CHAPTER: 2

REVIEW OF THE LITERATURE

The review of literature, albeit in brief, is likely to provide a bird‟s eye view
of the work done in India and abroad relating, directly or indirectly, to the subject-
matter of the present study. A number of studies were conducted to compare
different type of banks operating in India based on different
performance/efficiency criteria/parameters from time to time. After nationalization
of banks, there was a growing concern on the deteriorating of banking sector‟s
efficiency in several spheres. An academic study on the performance of the
nationalized banking sector in India is very important and pertinent in the context
of its structural existence. Before taking up such an exercise, an attempt is made
in this section to present a review of the available studies in the relevant area of
banking. Organized or formal research in banking and related areas is of recent
origin in India. The research studies conducted in the field of banking in India and
abroad relate mostly to institutional, functional and developmental activities of
banks.

The RBI constituted a number of committees, notably Tandon committee

(1975), Chakraborty committee (1986) and Narsimham committee (1991) which
inter-alia examined various parameters of efficiency and given a number of
suggestions to improve the efficiency of the bank in India. Several research
studies have been under taken in the basic field of this research problem, which
are as under:

Ajit and Banger17 Presented a tabulation of the performance of private

sector banks vis-à-vis public sector banks over the period 1996-1997, using a
number of indicators: profitability ratio, interest spread, capital adequacy ratio

17
Ajit D. and Bangar D., “The Role and Performance of Private Sector Banks in India”, 1991-‟92
to 1996-‟97, Political Economy Journal of India-1998, 7 (1) pp 720.

33
and the net NPA. The conclusion is that Indian private banks out perform public
sector banks. The study also found that Indian private banks have higher returns
to assets in spite of lower spreads.

Amandeep18 in her work profitability of commercial banks has made an

attempt to examine the trends in profit and profitability of 20 nationalized banks
she used trend analysis ratio analysis and concentration indices of the selected
parameters. She also used multi variant analysis. She concluded that to have
excellent profitability performance, banks need to have excellent performance in
managing burden.

Dr. A. Amarender Reddy19 noted that the turnover in the private banks
doubled relative to the public sector banks during the 1990s. The establishment
expenses drastically declined in private & foreign banks due to these banks have
been able to contain their wages and salaries expenditures compared to the
public sector banks however private and foreign banks spend more on
technology up gradation. Even thought PSBs comparing with the other two
categories in terms of profit, PSBs had the highest efficiency in deposit
mobilization. And foreign and private banks are efficient in value added services.

Angadi V. B. and V. J. Devrary20 in their paper studied that difference in

cost of working fund; interest earning social banking, funds management, other
than income expansion of banking business Banking service is the main factors
contributing to difference in productivity and profitability ratios of the banks.

Anup Kumar Bhandari21 Suggested that public sector banks are on and
average, better adjusting themselves to the changing environment and improving

18
Amandeep, “Profit and Profitability in Commercial Banks”, Deep & Deep Publication, New
Delhi- 1993.
19
Dr. A. Amarender Reddy, “Banking Sector Performance during Liberalization in India – A
Review”, Indian Institute of Pulses Research, Research Articles.
20
Angadi V. B. and V. J. Devaray, “Productivity and Profitability of Banks in India”, Economic and
political weekly, Nov. 1983.
21
Anup Kumar Bhandari, “Total Factor Productivity Growth and its Decomposition: An
Assessment of the Indian Banking Sector in the True Liberalization Era”, Working paper Aug.-
2010.

34
their performance relative to their counter parts under private and foreign
ownership.

A. M. Sadare22 analyzed Public Sector Banks, Private Sector Banks and

foreign banks. He concluded that policy supports as well as effectiveness is
important factors for improving the profitability of banks.

Arora U. and Verma R.23 studied the performance evaluation of public

sector banks in the post reforms period on the basis of four parameters that are
financial parameters, operational parameters, profitability parameters and
productivity parameters and during this period the performance of public sector
banks is quite satisfactory.

Bakshi24 said that good governance is of interest not only to an individual

bank but also to the society in which it operates-the basic objectives being
protection of depositors and safeguarding the integrity and soundness of the
system.

