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Profitability Analysis of Indian Banks

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A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

A COMPARATIVE STUDY OF PROFITABILITY OF


DIFFERENT GROUPS OF SCHEDULED COMMERCIAL
BANKS IN INDIA

Dr. Doonger Singh Kheechee


Associate Professor, Department of Business Finance & Economics
Jai Narain Vyas University, Jodhpur

INTRODUCTION
Financial system is consisted of financial institutions, financial markets, and financial
services. It is an essential and conducive requirement for accelerating the rate of
economic growth. There is synchronization between the rate of financial
intermediation, capital formation and rate of economic growth. Higher is rate of
capital formation, higher will be the rate of economic growth and vice-versa.
Commercial Banks are essential ingredients of financial system. About two-third of
financial resources are mobilized and dispersed by the active role of commercial banks.
In India, the growth of banking industry has witnessed various ups and downs before
independence but after independence due to active role of government in framing
banking regulations as well as establishment of S.B.I. and other public sector banks has
given a very sound base to the banking sector in the country. Banks are helping in
cherishing the economic goals as well as have changed class banking to mass banking.
The role of public sector banks is more dominating in banking sector of the country.
The shares in deposits and advances of banking sector are two-third and remaining
one-third is shared by private sector and foreign banks. After the adoption of policy of
liberalization, the role of private sector and foreign banks has also increased and the
banking sector in India is becoming more competitive and sound in persuading the
goal of economic growth but profitability and productivity of commercial banks cannot
be said to be very satisfactory. Not only this, there is great divergence in the
profitability of public, private and foreign banks. In this article, an attempt has been
made to compare the profitability of different categories of banks and to find out the
causes of difference in their profitability, so that a mechanism can be evolved for
improving the profitability and productivity of commercial banks.

THEORITICAL FRAMEWORK
The profit is the net of income and cost of funds and the profitability is an index of
profit expressed as the rate of return on funds. In order to analyze the profit and
profitability in detail, it is essential to have an idea of items of income and expenditure,
which are listed here asunder:
62 IJMT, Volume 19, Number 1, January - June 2011
A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

• Income
o Interest Income
 Interest on Advances
 Interest on Investment
o Other Income in the form of commission and brokerages
• Expenditure
o Interest on Deposits and Interest on Borrowings
o Provisions and Contingencies
o Operating Expenses
• Profit
o Operating profit = Income minus Expenditure
o Net profit = Operating profit – Provisions of Taxes and Contingencies

The various ratios used to indicate as cost of funds and returns on funds are :
• Cost of Deposits = Interest Paid on Deposits / Deposits
• Cost of Borrowings = Interest Paid on Borrowings / Borrowings.
• Cost of Funds = (Interest Paid on Deposits + Interest Paid on Borrowings)
(Deposits + Borrowings).
• Return on Advances = Interest Earned on Advances / Advances.
• Return on Investments = Interest Earned on Investments /Investments.
• Return on Funds = (Return on Advances + Return on Investments)
(Investments + Advances).

ANALYTICAL FRAMEWORK

PART A: ANALYSIS OF PARAMETERS OF PROFITABILITY


In order to ascertain the return on funds to express the profitability of different groups
and to have a comparative view of these parameters various ratios by using the above
formulae has been calculated for the period from 2003-04 to 2009-10 and are shown in
tables along with the mean value and value of standard deviation so that it can be
inferred that which bank group is having highest rate of return.

(A) RETURN ON FUNDS


It is the ratio of interest income to aggregate of investment and advances.
The numerical value for the ratio of returns and funds of various bank groups for the
period 2003-04 to 2009-10 are shown in following Table No.1.

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A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

Table 1 : Return on Funds


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 8.4 8.2 7.7 8.5 8.2
2004-05 7.3 6.9 7.3 8.0 7.1
2005-06 7.6 7.5 6.6 7.7 7.4
2006-07 8.2 7.5 7.4 8.0 7.6
2007-08 8.7 8.0 8.7 8.5 8.2
2008-09 9.9 8.2 9.5 9.1 8.5
2009-10 8.3 8.1 8.4 9.2 8.4
Descriptive Statistics

Mean 8.3429 7.7714 7.9429 8.4286


7.9143
Std.
.8384 .4889 .9813 .5707 .5429
Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India
FB = Foreign Banks in India
PSB = Public Sector Banks in India (SBI + Associates of SBI + Nationalized banks
PrSB = Private Sector Banks
SCB = All Scheduled Commercial Banks

By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the return on funds is very high in case of old private sector
banks, as the mean value is 8.42. Next is the place of foreign banks whose value is 8.34
and it is lowest in place of public sector banks as it is 7.77 and the overall mean value of
all scheduled commercial banks is 7.91.
The degree of variation is very low in public sector banks as the value of standard
deviation of the ratio on return on funds is .48 and the variation is very high in case of
new private sector banks as the value of standard deviation is .98. The variation is also
very high in foreign banks as the value of standard deviation is .83. The overall
variation in this ratio in case of all the banks is .54.

