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GALAXY International Interdisciplinary Research Journal_______________________ ISSN 2347-6915 GIIRJ, Vol.2 (3), MARCH (2014)

147

PERFORMANCE OF INDIAN BANKS IN AND AFTER FINANCIAL

CRISIS - A COMPARATIVE STUDY OF SELECTED BANKS

RAKESH KUMAR*; DR. BIMAL ANJUM**

. *ASSTT. PROFESSOR,

PG DEPARTMENT OF COMMERCE, SGGS KHALSA COLLEGE,

MAHILPUR.

**ASSTT. PROFESSOR, PG DEPARTMENT OF COMMERCE,

DAV COLLEGE,

CHANDIGARH.

ABSTRACT

Banking sector plays an important role in present economic scenario of a country. The Indian

banking sector sees tremendous changes in past few years. After the 2008 global financial

crisis, many developments seen in the Indian banking sector also. These developments affect

the performance of Indian banks. The present paper highlights the major indicators of

performance of banks in past three years. The study is restricted to selected banks from each

sector. For the purpose of study, three major banks from each sector selected for study. The

selection is made on the basis of assets size and capitalization of banks.

KEY WORDS: Public Sector, Private Sector, Foreign Sector, Financial Performance.

Introduction

The banking sector, being a crucial constituent of financial system is the lifeline of any

modern economy. It is one of the important financial pillars of the financial system which

plays a vital role in the success /failure on an economy. Banks are one of the oldest financial

intermediaries in the financial system. They play an important role in the mobilization of

deposits and disbursement of credit to various sectors of the economy. The banking system is

the fuel injection system which spurs economic efficiency by mobilizing savings and

allocating them to high return investment. Research confirms that countries with a well

developed banking system grow faster than those with a weaker one. The Indian banking

sector witnessed major changes in their structure due to global meltdown in 2008-09. The

economic slowdown has exerted pressure on banks’ profitability and capital. Public sector

banks, with a 70 percent share, were worst hit due to corporate borrowers’ declining loan-

servicing capacity, their own tax credit appraisal and the undue advantage they took of the

debt restructuring mechanism to defer non-performing asset formation. Private Banks,

cautious in expanding their balance sheets, fared well. While private banks have seen

improvement in asset quality and efficiency parameters, public sector banks have seen

declines in both areas. The present paper attempts to understand how various categories of

banks have performed since the crisis.

Historical Perspective in the Development of Banking in India: In India, the modern

banking system was initiated with the establishment of the Presidency Bank of Bengal in

1806, and the Presidency bank of Madras in 1840.However, the post independence period

witnessed the massive growth in the Indian banking sector. Reserve Bank of India was

nationalized on January 1, 1949 under the terms of the Reserve Bank of India Act, 1948. In


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1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India

to regularize, control and inspect the banks in India. The Banking Regulation Act also

provided the number of new banks or branches of an existing bank would be opened with a

license from the Reserve Bank of India. The RBI acts as banker, both to the central

government and state governments. It manages all the banking transactions of the

government involving the receipt and payment of money. In addition, RBI remits exchange

and performs other banking operations. RBI provides short-term credit to the central

government. Such credit helps the government to meet any shortfalls in its receipts over its

disbursements. RBI also provides short term credit to state governments as advances.

Review of Literature

Mahalakshmi Krishnan (2012) in her paper ‘Trends and Growth Opportunities of Indian

banking sector’ studies the correlation between Indian Banks’ Business growth and the GDP

using Karl Pearson’s Correlation co-efficient. The data were collected from various

secondary published sources and research studies. The studies show a strong positive

correlation between Indian Banks ‘Business Growth and the GDP. The Big Banks of USA

and Europe buckled under crisis but India could withstand the crisis mainly on the strength of

its banking industry. The paper also finds that in Retail Banking development shows in

Urban-centric and in rural area the concept is beyond the thinking of people. So attempt is

made to strengthen the Indian Banking system.

