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Performance Analysis of Public Sector Banks in India

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 Vol. 3 No. 2 March 2015 ISSN: 2319-961X

PERFORMANCE ANALYSIS OF PUBLIC SECTOR BANKS IN INDIA

Dr. H. N. Devanand
Assistant Professor, Centre for Rural Development Studies, Bangalore University

Dr. T. Rajendra Prasad

Professor, Department of Economics, Bangalore University, Bangalore- 560 0056

Abstract
Banking as a major part of the financial sector, is the life blood of the economy. It plays a
decisive role in accelerating the rate of economic growth. The importance of commercial banks in
the process of economic development has been stressed from time to time by the economic thinkers
and progressive bankers in the country. Banks are the heart of our financial structure. Banks play a
positive role in the economic development of a nation as depositories of community’s savings and as
purveyors of credit. Indian banks have aided the economic development during the past fifty eight
years (1949-2007) in an effective way. The banking sector has shown remarkable responsiveness to
the needs of planned economy.
Keywords: financial sector, modern economy, financial intermediaries, commercial banks, economic
growth, PSBs

A well planned, organized, efficient and viable banking system is a necessary

concomitant for the economic development of a nation. Banking occupies a crucial place in
undertaking the development effort and acts as a vehicle for socio-economic
transformation. In a modern economy, income is partly spent for consumption and partly
saved and much of the saving is channalised into investment via a variety of financial
intermediaries. In India, the commercial banks constitute the heart of the financial
structure since they have the ability to add to the money supply and thus create additional
purchasing power. As an important segment of the tertiary sector of our economy,
commercial banks act as the back-bone of economic growth and prosperity by playing an all
pervasive role as a catalyst of development.
Hence, the PSBs had to be the prime-movers and leaders for the achievement of
the socio-economic objectives of our economy. In the post-nationalisation period, there has
been a perceptible change in the structure, composition and direction of Public Sector
Banking in India. Its progress in quantitative and qualitative terms has been phenomenal.
Besides, a massive qualitative change in the operations of banking system, Public Sector
Banks have been called upon to assume a great variety of new responsibilities in the area of
social banking. Moreover, PSBs have made conscious efforts to become an engine of growth
by undertaking a number of innovative activities.
With this background the present paper examine the following aspects in detail
viz.,

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 Performance of Scheduled Commercial Banks in India

 Profitability Analysis of Public Sector Banks
Performance of Scheduled Commercial Banks in India
The banking sector in India is largely dominated by the public sector banks (PSBs)
that account for nearly 70 per cent of the banking assets. The fast pace of deposits growth
can be viewed from the fact that over a year time (2011-12), total bank deposits increased
by 14.9 per cent. Not only that, the total bank credit and investments in government, and
other approved securities made by the scheduled commercial banks (SCBs) grew at an
impressive rate of 18.1 per cent and 16.0 per cent respectively, during the same period.
Latest available statistics reveal that the new private sector banks have registered the
highest growth rate at 18.9 per cent in the branch network during 2011-12 while SCBs as a
whole marked 10.1 per cent expansion in their total branch network during the same
period. During 2012, the capital base of all SCBs increased by 16.1 per cent over the
previous year. Return on assets (ROA) has been higher than the benchmark (1%) in 8 public
sector and 15 private sector banks. These figures portray that the private and foreign banks
have carved a niche for themselves in the Indian financial system. These banks also started
setting new standard for the entire banking sector in terms of capital adequacy, return on
capital and profit per employee etc. The World Economic Forum in its Financial
Development Index (2008) credits the gradual reforms and prudential regulations for the
reasonable stability of the Indian banking system. Table 1 quickly assess the performance of
the different commercial bank groups at three different years-1991, representing the
initiation of the reform process, 2002 after a decade of reform process and 2012 for the
recent performance. The table 1 reveals the dismal performance of all the different bank
groups on the eve of the reforms; however, the private banks had an edge over others.
Since 1991, profit per employee has consistently increased and cost-income ratio has shown
a secular fall across all the bank groups.
Table 1: Profitability and Cost-based Indicators of Efficiency
Net Profit per Employee Cost-Income Ratio
Bank Groups
(Rs ‘000) (in %)
1991 2002 2012 1991 2002 2012
SBI and Associates 5.04 121.43 547.12 94.46 52.11 45.13
Nationalised Banks 4.76 102.58 675.82 93.89 56.65 43.05
Private Banks 7.42 170.94 1060.08 92.63 51.46 46.73
Average 5.74 131.65 761.01 93.66 53.40 44.97
Source: Authors’ calculation based on Database on Indian Banking 1987-98, IBA (1999) and
Performance Highlights of Public and Private Sector Banks, IBA (various issues)
Financial repression best describes the state of banking sector until the dawn of the
era of liberal economic policies in India. The banking sector had remained shielded from

