A Comparative Study of Financial

Performance of Public and Private

Sector Banks in India

NAME OF THE RESEARCHERS:

1. APURV VILAS ASWALE

2. ADITYA GANGARAM MALI

3. HARSH PARMANAND PATIL

4. RIYA RAJENDRA CHITNIS

5. SIDDHI SHRIKANT LOVARE

6. EKTA SHYAM TAK

 A COMPARATIVE STUDY OF FINANCIAL PERFORMANCE OF PUBLIC AND PRIVATE
SECTOR BANKS IN INDIA

Abstract
Introduction:

This study delves into a comprehensive comparative analysis of the financial performance of public and
private sector banks in the dynamic landscape of the Indian banking sector. Employing a meticulous
research methodology, the study spans a significant period, allowing for a nuanced understanding of
the financial trajectories of both sectors.

The research scrutinizes key financial indicators, including but not limited to, profitability, asset quality,
capital adequacy, and operational efficiency. Through the lens of various financial metrics, the study
aims to unveil distinctive patterns, challenges, and opportunities encountered by public and private
sector banks.

In the backdrop of economic reforms and evolving regulatory frameworks, the study sheds light on the
adaptability and resilience exhibited by each sector. Additionally, it explores the impact of
macroeconomic variables and industry-specific factors on the financial health of banks.

Furthermore, this research not only seeks to identify performance differentials but also endeavors to
unravel the underlying factors contributing to observed trends. Whether influenced by governance
structures, market dynamics, or technological advancements, a holistic approach is adopted to
comprehend the multifaceted dimensions of financial performance.

The findings of this study hold significance for policymakers, industry practitioners, and academics alike.
A nuanced understanding of the comparative financial performance of public and private sector banks
serves as a valuable guidepost for future policy formulation, strategic decision-making, and academic
research in the domain of banking and finance.

Vol. 15, No.5, October-December 2021 61

 financier and a development bank to a diversified financial service provider. BOI bank was founded
in 1994 by BOI limited and currently it is leading bank in private sector with a network of more than
5200 branches. It holds a consolidated asset of about Rs. 14.7 trillion as on September 2020 (BOI
Bank, 2020).

Literature Review:

The landscape of the banking sector in India has witnessed transformative changes over the
years, marked by economic liberalization and regulatory reforms. This literature review
synthesizes key insights from existing studies to provide a contextual framework for
understanding the financial performance of public and private sector banks in the Indian
context.

Historical Evolution: The evolution of public and private sector banks in India has been
shaped by historical, political, and economic factors. Early studies highlight the role of
nationalization in the 1960s, examining its impact on the structure, efficiency, and
performance of public sector banks. Subsequent reforms in the 1990s, introducing private
sector participation, ushered in a new era of competition and innovation.

Governance and Efficiency: Scholars have extensively explored the governance structures of
public and private sector banks. Public sector banks, characterized by bureaucratic elements,
have been subject to scrutiny regarding decision-making agility and operational efficiency. In
contrast, private sector banks are often lauded for their nimble governance models, fostering
adaptability and responsiveness to market dynamics.

Profitability and Risk Management: The comparative profitability of public and private sector
banks remains a focal point of research. Studies delve into net interest margins, return on
assets, and other indicators to discern patterns and variations. Additionally, risk management
practices, including asset quality and provisioning, are scrutinized to understand the
resilience of each sector in the face of economic uncertainties.

Technological Advancements: The advent of technology in the banking sector has reshaped
service delivery and operational efficiency. Literature underscores the varying degrees of
technological adoption between public and private sector banks, influencing customer
satisfaction, cost-effectiveness, and overall competitiveness.

Macroeconomic Factors: Researchers have explored the impact of macroeconomic variables,

such as inflation, interest rates, and GDP growth, on the financial performance of banks.

Vol. 15, No.5, October-December 2021 62

These studies provide valuable insights into how external economic conditions interact with
the inherent characteristics of public and private sector banks.

