIENCY, PRODUCTIVITY AND SOUNDNESS ACROSS EMERGING ECONOMIES COUNTRY
MALAYSIA KOREA CHINA RUSSIA CHILE INDIA BRAZIL MEXICO THAILAND PHILIPPINES INDONESIA

RANK
1 2 3 4 5 6 7 8 9 10 10

Source: Assocham Research Bureau Data Source: RBI and Bank Scope

Within the BRIC countries, India ranked at third position, behind China (first) and Russia (second), but ahead of Brazil (fourth) in the overall standing. However, with respect to the income ratios, Indian banking sector was best performing among the BRIC countries, it ranked second in terms of cost ratios and third in terms of profitability ratios.

China ranked first in terms of cost ratios whereas it shared joint second position with Russia in income ratios. In terms of profitability ratios, Russia shared the first position with Brazil.

BRIC ANALYSIS RANK (Income ratios) BRAZIL 4 4 RUSSIA 3 2 INDIA 2 1 CHINA 1 2 Source: Assocham Research Bureau COUNTRY Data Source: RBI and Bank Scope INDIAN BANKING SECTOR S.No. FINANCIAL PARAMETER 1 2 3 4 5 6 7 Cost to Income Personnel Expenses to Earning Assets Non-Labour Cost to Total Earning Assets Net Interest Margins Other Operating Income to Total Income Return on Assets Return on Equity in per cent 56.09 1.20 1.99 3.00 15.88 0.85 14.76 RANK (Cost ratios) RANK (Profitability ratios) 1 1 3 4 Overall Rank 4 2 3 1

Source: RBI and Bank Scope