Batra,-Amita25, examined the impact of policy constrains on the

profitability of the Indian scheduled commercial banks for the period 1955-1987.
The profit function approach has been used in the analysis. Previous bank
profitability studies are in several ways limited and confined their scope of inquiry
to questions of either operational or technical efficiency. The present study
provides a comparative view on pre and post nationalization periods of Indian
banking. It indicates the importance of loans and advances like SLR, CRR AND
branch expansion in explaining bank profitability.

22
A.M. Sadare, “Profitability in Banks”, Pigmy Economic Review vol.37 No. 9 April -1992.
23
Aarora U. and Verma R. “Banking Sector Reforms and Performance Evaluation of Public
Sector Banks in India“, Punjab Journal of Business Studies-April-sept.-2005. 11-25
24
Bakshi, S. “Corporate Governance in Transformation Times.” IBA Bulletin, 2003, 25(3): 41-61.
25
Batra,-Amita, “Bank Profitability with a Hybrid Profit Function-The Indian Case”, Indian
Economic Review; 31(2), July-Dec. 1996, pp. 223-34.

35
 Bhattacharya26 has found public sector banks with the highest efficiency
among the three categories of bank group as foreign and private sector bank
have much lower efficiencies. However PSB started showing a decline in
efficiency after 1987, private banks witnessed no change and foreign banks
disclosed sharp rise in efficiency.

Bhatia S. and Verma S.27 exercised to determine empirically the factors

influencing the profitability of public sector banks in India by making use of the
technique of multiple regression analysis. For analysis, the study made use of
time series data from 1971-1995 and ratios have been used to measure bank
profitability such as profit to income, return on deposits, operating earnings to
total assets, net profit to working funds. They found that profitability of banks
depends both on exogenous, i.e. policy determined variables such as reserve
requirement, directed credit programs, and on endogenous variables such as
composition of deposits, establishment expenses, spread and burden, etc.

Bhaumik and Dimova28 find that private sector and foreign banks were
more efficient than public sector banks initially, but after 1998-‟99, neither
ownership nor competition affects bank performance.

B. Janki29 analyzed that how technology is affecting the employee‟s

productivity. There is no doubt; in India particularly public sector banks will need t
use technology to improve operating efficiency and customer services. The focus
on technology will increase like never before to add value to customer services,
develop new products, strengthen risk management etc. the study concluded that
technology is the only tool to achieve their goals.

26
Bhattacharya A., “The Impact of Liberalization on the Productive Efficiency of Indian
Commercial Banks”, European Journals of Operational Research, 98(5), 332-345.
27
Bhatia S. & Verma S., “Factors Determining Profitability of Public Sector Banks in India: An
Application of Multiple Regression Model”, Prajanan, Vol. XXVII, No. 4, 1998-99, pp 433-445.
28
Bhaumik, S. K. and R. Dimova, “How Important is Ownership in a Market with level playing
Field? The Indian Banking Sector Revisited”, Journal of Comparative Economics-2004, vol. 32(1),
pp 165-180.
29
B. Janki, “Unleashing Employee Productivity: Need for a Paradigm Shift”, Indian Banking
Association Bulletin Vo. XXV, No. 3, Mmaaarch-2002, pp 7-9.

36
 C. J. Desai30 studied staff productivity in banks. Basic objective of the
study was to detect and correct staffing imbalances. He felt that in service
industries like banking with wide variations in work mix, universally applicable
and fully scientific formula is difficult to evolve in any area of management.

Chakrabarti R. and G. Chawla31 used DEA (Data Envelopment Analysis)

to evaluate the relative efficiency of Indian banks during 1990-2002 and
observed that on a group had been considerably more efficient than all other
bank groups, followed by Indian private banks. However, from a quantity
perspective, the India private banks seemed to be doing very well while the
foreign banks were the worst off and public sector bank were seen to be lagging
behind their private counter parts in performance.

Chakraborty committee32 studied the operational efficiency of

commercial banks and suggested that RBI would determine spread between
bank rate and bank deposit rate, government borrowing rate and the prime-
lending rate.