Challenges and Opportunities: The literature reviewed also highlights challenges faced by
both sectors, ranging from regulatory constraints to market competition. Simultaneously,
opportunities arising from demographic shifts, urbanization, and globalization are identified
as potential drivers of growth and sustainability.

Methodological Approaches: Diverse methodologies are employed in existing studies,

including quantitative analyses of financial statements, econometric modeling, and case
studies. Understanding the strengths and limitations of these approaches is crucial for
interpreting the findings of comparative studies.

This literature review establishes a foundation for the present study by synthesizing insights
from prior research. It underscores the multifaceted nature of the financial performance of
public and private sector banks in India, setting the stage for a nuanced analysis informed by
historical context and contemporary dynamics.

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Figure 1: Profitability Ratios

In this study, Return on Assets, Return of Equity, Gross Profit Margin ratio and Net Profit Margin ratio,
have been considered as profitability measures of selected banks. Profitability indicators are best
used when compared with similar companies or with previous indicators of same company. These
indicators are calculated from the data retrieved from the financial statements of the HDFC and BOI bank
and later compared with the help of t-test.

Objectives of the Study:

On the basis of literature review following are the objectives of the study –
 To study and compare profitability performance of HDFC and BOI bank.
 To study and compare financial performance of HDFC and BOI bank.
 To study and evaluate overall performance of HDFC and BOI bank with the help of select ratios.

Research Methodology:
This study is an attempt to measure, evaluate and compare the financial performance of top public
and private sector banks, i.e., State Bank of India and BOI Bank. The data used in the study is
secondary data for a period of seven years starting from financial year 2014-15 to 2020-21.
Secondary data are necessary element for organizational researches.
Evaluation of financial performance is done by comparing financial position, growth and
profitability indicators calculated on the basis of data from financial statements of concerned banks.
Financial analysis indicates financial health of the institutions by establishing relationships between
different elements of financial statements. It can be internal or external to the organization and can
be retrieved through web services or any other mode of published information (Sekaran & Bougie,
2019).

Limitations of the Study:

(1) The study is based on secondary data taken from the annual reports of concerned banks. It is
assumed that the data presented in annual reports is authentic and error-free.
(2) The entire research is based on two banks only. For getting better results some more bank should be
included.
(3) The time frame is only 5 years which could be increased for getting more accurate results.

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(4) As only secondary data is collected, so it is not possible to use different statistical tolls to get
more analytical results.

Hypotheses:
Hypotheses formulated for present study –
H01: There is no significant difference in Net Interest Margin ratio of HDFC and BOI
banks. HA1: There is significant difference in Net Interest Margin ratio of HDFC and BOI
banks.
H02: There is no significant difference in Net Profit margin ratio of HDFC and BOI banks.
HA2: There is significant difference in Net Profit margin ratio of HDFC and BOI banks.
H03: There is no significant difference in Return on equity ratio of HDFC and BOI banks.
HA3: There is significant difference in Return on equity ratio of HDFC and BOI banks.
H04: There is no significant difference in Return on assets ratio of HDFC and BOI banks.
HA4: There is significant difference in Return on assets ratio of HDFC and BOI banks.