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foreign competition consequent of the various restrictive policies in place. The banking
sector reforms were aimed at ushering efficiency and stability in Indian banking sector.
Table 2 represents the ratio of net profit to total assets of the public and private
sector banks respectively, for the last decade. There is an overall improvement in terms of
profitability for both the banks groups as indicated by their average values. However, the
private sector banks have experience a better improvement; 16 of the 20 private sector
banks ended with a higher net profit to assets ratio in 2012.
Table 2: Net Profit/Total Assets (in %) of Public Sector Banks
Banks 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Allahabad Bank 0.32 0.59 1.31 1.20 1.28 1.11 1.18 0.79 0.99 0.94 1.02
Andhra Bank 0.97 1.63 1.72 1.59 1.19 1.13 1.02 0.95 1.16 1.16 1.08
Bank of Baroda 0.77 1.01 1.14 0.71 0.73 0.72 0.80 0.98 1.10 1.18 1.12
Bank of India 0.72 1.12 1.19 0.36 0.62 0.79 1.12 1.33 0.63 0.71 0.70
Bank of Maharashtra 0.68 0.89 0.95 0.54 0.16 0.70 0.68 0.64 0.62 0.43 0.49
Canara Bank 1.03 1.24 1.34 1.01 1.01 0.86 0.87 0.94 1.14 1.20 0.88
Central Bank of India 0.31 0.54 0.98 0.52 0.34 0.54 0.44 0.39 0.58 0.60 0.23
Corporation Bank 1.31 1.58 1.73 1.19 1.10 1.02 1.1 1.03 1.05 0.98 0.92
Dena Bank 0.06 0.57 1.04 0.25 0.27 0.64 0.93 0.87 0.89 0.86 0.92
Indian Bank 0.11 0.53 1.04 0.93 1.06 1.35 1.43 1.48 1.53 1.41 1.24
Indian Overseas Bank 0.65 1.01 1.08 1.28 1.32 1.23 1.18 1.10 0.54 0.60 0.48
Oriental Bank 0.99 1.34 1.67 1.34 0.95 0.79 0.93 0.79 0.83 0.93 0.64
Punjab & Sind Bank 0.17 0.03 0.06 -0.45 0.57 0.99 1.24 1.04 0.90 0.77 0.62
Punjab National Bank 0.77 0.98 1.08 1.12 0.99 0.95 1.03 1.25 1.32 1.17 1.07
Syndicate Bank 0.79 1.00 0.92 0.77 0.88 0.80 0.79 0.70 0.58 0.67 0.72
UCO Bank 0.52 0.59 0.99 0.63 0.32 0.42 0.46 0.50 0.74 0.55 0.61
Union Bank of India 0.71 1.08 1.22 0.99 0.76 0.82 1.12 1.07 1.06 0.88 0.68
United Bank of India 0.52 1.26 1.22 1.03 0.62 0.63 0.59 0.30 0.42 0.58 0.62
Vijaya Bank 0.81 1.03 1.71 1.30 0.40 0.78 0.64 0.42 0.72 0.64 0.61
SBI & its associates 0.77 0.91 1.02 0.91 0.86 0.82 0.89 0.93 0.88 0.74 0.87
IDBI Bank ... ... ... 0.38 0.63 0.61 0.56 0.50 0.44 0.65 0.70
Average 0.65 0.94 1.17 0.84 0.76 0.84 0.90 0.86 0.86 0.84 0.82
Note: IDBI Bank was established in the year 2004
Source: Performance Highlight of Public Sector Banks, IBA (various issues).
Among the PSBs, there are a few whose performances have improved. In total, 23
banks (public and private) participated in M & A of which 4 PSBs (Bank of Baroda, IDBI, PNB
and SBI) and 3 private banks (Federal Bank, ICICI Bank and HDFC) have improved their
profitability in the post-merger period.
In the pre-reform days, interest rate regulation had been a major hindrance to the
development and efficient functioning of the banking sector. Competition among banks was
virtually absent and the nationalised banks were to perform many ‘social duties’. All these
were at the cost of profitability of the banks and eventually led to cumulative rise in non-
performing assets (NPA). In spite of a rapid increase in the bank deposits, the profitability

