A

Specialization Project Report

On
“A STUDY ON FINANCIAL PERFORMANCE OF PUBLIC SECTOR BANKS IN INDIA”

In the partial fulfilment of the Degree of

Master of Management Studies

Under the University of Mumbai

By

Mehul Ishwar Parmar

Class: MMS-B & Roll No: 04

Specialization: Finance
Batch: 2019-21

Under the Guidance of

Prof. Kinjal Shethia

ATHARVA INSTITUTE OF MANAGEMENT STUDIES

Malad-Marve Road, Charkop Naka, Mumbai 400 095.
 DECLARATION:
I, the undersigned, hereby declare that the Project Report entitled “A STUDY ON FINANCIAL
PERFORMANCE OF PUBLIC SECTOR BANKS IN INDIA” written and submitted by me to the
University of Mumbai, in partial fulfillment of the requirement for the award of degree of Master of
Management Studies under the guidance of Prof Kinjal Shethia is my original work and the conclusions
drawn therein are based on the material collected by myself.

Place: Student Name:

Date:
Signature:
 Chapter 1:- Introduction
The growth of any economy depends on the strong economic system. within the Indian
context, since the eve of independence the banking institutions are playing a significant
role as a significant contributor to the structural change of the economy. Initially, the public
sector banks were playing both as a catalyst and as active contributors to Indian financial
sector development without profit motive. However, the introduction of economic Sector
Reforms has posed a threat to the survival of the Indian public sector banks thanks to the
entry of origin banks and new generation private sector banks. This, successively has resulted
in the introduction of latest technology in banking and innovative customer services.
Though the post reform measures could show an improvement within the financial
performance and profitability of majority of the Indian banks, a logical question that
arises during this context is that to what extent Indian banks could improve their profitability
and how effectively the banks are ready to utilize the available resources. the current
project is aimed toward examining these issues.
The indigenous system of banking had existed in India many centuries back, in
order to cater to the credit needs of the economy of that point. The famous Kaulilya
Arthashastra, which was ascribed within the 4th century BC, contains references to creditors
and lending. as an example, it says "If anyone became bankrupt, debts owed to the state
had priority over other creditors". Similarly, there's also a relevance "Interest on
commodities loaned' (PRAYOG PRATYADANAM) to be accounted as revenue of the
state. Thus, it appears that lending activities weren't entirely unknown within the medieval
India and therefore the concepts like ‘priority of claims of creditors' and ‘commodity lending'
were the established business practices.
During nation rule, Indian banking was based upon British banking industry.
The initial phase ofthe development ofthe commercial banks in India was regulated and
governed by the archipelago Company's Government, the charter and therefore the
Government of India. It used the services of the Indian banks for the transfer of funds
between India and Britain; hence the Indian banks played only a passive role. However,
the strengthening and regulating of banking industry transpire after the establishment of Reserve
Bank of India in 1935.
During the post independent period the Indian economy has been set within the pace
of rapid development. But Indian economy has been targeted towards achieving the
requisite levels of production and competitiveness to achieve self-reliance. In building India
it was realized that improving the quality of living of the people was pertinent that
upgradation of technology and effective and efficient manpower are of utmost
importance. Obviously these would force more financial resources, which might play a
significant role in shaping the economy of a country by judiciously deploying their funds.
In achieving these goals, banks play a prominent role in discharging social
responsibilities i.e., poverty eradication, employment generation, development of
industry and agriculture, re-distribution of wealth and balanced regional development. In
the industrial field banks function an admirer, philosopher and guide to industrial units. They
nurse an oversized number of sick units with a view to enable them to continue their production
and maintain their level of employment. Through their merchant banking division several
banks have entered the sector of commercial finance by seizing underwriting of capital
issues. Hence, any successful plan of a nation requires a considerable expansion together with
qualitative improvements within the operations of the banking industry, in those areas whichare in
priority sector and on which the longer term development of a rustic rests. To quoteBhabha1. “
Banking is that the kingpin of the chariot of economic progress. per se its role in expanding
economy of a rustic like India can neither be underestimated nor overlooked. The success of our
plan depends among other things on the sleek and satisfactory performance ofthe role
by industry of our country".
The year 1969 was a landmark within the history of business banking in India. In
July, the govt. nationalized 14 major commercial banks ofthe country which had a
deposit of a minimum of Rs. 50 Crores each.
The broad objective of nationalization of banks as envisaged within the then Prime
Minister Mrs. Indira Gandhi's broadcast to the state on July 19, 1969 and her statement
in the Parliament on July 21, 1969 were:
”To have a bearing over the commanding heights of the economy with a view to
mobilize adequate resources for development and to scale back the inequality among regions.
The expansion of bank credit to priority sectors and inspiring a brand new class of
entrepreneurs through granting liberal credit for brand new schemes. .Giving professional bent
to bank management by appointing professional bankers as Chairmen and Economists,
Chartered Accountants, Lawyers, Agriculturists and little industrialists as members of
the board; and thus, removing control by some big businessmen and industrialists.
Further, the general public ownership of the key banks will help in eliminating the employment of
banks' credit for speculation and unproductive purposes”
On April, 1980 eleven years after the nationalization of fourteen commercial
banks, the govt. took over six more scheduled commercial banks each with
demand and time liabilities exceeding Rs 200 crores. the choice to nationalize these
banks was guided mainly by two considerations - first to assist in implementing the 20
Point Programme and secondly to possess more practical control over the credit policy
implementation of the industry as a full. These policies ofthe government have
made complied the scheduled commercial banks to play a catalytic role for development,
without being given consideration to profitability.
Indian Banking has become quite complex and varied. However, at present
there has been a major departure from the banker's earlier role of purveyors of credit
to profit earning. the stress now could be to fulfill the credit gaps both at micro and at macro
levels by ensuring proper and effective use of economic resources in line with the laid
down priorities.
Apart from meeting the credit needs of the economy the activities of the banks, at
present, encompasses advisory and counseling roles in addition as a monitoring function with
a distinct disciplining base. Technology introduction, innovations in commission delivery have
come to the forefront.
However, the tasks of fulfilling the social objectives with a priority on profit
earning are mutually exclusive and opposing. Hence, these banks need to earn reasonable
profits not only to form a contribution to the central exchequer, but also to satisfy their
social responsibilities, otherwise this giant financial edifice will crumble, thereby
threatening the complete economy itself. Although, profits today are not any longer the be-all and
end-all of banking business, any concern for healthy growth, long-term viability and
lasting contribution of banks must accord due emphasis on profitability. Banks in India
are sensitive instruments as they're much receptive public gaze and criticism and if
millions of people addressing banks must still repose their faith and trust in
them, they have to still function viably, efficiently and profitably.
 Chapter 2:- GENESIS OF INDIAN BANKING, CONCEPTS AND REVIEW
OF RELATED STUDIES

Role of commercial banks in Economic Development

Among the banking Institutions in the organized sector lbs. public sector commercial banks arc the
oldest institutions having a wide network of branches, commanding utmost pubic confidence
and have the lion’s share in the total banking operations.

Public Sector Banks

Public sector in Indian Banking reached its present position in three stages:-

First, the conversion of the when existing Imperial Bank of India into the State Bank of India in
1911 followed by the establishment of its seven subsidiary banks: ”Second the nationalization of
14 major Commercial Banks in 1961 and last the nationalization of 6 more commercial banks
in 1980. All these banks are owned by Central Government either directly or through Reserve Bank
of India.
All the 27 public sector banks are corporate bodies; but status under which were established was
different. As quoted in the Reserve Bank of India bulletin, the trends and progress of banking in
India, based on various issues these public sector banks are classified into two broad categories,
namely
Nationalized Banks and
State Bank of India and its Associate
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Nationalized Banks

At present there are 19 nationalized banks in the country. They are resided from 20 banks because
of the merger of New Bank of India with Punjab National Bank in the year 1993. The nationalized
banks were established under the two Acts, namely, Banking Companies (Acquisition and Transfer
of Undertaking) Acts of 1970 and 1980.

State Bank of India and its Associates

The site bank group comprises of State Bank of India and its seven subsidiaries. The separate act
was enacted as “State Bank of India Act”, on July 1, 1955. Through this Act, SBI was nationalized.
The seven subsidiary banks are almost fully owned by State Bank of India and popularly called as
SBI and its Associate banks, which is the largest commercial bank in India in terms of its branch
network, resources and manpower. SBI acts as an agent of Reserve Bank of India.

