30 Apr Indian banks- productivity and sustainability
Indian banks- productivity and sustainability – Today Current Affairs
In 2017–18, the scheduled commercial banks incurred losses of `324 billion with gross non-performing assets (GNPAs) rising to 11.6% of gross advances. The losses and GNPs for public sector banks (PSBs) were higher, amounting to `854 billion and 15.6% of gross advances, respectively. The Reserve Bank of India (RBI) has cautioned that growing GNPAs and losses of banks may endanger the stability of the banking sector. Moreover, the gross domestic product (GDP) growth rate of India has declined from 8.17% in 2016 to 6.98% in 2018, causing serious concern for all the stakeholders.
The measurement and analysis of the productivity of banks is important as it affects the financial stability. It will provide insights for taking corrective actions and stimulating economic development. Economic growth is augmented by several factors, such as efficiency of financial intermediaries, increased credit, and reduction in the interest margins. Thus, financial sector development leads to economic growth. It is possible that there exists a two-way relationship between economic growth and financial development. But whatever be the direction of relationship, the efficiency of the banking sector is important.
The Government of India has been addressing deteriorating condition of banks for a long time. In 2015, it had announced capital infusion of `700 billon in PSBs over a period of four years. In 2016, the Insolvency and Bankruptcy Code (IBC) was introduced providing for time-bound resolution of non-performing assets (NPAs). In 2018, the government had announced massive recapitalisation of PSBs by infusion of capital amounting to `2,110 billion (Press Information Bureau of India 2018). Of this, an amount of `1,350 billion was to be financed through recapitalisation bonds and the balance through budgetary provisions.
These measures will not be successful unless the individual banks take appropriate steps to improve their performance. This paper attempts to measure the productivity of 31 major Indian banks (constituting 93.61% of loan portfolio of the banking industry in 2018), for the period from 2005 to 2018. It benchmarks individual banks and suggests corrective measures for improvement in productivity. The Hindu Analysis
The purpose of this paper is to identify the factors affecting the productivity of banks and to suggest measures to improve it. The paper also compares the productivity of PSBs with that of the private sector banks and further examines the movement of their mean productivities over the period under study. The productivity-wise benchmarking of banks is done, which will be useful in strategic decision-making. The paper significantly contributes to the literature and has several policy implications.
Period of study: There is a strong relationship between bank credit and GDP growth. The author further observes that during the period of high credit growth, banks often compromise on quality standards in credit management.
We have considered 2005 as a base year for the calculation of MPCI, and the period of study is 2005 to 2018. In 2005, the GDP growth rate was high at 9.28%, and the credit growth rate was very high at 30.88%. During subsequent years, the GDP growth rate dipped to 3.89% (in 2008), and there was a corresponding dip in the credit growth rate too, though it continued to be as high as 22.30%. From 2011, the gap between GDP and credit growth rate started narrowing and came closest to each other in 2014.
Productivity of Banks (2006–18) : The Hindu Analysis
The paper looked at the changes in the productivity of public and private sector banks during the period under study. The movement of groupwise annual means of the productivity of both the groups and that of the sample (all banks) is shown in Figure. The Hindu Analysis
The productivity of PSBs was higher during 2006–08. During 2009–15, the private sector outperformed the public sector. In 2016 and 2017, the productivity of both the groups was negative, but the private sector suffered more as compared to the public sector. Thereafter, the productivity of the private sector improved but that of the public sector declined significantly.
Analyzing Productivity Change : The Hindu Analysis
We have calculated MPCI by considering capital, borrowings, and expenditure as the inputs and credit portfolio and profit as the outputs. The researchers have observed that there are several factors such as cash holdings, size of the organization, investments, NPAs, etc, which influence cost or income of the banks.
Cash holdings: The banks are required to keep cash balances with the RBI in proportion to their net demand and time liabilities (NDTL). Cash held is a non-interest earning asset. In addition to the opportunity cost, there are other costs associated with cash holdings such as transport cost, handling cost, and insurance. Therefore, the efficiency of banks is affected by the level of cash holdings. Today Current Affairs
Asset size: It is found that the profitability of banks increases with its size, that is, the total assets. However, it argues that productivity is negatively related to the growth of assets. This is because when the size grows beyond the optimum level, the productivity declines, leading to diseconomies of scale. As a result, the profitability also declines.
Investments: The banks in India are required to invest 18.25% of the NDTL in the form of government-approved securities as a statutory requirement. These are highly liquid. The Hindu Analysis
investments and carry lower rates of return as compared to the average return on loans. However, banks are investing 8.4% of the NDTL in excess of the statutory requirement, and the proportion of investments in other market securities is declining because of the associated risks. The earning on investments constitutes a substantial portion of the banks income and has significant impact on profitability.