(B) RETURN ON INVESTMENTS


It is the ratio of Return on Investments to total investment.
The numerical value for the ratio for the period are shown in the Table No.2

64 IJMT, Volume 19, Number 1, January - June 2011


A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

Table 2 : Return on Investment


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 8.5 8.5 6.2 8.1 7.8
2004-05 6.9 8.2 5.2 7.7 7.6
2005-06 7.5 8.2 5.5 7.2 7.7
2006-07 7.6 7.5 6.6 7.2 7.3
2007-08 7.1 6.6 6.4 6.3 6.6
2008-09 7.63 6.95 7.03 6.57 7.01
2009-10 6.39 6.72 6.28 6.18 6.59
Descriptive Statistics
Mean 7.3743 7.5243 6.1729 7.0357 7.2286

Std. .6669 .7849 .6298 .7209 .5070


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

(C) RETURN ON ADVANCES


It is the ratio of Interest Earned on Advances to Total Advances.
The numerical value for the ratio for the period are shown in the Table No.3

Table 3 : Return on Advances


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 8.3 7.9 8.8 8.8 7.2
2004-05 7.3 7.0 7.3 8.0 7.3
2005-06 7.6 7.1 7.3 7.9 7.2
2006-07 8.7 7.7 8.3 8.6 7.9
2007-08 9.8 8.6 10.0 9.6 8.9
2008-09 12.61 10.08 11.29 11.82 10.50
2009-10 9.99 9.10 9.56 10.95 9.29
Descriptive Statistics
Mean 9.1857 8.2114 8.9357 9.3814 8.3271

Std. 1.8185 1.1175 1.4628 1.5004 1.2751


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

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By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the return on advances is very high in case of old private sector
banks, as the mean value is 9.38. Next is the place of foreign banks whose value is 9.18
and it is lowest in public sector banks as it is 8.21 and the overall mean value of all
scheduled commercial banks is 8.32.
The degree of variation is very low in public sector banks as the value of standard
deviation of the ratio on return on advances is 1.11 and the variation is very high in
case of foreign banks as the value of standard deviation is 1.81. The variation is also
very high in old private sector banks as the value of standard deviation is 1.5. The
overall variation in this ratio in case of all the banks is 1.27.

(D) INTEREST INCOME


Total Income of banks is composed of Interest Income (interest on advances and on
investment) and other income which is in the form of commission and brokerages. The
analysis of interest income as a percentage to total income is shown in the following
Table No.4 which indicates that the share of interest income in total income is between
70 to 90% in all the categories of banks but there is difference in the share in different
categories of banks.

Table 4 : Interest Income as a per cent to total Income


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 70.2 79.6 76.2 78.9 78.5
2004-05 70.3 82.7 76.9 88.1 81.9
2005-06 69.6 86.3 78.3 89.5 84.0
2006-07 71.8 87.4 78.0 88.0 84.3
2007-08 69.8 86.7 79.2 87.0 83.6
2008-09 67.1 86.6 81.4 87.1 83.8
2009-10 72.6 86.3 78.4 86.8 84.8
Descriptive Statistics
Mean 70.2000 85.0857 78.3429 86.4857 82.9857

Std. 1.7540 2.8574 1.6772 3.4706 2.1752


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

Table No.4 exhibits the ratio of interest income. By comparing the various ratios on the
basis of the Mean value of ratios for the period, it has been noted that the ratio of
interest income is very high in case of old private sector banks, as the mean value is

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A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

86.48. Next is the place of public sector banks whose value is 85.08 and it is lowest in
foreign banks as it is 70.2 and the overall mean value of all scheduled commercial
banks is 82.98.
The degree of variation is very low in new private sector banks as the value of standard
deviation of the ratio on ratio of interest income is 1.67 and the variation is very high in
case of old private sector banks as the value of standard deviation is 3.47. The overall
variation in this ratio in case of all the banks is 2.17.