Banks are an important segment of the tertiary sector and acts as a backbone of economic growth
and prosperity. 12 They render vital services to masses belonging to various sectors of economy
like agriculture, industry whether small scale or large scale.'' The banking system is one of the few
institutions that impinge on economy and affect its performance for betterment or worsement. They
act as development agency and are the
Source of hope and aspirations of masses I . They are. Therefore, treated as the instruments for
conversion ot static credit into dynamic credit. In terms of the role of nationalized banks in planned
economy, they may be distinguished from other financial institutions. It assists in the
implementation of Government plans by providing the sinew of development, and also
performs functions such as fulfillment of credit requirements as per Government’s economic
plans and controlling the utilizations of these credits according to planned priorities and
implementations of RBI regulating measures. These
Roles of nationalized banks have an added signified. Rice for India‘s development efforts through
successive new-year plans.

Some studies based on the experience of individual countries and some other based on comparative
data from developed and under developed countries, support the hypothesis that the financial inter-
mediation has a positive role to play in the development process because finance plays a significant
role in the economic development. “Without finance the economy is like a fish out of water”. As
aptly remarked by Patrick I seems of be the case that where enterprise leads finance follows. The
same impulse within an economy which sets enterprise or fool makes owners of wealth
venturesome arid when a strong impulse to invest is fettered by lack of finance, devices are
invented to release it habits arid territories are developed ’
Also, the horizon of the banking institutions has increased from contributor of economic growth to
the role of social and economic transformation. Social responsibilities have undergone far-
reaching changes. Banks have become the prime
movers and pace setters for the achievement of socio-economic objectives of the country.

Savings and investments are the most important ingredients of capital formation for an economy;
therefore promotion of domestic savings is a must to boost the process of capital formation and
development. In fact capital formation is a function of generation, mobilization and canalization of
savings into productive activities. Thus, the commercial banks are in the nature of a catalyst,
converting savings into capital for productive investment.

The resources of individual savers are meager and scattered. Commercial banks play an important
role in mobilizing savings of economically surplus units, which are widely scattered.
Commercial banks, in view of their vast branch network spread over the country, obtain the savings
on a short or medium term basis, are placed in an especially privileged position to collect them. If
the banks fail to tap these savings, surplus money lying idle in the hands of the people could not be
of any use in a nation’s endeavour of economic development.

If any country wants io 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 society " The commercial
banks create the awareness among the rural and urban people about socially wasteful spending and
provide them the golden opportunities to make investment in more income generating assets.
Agriculture being the backbone of our Indian economy, the commercial banks help 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 the

modernization and mechanization ot“ farms, tor the marketing of their produce, for providing
irrigation facilities, for high yielding seeds and l’ertilizers. They provide medium or long term loan
for electric or diesel pump sets, or for developing or improving land etc. The commercial banks are
moving fast towards the attainment of agricultural development goal' 0
CONCEPTS RELATING TO THE STUDY

CAMEL is basically a ratio-based model for evaluating the performance of banks.

Various ratios forming this model are available in Exhibit 1.

Exhibit 1 : CAMEL Model

Capital Adequacy Ratio
C: Capital Adequacy Debt—Equity Ratio

A: Assets Quality
M: Management Efficiency
E: Earning Quality
L: Liquidity
Advances to Assets
Government Securities to Investments
Gross NPA to Gross Advances
Nel NPA to Net Advances
Total Investments to Total Assets
Net NPA to Total Assets
Total Advances to Total Deposits
Business per Employee
Profit per Employee
Profit per Branch
Interest Expenses to total Expenses
Operating Profits to Average Working funds
Spread to Working Fund
Net Profit to Average Assets
Interest income to Total Income
Non-lnterest Income to Total Income
Percentage Growth in Net Profit
Profit to Spread
Liquid Assets to Total Assets
Government Securities to Total Assets
Liquid Assets to Demand Deposits ” - Liquid
Assets to Total Deposits
Approved to Securities to Total Assets

Capital Adequacy
It is important for a bank to maintain depositors’ confidence to prevent the bank from going
bankrupt. Capital is seen as a cushion to protect depositors and promote the stability and efficiency
of financial system around the world. Capital Adequacy reflects the overall financial condition of
the banks and also the ability of the management to meet the need for an additional capital. It also
indicates whether the bank has enough capital to absorb unexpected losses. Capital Adequacy
Ratios as indicators of bank leverage. The following ratios measure Capita1 Adequacy:

Capital Adequacy Ratio (CAR)

The banks are required to maintain the Capital Adequacy Ratio (CAR) as specified by RBI from
time to time. As per the latest RBI norms, the banks in India should have CAR of 9 per cent. li is
arrived at by dividing the sum of Tier-1, Tier-11, and Tier-1 I l capital by aggregate of Risk
Weighted Assets (R WA) Symbolically:
CAR= (Tier-I + Tier-II + Tier-III)/RWA

Tier-I capital includes equity capital and free reserves.

Tier-II capital comprises of subordinate debt of 5 — 7 years tenure, revaluation reserves, general
provisions and loss reserves, hybrid debt capital instruments and undisclosed reserves and
cumulative perpetual preference shares.
Tier-III capital comprises of short-term subordinate debt. The higher the CAR, the stronger is
considered a bank, as it ensures high safety against bankruptcy.

Debt-Equity Ratio
This ration indicates the degree of leverage of a bank. It indicates how much of the bank
business is financed through debt and how much through equity. This is calculated an the
proportion of total outside liability to net worth. ‘Out side Liabilities; includes total borrowings,
deposits and other liabilities. ‘Net Worth” includes equity capital and reserves and surplus. Higher
ratio indicates less protection for the creditors and depositors in the banking system.

Advances to Assets
This is the ratio of the Total Advances to Total Assets. This ratio indicates a bank’s
aggressiveness in lending which ultimately results in better profitability. higher ratio of
advances/deposits (assets) is preferred to lower one. Total advances also include receivables. The
value of Total Assets is excluding the revaluation of all the assets.
Government Securities to Total Investments
The percentage of investment in government securities to total investments is a very important
indicator. which shows the risk-taking ability of the bank. it indicates a bank’s strategy as being
high profit-high risk or low profit-low risk. It also gives a view as to the availability of
alternative investment opportunities. Government Securities are generally considered as the most
safe debt instrument, which as a result, carries the lowest return. Since government securities are
risk-free, the higher the Government Securities to investment ratio, the lower the risk involved in
bank‘s investments.
Assets Quality
The quality of assets is an important parameter to gauge the strength of the bank. The prime motto
behind measuring the assets quality is to ascertain the component of Non-Performing Assets
(NPAs) as a percentage of total assets. This indicates what types of advances the bank has made to
generate interest and income. Thus, assets quality indicates the type of the debtors the bank is
having. The following ratios are necessary to assess assets quality

Gross NPAs to Gross Advances

It is a measure of the quality of assets in a situation, where the management has not provided tor
loss on NPAs. Here the Gross NPAs are measured as a percentage of Gross Advances. the lower
ratio, the better the quality of advances.
Net NPAs to Net Advances
It is a most standard measure of assets quality. In this ratio, Net NPAs are measured as a
percentage of Net Advances. Net NPAs are Gross NPAs net of provisions on NPAs and interest in
suspense account.

Total Investments to Total Assets Ratio

Total investment to total assets indicates the extent of deployment of assets in investment as against
advances. This ratio is used as a tool to measure the percentage of total assets locked up in
investments, which, by conventional definition, does not form part of the core income of a bank.
A higher level of investment means lack of credit off- take in the economy. This ratio is calculated
by dividing total investments by total assets of a bank. A higher ratio means that the bank has
conservatively kept a high cushion of investments to guard against NPAs. However, this affects its
profitability adversely.
Net NPAS to Total Assets
This ratio indicates the efficiency of the bank in assessing credit risk and to an extent, recovering
the debts. This ratio is arrived at by dividing the NET NPAs by Total Assets. Total Assets
considered are net of” revaluation reserves. Lower the ratio better is the performance of the bank.