Data Analysis:
The data analysis is done with the help of various statistical techniques including arithmetic mean,
dispersion (range), and t-test is used for hypothesis testing. To evaluate profitability aspects of selected
banks’ net interest margin ratio, net profit margin ratio, return on capital employed, return on equity,
and return on assets have been used.
1. Margin Ratio
A. Gross Profit Margin: It measures the gross profit margin on total net sales achieved by the
firm. The formula to calculate GP margin ratio is –
(𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑)
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑖𝑜 × 100
= 𝑆𝑎𝑙𝑒𝑠
In case of banking company gross profit can be understood as net interest earned, which is the difference
between interest earned on assets and interest paid on liabilities (ET Markets, 2019) (IMF, 2020).
For banking firms sales is equivalent to interest earned on its assets and cost of goods sold is interest
paid on its liabilities. A higher ratio indicates lower cost of goods sold.
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑜𝑛 𝐴𝑠𝑠𝑒𝑡𝑠 – 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑖𝑑 𝑜𝑛 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝑒𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝐴𝑠𝑠𝑒𝑡𝑠
Below (Table 1) is the calculated value of net interest margin ratio of BOI bank and HDFC for
years 2014-15 to 2020-21.
BOI BANK HDFC
BANK
Net Avg. Avg.
Net Interest NI
Year Interest Earning NI Margin Earning
Income Margin
Income Assets Assets
2021 38989.43 1230432.68 3.169 110710 4534429.63 2.442
2020 33267.07 1098365.15 3.029 98084.82 3951393.92 2.482
2019 27014.79 964459.15 2.801 88348.87 3680914.25 2.400
2018 23025.84 879189.16 2.619 74853.72 3454752 2.167
2017 21737.32 771791.45 2.816 61859.74 2705966.3 2.286
2016 21224.04 720695.1 2.945 56881.82 2357617.54 2.413

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2015 19039.61 646129.29 2.947 55015.25 2048079.8 2.686
Average 26328.3 901580.28 2.904 77964.89 3247593.35 2.410

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Maximum 38989.43 1230432.68 3.169 110710 4534429.63 2.686
Minimum 19039.61 646129.29 2.619 55015.25 2048079.8 2.167

Table 1: Net Interest Margin Ratio of BOI Bank and HDFC.

HDFC Net
BOI Net Interest Margin Interest
Margin
Mean 2.905714286 2.411428571
Variance 0.031561905 0.026047619
Observations 7 7
Hypothesized Mean
Difference 0
Df 12
t Stat 5.448537397
P(T<=t) one-tail 7.40063E-05
t Critical one-tail 1.782287548
P(T<=t) two-tail 0.000148013
t Critical two-tail 2.178812827

Table 2: t-test: Two-Sample Assuming Unequal Variances

H01: There is no significant difference in Net Interest Margin ratio of HDFC and BOI
banks. HA1: There is significant difference in Net Interest Margin ratio of HDFC and
BOI banks.
The above Table-2 presents the result of t-test. According to the above table calculated value of ‘t’
is 5.4485, which is greater than the t-table value that is 2.1788. Hence the null hypothesis is rejected
and alternative hypothesis is accepted at 5% level of significance. H01 is rejected and HA1 is
accepted.
The implication of the result is that there is a significant difference between the means of Net
Interest Margin ratio of HDFC and BOI bank.
B. Net Profit Margin: NP margin ratio is the relationship between net profit and total
business income of the firm. For banking companies business income is equivalent to the
total interest earned on the assets. This ratio is an overall measure of a firm’s ability to earn
profit from each rupee of sales. It presents the management’s efficiency to run the business.
A high ratio indicates an advantageous position of the firm with respect to cost and profit.
The formula to calculate Net Profit Margin ratio is—

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡

= 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒
Below (Table 3) is the calculated value of net profit margin ratio of HDFC and BOI bank for years 2014-
15 to 2020-21.
BOI Bank HDFC
Total Interest Net Profit Total Interest Net Profit
Year Earned(Rs. Net P/L Margin Earned (Rs. Net P/L Margin
Cr.) Ratio(%) Cr.) Ratio(%)

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16192. 20410.4
2021 79118.27 20.47 265150.63 7.70
68 7
7930.8 14488.1
2020 74798.32 10.6 257323.59 5.63
1 1

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2019 63401.19 3363.3 5.30 242868.65 862.23 0.36
6777.4 -
2018 54965.89 12.33 220499.32 -2.97
2 6547.45
9801.0
2017 54156.28 18.10 175518.24 10484.1 5.97
9
9726.2
2016 52739.43 18.44 163685.31 9950.65 6.08
9
11175. 13101.5
2015 49091.14 22.76 152397.07 8.60
35 7
Aver 9280.9
age 61181.50 9 15.43 211063.26 8964.24 4.48
Maxi 16192. 20410.4
mum 79118.27 68 22.76 265150.63 7 8.60
Mini -
mum 49091.14 3363.3 5.30 152397.07 6547.45 -2.97