Kapoor Reetu & R.C.Dangwal (2012) in their paper titled ‘Factors Affecting Bank

Profitability: An Empirical Study’ studied Profitability of Different Sector Banks in India

through factor analysis. Twelve variables used for study for a period of five years for the

analysis. The paper concludes that the evaluation of banks in terms of profitability, spread

seems to be affect the profitability of banks more for all bank groups. Paper also suggest that

banks should not only augment their interest income but also try to maximize their ancillary

and fee based income. Banks should keep a check on exorbitant expectations for

unproductive purpose.

Objectives of Study

1. To compare and analyze the financial performance of banks in Indian in the period of

financial crisis and in 2012-13.

2. To study the factors affecting performance of banks in India.

Banks selected for study

(A) Top Public Sector Banks which includes State Bank of India, Bank of Baroda &

Punjab National Bank

(B) Top Private Sector Banks which includes ICICI Bank, HDFC Bank & Axis Bank

(C) Top Foreign Sector Banks which includes Standard Chartered Bank , HSBC &

Citibank

Analysis and Interpretation

The data has been collected from various RBI publications of banks. On the basis of collected

data, results are interpreted after the end of each table. The data shown on various tables

relates only the year of financial crisis i.e. 2008-09 and compare with the figures of 2012-13

for the banks selected for study. The results and findings are described below:-


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Table 1: Business per employee (in cr.)

Name of Bank 2008-09 2012-13

State Bank of India 5.56 9.44

Bank of Baroda 9.14 16.89

Punjab National Bank 6.56 13.70

ICICI bank 11.54 7.35

HDFC Bank 4.46 7.50

Axis Bank 10.60 12.15

Standard Chartered Bank 9.71 16.88

HSBC Bank 9.62 18.90

Citibank 18.80 21.24

(Source: RBI)

The above table highlights the business per employee of banks selected for study. The data

shows that in 2012-13 the business per employee increases in public sector banks as compare

to the year of crisis. In private sector ICICI bank shows negative trends. The percentage

increase is also high in case of foreign sector banks and HSBC bank tops in ranking because

of higher percentage increase in their business per employee. The foreign sector banks

maintain their workforce according to requirements. This is the main reason for increase their

overall per employee business.

Table 2: Profit per employee (in cr.)

Name of Bank 2008-09 2012-13





HDFC Bank 0.04 0.10

Axis Bank 0.10 0.15


HSBC Bank 0.16 0.40

Citibank 0.45 0.50

(Source: RBI)

The profit per employee indicates the productivity of employees of banks. The profit per

employee also shows increasing trends in the entire banking sector. But foreign sector banks

maintain the leads also in these aspects as compare to other sectors.

Table 3: Net Interest Margin (in %)

Name of Bank 2008-09 2012-13





HDFC Bank 4.69 4.28

Axis Bank 2.87 3.09


HSBC Bank 4.30 3.74

Citibank 4.67 4.03

(Source: RBI)


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Net interest margin shows increasing trend only in case of State Bank of India in Public

sector bank. In private sector, ICICI bank maintains a lead and in foreign sector bank

standard Chartered Bank‘s growth positive. Due to global meltdown, majority of banks

effected. This will result in decrease their net interest margin.

Table 4: Return on Equity (in %) Name of Bank 2008-09 2012-13





HDFC Bank 17.17 20.34

Axis Bank 19.12 18.53


HSBC Bank 13.13 12.84


Return on equity shows the share received by the holders of equity capital from banks

earnings available after all interest and taxes. Profits of all banks are declined due to

financial crisis. This will affect the return on equity of banks also. The table 4 shows the

figures regarding return on equity of banks selected for study in the financial crisis period

and now and it highlights that only private sector banks maintain the same level or above the

previous level only. Other sector banks worst affected because of financial crisis.