Das, A.33 analyzed the level of risk and productivity of public sector banks
and observed interrelationship of the fact that the productivity, capital base and
risk taking attitude to be jointly determined and reinforced.

Das and Ghosh34 concluded that the liberalization of the banking sector in
India has generally produced positive results in terms of improving the cost and
profit efficiencies of banks.

30
C.J. Desai, “Analyzing productivity in Banking Concept and Methodology.” Pranjnan, July –
sept-1983 P.P.185-193.
31
Chakrabarti R. and Chavala G., “Bank Efficiency in India since the Reforms: An Assessment”,
Money & Finance, 2005, pp 31-48.
32
Chakraborty “Report of Committee to Review the Working of Monetary System”‟, RBI,
Bombay, 1986.
33
Das, A. “Risk & Productivity Change of Public Sector Banks”, Economic & Political Weekly,
2002 pp 437-447.

37
 Das A., Nag A. & Ray S.35 observed that the Indian banks are becoming
sharply differentiated in terms of revenue efficiency and profit efficiency. This
would imply that even within an environment subject to restriction on input or
output mixes and its prices, a firm can improve its profitability significantly by
adapting the best practices observed within the sector.

Don U. A. Galagedera and Piyadasa E.36 observed a small difference in

the performance of the public and private sector banks. This difference is
realized due to no TFP (Total Factor Productivity) growth in public sector banks.
The modest growth in public sector banks indicates their slow response to
deregulation. As the public sector banks are dominating the market, it has
become a difficult talk for the private sector banks to change market and
consumer attitudes swiftly.

Ganesh K.37 In his paper studied the effectiveness of monitoring system

profit centers, standards for comparison and management information system.
The study suggested that the working fund as the base for the purpose of
comparing profitability at the branch level is inadequate and he related it to the
total business.

Ganeshan P.38 reveals by an empirical establishment of profit function

that interest income, deposits per branch, credit to total assets, proportion of
priority sector advances & interest income loss are significant determinants of the
profits & profitability of Indian public sector banks.

34
Das A. and Ghosh S., “Financial Deregulation and Profit Efficiency: A Nonparametric analysis
of Indian Banks”, Journal of Economic and Business, J. Jeconbus, 2009.
35
Das A., Nag A. and Ray S., “Liberalization, Ownership and Efficiency in Indian Banking: A
Nonparametric Approach”, Economics Working Papers- Jan-2004.
36
Don U. A. Galagedera and Piyadasa Edirisuriya, “Performance of Indian Commercial Banks
(1995-2002): An Application of Data Envelopment Analysis and Malmquist Productivity Index”
Research Paper.
37
Ganesh K., “Monitoring Profitability in Banks” the Commerce July-1979, P.25
38
Ganeshan P., “Determinants of Profit & Profitability of Public Sector Banks in India: A Profit
Approach “, Journal of Financial Management & Analysis, 2001, 14(1), 27.

38
 Gangadhar V.39 has examined the overall performance of the selected
banks during 1991-97. Their average rate of return at 1.2% in 1997 indicated
poor performance. Even the reasonable rate of return was not achieved. It was
suggested that suitable measures should be taken to invest surplus funds in an
appropriate manner by protecting the liquidity as well as profitability and avoiding
idle funds.

H. N. Aggarwal40 studied the concept of social obligation of banks. The

study recommended that providing more branch office to the public particularly in
semi-urban and rural areas, providing greater credit facilities to the public as well
as to the priority sector helping (1)Generation and maintains of employment
opportunities in the country (2) Financing the government securities and
popularizing the bill from of credit.

Hugar41 analyzing first phase of reforms found that with the introduction
of reform packages, banks have improved their profitability, started cleaning their
balance sheet, improved the NPA position, but they are yet to give more focus on
rationalizing cost structure.

Hundekar, S.G.42 studied the productivity aspects of the regional rural

banks. He examines growth and working of regional rural banks. He studied
operational efficiency, profitability and productivity in rural oriented Bijapur gramin
bank. He concluded that Bijapur gramin banks operating profitability has been
very poor over the study period because of its ineffectiveness in controlling the
burden.

