Indian Public And Private Sector Banks

The economic reforms in India started in early nineties, but their outcome is visible now. Major changes took place in the functioning of Banks in India only after liberalization. Though role of banks as financial intermediaries has reduced gradually, market share of banks continues to remain the largest in the financial market. Increased competition, new information technologies and thereby declining processing costs, the erosion of product and geographic boundaries, and less restrictive governmental regulations have all played a major role for Public Sector Banks in India to forcefully compete with Private and Foreign Banks. The research also focuses on the factors that made the banks moving from one cluster to another. This paper an attempt to analyze how efficiently Public and Private sector banks have been managing NPA. We have used statistical tools for projection of trend.

Introduction

The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. Banking in India was defined under Section 5(A) as “any company which transacts banking, business” and the purpose of banking business defined under Section 5(B),”accepting deposits of money from public for the purpose of lending or investing, repayable on demand through cheque/draft or otherwise”. In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949). During Britishers’ time, three Presidency Banks were opened in Bengal (1809), Bombay (1840) and Madras (1843) with powers to issue Notes. In the year 1921, due to banking crisis during First World War, the three Presidency Banks merged to form Imperial Bank of India. In the year 1955, after Independence, Imperial Bank of India was nationalized and renamed as State Bank of India (SBI) with a primary mandate to go to rural areas by opening at least 400 branches immediately. In the year 1957, the seven banks that were earlier catering to the rulers of different areas or States viz., Patiala, Bikaner, Jaipur, Indore, Saurashtra, Hyderabad, Mysore, Travancore, became subsidiaries of SBI. In 1969 and 1980, Government of India nationalized 14 and 6 major banks respectively. After the merger of New Bank of India with Punjab National Bank during the era of Financial Sector Reforms, the number of PSBs became 27, which are under present study. This is reflected in their market valuation. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. Comparisons of bank performance based on financial ratios suffer from the problem that financial ratios might overstate performance because of inaccurate reporting of non-performing assets (NPAs) or because NPAs tend to be lower in the initial years in the case of newly established banks. Stock prices may, however, capture performance more accurately because markets, including ours, are reasonably efficient in incorporating information that may escape financial statements. The means of both unadjusted and adjusted returns for each of the three categories of banks were compared with returns to the Sensex – this gave the relative returns for each category. Two important findings emerged. The comparisons of stock price performance suggest that, in the perception of the market, PSBs as a category can withstand competition from today’s private banks. This finding has important implications for policy. It undermines the proposition that disinvestment, the mere dilution of government equity in PSBs, cannot possibly contribute to any improvement in performance and that government control must cease altogether. Consequent to disinvestment, PSBs have performed as well as the Sensex and private sector banks. This suggests that listing on the exchanges, a profit orientation, and a measure of autonomy can together produce improvement in performance and that a transfer of ownership is not a pre-condition for such improvement All these were aimed at generating income or employment to large number of rural masses comprising weaker sections of society, artisans, agriculturists and self-employed persons including educated unemployed youth. In India, till the eighties, the banks operated in a protected environment characterized by administered interest rates, high levels of pre-emption in the form of reserve requirements and directed credit. In the process, strategies of certain banks, especially Public Sector Banks, are aiming to divide customers into different segments on the basis of the type of service they would like to render and also trying to segregate their servicing counters in their respective branches to enable customer to have easy access to a particular transaction. “Electronic Clearing”, “Tele-Banking”, etc. This paper explores an empirical approach to the analysis of Non-Performing Assets (NPAs) of public and privates banks in India. The NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector.