Table 3: Net Profit Margin Ratio of BOI Bank and HDFC

BOI NP Margin Ratio HDFC NP Margin
Ratio
Mean 15.42857143 4.481428571
Variance 38.47921429 17.65371429
Observations 7 7
Hypothesized Mean Difference 0
Df 11
t Stat 3.865814005
P(T<=t) one-tail 0.001313414
t Critical one-tail 1.795884814
P(T<=t) two-tail 0.002626828
t Critical two-tail 2.200985159

Table 4: t-test: Two-Sample Assuming Unequal Variances

H02: There is no significant difference in Net Profit margin ratio of HDFC and BOI
banks. HA2: There is significant difference in Net Profit margin ratio of HDFC and
BOI banks.
According to above Table-4, which presents the result of t-test, the calculated value of ‘t’ is 3.8658,
which is greater than the t-table value that is 2.2009. Hence the null hypothesis is rejected and alternative
hypothesis is accepted at 5% level of significance. H02 is rejected and HA2 is accepted.
The implication of the result is that there is a significant difference between means of Net Profit Margin
ratio of HDFC and BOI bank.
2. Return Ratio:
A. Return on Equity: ROE is calculated to measure financial performance of the firm. It is
the relationship between firm’s net income and shareholders’ equity in the firm. The formula
to calculate ROE is –
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
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𝑅𝑂𝐸 = '
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

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A reasonable value of ROE is dependent upon what is considered normal in related industry. Following
Table 5 presents the value of ROE of BOI bank and HDFC from 2014-15 to 2020-21.
BOI Bank HDFC
Total
Year Net P/L ROE Total Equity Net P/L ROE
Equity
2021 144412.49 16192.68 11.21 230297.84 20410.47 8.86
2020 113386.05 7930.81 6.99 208244.76 14488.11 6.96
2019 105318.86 3363.3 3.19 196259.88 862.23 0.44
2018 102150.18 6777.42 6.63 194280.58 -6547.45 -3.37
2017 96902.68 9801.09 10.11 156700.41 10484.1 6.69
2016 86911.41 9726.29 11.19 144274.44 9950.65 6.90
2015 80421.92 11175.35 13.90 128438.22 13101.57 10.20
Average 104214. 80 9280.99 9.03 179785.16 8964.24 5.24
Maximum 144412.49 16192.68 13. 90 230297.84 20410.47 10.2006786
Minimum 80421.92 3363.3 3.19 128438.22 -6547.45 -3.3701001

Table 5: Return on Equity Ratio of BOI Bank and HDFC

BOI ROE HDFC ROE
Mean 9.033832 5.239624
Variance 13.03886 23.78514
Observations 7 7
Hypothesized Mean Difference 0
Df 11
t Stat 1.654263663
P(T<=t) one-tail 0.063148577
t Critical one-tail 1.795884814
P(T<=t) two-tail 0.126297154
t Critical two-tail 2.200985159

Table 6: t-test: Two-Sample Assuming Unequal Variances

H03: There is no significant difference in Return on equity ratio of HDFC and BOI
banks. HA3: There is significant difference in Return on equity ratio of HDFC and
BOI banks.
The results of t-test in Table-6 presents that the calculated value of ‘t’ is 1.6542 while t-table value
is 2.2009. Here, t-table value is greater than calculated value of ‘t’. Hence null hypothesis H0 3 will
be accepted and HA3 will not be accepted.
Thus, we can conclude that there is no significant difference in means of return on equity ratio of
HDFC and BOI banks.
B. Return on Assets: ROA is a measure to evaluate firm’s efficiency to generate
earnings by using its assets. It indicates firm’s ability to generate returns from
available sources of funds or invested capital. ROA as comparative measure should be
used against similar company’s ROA because it is highly dependent on the industry.
ROA give an investor or a manager an idea as to how efficient a firm is at using its
assets to generate returns.
The formula to calculate ROA is—
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𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
A higher value of ROA indicates that the company is earning more money on less investment. Following
Table 7 presents the ROA ratio of BOI bank and HDFC.