39
Gangadhar V., “Performance of the Commercial Bank of Eritrea”, The Management
Accountant, September-1999, pp. 666-673.
40
H. N. Aggarwal, “A Portrait of Nationalized Banks: A Study with Reference of their Social
Obligation” Inter India Publication, Delhi-1979.
41
Hugar, R.S., Challenges to the Banking Industry, the Indian Institute of Bankers, Oct-Dec.-
1988, pp 157, 158.
42
Hundekar S. G., “Productivity in Banks”, Research Paper, Published by Rupa offset prints-
Jaipur, 1995.

39
 Jagwant Singh43 has analyzed productivity of Indian banks. He has used
it indicators that can be categorized in to three main indicators i.e. per employee
indicators per branch indicators and financial indicators. He observed that united
commercial bank was the one bank that from all angles was giving poor
performance after nationalization. SBI was able to make considerable
improvement in its productivity. He recommended that all the banks should set
up productivity cells.

Joshi P. N.44 studied the trend of gross and net profits of scheduled
commercial banks. He observed that declining demand from the corporate sector
for bank funds has seriously contributed a lot to the decline trend in profitability.

J. Panda and G. S. Lall45 in their paper attempted to develop internal

management techniques for improving the profitability of the Indian banks. They
identified most important factor influencing the profitability i.e. productivity
development of funds, quality of advances, information system organizational
setup and branch expansion policy.

Ketkar.-Kusum-W.46 made an attempt to determine the impact of bank

nationalization through aggressive bank branch expansion programs and priority
sector credit allocation on India‟s financial savings, investment, productivity and
GDP. The empirical findings indicate that the bank nationalization policy has
been a mixed blessing. The aggressive bank branch program since 1969
resulted in an increase in savings, investment and productivity of capital and
GDP. However, the priority sector credit allocation policy did not fully achieve its
desired goals.

43
Jagwant Singh, “Indian Banking Industries Growth and Trends in Productivity”, Research
paper, Deep & Deep Publication, New Delhi-1993.
44
Joshi P.N. – “Profitability and Profit Planning in Banks” The Journal of India Institute of
Bankers-June 1986
45
J. Panda and G.S. Lall, “A critical Appraisal on the Profitability of Commercial Banks”, Indian
Journal of Banking and Finance, vol. 5, 1991-92.
46
Ketkar, Kusum W., “Public Sector Banking, Efficiency and Economic Growth in India”, World-
Development, 21(10), October1993, pp.1685-97.

40
 L. K. Kulkarni47 in his paper compared developmental responsibility and
profitability of banks. He reviewed that one of the important reason for the decline
in profitability of banks in the developmental responsibility undertaken by them.
He suggested that carrying of developmental business could be possible as well
as profitable only by reducing costs, improving systems and improving
productivity.

Manish M. and Aruna D.48, concluded that the competitive is increased

productivity and profitability. Indian banks especially the public sector banks and
the old private sector banks are lagging far behind their competitors in terms of
both productivity and profitability with the exception of the State bank of India and
its associate. The other public sector banks and old private sector banks need to
go for the major transformation program for increase their productivity and
profitability. They suggest a three point program-reduce overstaffing, forge
strategic alliance with the rural regional banks to open up rural branches and
increased use of technology for improved products and services for the same.

Mishra M. N.49 In his paper evaluated the profitability of scheduled

commercial banks taking into account the interest and non-interest income and
interest expenditure, manpower expenses and other expenses. The author has
identified that the growing pre emption of funds in the form of statutory liquidity
ratio, cash reserve ratio, faster increase of expenses as compared to the income,
advances and total investment than interest income and few more factors have
contributed to the declining profitability of Indian commercial banks.

47
L. K. Kulkarni, Developmental Responsibility of Banks: Economic & Political Weekly, vol,
14(34) Aug 25, 1979.
48
Manish M. & Aruna D., “Profitability and Productivity in Indian Banks: A Comparative Study”
AIMS International Volume 1, Number 2, Research Paper May 2007, pp 137-152.
49
Mishra M.N., “Analysis of Profitability of Commercial Banks”, Indian Journal of Banking and
Financial vol., 5, 1992.