Review of literature

  1. Roma Mitra, Shankar Ravi (2008), A stable and efficient banking sector is an essential precondition to increase the economic level of a country. This paper tries to model and evaluate the efficiency of 50 Indian banks. The Inefficiency can be analyzed and quantified for every evaluated unit. The aim of this paper is to estimate and compare efficiency of the banking sector in India. The analysis is supposed to verify or reject the hypothesis whether the banking sector fulfils its intermediation function sufficiently to compete with the global players. The results are insightful to the financial policy planner as it identifies priority areas for different banks, which can improve the performance. This paper evaluates the performance of Banking Sectors in India.
  2. B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indian private sector banks wrote Private sector banks play an important role in development of Indian economy. After liberalization the banking industry underwent major changes. The economic reforms totally have changed the banking sector. RBI permitted new banks to be started in the private sector as per the recommendation of Narashiman committee. The Indian banking industry was dominated by public sector banks. But now the situations have changed new generation banks with used of technology and professional management has gained a reasonable position in the banking industry.
  3. Brijesh K. Saho, Anandeep Singh (2007), this paper attempts to examine, the performance trends of the Indian commercial banks for the period: 1997-98 – 2004-05. Our broad empirical findings are indicative in many ways. First, the increasing average annual trends in technical efficiency for all ownership groups indicate an affirmative gesture about the effect of the reform process on the performance of the Indian banking sector. Second, the higher cost efficiency accrual of private banks over nationalized banks indicate that nationalized banks, though old, do not reflect their learning experience in their cost minimizing behavior due to X-inefficiency factors arising from government ownership. This finding also highlights the possible stronger disciplining role played by the capital market indicating a strong link between market for corporate control and efficiency of private enterprise assumed by property right hypothesis. And, finally, concerning the scale elasticity behavior, the technology and market-based results differ significantly supporting the empirical distinction between returns to scale and economies of scale, often used interchangeably in the literature.
  4. Vradi, Vijay, Mauluri, Nagarjuna (2006), in his study on´ Measurement of efficiency of bank in India ³concluded that in modern world performance of banking is more important to stable the economy .in order to see the efficiency of Indian banks we have see the fore indicators i.e. profitability, productivity, assets, quality and financial management for all banks includes public sector, private sector banks in India for the period 2000 and 1999 to 2002-2003. For measuring efficiency of banks we have adopted development envelopment analysis and found that public sectors banks are more efficient then other banks in India.
  5. Petya Koeva( July 2003) , in his study on The Performance of Indian Banks.During Financial Liberalization states that new empirical evidence on the impact of financial liberalization on the performance of Indian commercial banks. The analysis focuses on examining the behavior and determinants of bank intermediation costs and profitability during the liberalization period. The empirical results suggest that ownership type has a significant effect on some performance indicators and that the observed increase in competition during financial liberalization has been associated with lower intermediation costs and profitability of the Indian banks.
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Objectives of study

  1. To compare the performance of public and private banks of India.
  2. To find out trends in NPA Level.
  3. To suggest various measures for NPA management.

Public Sector Banks

Public sector banks are the ones in which the government has a major holding. They are divided into two groups i.e. Nationalized Banks and State Bank of India and its associates. Among them, there are 19 nationalized banks and 8 State Bank of India associates. Public Sector Banks dominate 75% of deposits and 71% of advances in the banking industry. Public Sector Banks dominate commercial banking India. These can be further classified into:

1. State Bank of India 2. Nationalized banks 3. Regional Rural Banks

Nationalized banks

In July 1969, 14 banks with a deposit base of Rs.50 crores or more were nationalized. Again in 1980, six more private banks were nationalized, bringing up the number to twenty. These Banks were:

(1)Bank of Baroda (2) Punjab National Bank (3) Bank of India (4) Canara Bank (5) Central Bank of India (6) Indian Bank (7) Indian Overseas Bank (8) Syndicate Bank (9) UCO Bank (10) Allahabad Bank (11) United Bank of India (12) Oriental Bank of Commerce (13) Corporation Bank (14) Vijaya Bank (15) Dena Bank (16) Bank of Maharashtra (17) Andhra Bank (18) Punjab & Sind Bank (19 New Bank of India (20) Corporation Bank.

Private Sector Banks

Private sector banks came into existence to supplement the performance of Public sector banks and serve the needs of the economy better. As the public sector banks were merely in the hands of the government, banks had no incentive to make profits and improve the financial health. Main difference is only that Public follow the RBI Interest rules strictly but Private banks could have some changes but only after the approval from the RBI! Private sector banks are the banks which are controlled by the private lenders with the approval from the RBI their interest rates are slightly costly as compared to Public sector banks.

Difference between Public Sector Banks & Schedule Banks

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. Whereas Public sector Bank simply means a banking entity which owned by Govt. of India any of state govt’s. Thus all PSB’s are scheduled (almost) but all scheduled banks are not PSB’s

NPA and Banks

Non-Performing Asset or NPA. It is called such as while it is an “Asset”, it does not bring substantial income to its owner or is just dormant. Call it a white elephant if you wish.
Basically, it is having something that SHOULD work but does not. It is supposed to make Non- Performing Assets work. The RBI has issued guidelines to banks for classification of assets into four categories.

1. Standard (Assets)

These are loans which do not have any problem are less risk.

2. Substandard(Assets)

These are assets which come under the category of NPA for a period of less than 12 months.

3. Doubtful(Assets)

These are NPA exceeding 12 months.