Management Efficiency
Management efficiency is another important element of the CAMEL Model. The ratios in this
segment involve subjective analysis to measure the efficiency and effectiveness of management.
The management of the bank takes crucial decisions depending on its risk perception. It sets vision
and goals for the organization and sees that it achieves them. This parameter is used to evaluate
management efficiency as to assign premium to better quality banks and discount poorly managed
ones. The ratios used to evaluate management efficiency are described as under:

Total Advances to Total Deposits

This ratio measures the efficiency and ability of the bank’s management in converting the deposits
available with the bank (excluding other funds like equity capital, etc.,) into high earning advances.
Total Deposits include demand deposits, savings deposits, term deposits and deposits of other
banks. Total advances also include the receivables.
Business per Employee
This ratio shows the productivity of human forces of the bank. It is used as a tool to measure the
efficiency of all the employees of a bank in generating business for the bank. It is arrived at by
dividing the total business by total number of employees. Higher the ratio, the better it is for the
bank. By business, we mean the sum of Total deposits and Total Advances in a particular year.

Profit per Employee

This ratio shows the surplus earned per employee. It is arrived at by dividing the Profit after Tax
(PAT) earned by the bank by the total number of employees. "the higher the ratio, the higher the
efficiency of the management.
Profit per Branch
This measures the efficiency of the employee at the branch level. It also gives valuable inputs to
assess the real strength to a bank‘s branch network. It is arrived at by dividing the Profit After Tax
(PAT) earned by the bank by the total number of thank beaches. The higher the ratio, the higher the
efficiency of management. However, it is advisable lo look at the number of branches too. as a
bank with fewer branches can figure among the top players in this category despite earning a lower
net profit.

Interest Expenses to Total Expenses

This ratio shows how effectively the management is controlling the non interest expenditure among
total expenses. It is arrived at by deciding the Interest expenses paid by the Total expenditure of
the bank. The higher the ratio, higher the efficiency of the bank.

Earnings Quality
The quality of earnings is a very important criterion that determines the ability of a bank to earn
consistently, going into the future. it basically determines the profitability of the bank. It also
explains the sustainability and growth in earnings in the future. This parameter gains importance in
the light of the argument that much of a bank’s income is earned through non-core activities like
investments, treasury operations, and corporate advisory services and so on. The following ratios
try to assess the quality of income in terms of income generated by core activity- income from
lending operations:

Operating Profits to Average Working Funds Ratio

This ratio indicates how much a bank earns from its operations net of the operating expenses for
every rupee spent on working funds. "(his is arrived at by dividing the operating profits by average
working funds. Average Working Funds (A WF) are the total resources (total assets or liabilities)
employed by a bank. It is daily average of total assets/liabilities during a year. The higher the ratio.
the better it is, This ratio determines the operating profits generated out of working funds
employed. The better utilization of funds will result in higher operating profits. Thus, this ratio will
indicate how a bank has employed its working funds in generating profits. Banks which use their
assets efficiently will tend to have a better average than the industry average.
Spread to Working fund
Spread, being the difference between the interest income and the interest expended as a percentage
of working funds, shows the ability of the bank to keep the interest on deposits low and interest on
advances high. it is an important measure of a bank's core income (income from lending
operations). A higher spread indicates the better earnings given the working fund. The interest
income includes dividend income and interest expended includes interest paid on deposits, loan
from the RBI and other short-term and long-term loans.

Net Profits to Average Assets.

Profit to average assets indicates the efficiency of the banks in utilizing their assets in generating
profits. A higher ratio indicates the better income generating capacity of the assets and better
efficiency of management. it is arrived at by dividing the net profit by average assets, which is
the average of total assets in the current year and previous year. Thus, this ratio measures the
return on assets employed. Higher ratio indicates better earning potential in the future.
Interest Income to Total Income
Interest income is a basic source of revenue for the banks. The interest income to total income
indicates the ability of the bank in generating income from its lending. In other words, this ratio
measures the income from lending operations as a percentage of the total income generated by the
bank in a year. Interest income includes income on advances, interest on deposits with the RBI, and
dividend income.
Non-Interest Income to Total Income
Fee-based income accounted for a major portion of bank‘s other incomes. The bank generates
higher fee income through innovative products and adapting the technology for sustained service
levels. This stream of revenue is not dependent on the bank’s capital adequacy and consequent
potential to generate income is immense. Thus, this ratio measures the income from operations,
other than lending as a percentage of the total income. Non-interest income is the income earned
by the banks excluding income on advances and deposits with the RBI. The higher ratio of non-
interest income/total income indicates the increasing proportion of fee-based income.

Percentage Growth in Net Profit

It is highly essential for an organization to earn a reasonable amount of profit for its survival and
growth. Moreover, profit plays a vital role in measuring the degree of efficiency, progressiveness
and stability of an undertaking. t4ence, profit is also considered as the acid test of ability and
competence in business planning and programming. Thus this ratio measures the growth in net
profit. it is the percentage change in net profit from last year. Higher ratio indicates the efficiency
of the bank.
Profit to Spread
Net Profit is the most important element of income statement for measuring the profitability of a
bank in a particular year. When it is compared with the spread, being the difference between the
interest income and the interest expended. then over all performance of earning capacity of the
bank activities are assessed. Net profit to spread represents the earning quality of the bank. Higher
ratio of profit to spread indicates more favorable for bank.

Liquidity
Liquidity is very important for any organization dealing with money. Banks have to take proper
care in hedging liquidity risk while at the same lime enduring that a good percentage of funds are
invested in higher return generating investments, so that banks can generate profit while at the
same time provide liquidity to the depositors. Among a bank’s assets, cash investments are the
most liquid. The ratios suggested to measure liquidity under CAMEL model are as follows:

Liquid Assets to Total Assets

Liquid Assets include cash in hand, balance with the RB1. balance with other banks (both in India
and abroad) and money at call and short notice. Total assets include the revaluations of all the
assets. The proportion of Liquid Assets to Total Assets indicates the overall liquidity position of
the bank.
Government Securities to Total Assets
Government securities are the most liquid and safe investments. This ratio measures the
Government Securities as a proportion of total assets. Banks interest in government securities
primarily to meet their SLR requirements, which are around 25 per cent of net demand and time
liabilities. This ratio measures the risk involved in the assets held by a bank.

Liquid Assets to Demand Deposits

This ratio measures the ability of a bank to meet the demand from deposits in a particular year. If
is arrived at by dividing the liquid assets by total demand deposits. Demand deposits offer high
liquidity to the depositor and hence banks have to invest these assets in a highly liquid form. The
liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India
and abroad) and money at call and short notice.
Liquid Assets to Total Deposits
This ratio measures the liquidity available to the deposits of a bank. Total deposits include demand
deposits, saving deposits, term deposits and deposits of other financial institutions. Liquid assets
include cash in hand, balance with RBI, balance with other banks (both in India and abroad) and
money at call and short notice.

Approved Securities to Total Assets

This is arrived at by dividing the total amount invested in approved securities by Total Assets.
Approved securities are investment made in state-associated bodies like electricity boards, housing
boards. corporation bonds, shares of regional rural banks.

REVIEW OF RELATED STUDIES

A number of studies have been conducted by various researchers and institutions, on different
aspects of publ ic sector banks. Some important studies relating to the banking development in
India have been reviewed in this chapter.
A large number of studies conducted in India relate to the performance appraisal of commercial
banks, in the light of their branch expansion, deposit mobilization and credit deployment at the
national level. Some of the studies also focus on the Non performing assets of commercial banks,
and profitability of commercial banks. In a fei¥ of them CAMEL model studies have also been
made. Some of the important studies are as follows.
Patel '. (1974) traced out the problems and challenges faced by the nationalized banks in the field
of credit disbursement in rural areas. He suggested that in order to ensure the timely
repayment of the loans and to reduce the risk of non-repayment, the banks should identify the
specific local problems of rural finance, discipline the borrowers and involve the voluntary
institutions while providing credit in rural areas. The researcher was of the view that in order to
enhance the production efficiency of farmers, commercial banks should make available to the
farmers the package of practices—cum- technical services.