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was extremely low- the average ROA in the second half of 1980s was only about 0.15 per
cent.
By 1991, the Indian banking sector had become unprofitable, inefficient and
financially weak; Joshi and Little (2003). Following the nationalisation of banks in 1969, the
primary objective was not attaining efficiency but an increase in deposits and loans by way
of branch expansion. The banking sector in the recent past has shown stability and
resilience.
Both the bank groups experience a decrease in the cost of intermediation by around
38 per cent vis-a-vis their 1991 position. While the PSBs took some time to adjust to the
regulatory changes, the private banks were able to adapt quickly to the new business
environment. In the recent past, the PSBs had maintained a lower intermediation cost than
their private sector counterparts implying their relative cost advantage with respect to the
domestic private banks.
In comparison to the Basel II norms, only the (domestic) private banks perform
above the benchmark in 2002. In the later period, though SBI group have witnessed a fall in
the average ROA, it has subsequently improved its performance along with the other
nationalized banks in 2010. In contrast, the private banks as a whole experienced an initial
decline in their ROA before improving it in 2010. Operating profit declined by 29.34 and
21.67 per cent respectively for SBI group and the private sector banks. However, the
nationalized banks recorded an impressive growth of 176.47 per cent.

Profitability Analysis of Public Sector Banks

Banking sector in India has undergone remarkable changes since the nationalisation
of 14 major commercial banks in 1969. The geographical and functional coverage of banks
has surged at a rate that is unprecedented in the world. Similarly, services rendered by
banks witnessed major changes after liberalisation of the financial sector carried out from
the early 1990s. In the recent years the Indian banking system has witnessed a significant
transformation. Prior to the institution of financial sector reforms, Indian banks were
operating in a highly regulated environment. In view of the social responsibility placed on
the banking sector, profitability was not considered as an important yardstick to judge their
performance. From the time of the nationalisation of 14 major commercial banks in 1969
till the early 1990s, the main thrust of banking operation was on social banking. Accordingly
the emphasis was placed on enhancing the branch network in rural and semi-urban areas.
Moreover, banks had to undertake several other responsibilities, which included financing
the fiscal deficit and facilitating the development of certain specific sectors as reflected in
high and increasing prescription of SLR and direct lending. By and large, banking remained
concentrated in the public sector and functioned in a highly regulated environment.
With the institution of financial sector reforms, competition among the banks has
increased. Barriers to entry have been sharply reduced. Economies of scale and scope have

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to be exploited for facing competition. Productivity, efficiency and profitability have, as a

result, become critical objectives to be aimed at. However, in post reforms period of
liberalisation, privatisation and globalisation the focus of banking changes towards
increasing productivity, profitability, improving operation efficiency in the banking sector
and the profit planning has become a complex phenomenon under competitive and
deregulated environment. The growth in profits of the banks now assumes a greater
significance as a measure of efficiency and credibility of the organisation and retaining the
confidence of customer and the investors.

Profitability Ratio
Profitability ratio is an important analytical technique which is used to measure the
results of banking operation or overall performance and effectiveness of the organization.
Profitability analysis is indispensable for a banking organization from the view point of its
survival and growth. “The growth in profits of the banks now assumes a greater significance
as a measure of efficiency and credibility of the organisation and retaining the confidence
of customer and the investors. Profitability also assumes importance for management of
capital in the banking sector and adoption of prudential norms in order to meet
international standards of accounting”. Thus, in the present study, the following three
ratios have been considered for the purpose of evaluating the performance of the Public
Sector Banks, Private Sector Banks and Foreign Banks:
 Profit in Relation to Working Fund.
 Profit in Relation to Total Income.
 Profit in Relation to Deposits.