Table 5: Return on Asset (in %) Name of Bank 2008-09 2012-13





HDFC Bank 1.28 1.90

Axis Bank 1.44 1.70


HSBC Bank 1.51 1.81

Citibank 2.12 2.12

(Source: RBI)

Return on assets shows the relationship between earning after tax and total assets of banks.

The table 5 indicates that private sector banks and foreign sector banks’ return on assets

improved slightly, but no improvement shown in case of public sector bank.

Table 6: Net NPA Ratio (in %) Name of Bank 2008-09 2012-13





HDFC Bank 0.63 0.20

Axis Bank 0.40 0.36


HSBC Bank 1.42 0.33

Citibank 2.63 1.47

(Source: RBI)


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NPA ratio highlights the share of non-performing assets from the total assets of banks. The

non-performing assets also increased after financial crisis period in case of public sector

banks as compare to other sector banks in India.

Table 7: Capital adequacy Ratio (in %)

(Source: RBI)

Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio

(CRAR), is the ratio of a bank's capital to its risk. National regulators track a bank's CAR to

ensure that it can absorb a reasonable amount of loss and complies with statutory Capital

requirements. This ratio is propounded to ensure that banks can adopt a reasonable level of

losses arising from operations and to ascertain bank’s loss bearing capacity. Higher the ratio

means banks are stronger and the investors are more protected. Latest RBI guideline for

banks in India is to maintain a CRAR of 9%. Capital to Risk-weighted Assets Ratio (CRAR)

= (Tier-I + Tier-II)/Risk Weighted Assets. Tier 1 capital includes shareholders’ equity;

perpetual non-cumulative preference shares, disclosed reserves and innovative capital

instruments. Tier 2 capital includes undisclosed reserves, revaluation reserves of fixed assets

and long-term holdings of equity securities, general provisions/general loan-loss reserves;

hybrid debt capital instruments and subordinated debt. The table 7 depicts the Capital

Adequacy Ratio of banks selected for study. All the banks maintain their CAR above the

average level. But public sector bank fails to maintain their past level of this ratio as compare

to other sector banks. At present the ratio is maximum in ICICI bank following by Axis

Bank. This shows the banks awareness regarding risk associated with their business.

Challenges & Opportunities before the Banking Sector:

1. Rural Markets: Large number of people does not have access to banking facilities

due to scattered and fragmented locations. Significant proportion of the same lies in

rural areas where private banks have little incentive to invest. As per Census 2011

about 58.7 per cent households in India avail banking facilities. The proportion is less

than 50 per cent in case of States like Bihar, Chhattisgarh, Odisha, West Bengal &

North Eastern states like Manipur & Nagaland, Assam & Meghalaya. However, with

increasing consumption levels of rural India & cut throat competition in urban

markets, rural areas are gaining increasing importance.

2. Increased competition: Profits of banks are being affected by increased competition,

with different public and private sector banks vying for increased share of customers.

But increased competition has also resulted in increased efficiency, improved

customer services and profitability in terms of returns on both equity and assets.

Banks, now have to continuously innovate their practices to stay ahead in the market.

Increasing competition, however, might also induce the banks to higher risk taking

strategies.

Name of Bank 2008-09 2012-13




ICICI Bank 15.53 18.74

HDFC Bank 15.69 16.80

Axis Bank 13.69 17.00


HSBC Bank 15.31 17.10


http://en.wikipedia.org/wiki/Ratio

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Financial_capital

http://en.wikipedia.org/wiki/Risk

http://en.wikipedia.org/wiki/Bank_regulation

http://en.wikipedia.org/wiki/Capital_requirement




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3. Management of Risks: Researchers have found that Indian banks risk management

capabilities has been improving over time. However cyber banking, existing global

banking scenario etc have introduced newer types of risk. International regulatory

norms have become more stringent in view of failure of many financial institutions.