Malhur (1975) made an attempt to assess the role played by the slate Bank of India in Indian
economy. T he findings revealed lhat during its two decades of operation the SBI accelerated the
pace of gro›vih of Indian economy by providing finance to the neglected sectors of the economy.
The bank also played an important role in the development of backward and unbanked areas of the
country by pursuing the policy of vigorous branch expansion in rural areas.
Shetty' 3 (1978) examined the extent to which the banking system in I ndia had been successful in
achieving lhe objectives underlying bank nationalization. He conducted that by and large banks
failed io achieve the goals of nationalization. They could not improve ihe credit- deposit ratio both
in rural and semi-urban areas. The study pointed out that the share ot" priority sector in overall
advances also fell far short of’ the desired level. Moreover. commercial banks failed to reduce the
inter-sectoral as well as inter-regional disparitles in the country.

Abrol " (1987) conducted a comparative study of the performance of the Jammu and Kashmir Bank
Limited and other Commercial Banks working in Jammu and Kashmir during 1961 -75. The
analysis was carried out in the lighl of branch expansion, deposit mobilization and credit
deployment activities of the banks. The study revealed that the Jammu and Kashmir Dank Ltd.
witnessed a faster growth than other banks working in the state, in terms of all the selected
parameters. Finally, after identifying the operational problems faced by the commercial banks,
some suggestions to improve their working efficiency were given.

Another study analyzing the growlh of banking in a particular state was conducted by Chawla25
(1987). He examined the impact of bank nationalization on the development

and growth of banking activities in Punjab. He carried out the analysis with the help of both
primary and secondary data. Further, ihe statistical tools like simple growth rate, non-linear growth
rate, indices of change and coefficient of variation etc., were used to reach ihe tinal results. The
study indicated that since the nationalization there had been a substantial increase in branches,
deposits and credit in Punjab, yet there existed wide disparities with respect to various banking
parameters among different districts in the Stale.

Gosh' 6 (1989) proviiicd an overview of the significant changes that took place in Indian Banking
scenario during the last four decades. The study revealed that after nationalization there occurred a
shift in the pattern of sectoral deployment of credit from large and medium scale industries to small
scale industries and agriculture. Similarly, the share of backward areas in totaJ bank credit also
recorded a substantial jump after nationalizalion. The researcher was of the view that in the wake
of liberalization, the policy makers should not forget about the role assigned to commercial banks
to fulfi11 the objectix’e of gro›xth ›x’ith equit} .

Karunagaran and Benjamin' 7 (1989) analysed the performance of commercial banks in Tami)
Nadu during 1969-1986. The analysis was carried out with the help of some simple indicators like
population coverage by banks; distribution of their branches, deposits and advances in different
population groups etc., the progress of commercial banks in the State (Tamil Nadu) was also
compared with that in the country as a whole. The analysis pointed out that by and large, the
banking industry in Tamil Nadu was not in a good state of health.

Narasimham Committee" (1991 ) made recommendations for the removal of existing obstacles
and for the generation of new attitudes and practices to make the public sector banks efficient and
competitive. The major recommendations of the committee were:

Delinking the issue of concessional credit from banking operations and redefining and curtailing
priority sector credit:
Reducing the statutory liquidity ratio (SLR) to 25 per cent over a period of five year, to strengthen
the capital base of the banks
Bringing about a general freeing of interest rates; and

Allowing the foreign banks to operate either as branches or as subsidiaries in

collaborative ventures with Indian banks.

In addition, the committee envisaged the four tier banking syslem for the country. As regards the
composition of the board of banks, the committee suggested to draw up experts from management
ot‘ financial insiitutions, industry and professionals to function as directors. It also proposed for
abolishing the office of the Controller of the Capital Issues (CC1)
Ballabh. J 2’ (2001) analyzed challenges in the post-banking sector reforms. With globalization and
changes in technologies financial markets, world over, have become closely integrated. The
researcher suggested that for the survival of the banks they should adopt new
policies/strategies according to the changing environment.

Vashisht, A.K. **! (2004) studied recent global developments, which has transformed the
environment in which commercial banks operate. Globalization has expanded economic
interdependence and interaction of countries greatly. Under ihe regime of globalization
environment, the financial performance of the commercial banks has changed and the commercial
banks will face new challenges and also new opportunities in the coming years.
Wahab, A3 ' (2001) has analysed the performance of the commercia! banks under reforms. He also
highlighted the major issues nee‹J to be considered for further improvement. He concluded that
reforms have produced favourable effects on performance of commercial banks in general bui still
there are some distortions like low priority sector advances, low profitability etc., care to be
reformed again.

Sree Rama Murthy and Haresh 3' (1991) studied the saving behaviour of the people in the form of
deposits and linked it with the level of income and financial intermediation. The researcher also
e.xamined the inter-regional disparities in saving and attempted to explain lhe reasons for the
disparities with the help of analysis of variance (ANOVA) technique. The state-wise data for six
regions were analyzed for the year 1979 and 1989. The study revealed that lhe state/region with
higher level of income and intense spread of branches had higher level of deposits and vice-versa.

Sooden " (1992) made an attempt to ascertain the extent of inter-state variations in the spread of
commercial banking in India, during 1975-87. The coefficient of variation, Herfindahl Index, Z-
sum technique and Principal Components Analysis etc., were used to reach the final results. The
researcher concluded that though disparities with

respect to most of the indicators narrowed down yet (by and large ), the relative position of
different slates did not get changed very much during the reference period. On the basis of lhe
composite index of banking development, Punjab, West Bengal, Maharashtra, 4 ami) Nadu and
Karnataka emerged as highly-banked states of India in 1987. On the other hand Assam, Manipur,
Tripura, Bihar, Madhya Pradesh, Uttar Pradesh
and Meghalaya emerged as very lo -banked states during the same year.

Padmanabhan Working Group (1995) in its report on in-Site supervision recommended for
supervisory interventions ano intro‹iuction of a rating methodology for banks on the lines of
CAMEL model with appropriate modification to suit Indian conditions. The Working Group has
recommended six rating factors- Capital Adequacy, Assets Quality, Management , Earnings,
Liquidity, Systems and Controls(i.e., CAMELS) and for Foreign Banks four rating factors, namely
Capital Adequacy, Assets Quality, Compliance, Systems and Control (i.e., CACS).

Narasimham Committee 3' (1998) made several important recommendations like introduction of
internationally accepted prudential norms relating to income recognition, assets classification,
provisioning and capital adequacy. According to a framework for the evaluation of the current
strength of the system and of the operations, the performance of banks has been provided by
Reserve Bank’s measuring rod of “CAMEL”, which stands for Capital Adequacy, Assets
Quality, Management, Earnings, Liquidity and Internal Control System.

The main endeavor of CAMEL system is lo detect problems before mani test1ng themselves. The
RBl has instituted this mechanism for critical analysis of the balance sheet of banks by themselves
and presentation of such analysis before their boards to provide an inlemal assessment of the health
of the bank. The analysis, which is made available to RBI, forms a supplement to the system of off-
site monitoring of banks. An efficient result-oriented on-site inspection system requires an efficient
follow-up. The entire cycle of inspection and follow-up action are nov. completed within a
maximum period of i 2 months. Monilorable action plan for rectification of irregularities/
deficiencies noticed during inspection from within a frame is drawn up and progress in
implementation pursued with the bank concerned.

Thus, the present supervisory system in banking sector is a substantial improvement over the
earlier system in terms of frequency coverage and focus as also the fools employed. Nearly one-
half of the Basle Core Principles for Effective Banking Supervision has already been adhered to
and the remaining is at a stage of implementation. Two supervisions have already been adhered to
and the remaining is at a stage of implementation. Two Supervisory Rating Models, based on
CAMELS and CACS factors for rating on Indian commercial banks and foreign banks operating in
India respectively have been worked out on the lines recommended by the Padmanabhan Working
Group (1995). These ratings would enable the Reserve Bank to identify the banks whose condition
warrants special supervisory attention.

Barr and Siems 36 (1996) tried to predict failures in the US, using the data form
December 1984 to June 1987 using CAMEL Model. They used technical efficiency

measure, using DEA in their prediction model. Along with their DEA results, which represent
Management Qualily M” in the CAMEL rating, they used financial ratios representing soundness
of Capital, Asset Qual ity, Earnings and Liquidity. They round that the use ot the DEA
Efficiency Score in the regression increased the accuracy of the classification results for 89 percent
to 92.4 percent and new model was superior to the
earlier early-warning models.