Profit in Relation to Working Fund

The ratio of profit in relation to working fund is derived when the net profit is
divided by the working fund and expressed in terms of percentage. This ratio explains as to
what percentage of working fund is earned by a bank as net profit. Stated otherwise, this
ratio determines the level of efficiency with which a bank can be able to utilise its
resources to the maximum extent to enhance its volume of profit.]
In table 3 the trends of the ratio of net profit to working fund of the sample bank
groups have been exhibited. The table indicates that during the study period, the PSBs,
Private Sector Banks and Foreign Banks showed the increasing trend of the ratio. The group
wise analysis shows that the ratio ranged from -1.15 per cent in 1993-94 to 1.12 per cent in
2003-04 in case of Public Sector Banks. Likewise, this ratio of Private Sector Banks ranged
from 0.34 per cent in 1992-93 to 1.19 per cent in 1995-96. Further, this ratio varied in
between -2.88 per cent in 1992-93 and 1.65 per cent in 2006-07.
When phase-wise analysis of this ratio is made in all the three sample bank groups,
it is confirmed that in the first phase of the study period (1992-93 to 1998-99), the Public

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Sector Banks improved their ratio of profit to working fund to 0.77 per cent in 1997-98 from
-1.15 per cent in 1993-94. During the same period, the Private Sector Banks raised their
profit from 0.34 per cent in 1992-93 to 1.19 per cent in 1996-97 where as the Foreign Banks
accelerated their profit to 1.60 per cent in 1994-95 from -2.88 per cent in 1992-93. During
the second phase (1999-2007), it was observed that the ratio of Public Sector Banks
declined to 0.42 per cent in 2000-01 from 0.77 per cent in 1997-98 but in the year, i.e.,
2003-04 it rose to 1.12 per cent over the previous year and further declined to 0.83 per
cent in the last year, i.e., 2006-07.
Similarly, the same tendency was observed in case of Private Sector Banks in the
second phase of the study period. The ratio of Private Sector Banks declined to 0.64 per
cent in 2001-02 from 0.89 per cent in 1999-2000. However, during the same period, the
ration of Foreign Banks rose to 1.65 per cent in 2003-04 against 1.18 per cent in 1999-2000.
The average ratios of net profit to working fund were found to be 0.41 per cent
with a coefficient of variation of 165.41 per cent of Public Sector Banks, 0.86 per cent with
a coefficient of variation of 27.29 per cent for Private Sector Banks and 1.05 per cent with
a coefficient of variation of 106.58 per cent of Foreign Bank. The coefficient of correlation
between net profit and working fund in case of Public Sector Banks, Private Sector Banks
and Foreign Banks were 0.95, 0.99 and 0.95 respectively. Moreover, the correlation is
significant at 5 per cent level of significance.
Table 3: Profit in Relation to Working Fund of Public Sector Banks and Other Bank
Groups during 1992-93 to 2006-07
(In percentage)
Year Public Sector Banks Private Sector Banks Foreign Banks
1992-93 -1.00 0.34 -2.88
1993-94 -1.15 0.58 1.51
1994-95 0.25 1.16 1.60
1995-96 -0.07 1.19 1.45
1996-97 0.56 1.13 1.19
1997-98 0.77 1.03 0.96
1998-99 0.42 0.70 0.83
1999-00 0.57 0.89 1.18
2000-01 0.42 0.71 0.92
2001-02 0.72 0.64 1.32
2002-03 0.96 1.00 1.56
2003-04 1.12 0.95 1.65
2004-05 0.87 0.83 1.29
2005-06 0.82 0.87 1.54
2006-07 0.83 0.87 1.65
Average 0.41 0.86 1.05
CV 165.41 27.39 106.58
Co-efficient of
correlation
0.95 0.99 0.95

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Sources: IBA Bulletins, Various issues; Mumbai