41
 Mittal and Dhingra50 observed that private sector banks which took more
information technology initiative were more efficient in terms of the productivity
and profitability parameters than their counter parts under public ownership.

Mohan51 expressed his views regarding the transformation in Indian

Banking that if Indian Banks are to compete globally, the time is opportune for
them to institute sound and robust risk management practices.

Nayan Kamal52 in their research theses recommended a model for

evaluation of performance of commercial banks. He suggested that the basis of
all the import quantifiable parameters of performance an integrated performance
index needs to be developed, which act as a model for will evaluate in the
performance of commercial banks.

Narasimham Committee53 on the Financial System 16 appointed by the

Government of India (Narasimham Committee), in 1991 examined all aspects
relating to the structure, organization and functions of the Indian financial system.
It made wide ranging recommendations with a view to ensuring flexibility,
functional autonomy and thereby enhancing efficiency, productivity and
profitability of the banking sector and the financial system. It. examined the cost,
composition and adequacy of the capital structure of the various financial
institutions and reviewed the relative roles of the different types of financial
institutions in the financial system and recommended ways to improve the
efficiency and effectiveness of the system with the emerging credit needs of the
economy. Its recommendations include, inter alia capital adequacy norms,

50
Mittal, R. K. and S. Dhingra, “Assessing the Impact of Computerization on Productivity and
Profitability of Indian banks: An Application of Data Envelopment Analysis”, Delhi Business
Review – 2007, 8(1), pp3-73.
51
Mohan, R., “Transforming Indian Banking: In Search of a Better Tomorrow”. IBA Bulletin, 2003,
25(3): 33-40.
52
Nayan Kamal, “Commercial Banks in India Performance Evaluation”, Deep and Deep
Publishing New Delhi, 1985.
53
Report of the Committee on the Financial System (1991), (Heads by M. Narasimham),
Reserve Bank of India Bulletin, February 1992.

42
prudential norms for income recognition, provisioning for bad debts, transparency
of bank balance sheets, liberal branch licensing policy and so on.
Padamasai54 studied that productivity and profitability of five big banks
increased throughout the post-reforms period in terms of selected ratios of each
parameter, but on account of efficiency, the performance of the top five banks is
very dismissal as inefficiency has increased during the study period. He
suggested that if the government sells its share in the profit making banks, it
would be able to bail out the weak banks.

Pankaj Sahay55 tries to measure and explain the variation in productivity

of Indian commercial banks during the initial stages of liberalization period. The
study covered 70 commercial banks for the evaluation of performance during
1986-1992 to prove that before 1989 the productivity declined because of
consolidation of branch network, but after 1989 it increased to be followed by a
decline after security scandal. The productivity growth in the banking industry
during the sample period was 5.5% per annum – the growth was 1.2% in case of
PSBs and it was 2.3% in the case of private banks. The impressive growth rate
was in the case of foreign banks at 15.3 per annum.

Paroma Sanyal & Rishmi Shankar56 find that Indian private bank
productivity is much higher than that of public banks, and that both old and new
Indian private banks have much higher productivity than the public banks. They
also find that Indian private bank productivity is growing at a faster pace in the
post-1998 period when compared to the public and foreign banks.

Rajagopalang A. V.57 in his paper has given an over all view on

productivity in banks. He concluded that profitability and productivity depends on

54
Padamasai, T., “Profitability, Efficiency and Productivity of the Big Five Public Sector Banks in
India”, Dissertation, Dept. of Commerce, Delhi School of Economics, Uni. of Delhi, Delhi, 2000.
55
Pankaj Sahay: “Productivity change in Indian Banking: a Generalized Malmquist Productivity
index approach (India)”, the University of North Carolina at Chapel Hill, 1996.
56
Paroma Sanyal and Rashmi Shankar-“Ownership Competition and Bank Productivity: An
Analysis of Indian Banking in the post-reforms period”, Research Paper- July 2008.
57
Rajagopalang A. V., “Productivity in Banks, an Overviews”, Research Paper, Deep & Deep
Publication-1993.