Godse " (1996) examined the application on new model CAMEL, i.e., “Capital Adequacy, Assets
Quality, Management, Earning Quality, Liquidity, Sysiem and Control”, for evaluating the
performance of banks

Rao and Datta ' (1998) made an attempt to derive rating based on CAMEL. ln their study, based
on these five groups (C-A-M-E-L), 21 parameters in all were developed. After deriving separate
rating for each parameter, a combined rating was derived for all nationalized banks (19) for ihe
year 1998.The study found ihat Corporation Bank has the best rating followed by Oriental Bank
of Commerce. Bank of Baroda, Dena Bank, Punjab National Bank, etc., And the worst rating was
found to be of Indian Bank preceded by UCO Bank, United Bank of India, Syndicale Bank and
Vijaya Bank.

Prasuna ' 9 (2004) analyzed the performance of Indian banks by adopting the CAMEL Model. The
performance of 65 banks was studied for the period 2003-04. The author concluded that the
competition was tough and consumers benefited from it. Better service quality, innovative
products, better bargains are all greeting the Indian customers. The coming fiscal will prove to be
a transition phase for Indian banks, as they will have to align iheir strategic focus to increasing
interest rates.

Veni ” (2004) studied the capital adequacy requirement of banks and the measures adopted by
them to strengthen their capital ratios. The author highlighted that the rating agencies give
prominence to Capital adequacy Ratios of banks while rating the bank’s certificate of deposits,
fixed deposits and bonds. They normally adopt CAMEL Model for rating banks. Thus. Capital
Adequacy is considered as the key element of bank rating.

Satish. Jutur Sharath and Surender t (2005) adopted CAMEL model to assess the performance
of inuian Banks. The authors analyzed the performance of 55 banks for the year 2004-05. They
concluded thai the Indian banking system looks sound and Information Technology will help the
banking system grow in strength while going into tuture. Banks’ lnitial Public Offer will be hitting
the market to increase their capital and gearing up for the Basel I I norms.

On making review of the previously conducted studies, it is clear that they used CAJ’vlEL Model
for ranking / rating of the banks. In the light of the above, the present study has been conducted.

Bhatia and Verma 42 (1998) made an attempt to determine empirically the factors influencing
profitability of public sector banks in India by making use of the technique of multiple regression
analysis. Net profit as percentage of working funds has been used to measure the bank profit
ability during 1971 to 1995. The analysis revealed
that priority sector advances; fixed/current deposit ratio and establishment expenses affected the
profitability of public sector banks negatively. Net spread, which to a great extent depends on
the management acumenship of the bank staff, influenced the

profilability of banks positively and significantly. High credit-deposil ratio was also observed to be
influencing profitability positively. However, its impact was found to be statistically non-
significant.
The focus of the study made by Das ‘ 3 (1999) was to compare the inter-bank performance of the
public sector banks for three years (1992,1995 and 1998) in the post- reform period. He found a
certain convergence-taking place in the performance of the banks during the period under study. lt
was observed that whereas an increase in emphasis on iioiz-inicrest income is a welcoming
change the banks behaviour to opt for risk free in investments over risky loans may have serious
effects on the economy.

Khanna (1999) “ While studying the impact of financial reforms on industrial sector in India
observed that the banking sector reforms have failed to achieve their goal of making this sector
more efficient. It was observed that there has been a hardening of interest rates instead of the
cheaper credit ihat was promised. The analysis revealed that the cost of bank finance has risen
sharply after the reforms and the availability of the credit to private sector too has been curtailed.
Bank loans as proponion to total financing
to commercial sector declined in 1993 and 1994 as compared to 1988-1989. The reforms have a
number of adverse effects on the industrial sector.

Kholi 4’ (1999) while evaluating the effectiveness of bank branch licensing policy in the
background of financial sector reforms observed that in view of the changes in banking perspective
in India, performance evaluation parameters have also changed. Earlier performance indicators,
like deposits, priority sector lending and branch expansion have yielded to new ones i.e.,
efficiency and profitability. It was observed that

Indonesian Bank Rakyat could be accepted as a model relevant for rural branches of public sector
banks in I ndia. It was suggested that a strategy of either a closure of the pubic sector banks or
gradual substitution by private sector banks should be adopted in order to make the rural banking
more viable.

Rajaraman,‘ 6 (1999) explained inter bank variations in net non performing assets (NPA) for the
year 1996-97. The study was performed by a specification that included intercept dummies oy
ownership category, bank specific prudential and efficiency indicators, and region of operation as
measured by percentage branches in each set of state clusters. The analysis revealed that the
foreign banks of Asian and West- Asian origin performed not better than domestic private sector
banks in terms of NPA’s. The findings show that the banks specific characteristics, such as
ownership or adherence. The prudential norms, do not suffice to explain inter bank variations in
NPA’s. It was concluded that the sustainable reforms in the financial sector and improvement in
ihe performing efficiency of the domestic banks arc very essential.

The main objective of the study done by Bilgrami ‘ 7 (2000) was lo examine the credit deposit
trends in the public sector banks in the pre- and post- economic reform scenario. The credit deposit
ratio, despite a significant reduction in cash reserve ratio and statutory — liquidity ratio in the post
reform period, exhibited a declining trend. Further, it was observed that the level of probability,
efficiency and customer services in the public sector bank, have deteriorated in the post reform
period. The main reason behind this sluggish growth rate of bank deposits during the post reform
period is the growth of non banking financial intermediaries including financial companies, mutual
funds, and stock markets and of private sector banks. The entry of new private and foreign banks
and their

quality of customer services have also affected the level of deposits in the public sector banks.
Another important reason for slow growth ot’ deposits in the public sector banks has been that all
these banks have touched the saturation level in mobilizing saving through bank expansion
programmes. But this is not the case for “NEW” banks. During Pre-reform period, they were
functioning much below their potential in deposit mobilization owing to restrictions on branch
expansion programme. The post reform period has provided these new banks much freedom and
hence they are now capable of attracting more saving.

Nettime and Kuruba 4' (2000) observed ihat the pace of i efoi’iiis in the banking sector in India is
definitely encouraging and giving positive signals of structural changes in lhe financial sector.
However, it was opined that the reforms would be successful only if the level of NPAs is reduced.
In order to tackle the problem of NPAs there is need for legal retorms. It is the attitude and
efficiency of the banking authorities, which have to go a long way in making the banking reforms
operationally and functionally effective.

U Patel 4’ (2000) has highlighted the problem of bad loans and growing level of non- performing
assets in the commercial banks in the post- re(orm period. It was observed that it is important for
the banks and supervisory authorities to adopi more effective lending practices. At the same time it
was also emphasized that corporate entities should be made more accountable though following
more disclosure and transparency practices and corporate governance principles. Efficient legal
machinery, the larger number of Debt Recovery Tribunals and Settlement Advisory Committees
and credii Information Bureau in banks can prove effective in quick recoveries of dues.

The RBI ’0 (2000) studied that how dere Lllation has affected the banks performance. The
RB1’s study covered all categories of the banks. It was observed that there has been a decline in
spreads and a tendency towards their convergence across all the bank groups. Intermediation costs
as percentage of total assets was also found to have declined especially for the public sector banks
and new private sector banks, largely due io a decline in their wage cost. Capital adequacy and
asset quality have both impro.'•d over the period 1995-96 to 1999-2000. Median profit per
employee of the public sector
banks witnessed a significant rise between l99ñ-97 to 1999-2000. Further, ii was found thai non-
interest income to working funds also rose rnoñ•.st1y for the Median public sector bank. The cost
to income ratio declined both in the SBI Group and the nationalized banks.

The Verma Committee ' (2000) identified and examined the problems of weak banks
suggested a strategic plan of financial, organizational and operational restructuring for them.
The committee on the basis of seven parameters covering solvency. earning capacity and
profitability evaluated in the public sector banks. These were, CAR-8 percent, coverage ratio —
0.50% , return on assets — median level , net interest margin- median level, profit to average
working funds — median level, ratio of cost to income median level, and ratio of staff cost to
income — median level for the years 1997-98 and 1998-99. All the public sector banks were
further categorir.ed into five groups. 1B, UCO and UNBOI were identified as
weak banks. The committee recommended
recapitalization of these banks subject to strict conditionally relating to operational restructuring.