4. Loss(Assets)

These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI. The classification of assets of scheduled commercial bank. A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.A company’s total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. Loans and advances given by banks to its customers is a asset to the bank. But, when repayment of interest and Principal is overdue, such asset is classified as NPA in the financial reports of banks. NPA is nothing but NON PERFORMING ASSETS. Simply it’s a Bad Debt to Bank.

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Recommendations for reducing NPAs

  1. Effective and regular follow-up of the end use of the funds sanctioned is required to ascertain any embezzlement or diversion of funds. This process can be undertaken every quarter so that any account converting to NPA can be properly accounted for.
  2. Combining traditional wisdom with modern statistical tools like Value-at-risk analysis and Markov Chain Analysis should be employed to assess the borrowers. This is to be supplemented by information sharing among the bankers about the credit history of the borrower. In case of new borrowers, especially corporate borrowers, proper analysis of the cash flow statement of last five years is to be done carefully.
  3. 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.
  4. Assisting the borrowers in developing his entrepreneurial skills will not only establish a good relation between the borrowers but also help the bankers to keep a track of their funds.
  5. Countries such as Korea, China, Japan, Taiwan have a well functioning Asset Reconstruction/Recovery mechanism wherein the bad assets are sold to an Asset Reconstruction Company (ARC) at an agreed upon price. In India, there is an absence of such mechanism and whatever exists, it is still in nascent stage. One problem that can be accorded is the pricing of such loans. Therefore, there is a need to develop a common prescription for pricing of distressed assets so that they can be easily and quickly disposed. The ARCs should have clear ‘financial acquisition policy’ and guidelines relating to proper diligence and valuation of NPA portfolio.
  6. Some tax incentives like capital gain tax exemption, carry forward the losses to set off the same with other income of the Qualified Institutional Borrowers (QIBs) should be granted so as to ensure their active participation by way of investing sizeable amount in distressed assets of banks and financial institutions.
  7. So far the Public Sector Banks have done well as far as lending to the priority sector is concerned. However, it is not enough to make lending to this sector mandatory; it must be made profitable by sharply reducing the transaction costs. This entails faster embracing of technology and minimizing documentation.
  8. Commercial Banks should be allowed to come up with their own measures to address the problem of NPAs. This may include waiving and reducing the principal and interest on such loans, or extending the loans, or settling the loan accounts. They should be fully authorized and they should be able to apply all the preferential policies granted to the asset management companies.
  9. Another way to manage the NPAs by the banks is Compromise Settlement Schemes or One Time Settlement Schemes. However, under such schemes the banks keep the actual amount recovered secret. Under these circumstances, it is necessary to bring more transparency in such deals so that any flaw could be removed.

Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of Liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank (earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.

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In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks’ loan recovery efforts have driven defaulting borrowers to suicide.[

Classification of Banks

  1. Nationalized Banks major stake is with GOI like SBI.
  2. Private sector Banks major stake is with share holder like ICICI.
  3. Cooperative sector Banks are generally owned by trust kind of setup like national cooperative bank.
  4. RRB regional rural bank for the development of banking in rural area generally owned by big nationalized bank like Corp Gramin Bank
  5. MNC Banks having offices outside India like CITI Bank.

Table: 1: Promotional Strategies by Public andPrivate Sector Banks

Promotional Tool

Public Sector Bank

Private Sector Bank

Advertising on T.V.

Yes

Yes

Advertising in Newspaper

Yes

Yes

Personal Selling/Personal Contact

No

Yes

In Journals and Magazines

Yes

Yes

Tele Calling by Sales Persons

No

Yes

Outdoor Advertising Hoardings etc

Yes

Yes

Schemes/Gifts/Prizes for Customers

No

Yes

Public Relations/ Events/Programmes 

Yes

Yes

Online Marketing/ E-Mail

Yes But Few

Yes

Pamphlets/Propaganda

No

Yes

Letter/Mail/ with Relevant Material 

No

Yes

Publishing News in Newspapers 

Yes But Few

Yes

TABLE: 2 NPA of Public Sector Banks

(Amount in ` crore)

NPA of Public Sector Banks

Sr. No.