43
various factors like reduction of costs, recovery work reorganization,
computerization etc. He opined that establishments expenses play a key role in
determine the level of profit. He suggested that attention should be given on
staffing pattern.

Ram Mohan58 covers a recent period, 1996-97 to 1999-2000. He found

that over these years the profitability of the Public Sector Banks did improve in
comparison to the Private and Foreign Banks, but they have lagged behind in
their ability to attract deposits at favorable interest rates and have been slow in
technology up gradation and improving staffing and employment practices, which
may have negative implications on their longer-tem profitability.

Dr. Rangrajan59 reviews various efficiency parameters for evaluating the

performance of the financial system. According to him, the Indian financial sector
reforms aim at removing external and internal constraints and he ultimately
concludes that various reform measures in India have laid foundation for an
efficient and well functioned banking system, which will support and strengthen a
high level of growth in future.

Dr. R. K. Uppal60 concluded that although most of the banks have

succeeded to bring down their non-performing assets and costs, but still they are
facing deterioration in their profitability. Most of the public sector banks even with
the highest share in assets, rural branches, priority sector advances and
investments of all scheduled commercial banks, still have to face competition in
terms of new challenges from new private sector banks and foreign banks as
their costs is the highest along with continuous deterioration in profits and
spread. Therefore, there is a need to make some practical strategies for the

58
Ram Mohan T., “Deregulation & Performance of Public Sector Banks”, Economic & Political
Weekly, Issue on Money, Banking & Finance, Feb-2002, pp 393.
59
Dr. Rangarajan C., “Financial Development and Economic Growth”, Journal of Social and
Economic Development, Jan.-Jun. 1998, pp. 1-14.
60
Dr. R. K. Uppal, “‟New Competition and Emerging Changes in Indian Banks: An Analysis of
Comparative Performance of Different Bank Group”, Indian journal of Commerce & mgt. studies,
vol. II- issue, Jan. 2011.

44
public sector banks and old private sector banks to make them as much
competitive as new private sector banks.

Rao61 analyzed the impact of new technology on banking sector. The

technology is changing the way the business is done and opened new vistas for
doing the same work differently in most cost-effective manner. Tele-banking and
internet-banking are making forays such that branch banking may give to home
banking. He provided some policies to protect their profitability.

RBI62 noted that “Development after 1996 indicates that a majority of the
public sector banks have been able to progress considerably to words the
direction of passing the acid test of achieving competitive efficiency.

Sarkar, Bhaumik,63 etc. at al. consider the ownership-performance issue.

The assumption being that, the private owners or enterprises are superior to
public enterprise. The authors conclude that in the absence of well functioning
capital market there may not be significant difference in performance of private
and public enterprises in the Indian banking industry. They have suggested the
creation of appropriate institutions prior to pursuing privatization in developing
country.

Sarkar & Das64 compared performance of Public Sector Banks, Private

Sector Banks and Foreign Bans for the year 1994-95 on their profitability,
productivity and financial management. They found that Public Sector Banks
compare poorly with the other two categories of banks.

61
Rao, N. V., “Changing Indian Banking Scenario: A Paradigm Shift, IBA Bulletin, Vol. XXIV No.
1, pp 12-20.
62
RBI: “Some aspects and issues relating to NPAs in Commercial Banks” RBI Bulleting, July-
1999, pp 913-93.
63
Sarkar,-Jayati; Subrata, Bhaumik Sumon K.: “Dose Ownership Always Matter?-Evidence from
the Indian Banking Industry”, Journal of Comparative Economics; 26(2), June 1998, pp 262-81.
64
Sarkar, P. C. & Das, “Development of Composite Index of Banking Efficiency: The Indian
Case” RBI Occasional Papers, Dece.1997, Vol.18, No.4.

45
 Sathye65 studied the impact of privatization on banks performance and
efficiency for the period 1998-2002 and found that partially privatized banks have
performed better than fully Public Sector Banks and they are catching up with the
banks in the Private Sector Banks.