The objective of the study made by Das " (2001) was to evaluate ihe performance of public sector
banks with respect to priority sector credit and the expansion of banking services to the un- banked
areas during the pre- and post reform periods. It is observed that ihe percentage share of the priority
sectors in total bank credit has been found increasing but al a decreasing rate in lhe post reform
period as compared to pre- retorm period. It is concluded that the impact of financial sector
reforms on regional equalities and the priority sector lending has been much adverse.
Garai, ' 3 (200 l) in their study assigned ranks to the different scheuuled commercial banks (68 in
number) on the basis of il‹e‹r performance scores. The study is confined to the period 1995-96 to
1997-98 and six indicators reflecting different aspects of banks operating efficiency were selected.
The weights were assigned on the basis of multi group discriminate analysis. The ranking of banks
with respect to their performance did not change much during the pcriod under context. The
existence of group difference was also examined applying parametric test procedure. The results
confirmed the view that the performances of public sector banks were generally not good enough in
comparison with those of private and foreign banks.

Kannan, ' 4 (2001 ) made an attempt to identify the factors influencing spreads of Scheduled
Commercial Banks in India. The relevant data for the period 1995-96 to 1999- 2000 was collected
from the 27 public sector banks, 31 private banks and 28 foreign banks. For the purpose of
analysis, time series pooled data estimation procedure was used. Pooled data models pre-suppose
the fact that the differences across units can be captured in differences in constant term as in fixed
effect models. The generalized Least Square approach was aiso used for carrying the analysis. The
study revealed that size (bank size) does not necessarily imply higher spreads. Secondly, higher
non-interest

income as a share of total assets (fee) enables banks to tolerate lower spreads. With regard to
regulatory requirement variables, it was found that capital plays an important role in affecting
spreads of the public sector banks. Non — performing tssets were found to be uniformly relevant
across all lhe bank groups in influencing spreads.

Passah " (2001) analysed rationale progress, efficacy and future agenda of banking sector reforms
in India. The analysis revealed that b;' mid-1997, the operating and net profits of public sector
banks improved. Performance of many oiher indicators also registered a positive change.
Though there has been an improvement in several of the quantitative indices, yet there are
iiiaiij areas i.e. the customer service, technological up gradation, improvement in house keeping
in terms of entries and balancing of books, in which weaknesses still persist.

Singh 6 (2001) made an attempt to assess the impact of the reforms on the operational performance
and efficiency of the commercial banks in India. The ratio analysis has been a major tool for
assessing the performance of the selected commercial banks. The study revealed that lotal income
as a percentage of working funds and/or total assets, and spread as a percentage of total income
/working funds/total advances/total deposits have improved in the post-reform period as against
the pre- reform period in most of the banks. Total income interest earned, other income, spread,
total expenses, interest expended, operating expenses and establishment expenses are
comparatively
more consistent in the post-reform period. The hypothesis that the profitability position
has improved in post- reform period may be accepted to some extent. It was observed that in the
public sector banks the size of NPAs has also reduced to some extent and the quality of service
has been improved in the post- reform period. The priority sector lending has registered a decline in
the deregulation era.

Subramani and Raghav ° (2001) analysed and compared el’ficiency in the six public sector banks.
four private sector banks and three foreign banks for the year 1996-
97. Operational efficiency is calculated in terms of total business and salary expenditure per
employee. The analysis revealed that higher per employee salary level need not result in poor
efficiency and business. Per employee efficiency and co-efficiency were also calculated among the
public sector banks, Bank of Baroda registered the :-.ighesl efficiency and operating profit per
employee. Among the private secior banks Indus bank followed by Citibank registered the highest
and second highest operating profit per employee respectively. How.••.•.her, amongst the
nationalized banks there existed wide variations of efficiency.

Bhide, et. al. ' 8 (2002) analyzed the banking sector reforms in India and observed

that ihere has been a commendable improvement in the profitability of the public sector

.Banking system measured in terms of operating profits and net profits. If was pointed out that
the inter-mediation process has also improved, as it is evident from the ratio of net interest income
to Total assets of publ ie sector banks. The profile of Assets portfol to and the extent of the net
non performing loans as percentages to total assets also exhibited improvement during the period
1992-93 to 1999-2000. According to the study externality of the reforms process has been the
building up of the institutional architecture in terms of market and creation of enabling
environment through technological and legal infrastructure and improving the managerial
competency. They further identified the different shortcomings of the banking systems and
pointed that faulty debt recovery process, inefficient legal system and inadequate risk management
techniques etc., are the major weaknesses. It was observed that in the banks existed wide variations
of efficiency.

Elyasiani, et. at.(1995) " The purposes of this paper are in two fold: First, to employ a flexible
non-parametric approach to contrast the productive efficiency ot“ a sample of small and large
banks in order to examine the relalionship between size and productive performance in the banking
industry. Second, lo investigate whether the relative efficiency performance of small and large
banks has changed following the changes in the banking environment in the 1 Si ds and to
contrast the rate of technological change achieved by these two groups of banks over this time
period. The findings based
on group-specific frontiers suggest that in the pre-deregulation environment small banks were
more efficient thsn the large banks while in the deregulated environment small and large banks
were equally efficient. Moreover, the dispersion in the efficiency measures of the small banks is
found to have increased substantially while that of the large banks changed little over the sample
period.
Gintschel, et. al. (2004) 60 The study shows that multi-bank loan pool contracts improve the
risk-return profi Ie of banks' loan business. Banks wriie simple contracts on the proceeds from
pooled loan porifolios, taking into account the free-rider problems in joint loan production.
Thereby especially smaller banks benefit greatly from diversifying credit risk while limiting the
efficiency loss due to adverse incentives. Calibration results are presented for a sample of German
savings banks: the formation of loan pools reduces the volatility in default rates, proxying for credit
risk, of loan portfolios by roughly 80%.
Under reasonable assumptions, the gain in return on equity (in certainly equivalent terms) is around
200 basis points annually.

Gray, et. al. (2004) ”' Severe disturbances in the financial markets in many countries during the
1980s and 1990s caused many stakeholders to examine vhcther commercial banks had adequate
reserves for future loan losses. In lhe United States, bank regulators considered an adequate
Allowance for Loan Losses a safety and soundness’ issue while the SEC became increasingly
concerned over lhe possibility of banks using the Allowance as a method to ‘ma-age earnings’.
Both regulators demanded more rigorous calculations from banks to support their accounting
entries. Also lhe F ASB and the IASB have expressed concerns about a ln.ck of harmonization and
convergence in
standards. .*.n analysis of measurement standards in the United States, Canada, Japan. the United
Kingdom and Australia, as well as by the Basel Committee on Banking Supervision and the
IASB, reveals the partially conflicting goals for the Allowance: (a) promote harmonization
(1ASB), (b) increase transparency (SEC), (c) promote safety and soundness (bank regulators) and
(d) maintain reasonable flexibility in recognition of ihe subjective aspects in determining an
appropriate Allowance (bankers). The article oft’ers a methodology which an individual bank
may utilize to reconcile the contJicting goals of all interested parties.

Ganesan, P, (2003) 62 The study re-examines the repeated observations of economists and
bankers: that whether the priority sector advances have actually eroded the profitability of the
public sector banks? Confessional interest rate, the subsidy rate and credit outstanding to priority
sectors have increased over the years. The total amount of interest income loss in 1974 was
Rs.34.13 crores (one crore = 10 million) which had gone up to the maximum of Rs.973.25
crores in l99H—91 declined to Rs.108.24 crore in 1998—99. The income loss ratios are
substantially higher than the profitability ratios and

the diferences bctween them have increased. Consequent to the introduction of reforms

in financial sector, the banks began to step-down the larsel for priority sector credit and thus there
was decline in the income loss ratios, which subsequently increased the profitability ratios, thus
establishing the fact thai the priority sector advances, concessional lending and cross
subsidization of advances adversely affected the profitability of Indian Public Sector Banks (PSBs).