So, it clearly indicates that among the sample bank groups, the Foreign Banks have
accelerated their profit to the maximum extent at an average of 1.05 per cent. Whereas
the Public Sector Banks have improved their profit in relation to working fund to the
minimum extent with highest variation.
Table 4: Profit in Relation to Total Income of Public Sector Banks and Other Bank
Groups during 1992-93 to 2006-07
(In per centage)
Year Public Sector Banks Private Sector Banks Foreign Banks
1992-93 -9.34 3.25 -22.83
1993-94 -11.65 5.46 12.33
1994-95 2.60 11.18 13.27
1995-96 -0.69 9.97 12.30
1996-97 5.05 9.24 8.77
1997-98 7.42 8.91 7.23
1998-99 4.02 6.32 8.27
1999-00 5.63 8.59 10.11
2000-01 4.17 7.01 8.54
2001-02 7.08 8.22 11.51
2002-03 9.57 9.29 15.13
2003-04 12.02 10.50 15.23
2004-05 10.68 10.83 15.20
2005-06 10.35 11.35 17.38
2006-07 10.66 10.38 18.37
Average 4.50 8.70 10.05
CV 156.14 26.61 96.62
Co-efficient of 0.92 0.99 0.92
correlation
Sources: IBA Bulletins, Various issues; Mumbai

Profit in Relation to Total Income

The profit in relation to total income tends ratio of all the sample bank groups have
been exhibited in Table 4. Table 4 discloses a fluctuating trend of the ratio of all the bank
groups during the study period. During the study period, the Public Sector Banks have
suffered losses to the tune of 9.34 per cent, 11.65 per cent and 0.69 per cent in 1992-93,
1993-94 and 1995-96 respectively. But, from 1996-97 to 2006-2007 the Public Sector Banks
have improved their profitability over the study period. The profit as percentage to total
income of Private Sector Banks ranged from 3.25 per cent in 1992-93 to 11.35 per cent
2005-06. The Foreign Banks have sustained loss of 22.83 per cent in the beginning year

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(1992-93) of the study period. But, thereafter, they improved their profitability which
varied in between 7.23 per cent in 1997-98 and 18.37 per cent in 2006-07.
The phase-wise analysis of the ratio reveals that during the first phase of the study
period (1992-93 to 1998-99), the Public Sector Banks have incurred losses in the year 1992-
93, 1993-94 and 1995-96. The main reason was the introduction of prudential norms as per
banking sector reforms. The Foreign Banks have incurred loss in the year 1992-93 only. But
the Private Sector Banks accelerated their profitability without suffering any losses during
the study period. However, during the second phase the profitability of Public Sector Banks
accelerated and the ratio varied around 4 to 12 per cent. The growth in profit has been
achieved due to increase in net interest income and containment of operating expenses at
a moderate level, the ratio varied around 7 to 11 per cent in case of Private Sector Banks
and 8 to 18 per cent in case of Foreign Banks showed good performance in the second phase
whereas the Private Sector Banks and Foreign Banks have performed well in the first phase.
The fifteen yearly average of the ratio of Public Sector Banks was 4.50 per cent
(whereas it was 1.43 per cent in 2001-2002) with a high coefficient of variation of 156.14
per cent. The same in case of Private Sector Banks was 8.70 per cent with a coefficient of
variation of 26.61per cent. But the Foreign Banks earned income at higher rate while the
Public Sector Banks earned the income at a lower rate with the highest variation. Moreover,
the Private Sector Banks earned the income at a moderate rate with negligible variation.
The coefficient of correlation between profit and total income of the three sample bank
groups were 0.92, 0.99 and 0.92 in case of Public Sector Banks, Private Sector Banks and
Foreign Banks. It was found to be significant at 5 per cent level of significance in all the
cases.