Satyamurty B.66 clarified the concepts of Profits, Profitability &

Productivity applicable to the banking industry organized by the bank
managements that the pressure on the profitability is more due to the factors
beyond their control.

Saveeta and Satish Verma67 examined the profitability of commercial

banks they have depicted a declining trend in profitability since 1969, showing a
comparatively better performance of foreign banks.

Shah68 in various papers discussed bank profitability and productivity. He

disapproved the attitudes of banks that higher profitability can result from
increased spread and that innovations have a limited role. He emphasized also
on reduction of costs, creation of a team spirit, improvement in the management
for improving bank profitability and productivity.

Sharad Kumar and M. Sreeramulu69 observed that the performance of

the modern banks (Foreign and New Private Sector Banks) was much superior to
the traditional banks (Public Sector and Old Private Sector Banks). However, the
gap between the performance of modern and traditional banks on all the five

65
Sathey, M., “Privatization, Performance, and Efficiency: A study of Indian Banks”, Vikalpa,-
2005, (30)(1), 7-16.
66
Satyamurty B. “A Study on Interest Spread in Commercial Banks in India” NIBM, working
paper-1994.
67
Saveeta and Satish Verma, “Determinants of Profitability of SBI group other Nationalized
Banks and Foreign Banks India”, 1971-1996.
68
Shah, S.G., 'Bank Profitability: The Real Issue,' Journal of Indian Institute of Bankers, (July-
Sept. 1979), pp.130-144.
69
Sharad Kumar and M. Sreeramulu, “Employees‟ Productivity and Cost- A Comparative study of
Bank in India” During 1997 to 2008, RBI Occasional Papers, vol. 28, No. 3 winter-2007.

46
variables has shown a decreasing trend, which has significantly reduced during
the period 12 years (1997 to 2008) under study.

Singh I. & Kumar P.70 analyzed that deposits is a major determinant of

spread followed by borrowing and labour. The study again concluded that
average technical and a locative efficiency are the highest in foreign banks while
PSBs in although lower than FBs but much better than Private Sector Banks.

Singla & Arora71 studied the comparative performance of Canara Bank

and Indian Bank that both the banks have improved their financial performance
during the study period where Canara Bank has an upper hand in growth of
deposit, advances and average working funds. In case of productivity it is rising
in both the banks but remained much higher in Canara Bank.

Sunil Kumar and Rachita G.72 concluded that the level of competitive
practices and technology in the Indian banking industry during the post-reforms
years served as a catalyst to improve cost efficiency and to bring convergence
across PSBs in terms of their efficiency levels. In the light of empirical finding, the
future reforms in the banking sector should be directed towards strengthening
competitive and market oriented policies.

Srivastava73 stressed on accelerating the pace of the process of

computerization of bank branches to enhance the profitability, operating
efficiency, service quality, and diversify the earning base.

70
Singh I. & Kumar P., “Liberalization and Efficiency: The Case of Indian Banking” Indian
Management Studies Journal 10(4) 77-93.
71
Singla, A. & Arora, R. S. Financial Performance of Public Sector Banks: A Comparative Study
of Canara Bank and Indian Bank. Punjab Journal of Business Studies, 2005, 1(1): 87-93.
72
Sunil Kumar & Rachita Gulati, “Dynamics of Cost Efficiency in Indian Public Sector Banks: A
Post-deregulation Experience, a Research Paper- March 2010.
73
Srivastava, R., Computerization in Indian Banks, Banking Finance Feb. 2000.

47
 Swami, B. N. Anantha74 made comparative analysis of performance of
specific bank groups during 1996-2000 and concluded that the share in assets of
scheduled commercial banks was declining in public sector banks and foreign
banks while increasing in old private sector banks and new private sector banks.
Among the factors influencing their relative share, profitability and spread were
continuously declining whereas costs were increasing although non-performing
assets of public sector banks have declined while increased in all other bank
groups. Overall performance of banks is not sound in some selected parameters
of performance.