Kumbhakar, et. al. (2003) ’3 This paper analyzes lhe relationship between deregulation and total
factor productivity (T FP) growth iii the Indian banking industry using a generalized shadow cost
function approach. TFP growth is decomposed into a technological change, a scale. and a
miscellaneous component. A disaggregated panel data analysis, using the population of public and
private banks over 1985-96 that covers both pre- and post-deregulation periods, indicates that a
significant decline in regulatory distortions and the anticipated increase in TFP growth have not
yet materialized following deregulation. While private sector banks have improved their
performance mainly due io ihe freedom to expand output, public secior banks have not responded
well to the deregulation measures.
Rishi, et. at. (2004) 6‘ Given that technological innovations in the banking sector in industrialized
countries have been shown to increase productivity of this industry around the world, then why did
India shy away from adopting this technology until 1990s? Why has lndia been a late adopter of
technology in the banking industry when it could have reaped the benefits from the existing R&D
expertise developed by innovators and early adopters? This article charts out the path of
technological innovation in the Indian banking industry post-economic liberalization (1991-02)
and identifies initial

conditions in terms of competitive environment and regulatory pressures that have

contributed to the diffusion of these innovations. The article highlights the role of labour unions in
public sector banks and their initial opposition to technological adoption. The empirical analysis
demonstrates the superior performance of the early adopters of lechnology (private sector and
foreign banks) as measured by productivity, returns on equity, and market share, as compared to
the late or passive adopters (public sector banks).

Ataullah, et. al. (2004) 6' This paper provides a comparative anuiysis of ihe evolution of the
technical efficiency of commercial banks in India and Pakistan during 1988-1998, a period
characterized by far-reaching changes in the banking industry brought about by financial liberal
ization. Data Envelopment Analysis is applied to two alternative input-output specifications to
measure technical efficiency. and to decompose technical efficiency into iis two components. pure
technical etticiency and scale efficiency. The consistency of the estimated efficiency scores are
checked by examining
their relationship with three tradilional non-frontier measures of bank performance. In addition, the
relationship between bank size and technical efficiency is examined. It is found that the overall
technical efficiency of the banking industry of both countries improved gradually over the years,
especially after 1995. Unlike public sector banks in lndia, public sector banks in Pakistan witnessed
improvement in scale efficiency only. It is also found that banks are relatively more efficient in
generating earning assets than in
generating income. This is attributed to the presence of high non-performing loans. In

addition, it is found that the gap between the pure technical efficiency of different size

groups has declined over the years.

Gupta V, et. a1. (2004) 6‘ this paper examines the 1 iability structure of 68 commercial banks
operating in lndia for eighi consecutive years. I 992-2000. The special emphasis is on the influence
of ownership structure and size in this regard. Time series and cross-section analysis of the
liability structure of sample banks reveals thal they use 17 units of debt for each unit of owned
funds, which is consistent with limits set by regulation. After recapitalization, nationalized banks
appear closer to toreign banks in ierms of leverage; the leverage of private banks is closer to the
State Bank group. Although nei worth to total assets rati›o is highest for s!nall banks, relatively
lower reserve to net worth ratio for them suggests lhat their shareholders are more interested in
regular dividend income. With the notable exception of the foreign banks, the share of deposits has
increased for all bank groups in the second half of the study. The relative importance of various
types of deposits seems to depend on the nature and scale of operations of the sample banks.
Borrowings constitute a miniscule portion of total sources of funds for the sample banks.

Shanmugam K. R, Das. .4 (2004) ’ 7 This article contributes to the banking efficiency literature by
measuring technical efficiency of banks in four different ownership groups in lndia during the
reform period, 1992-1999. It employs the stochastic fronlier function methodology for panel data.
The results indicate that the efficiency of raising interest margin is time invariant while the
efficiencies of raising other outputs- non-interest income, investments and credits are time varying.
The state bank group and foreign banks are more efficient than their counterparts. The reform
period witnessed a relatively high efficiency for augmenting investments, which is consistent with
economic growth objective of the reform measures. However, there are still larger gaps between
the actual and potential performances of banks.

De Young, et. al. (2004) 6' Non interest income now accounls for over 40% of operating income in
the U.S. commercial banking industry. This paper demonstrates a number of empirical links
between bank nt›n interest income, business strategies, market conditions, technological change.
and tinancial performance between 1989 and 2001 . The results indicate that well-managed banks
expand more slowly into non interest activities, and that marginal increases in non interest income
are associated with poorer risk-return tradeoffs on average. These findings suggest that non interest
income is coexisting with, rather than replacing, interest income from the intermediniion
activities that remain banks' core financial services function.
Yavas, et. al. (2005) 6’ Considerable research has been devoted to using multiple criteria to
measure the performance of business units such as bank branches. However, bank managers
continue to use traditional methods to evaluate their branch offices. In
general, subjective wei ghts for various criteria are used to arrive at a weighted average score to
measure the performance of a bank branch. Potential deficiencies in an existing set of weights
include bias and inconsislency with organizational objectives. This paper employs Data
Envelopment Analysis (DEA) to evaluate the operational performance of a
bank branch relative to the performance of its peer branches. Utilizing data from 31 branches of a
major bank located in Southern California, the use of DEA yields the following: I) rankings of
bank branches using efficiency scores, 2) identification of areas of deficiency and 3) establishment
of the reference group against which a branch is evaluated. Twenty-two of the 3 I branches were
found to be in need of improvements in various areas. In addition to identifying best-practice
branches and those that are out-of- line with the best practice branches, DEA also points to the
specific changes that must be

made in the less productive branches in crder to catch up with their best-practice peer
group. The findings of this study should help management in identifying the strengths and
weaknesses of their bank branches

Ghosh, Saurabh (2005) 70 In the literature, the underperformance of I PO’s is a well-documented

empirical anomaly. This study concentrates on I PO’s from the banking sector of an emerging
economy, lndia. In a developing country, the role of the banking seclor for economic development
is undisputed. In view of its importance in economic resource allocation and its distinction from
other industries in general, this paper analyses the post offering performance of banking sector
IPO‘s in detail. The performance evaluation on the basis of stock returns did not find significant
evidences of underperformance for the lPO“s from the banking sector. Moreover, this study based
on
key accounting parameters found improvements in performance of banks in post-listing period.
There were no significant differences across ownership groups (public sector banks vis-ñ-vis their
private counterpart) in the IPO performance.

Sathye, et. al. (2005) 7' Enhancing efficiency and performance of public sector banks (PSBs) is a
key objective of economic reforms in many countries including lndia. It is believed that private
ownership helps improve efficiency and performance. Accordingly, the Indian government started
diluting its equily in PSBs from early 1990s in a phased manner. Has the partial privatization of
Indian banks really helped improve their efficiency and performance? International evidence on
impact of privatization is mixed. Though the issue is important in the Indian context, no study to
the author's knowledge has addressed it so far. The present study, thus, fills an important gap. The

data required for the study were obtained from Performance Highlights of Banks, a publication of
the Indian Banks' Association. The author could readily obtain publications for five years 1998-
2002; his analysis is. thus, restricted to these five years. The financial performance of lhe banks
was measured using the standard financial performance measures such as return on assets. The
etficiency of banks was measured using accounting ratios, e.g.. deposits per employee. Two main
approaches are generally used to evaluate the impact of privalization on firm performance:
*'Synchronic' approach in which the performancc of state-owned firms is compared
with the firms that were
privatized or wiih the firms that were already in private ownership. 'Historical' approach, in
which ex-ante and ex-post privatization performance of the same enterprise is compared. Given
that the data are available for only five years, the author uses the synchronic approach. Since the
dataset is not large enough to allow ihe use of more robust multivariate statistical procedures, he
confines himself io the use of the difference of means test. This study reveals the following: *
Financial performance of partially privatized banks (measured by return on assets) and their
efficiency (measured by three
different ratios) were significantly higher...

Bodla, et. al. (2006) 7' Banking Sector Reforms have changed the face of Indian banking industry,
The reforms have led to the increase in resource productivity, increasing level of deposits, credits
and profitability and decrease in non-performing assets. However, the profitability, which is an
important criteria to measure the performance of banks in addition lo productivity, financial and
operational efficiency, has come under pressure because of changing environment of banking. An
efficient management of banking operations aimed at ensuring growth in profits and efficiency

requires up-to-date knowledge of all those factors on which the bank's profit depends. Accordingly.
in this paper they have made an attempt to identify the key determinants of profitability of Public
Seclor Banks in I ndia. The analysis is based on step-wise multivariate regression model used on
temporal data from 1991-92 to 2003-04. The study has indicated that the variables such as non-
interest income, operating expenses, provision and contingencies and spread have significant
relationship with net profits.

