subject: Discuss in detail the performance of commercial bank in India [print this page] Discuss in detail the performance of commercial bank in India
PERFORMANCE OF COMMERCIAL BANKS IN INDIA
*INTRODUCTION:
~ Commercial banks play an important role in the economic development of the nation. Hence, the performance of commercial banks can have a marked influence on the development of an economy.
~ With this fact in view, various reforms were introduced in the banking sector in India.
~ These reforms brought about a remarkable improvement in the performance of commercial banks.
*INDICATORS
~ The performance of a bank can be judged on various indicators.
~ These indicators can be categorised as under:
#PROFITABILITY INDICATORS:
^ The net profit of a bank is an indicator of its profitability.
^ This is influenced by the banks interest income, non-interest income and expenses.
^The following are the profitability indicators of a commercial bank:
1)Interest Income Ratio:This is the ratio of a bank's interest income to its total assets. A high interest income ratio indicates greater profitability.
2)Interest Expended Ratio:It is the ratio of interest expenses to total assets. A decline in this ratio brings greater profitability to the bank.
3)Net Interest Margin Ratio:Net interest indicates the difference between interest income and interest expense. So, it is the difference between the revenue generated by interest bearing assets and cost of borrowed funds. A net interest margin ratio is the ratio of this net interest to total assets. The higher the ratio, the greater the profitability. A fall in the ratio signals the bank to reorient its policies to earn higher yields through cheaper mix of funds.
4)Intermediation Cost to Asset Ratio:Is the ratio of intermediation cost (operating expenses cost) to its total assets. A lower ICAR is an indicator of higher profitability and efficiency.
5)Burden Ratio: Is the ratio of non-interest income to non-interest expenses. A higher ratio brings about greater profitability.
6)Return on Assets Ratio: Is the ratio of net profit to total assets. It is the most important indicetor of the bank's performance. A higher ratio is an indicator of high performance and profitability.
7)Return on Equity Ratio: Is the ratio of net profit to total equity. A higher ratio indicates greater profitability and better efficiency. This enables a bank to raise more funds from the capital markets.
Capital market Indicators: The performance of a bank's scrip (shares) on the stock market depends on its profitability and it is judged by 2 parameters:
^Earning per share (EPS) ratio:Net Profit
No of equity shares.
^Price Earning Ratio (P/E) :price of shares
Earning per share
#PRODUCTIVITY INDICATORS:
~ The performance of a bank's employee (human resource) has an important effect on the bank's performance in the world of competition.
~ The productivity of the banks can be indicated by:1) Profit per Employee:Net profitNo. of employees2) Business per Employee:Net Total IncomeNo. of employees~ Higher ratio indicates a productive and efficient staff.#FINANCIAL STABILITY INDICATORS:~ Apart from profit, financial stability is also of utmost importance to the banks as it gains the trust and confidence of its depositors.~ Financial stability can be judged by the CRAR ratio. It is the ratio of capital to risk-weighted assets.#Quality of Assets:~ The quality of assets in the bank depends on the level of Non-performing Assets (NPAs).~ The NPAs are those assets on which the payment of interest / principal amount receivable is in arrears.~ Higher NPAs indicate the deteriorating quality of assets.~ They are compared to Total Advances / Total Assets.~ The ratios used are: Gross NPAs / Gross Advances: Net NPAs / Net Advances~ If these ratios are higher, they indicate decreasing performance of assets.*PERFORMANCE OF PUBLIC SECTOR BANKS, NEW PRIVATE SECTOR BANKS AND FOREIGN BANKS IN INDIA:~ After the introduction of reforms, there is an overall improvement of performance of all banks.~ There is greater efficiency and better profitability despite the decline in spread.~ Comparative performance:PUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS1997-98 88.5 lakhs785.9 lakhs529.4 lakhs2005-06 324.1 lakhs728.9 lakhs1012.8 lakhsIncreased, butDeclined due to higher baseIncreased considerablyComparatively lowEffect# Profits per Employee =Net ProfitsTotal no.of employees.PUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS1997-980.7 lakhs11.4 lakhs4.5 lakhs2005-062.9 lakhs6.3 lakhs26.5 lakhsIncreasedSharply declined due to higher base effectIncreasedEnormously# Business per Branch:PUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKSNationalised BanksSBI & Associates1999-2000 2152 lakhs2860 lakhs14989 lakhs54800 lakhs2004-2005 4242lakhs7454 lakhs21656 lakhs114768 lakhsIncreased, but comparatively lowerIncreasedIncreased~Thus the productivity of foreign banks was the highest, followed by the new private sector banks and then the public sector banks.~ The use of IT, customer care, liberal RBI policies, dedication of employees etc. play a key role in the increased production of Foreign Banks and New Private Banks.*PROFITABILITY:# Interest income Ratio=Interest IncomeTotal AssetsPUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS2000-20018.8%8.2%9.3%2008-20097.26%8.3%6.78%DeclinedImproved marginallyDeclined# Interest Expended Ratio =Interest ExpensesTotal AssetsPUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS2000-20016.0%6.0%5.6%2008-20095.14%5.55%2.87%DeclinedDeclinedDeclined considerably# Intermediation-Cost Ratio =Operating CostsTotal AssetsPUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS2000-20012.7%1.7%3.0%2008-20091.5%2.2%2.8%DeclinedIncreasedDeclined# Net Profit Ratio =Net profitsTotal AssetsPUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS2000-20010.4%0.8%0.9%2008-20090.91%1.06%1.68%IncreasedIncreasedIncreased# Spread Ratio =Net InterestTotal AssetsPUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKS2000-20012.9%2.1%3.6%2008-20092.12%2.79%3.91%DeclinedIncreasedIncreased~ Thus, the foreign banks and new private sector banks are efficient and are able to generate greater income.~ However, the profitability of Public Sector banks is also improving.*FINANCIAL STABILITY:~ The capital adequacy ratio (CAR) indicates the financial soundness of a commercial bank.# CAR RATIO OF BANKSPUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKSMarch200111.2%11.5%12.6%March200912.3%15.1%15.1%ASSET QUALITY:~ Asset Quality can be judged by the level of Non-Performing Assets (NPAs).~ A lower level of NPAs indicates better Asset Quality.~ A better quality of assets indicates greater efficiency.# GROSS AND NET NPAs OF COMMERCIAL BANKS.PUBLIC SECTORNEW PRIVATE SECTORFOREIGN BANKSGross NPAsNet NPAsGross NPAsNet NPAsGross NPAsNet NPAs20082.2%1.0%2.5%1.2%1.8%0.8%20092.0%0.9%3.1%1.4%4.0%1.8%DeclinedIncreasedIncreased*CUSTOMER SERVICE:~ These services provide customers easy access to banking facilities, thus improving overall customer service.~ Various financial services are available to customers. These Include:1)Core Banking Solution: These services include anywhere banking', everywhere access' and quick transfer of funds.2)ATM Facilities: All banks have introduced ATM facilities. The new private sector banks and foreign banks have greater percent of ATMs as compared to public sector banks.3)Computerization Of Banks: New Private Sector Banks and Foreign Banks have 100% computerization. The proportion of Public Sector Banks branches that achieved full computerization has also increased to 95%.http://www.articlesbase.com/college-and-university-articles/discuss-in-detail-the-performance-of-commercial-bank-in-india-4315903.html