T. Padamasai75 studied that productivity and profitability of five big banks

increased throughout the post-reforms period in terms of selected ratios of each
parameter, but on account of efficiency, the performance of the top five banks is
very dismissal as inefficiency has increased during the study period. He
suggested that if the government sells its share in the profit making banks, it
would be able to bail out the weak banks.

Tandon Committee76 suggested Maximum Permissible Bank Finance

with reference to the working capital requirements and bank should have
Quarterly Information System. The group also recommended norms for inventory
and receivables in each industry, level of the borrower‟s resources to enable the
banker to carry on acceptable level of current assets, and the style of bank credit.

The PEP committee77 on Banking constituted to study the productivity,

efficiency and profitability of commercial banks has used four criteria; namely,

74
Swami, B.N. Anantha, “New Competition, Deregulation and Emerging Changes in Indian
Banking: An analysis of the Comparative Performance of different Bank”, Bank Quest, Vol. 72,
No. 3, Septe-2001, pp 3-22.
75
T. Padamsai “Profitability, Efficiency and Productivity of the Big Five Public Sector Banks in
India”, Dissertation Dept. of commerce, Delhi School of Economics, Uni. of Delhi, Delhi-2000.
76
The Report of the Study Group to frame the guidelines for follow-up of Bank Credit, Tandon
Committee Report, RBI, Bombay-1975.
77
Report of the Productivity, Efficient and Profitability (PEP) Committee on Banking, (Headed by
C. Luther), Reserve Bank of India. 1977.

48
productivity, social objectives-spatial, social objectives-pectoral and profitability.
Under each criterion, it used a set of indicators. It also examined aspects like
planning, budgeting, marketing, management information systems, annual
accounts, audit systems, procedures and so on. It analyzed banking costs,
profitability of operations, pricing of bank services, trends in earnings and
expenditures etc. and made a number of recommendations. The study was
experimental in nature and it categorically stated that the set of indicators used
by it does not represent either the first or the last choice.
The Reserve Bank of India78 in its conference paper observed that the
rapid expansion of baking activities called for a phase of consolidation to improve
the quality of banks' operational efficiency, productivity and customer service. It
noted that poor quality of bank assets continues to be a cause for concern in
view of large scale industrial sickness and wide spread defaults in repayment of
banks dues. It emphasized the need for sustained efforts to improve bank
productivity and profitability.
Varde79 in his conference paper distinguished between effectiveness,
efficiency and productivity. He classified the efficiency of a bank into four
categories, i.e., (1) manpower efficiency (2) operational efficiency (3) commercial
efficiency and (4) efficiency of ancillary business. Efficiency under each category
can be measured separately, and measure of efficiency can be considered as
productivity.

Verma, Amitabh80 concluded that Indian public sector banks have a

unique advantage over their competition in terms of their branch network and the
large customer base, but it is the use of technology that will enable PSBs to build

78
Department of Banking Operations and Development, Reserve Bank of India, „Efficiency,
Productivity and Customer Service in Banks,' Conference Paper, National Conference on
Banking Development, Reserve Bank of India, Bombay, November 12, 1988.
79
Varde, V.S., 'Effectiveness, Efficiency and Customer Service in Banks, Conference paper,
National Conference on Banking Development organized , by Reserve bank of India, Bombay,
12th November, 1988.
80
Verma, Amitabh,”The Impact of Technology on Productivity and Profitability of Indian Banks in
post Liberalization period”, Abhigyan Articles, Social and Theoretical sciences Journals – July-
2009.

49
on their strengths. Foreign banks and the new private sector banks have
embraced technology right from their inception and they have better adapted
themselves, to the change in technology where as the public sector banks and
old private banks have been slow in keeping pace with changing technology,
which is reason affecting their profitability and productivity.

Zhao81 et al noted that, after an initial adjustment phase, the Indian

banking industry experienced sub stained productivity growth, driver mainly by
technological progress.

81
Zhao, T. Casu, B. and Ferrari, A., “Deregulation and Productivity Growth: A Study of Indian
Commercial Banking”, Economic Analysis Research Group Working Papers, No. erg- WP 2006-
07, School of Business, Reading University.

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