(E) OTHER INCOME


Other Income of the banks is in the form of commission and brokerages which is
earned by view of providing various banking services to the customers and for that
purpose the operating expenses of banks are increased, therefore, the analysis in the
following table is made whether the contribution of other income is more or less than
the operating expenses. If percentage of other income to operating expenses will be
high, banks profitability will increase and vice-versa.
The numerical value of other income as a percentage to operating expenses are shown
in the Table No.5

Table 5 : Other Income as a per cent to operating expenses


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 103.1 86.2 102.8 102.3 90.4
2004-05 87.5 82.5 84.4 47.9 68.7
2005-06 91.8 53.0 76.8 39.5 59.7
2006-07 90.9 54.8 87.0 52.8 64.9
2007-08 102.3 70.3 87.0 67.5 78.1
2008-09 121.1 76.4 85.0 70.8 84.0
2009-10 89.6 73.3 95.8 65.4 78.7
Descriptive Statistics
Mean 98.0429 70.9286 88.4000 63.7429 74.9286

Std. 11.8867 12.8104 8.4475 20.4604 10.9332


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the ratio of other income is very high in case of foreign banks, as
the mean value is 98.04. Next is the place of new private sector banks whose value is
88.40 and it is lowest in old private sector banks as it is 63.74 and the overall mean
value of all scheduled commercial banks is 74.92.

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A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

The degree of variation is very low in new private sector banks as the value of standard
deviation of the ratio of other income is 8.44 and the variation is very high in case of
old private sector banks as the value of standard deviation is 2.46. The overall
variation in this ratio in case of all the banks is 10.93.

PART B: ANALYSIS OF PARAMETERS OF COST OF BANKING OPERATIONS

(A) COST OF FUNDS


Cost of funds is the aggregate of cost of deposits and cost of borrowings, therefore, the
ratio of cost of funds is calculated as interest paid on deposit plus interest paid on
borrowings / deposits plus borrowings.
The numerical value for the ratio for the period is shown in the Table No.6.

Table 6 : Cost of Funds


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 3.8 5.0 3.7 5.3 4.8
2004-05 3.1 4.2 3.0 4.6 4.0
2005-06 3.2 4.2 3.5 4.5 4.0
2006-07 3.5 4.4 4.5 4.8 4.3
2007-08 3.9 5.3 5.5 5.7 5.3
2008-09 4.2 5.5 6.0 6.1 5.5
2009-10 2.8 5.3 4.4 6.1 5.1
Descriptive Statistics
Mean 3.5000 4.8429 4.3714 5.3000 4.7143

Std. .4967 .5623 1.0828 .6856 .6203


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the ratio of cost of funds is very high in case of old private sector
banks, as the mean value is 5.3. Next is the place of public sector banks whose value is
4.84 and it is lowest in foreign banks as it is 3.5 and the overall mean value of all
scheduled commercial banks is 4.7.
The degree of variation is very low in foreign banks as the value of standard deviation
of the ratio of cost of funds is .49 and the variation is very high in case of new private

68 IJMT, Volume 19, Number 1, January - June 2011


A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

sector banks as the value of standard deviation is 1.08. The overall variation in this
ratio in case of all the banks is .62.

(B) COST OF DEPOSITS


It is ratio of interest paid on deposits to total deposits.
The numerical value for the ratio for the period is shown in the Table No.7.

Table 7 : Cost of Deposit


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 3.6 5.1 4.2 5.4 4.9
2004-05 3.1 4.4 3.4 4.6 4.2
2005-06 2.8 4.3 3.6 4.5 4.1
2006-07 3.2 4.5 4.7 4.9 4.5
2007-08 3.8 5.4 5.9 5.7 5.4
2008-09 4.5 6.3 6.6 6.7 6.2
2009-10 3.2 5.7 5.0 6.3 5.5
Descriptive Statistics
Mean 3.4571 5.1000 4.7714 5.4429 4.9714

Std. .5653 .7506 1.1729 .8443 .7697


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the ratio of cost of deposit is very high in case of old private
sector banks, as the mean value is 5.44. Next is the place of public sector banks whose
value is 5.10 and it is lowest in foreign banks as it is 3.45 and the overall mean value of
all scheduled commercial banks is 4.97.
The degree of variation is very low in foreign banks as the value of standard deviation
of the ratio of cost of deposit is .56 and the variation is very high in case of new private
sector banks as the value of standard deviation is 1.17. The overall variation in this
ratio in case of all the banks is .76.