Name Of the Bank

Priority Sector NPA

Amount

Of Which Agriculture

Amount

Of which Small Scale Industries Amount

Of which others

Amount

Public Sector NPAs

Amount

Non Priority Sector

Amount

Amount 9=(3+7+8)

1

2

3

4

5

6

7

8

9

Public Sector Banks

30,848

8,330

11,537

10,981

524

25,929

57,301

Nationalised Banks

19,908

5,741

8,668

5,499

280

15,283

35,470

1

Allahabad Bank

713

215

311

187

119

389

1,221

2

Andhra Bank

218

26

66

126

270

488

3

Bank of Baroda

1,444

636

530

279

85

667

2,196

4

Bank of India

2,147

490

1,360

297

18

2,317

4,481

5

Bank of Maharashtra

795

232

363

200

415

1,210

6

Canara Bank

1,423

462

394

568

1,081

2,505

7

Central Bank of India

1,658

421

922

315

8

792

2,458

8

Corporation Bank

398

122

79

197

253

651

9

Dena Bank

379

83

74

222

263

642

10

Indian Bank

249

55

163

31

210

459

11

Indian Overseas Bank

1,192

276

606

310

2

2,248

3,442

12

Oriental Bank of Commerce

911

276

385

250

558

1,469

13

Punjab and Sind Bank

138

42

85

11

68

206

14

Punjab National Bank

2,471

977

1,165

328

4

739

3,214

15

Syndicate Bank

1,091

176

238

677

12

902

2,005

16

UCO Bank

976

289

339

348

15

674

1,665

17

Union Bank of India

1,632

369

895

367

1,032

2,664

18

United Bank of India

894

204

283

407

478

1,372

19

Vijaya Bank

394

93

190

110

17

583

994

20

IDBI Bank Ltd.

785

297

221

267

1,344

2,129

State Bank Group

10,940

2,589

2,869

5,482

244

10,646

21,831

21

State Bank of Bikaner and Jaipur

269

7

124

139

343

612

22

State Bank of Hyderabad

290

55

102

134

356

646

23

State Bank of India

9,073

2,322

2,168

4,583

235

8,529

17,836

24

State Bank of Indore

210

19

57

134

283

493

25

State Bank of Mysore

291

43

120

129

3

301

595

26

State Bank of Patiala

543

119

212

212

463

1,007

27

State Bank of Travancore

264

25

87

152.00

6

372

642

Table 3 NPA in Pvt. Sector Banks

(Amount in ` crore)

NPA in Pvt.Sector Banks

Sr. No.

Name of the Bank

Priority Sector NPAs

Of which, Aagriculture

Of which Small Scale Industries

Of Which Others

Non-Priority Sector NPAs

Non

Priority  Total

Sector

NPANPAs

Amount

Amount

Amount

Amount

Amount

Amount

Amount 9 = (3+ 7+8)

1

2

3

4

5

6

7

8

9

Private Sector Banks

4,792

2,023

1,139

1,630

12,592

17,384

Old Private Sector Banks

1,613

269

475

869

1,999

3,612

1

Bank of Rajasthan Ltd.

61

7

42

12

232

294

2

Catholic Syrian Bank Ltd.

62

7

32

23

87

149

3

City Union Bank Ltd.

41

16

9

16

52

94

4

Dhanalakshmi Bank Ltd.

35

4

6

26

42

78

5

Federal Bank Ltd.

440

65

18

356

381

821

6

ING Vysya Bank Ltd.

65

36

23

6

159

224

7

Jammu and Kashmir Bank Ltd.

286

32

54

199

176

462

8

Karnataka Bank Ltd.

324

51

172

102

225

550

9

Karur Vysya Bank Ltd.

68

7

53

8

167

235

10

Lakshmi Vilas Bank Ltd.

58

10

15

33

267

325

11

Nainital Bank Ltd.

17

8

2

7

6

23

12

Ratnakar Bank Ltd.

18

2

10

6

10

28

13

SBI Commercial and International Bank Ltd.

2

2

1

3

14

South Indian Bank Ltd.

88

12

27

49

123

211

15

Tamilnad Mercantile Bank Ltd.

46

10

12

24

69

115

New Private Sector Banks

3,179

1,754

664

760

10,594

13,772

16

Axis Bank Ltd.

528

248

140

141

767

1,295

17

Development Credit Bank Ltd.

68

14

52

3

251

319

18

HDFC Bank Ltd.

400

110

276

14

1,407

1,807

19

ICICI Bank Ltd.

1,946

1303

50

593

7,321

9,267

20

IndusInd Bank Ltd.

84

31

46

8

171

255

21

Kotak Mahindra Bank Ltd.

152

49

100

2

616

767

22

Yes Bank Ltd.

60

60

Conclusion

It is right time to take suitable and stringent measures to get did of NPA problem. An efficient management information system should be developed. The bank staff involved in sanctioning the advances should be trained about the proper documentation and charge of securities and motivated to take measures in preventing advances turning into NPA. Public banks must pay attention on their functioning to compete private banks. Banks should be well versed in proper selection of borrower/project and in analyzing the financial statement.


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