BOI Bank HDFC

Total
Year Net P/L ROA Total Assets Net P/L ROA
Assets
2021 1230432.68 16192.68 1.32 4534429.63 20410.47 0.45
2020 1098365.15 7930.81 0.72 3951393.92 14488.11 0.37
2019 964459.15 3363.3 0.35 3680914.25 862.23 0.02
2018 879189.16 6777.42 0.77 3454752 -6547.45 -0.19
2017 771791.45 9801.09 1.27 2705966.3 10484.1 0.39
2016 720695.1 9726.29 1.35 2357617.54 9950.65 0.42
2015 646129.29 11175.35 1.73 2048079.8 13101.57 0.64
Average 901580.28 9280.99 0.011 3247593.35 8964.24 0.003
Maximum 1230432.68 16192.68 0.0173 4534429.63 20410.47 0.0064
Minimum 646129.29 3363.3 0.0035 2048079.8 -6547.45 -0.0019

Table7: Return on Assets Ratio of BOI Bank and HDFC.

BOI ROA HDFC ROA
Mean 1.072857143 0.3
Variance 0.224557143 0.080666667
Observations 7 7
Hypothesized Mean
Difference 0
Df 10
t Stat 3.701170064
P(T<=t) one-tail 0.002050288
t Critical one-tail 1.812461102
P(T<=t) two-tail 0.004100576
t Critical two-tail 2.228138842

Table 8: t-test: Two-Sample Assuming Unequal Variances

H04: There is no significant difference in Return on assets ratio of HDFC and BOI bank.

HA4: There is significant difference in Return on assets ratio of HDFC and BOI bank.
Above Table-8 indicates the result of t-test and it is showed that calculated value of ‘t’ is 3.7011, which
is greater than t-table value i.e., 2.2281. Hence, the null hypothesis H0 4 is rejected and alternate
hypothesis HA4 is accepted at 5% level of significance.
So, we can conclude that there is a significant difference between means of return on assets ratio of
HDFC and BOI bank.

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Conclusion:
State Bank of India (HDFC) is the largest bank in the public sector while BOI is the largest bank in
the private sector in India. The capital base, customer base, branches and trust of HDFC is more than the
BOI bank. The HDFC has its branches in rural as well as in urban areas while BOI has its branches
mainly in the urban areas. For the comparison of the banks, various ratios have been used to
measure the bank’s profitability and managerial efficiency. There are significant differences in the
performance of both the banks. After analysing the data of last 7 years with different statistical tools,
it can be inferred:
1. The average Net interest margin of BOI bank is (2.904%) is higher than the HDFC bank
(2.410%), which means BOI is better utilizing their resources and able to generate more
returns. NIM of BOI has increased from year 2015 to 2021, while NIM of HDFC decreased
from year 2015 to 2021.
2. The average Net profit margin of BOI bank is (15.43%) is also quite higher than the HDFC
bank (4.48%). Net profit margin of BOIbank is three times higher than the HDFC bank,
which shows that BOI is able to generate more returns for its stakeholders and has shown better
operational efficiency. Thus, the BOI has shown comparatively lower operational expenses
than HDFC.
3. The average Return on Equity of BOI bank is 9.03% whereas for HDFC it is 5.24%. BOI is
providing better returns to its equity shareholder’s. Although HDFC has more profits than
BOI but their return on equity is less.
4. The average return on Assets of BOI is 1.029% whereas HDFC has only 0.27%. It shows that
BOI can utilize its assets and resources in a more efficient way.

Although HDFC is the oldest and largest bank of India but after analysing the different ratios, the
performance of BOI bank is better than the HDFC. BOI bank can provide better returns to their all
the stakeholders including equity shareholders than the HDFC.
Hence, based on the above study or analysis of seven financial periods, it can be concluded that BOI
bank is performing well in comparison to HDFC. This study will help enhance further research on
the subject by researchers and academicians.

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