Profit in Relation to Total Deposits

The ratio of Profitability in relation to total deposits is an important ratio of
Profitability for the assessment of profitability of Public Sector Banks. This ratio provides
information relating to the profit derived by banks as percentage of total deposits over a
period of time.
In Table 5 it is observed that the ratio of profit in relation to the total deposits of
all the three sample bank groups reflected a fluctuating trend over the fifteen year study
period. Moreover, the ratio of Public Sector Banks highly fluctuated with a coefficient of
variation of 170.48 per cent followed by Foreign Banks with 104.69 per cent and Private
Sector Banks with 33.73 per cent. The ratio varied in between -1.43 per cent in 1993-94
and 1.35 per cent in 2003-04 in case of Public Sector Banks, 0.40 per cent in 1992-93 and
1.48 per cent in 1995-96 in case of Private Sector Banks and -4.31 per cent in 1992-93 and
3.04 per cent in 2006-07 in case of Foreign Banks. The PSBs and Foreign Banks incurred
losses due to higher provisioning requirement during the beginning years of the study
period.

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Table 5: Profit in Relation to Total Deposits of Public Sector Banks and Other Bank
Groups during 1992-93 to 2006-07
(In percentage)
Year Public Sector Banks Private Sector Banks Foreign Banks
1992-93 -1.28 0.40 -4.31
1993-94 -1.43 0.64 1.95
1994-95 0.32 0.36 2.16
1995-96 -0.09 1.48 2.45
1996-97 0.69 1.33 1.79
1997-98 0.95 1.21 1.47
1998-99 0.51 0.84 1.34
1999-00 0.69 1.07 1.96
2000-01 0.50 0.85 1.57
2001-02 0.86 1.00 1.26
2002-03 1.14 1.43 2.63
2003-04 1.35 1.30 2.57
2004-05 1.07 1.12 2.29
2005-06 1.02 1.16 2.70
2006-07 1.01 1.17 3.04
Average 0.49 1.02 1.66
CV 170.48 33.74 104.67
Co-efficient of 0.95 0.99 0.96
correlation
Sources: IBA Bulletins, Various issues; Mumbai
Yet, they could be able to gear up their profit in the succeeding years by lowering
their provisioning requirements as per the norms prescribed in the banking sector reforms.
The phase-wise analysis exhibited that during the first phase of the study period
(1992-93) to (1998-99), the public sector banks and foreign banks suffered losses, due to
higher provisioning requirements where as the private sector banks performed well. The
ratio increased with fluctuation in case of all the sample banks oscillated significantly in
between -1.43 per in 1993-94 and 0.95 per cent in 1997-98. Similarly, the ratio of private
sector banks fluctuated in between 0.40 per cent in 1992-93 and 1.48 per cent in 1995-96
whereas the ratio of foreign banks varied substantially in between -4.31 per cent in 1992-93
and 2.45 per cent in 1995-96. But, in the second phase the ratio showed a declining trend
with fluctuation in case of all the sample bank groups. So, the ratio of public sector banks
hovered in between 0.50 per cent in 2000-01 and 3.04 per cent in 2006-07 in case of foreign
banks. Similarly, the ratio varied in between 0.85 per cent in 2000-01 and 1.43 per cent in
2002-03 in case of Private Sector Banks.

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From the above analysis it was concluded that among the three sample banks
groups, the Foreign Banks utilised their deposits most efficiently and effectively by
generating the highest profit registering an average of 1.66 per cent of their total deposits
in spite of suffering losses in the initial year of the study period. Whereas, the Public Sector
Banks showed a poor performance in respect of generating profit in relation to their
deposits recording an average of 0.49 per cent only. On the other hand, the Private Sector
Banks retained its position in between the Foreign Banks and Public Sector Banks with an
average of 1.02 per cent of their total deposits. The coefficient of variation of all the three
sample banks was 170.48, 33.73 and 104.67 per cent in case of Public Sector Banks, Private
Sector Banks and Foreign Banks respectively.
The coefficient of correlation between profit and total deposits of Public Sector
Banks, Private Sector Banks and Foreign Banks were 0.95, 0.99 and 0.96 respectively. This
was found to be significant at 5 per cent level of significance in all the cases.

Conclusion
Thus it has been clearly observed that in the post reform period the focus of
banking changed towards increasing the productivity, profitability, improving operational
efficiency in the banking sector. The profit planning has become a complex phenomenon
under competitive and deregulated environment. In the present scenario, there has been
an increased focus on profitability, although other social objectives continue to be
important. Moreover, the setting up a new competitive environment has resulted in new
challenges for the public sector banks to retain their position.

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