Non-performing assets: The NPAs negatively impact profitability due to the loss of interest income and additional provisioning (Koutsomanoli et al 2009). These may be due to
endogenous factors like poor management, resulting in the failure to control risks and costs of recovery. However, the net non-performing assets (NNPAs) level of 9.46% is a cause for concern. Today Current Affairs
Cost of funds: The average cost of funds for the sample increased to 5.32% in 2018 from 4.90% in 2006, with fluctuations during the period. The average cost gradually increased from 4.90% (2006) to 6.76% (2009) and declined to 5.49% (2011). From 2011, it increased to 7% in 2013 and progressively declined to 5.32% in 2018.
Net interest margin: The NIM is reduced by increasing costs, which in turn reduces profitability. The NIM for the sample has declined from 3.04% in 2006 to 2.50% in 2018. However, the decline was not progressively downwards. The NIM gradually declined from 3.04% in 2006 to 2.53% in 2008. In 2009, it increased to 2.63%; in 2010, it decreased to 2.59%; and in 2011, it again increased to 2.94%. In the subsequent period from 2011 to 2018, the NIM gradually declined from 2.94% to 2.50%.
Conclusions and Limitations : The Hindu Analysis
We have measured the change in the total factor productivity of 31 Indian banks from 2005 to 2018 using MPI, taking 2005 as a base year. Inputs taken are net worth, total debt, and expenses, whereas outputs are outstanding loan portfolio and income. The sample comprises 21 PSBs and 10 private sector banks constituting 86.34% and 93.61% of the loan portfolio of scheduled commercial banks in 2005 and 2018, respectively.
Amongst the PSBs, Vijaya Bank and Bank of Baroda are ranked first and second, respectively, in respect of all the three efficiency changes. This indicates that the merger initiatives between Vijaya Bank, Dena Bank and the Bank of Baroda were an attempt to strengthen the three PSBs by merging one strong bank with three weak ones. It seems that the attempt was to strengthen two moderately weak banks with one strong bank amongst the public sector by merging them.
In the private sector, Kotak Mahindra Bank is at the bottom of the list, followed by ICICI Bank in respect of total factor productivity change. The latter is the largest bank in the private sector in India. As such, the paper has benchmarked banks in India with reference to productivity. The results can be used as one of the inputs in deciding merger schemes of the banks. The Hindu Analysis
It is found that efficiency, technical efficiency, and TFP for private sector banks (mean values) are higher than those of PSBs, respectively. However, public and private sector banks have performed differently during the periods under study. The productivity of PSBs was higher during 2006–09 (as compared to private sector), whereas the productivity of
private sector banks was higher than that of PSBs during 2009–13. In 2016, the productivity of both the groups was negative, but the private sector’s performance was worse than that of the public sector. In the subsequent years, the productivity of private sector improved but that of public sector declined significantly.
Banks in India are paying a higher rate of interest to senior citizens on deposits and are charging lower rates of interest on priority sector advances as compared to the market rates. As these are social welfare security measures, the interest differential should be reimbursed by the government to the banks. This will reduce the cost of funds, improve NIM, and enhance the productivity of banks. There is a case for a reduction in the rate of interest on deposits by the banks. This might lead to lower mobilization of funds but will also reduce the cost of funds.
It is found that the improvement in technology after 2005 has facilitated the growth of bank deposits. The deposits constitute a major portion of the banks’ funds and as the average cost of deposits is rising since 2006, the average cost of funds for banks is also rising. This is negatively impacting the productivity of banks. This is because the banks are investing in low-return, low-risk government securities and are not lending enough on account of perceived high risks. This has led to mobilizing higher deposits at increased costs, nullifying the benefits of technology. It is found that the “growth rate of assets” is negatively impacting the technology change component of productivity. This implies that banks are acquiring non-remunerative assets. Today Current Affairs
In order to facilitate the reduction in cash holdings of the banks and cash reserve ratio, it is suggested to take measures to improve the digitisation of economy. Moreover, lowering of the statutory liquidity ratio will increase lendable resources of the bank and will improve profitability with the reduction of investments in low-yielding government securities. The reduction in NPAs of banks through legal reforms, faster execution of law suits for recovery, realistic assessment of credit proposals, and strict monitoring of loan accounts is suggested.
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plutus ias daily current affairs 30 April 2022 Hindi
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