4. Global & Domestic Environment: Bankruptcy of Lehman Brothers Holdings Inc,

fourth largest investment bank in US, in 2008, revealed financial instability in Global

markets. Instability of sovereign debt market in Euro zone continues as increasing

number of countries in European Union face tough situation. Amidst worsening

global scenario, banking rules & regulation framework of India has prevented it from

economic crisis. But the stagnation & even recession in some global markets leading

to lesser demand and slower pace of growth of Indian economy has constrained the

credit uptake. However, Indian financial system is expected to remain robust on

account of banks capability to withstand stress. However, a series of stress tests

conducted by the Reserve Bank in respect of credit, liquidity and interest rate risks

showed that banks remained reasonably resilient. However, under extreme shocks,

some banks could face moderate liquidity problems and their profitability could be

affected. In the long run, with high growth potential of the Indian economy and

favorable demographics, banks have immense opportunities to further expand their

business both with traditional and innovative products and through financial inclusion

using technology enabled sustainable business models.

5. Compliance with International Requirements: In the background of recent global

regulatory developments, Basel III largely aiming at higher and better quality capital;

an internationally harmonized leverage ratio to constrain excessive risk taking; capital

buffers which would be built up in good times so that they can be drawn down in

times of stress; minimum global liquidity standards; and stronger standards for

supervision, public disclosure and risk management, was introduced. A few individual

banks may fall short of the Basel III norms and will have to augment their capital.

Banks will also face challenges of upgrading risk management systems and meeting

the credit needs of a rapidly growing economy even while adjusting to a more

demanding regulatory regime. Introduction of International Financial Reporting

System (IFRS) to facilitate comparability between enterprises operating in different

jurisdictions has also placed additional demands on Indian banks. In order to make the

transition to IFRS they would have to handle accounting issues and upgrade their

infrastructure including IT & human resource.

Conclusion

After the financial crisis that began in 2008, banks are taking steps to improve their

performance measurement capabilities in light of changed economic and market conditions

and new management needs. For example, new regulatory strictures are affecting the

underlying economics of such businesses as payment-card issuing and processing. Capital

requirements are increasing for most banking businesses. New channels like mobile phones

are becoming more important. Revenue growth continues to be difficult to achieve due to

weak economic conditions, low interest rates and regulatory restrictions. Banks are trying to

manage costs better, deepen relationships with customers and enhance product mix and

pricing decisions. Banks at present described as indicators of financial soundness of any

economy. Due to global crisis, the overall performance of bank affected to the extent. The

data shown in the tables clearly indicates that the performance of public sector banks is

mostly affected after the financial crisis period. The private sector banks and foreign sector

banks are least affected because of adoption of proper policies regarding various aspects of

workings. Private and foreign sector banks also maintain the level of CAR to cover the risks


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in future. The above discussion shows that public sector banks mostly affected after financial

crisis. So public sector banks must adopt the appropriate standards regarding smooth

functioning of banks. Management of Indian banks has worked hard in maintaining the

growth of Indian Banking industry. To reduce the level of NPAs, A healthy Banker-Borrower

relationship should be developed. Many instances have been reported about forceful recovery

by the banks, which is against corporate ethics. Debt recovery will be much easier in a

congenial environment.

References:-

(1) ‘Factors Affecting Bank Profitability: An Empirical Study’ Kapoor Reetu &

R.C.Dangwal Journal of Accounting and finance Vol. 26 No.2 April-September 2012 pp25-

37

(2) ‘Trends and Growth Opportunities of Indian banking sector’ studies the correlation

between Indian Banks’ Mahalakshmi Krishnan Journal of Management Outlook Volume 2,

No. 1, Jan-June 2012, pp 76-85

(3) Indian Banking Industry – Challenges & Opportunity, Dr K A Goyal & Vijay Joshi,

International Journal of Business Research and Management (IJBRM), Volume

3: Issue (1): 2012

(4) RBI- A Profile of Banks-2012

(5) Report on Trend & Progress of Banking in India 2010-11, Reserve bank of India.

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