13-06-2014, 10:32 AM
Growth in Income, Spread and Profit of Commercial Banks in India
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Abstract
The banking sector in India has been passing through an era of significant changes since the introduction of economic reforms in 1991. The operating environment for banks which existed during the pre-reform period was highly protective in nature. However, the opening up of the economy has brought in new players, new regulations paving deregulations and severe competition. The ways of doing business and customer service have gone through significant changes. Accountability for services of banks has been tightened. Need for increased professionalization in planning and execution is highly warranted. Altogether, the sector is exposed to high dynamism to reap for business and profit. The paper examines some of the key variables of banks’ performance during the last decade to understand the trends in those variables
. Introduction
The banking system is an integral part of any economy. It is one of the many institutions that impinges on the economy and affects its performance. Economists have expressed a variety of opinions on the effectiveness of the banking system in promoting the economic development. As an economic institution, banks are expected to be more directly and positively related to the performance of the economy than most non-economic institutions (Rondo, 1972). The Indian financial sector, wherein banks hold the main stay, is significantly different from what it used to be a few decades back, in the 1970s and 1980s. The financial sector has received a superior focus during 1990s and 2000s in India. While concerns emanate on financial stability, it is being increasingly realized that promoting healthy financial institutions, especially banks,
is a vital element for a sound economy. The banking sector in most of the emerging economies is now passing through challenging yet exiting times. The last decade has seen many positive developments in the Indian banking sector. The policy makers have made several notable efforts to ensure the safety and soundness of the sector. With the integration of Indian financial sector with the rest of the world, the concept of banks and banking has undergone a paradigm shift. Before financial reforms in 1991, Indian banks were enjoying a protected environment with a strong cushion of the Government support. However, with the RBI taking strong measures based on the recommendations of the Narasimham Committee , the landscape of Indian banking changed altogether. All the banks were directed to follow the norms of capital adequacy, asset quality, provisioning for NPAs, prudential norms, disclosure requirements, acceleration of pace and reach of latest technology, streamlining the procedures and complying with accounting standards and making financial statements transparent. Towards this end, they re-defined their objectives, strategies, policies, processes, methods and technologies which have a direct bearing on the financial health and performance of these banks. In this way, these banks were not only required to take the above steps but always evaluate their financial position. Entry of foreign banks and addition of private banks made the picture more competitive and vibrant. Adoption of prudential norms for asset classification and provisioning and interest rate deregulation were more or less streamlining the system as a whole. It is in these circumstances, the paper examines the trends in income, expenditure spread and profit of the commercial banks in India during the last decade.
Methodology
The paper focuses on the trends in the income, expenditure, spread (difference between interest income and interest expenditure) and profit of commercial banks in India during the
last decade. The analysis is carried out by segregating commercial banks into public sector and private sector. Further, for analysis, the public sector banks are separated into two compartments – SBI and its associates and other public sector commercial banks; and private sector banks are separated into private sector domestic banks and private sector foreign banks. Correlation Coefficient (Karl Pearson) is computed for each sector to find the relationship of income, expenditure, spread and profit. The Compound Annual Growth Rate (CAGR) is computed to understand the relative performance of the different sectors during the decade.
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III. Analysis, Results and Discussion
The income, expenditure, spread and profit of the commercial banks examined primarily in four cubicles as explained in the methodology part follows in the forthcoming pages
. Conclusion
The analysis of income, expenditure, spread and profit of commercial banks in India during last decade shows significant upward trend in all the key variables with considerable sectoral variations. The nationalized banks which accounts for 78.36 per cent of the total income of the banking sector in the country, lag behind the private sector domestic banks and foreign banks in the matter of growth in the above indicators. The nationalized commercial banks are operating with lesser spread compared to the private sector banks and the ratio of profit to spread is also lower in the case of nationalized bank. Among the private sector banks, the domestic banks have shown better performance in the key variables than the foreign banks. Though some structural differences in operations exist among the public sector and private sector banks, assuming those variations stationary, the private sector depicts better trends than their counterpart