Sanjeev. Gunjan M.(2006) 7 Lately there has been a focus on consolidation of banks operating in
lndia. lt is teii mat larger ban*.s will be able to benefit from the economies of scale and will
benefit in terms of profitability by taking on larger projects. As the size increases. efficiency
becomes a matter of increasing concern. This study has evaluated the efficiency of the public sector
banks operating in India for a period of five years ( I 997-2001) using the Data Envelopment
Analysis (DEA). Further, it has investigated if there exists any relationship between the efficiency
and size of the banks. The results of the study suggest that no conclusive relationship can be
established between the efficiency and size of ihe banks

Vyas, et. at. (2006) 7‘ This paper is a study of cross-selling practices in Indian public and private
sector banks through the case study method. The sludy revealed that cross-selling practices in
public sector and private sector banks are quite different. These differences emerge mainly from
their different philosophy, background and distinct target customer segments. However, both
sectors can learn from each other; public sector banks can introduce specialised training and
incentives, whereas private sector banks need to introduce appropriate control mechanisms and
avoid indiscriminate cross-selling. The paper also brings out the elements of successful cross-
selling in India.

Hoivcroft, et. at. (2006) 7° I n the early 1 990s, I ndia and Pakistan introduced a series of financial
liberalization initiatives aimed at increasing the productivity of their financial services sector.
Against a background of unprecedented change, which these initiatives heralded, the paper applies
a DEA-type Malmquisl total factor productivity change index to examine productivity growth,
efficiency change, and technical progress in the commercial banking industries of I ndia and
Pakistan during I 992—98. Following Leightner and Lovell [ 1998], a Malmquist index is
constructed for two different bank service specifications. The first is derived from the corporate
objectives of the commercial banks, and the second from the policy objectives of the Indian and
Pakistani governments. The analysis reveals that in both countries the improvement in total factor
productivity was highest when the government's policy objective was used. In addition, the public
sector banks showed very linle improvement in total factor productivity due to their inability to
adopt new technology and because of the presence of high non- performing loans. In contrast,
foreign banks witnessed the highest improvement in total factor productivity due to an
improvement in their efficiency and technological innovation.

Sanjeev, Gunjan M (2006) 76 The 1 ndian banking sector has witnessed a series of reforms in the
last fifteen years to improve their efficiency. The reforms focused on the deregulation of policies,
prescription of prudential norms on capital adequacy, income recognition, asset classification and
provisioning for impaired assets. They allowed the opening up of the private sector, including the
entry of foreign banks in order to increase competition within the Indian banking system. The
reforms also gave greater freedom to the banks to manage both the pricing and quality of resources.
This study makes an

attempt to evaluate the technical efficiency of the banks operating in India in the post- reform era.
The study uses a non-parametric linear programming-based technique. Data Envelopment Analysis
(DEA) is used to determine the technical efficiency of the public, private and foreign banks
operating in 1 ndia. The study has also investigated the relationship between the efficiency and the
percentage of non-performing assets (NPAs) of the commercial banks operating in I nciia. The
results show that the efficiency of the banks has improved over time and that the foreign banks
have outperformed both private sector and public seclor banks. Competition has increased
sharply amongst the banks in the post-reform era. Therefore, it is evident that banks have
responded positively to the reforms. It is concluded that the Indian banking sector is likely to
witness greater thrust on reftirms in coming years.

G ilbert, ct. at. (2007) 77 The federal tax code creates challenges for comparing the profit
rates of different banks on a consistent basis. The earnings of banks that elect io operate under
subchapter S of the federal tax code are not subject to federal corporate income tax, but
shareholders of lhese ”S-banks" are taxed on their pro rata share of the entire earnings of the bank.
The number of banks electing subchapter S tax treatment has increased rapidly, especially among
small banks. The authors use estimates of the federal corporate income tax that S-banks would pay
if they were subject to the tax to show that the difference in the tax treatment of S-banks and other
banks has a large impact on measures of the U.S. banking system profitability. Further, the
article shows that adjustment of S-bank earnings by estimates of federal income taxes to make
them comparable with the earnings of other banks can markedly affect conclusions of studies that
use net income as a measure of performance. Finally, the article shows that S-banks
(even after their earnings are reduced by estimated federal taxes) tend to out-earn their pcers: S-
banks also tend to have higher earning rates than their peers in the year before they elect S-bank
status.

Yan Lu: e1. al. (2007) 7' The article uses a sample of four state-owned commercial banks, ten
joint-share commercial banks, and all foreign banks in China to examine the changes in market
structure and financial performance (profitability) of Chinese commercial banks. The market
structure appears to have some :-.*uence on the performance of Chinese commercial banks. There
are other factors affecting the performance of China's bank market. Although the concentration
ratios and the Herfindahl-Hirschman Index indicate the monopolistic nature of China’s bank
system, which is in a state of monopolistic competition or moderately concentrated now, foreign
banks seem to have had some marginal effects on the Chinese banking market.

Hassan Al-Tamimi, et. al. (2007) ” This study investigates the operating and profitability efficiency
of 15 branches of UAE-based commercia) bank utilising the data envelopment analysis method.
The results indicate that efficiency levels among the various branches vary and that there is
room for improvement. Profitability efficiency appears to be higher than operational efficiency.
Regarding the financial ratios analysis, a consistent effect cannot be obtained and it cannot be
determined which branch has an overall position in terms of higher performance. The historical
analysis of the branch network performance indicates that management should consider major
operational improvement efforts to reduce employees' expenses and other operating expenses
combined with an increase in the total loans portfolio. Improvement in both interest and
non-interest revenues is required to increase profitability efficiency of lhe whole branch

Ogawa, Kazuo. (2007)"’ They investigated, empirically, why Japanese banks held excess reserves
in the late 1990s. Specifically, they pin down two factors explaining the demand for excess
reserves: a low short-term interest rate, or call rate, and the fragile financial health of banks. The
virtually zero call rates increased the demand for excess reserves substantially, and a high bad
loans ratio largely contributed to ihe increase in excess reserve holdings. They found that the
holdings of excess reserves would fall by two-thirds if the call rate were to be raised to its level
prior to the adoption of ihe zero- interest-rate policy, and the bad loans ratio were to fan oy 50%.
Vimi; et. at. (2008) 8' Satisfaction with banking services is an area of growing interest to
researchers and managers. This study investigates relationship dimensions and studies the
differences in perception of customers with respect to services provided by five lndian banks. The
relationship dimensions which lead to customer satisfaction have been identified with the help of
factor analysis. This study reports on the different satisfaction levels of customers of private and
public sector banks wilh respect to the services provided by their banks.

Gnanadhas, et. al. (2008) " The main objectives of this study are to evaluate the performance of“
Entrepreneurial Development Programmes from the standpoint of the banks, to study the factors
influencing the attitude of the entrepreneurs towards the Entrepreneurship Development
Programmes, to give suggestions for conducting the Entrepreneurial Development. This study has
been undertaken in all the districts, namely, Chennai, Madurai, Salem, Dharmapuri, Dindigul,
Erode, Ramanathapuram, Sivanganga, Tiruch, Villupuram, Coimbatore, Tirunelveli, Kanyakumari;
Pudukottai, Virudhunagar

Cuddalore, Tuticorin and T hanjavur. This study has been pursued trom the poini of view of lhe
entrepreneurs who attended training programmes and started industrial units. The study also
analyzed the motivational factors responsible for the active participation of the entrepreneurs in the
training program. Ten factors were taken for the study to find out the factors which are highly
prompting the entrepreneurs to participate in the training programme. The present study is mainly
empirical in nature and based on the survey method. Both primary and secondary data were
collected for the study. Secondary data of the study comprised information from tne puoiications of
District industries Centers and various banks. Primary data were collected from 100 trained
entrepreneurs by administering them an interview schedule. Hypotheses have been framed to find
out the relationship between the social variables and attitude. This has been analyzed by adopting
Analysis of Variance Test (ANOVA).The factors motivating the respondents io attend the training
were measured by applying simple arithmetic mean. On the basis of the findings of the survey, if is
observed that for a greater success of the program certain modifications have to be brought in the
Entrepreneurial Development Programmes.