(C) COST OF BORROWINGS


It is ratio of interest paid on borrowings to total borrowings.
The numerical value for the ratio for the period is shown in the Table No.8.

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A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

Table 8 : Cost of Borrowing


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 4.3 2.3 1.5 2.8 2.4
2004-05 3.5 2.6 1.4 2.7 1.7
2005-06 4.5 2.5 3.1 3.1 3.0
2006-07 4.7 3.4 3.1 3.4 3.6
2007-08 4.5 3.5 3.1 4.6 3.6
2008-09 4.07 3.04 3.52 4.44 3.37
2009-10 1.58 1.37 1.96 1.94 1.57
Descriptive Statistics
Mean 3.8786 2.6729 2.5257 3.2829 2.7486

Std. 1.0869 .7325 .8772 .9572 .8669


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the ratio of cost of borrowing is very high in case of foreign
banks, as the mean value is 3.87. Next is the place of old private sector banks whose
value is 3.28 and it is lowest in new private sector banks as it is 2.52 and the overall
mean value of all scheduled commercial banks is 2.74.

The degree of variation is very low in public sector banks as the value of standard
deviation of the ratio of cost of borrowing is .73 and the variation is very high in case of
foreign banks as the value of standard deviation is 1.08. The overall variation in this
ratio in case of all the banks is .86.

(D) ANALYSIS OF PARAMETERS OF DIFFERENCE BETWEEN RETURN OF FUNDS


AND COST OF FUNDS: SPREAD
The difference between return on funds and cost of funds has been termed as spread.
It measures the efficiency of banks where it is high banks, are efficient and vice-versa.
The numerical value of spread is shown in the Table No.9.

70 IJMT, Volume 19, Number 1, January - June 2011


A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

Table 9 : Spread (Return on Fund – Cost of Fund)


Year FBs PSBs New PrSBs Old PrSBs SCBs
2003-04 4.6 3.2 4.0 3.1 3.3
2004-05 4.0 3.2 3.5 3.3 3.2
2005-06 4.3 3.3 3.1 3.2 3.3
2006-07 4.8 3.2 3.2 3.3 3.3
2007-08 4.8 2.7 3.2 2.8 2.9
2008-09 6.10 3.07 3.77 3.34 3.40
2009-10 5.49 3.02 3.99 3.12 3.31
Descriptive Statistics
Mean 4.8700 3.0986 3.5371 3.1657 3.2443

Std. .7144 .1989 .3859 .1861 .1625


Deviation
SOURCES: Various Issues of RBI Bulletins and Statistical Tables relating to Banks in
India and Reports on Trend & Progress of Banking in India

By comparing the various ratios on the basis of the Mean value of ratios for the period,
it has been noted that the ratio of spread is very high in case of foreign banks, as the
mean value is 4.87. Next is the place of new private sector banks whose value is 3.53
and it is lowest in public sector banks as it is 3.09 and the overall mean value of all
scheduled commercial banks is 3.24.
The degree of variation is very low in old private sector banks as the value of standard
deviation of the ratio of spread is 1.8 and the variation is very high in case of foreign
banks as the value of standard deviation is .71. The overall variation in this ratio in
case of all the banks is .16.

SUMMARY AND CONCLUSION


Analysis of parameters of Return of Funds shows that:-
1. Returns on Funds are very high in private sector banks as well as in Foreign
Banks and very low in public sector banks.
2. The Return on Investment as a component on return on fund is very high in
case of public sector banks as well as in foreign banks and very low in new
private sector banks. It shows that the management of portfolio of securities is
very efficient in public and foreign banks and is less efficient in private sector
banks.
3. The return on advances is very high in case of private sector and foreign banks
and is very low in public sector banks. It shows that the management of loan
portfolio is very efficient in private sector and foreign banks and very less
efficient in public sector banks.

IJMT, Volume 19, Number 1, January - June 2011 71


A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

4. The interest income which is composed of interest on advances and interest on


securities is very high in private sector banks as well as public sector banks and
very low in foreign banks.
5. The share of other income in the total income is very high in case of foreign
banks as they deal in foreign exchange transactions as well as it is also high in
private sector banks as various financial services are rendered by private sector
banks but it is not very high in public sector banks. It shows that the financial
services rendered by public sector banks are not as large as in private sector
and foreign banks. The spread i.e. the difference of return on funds and cost of
funds is very high in case of foreign banks as well as new private sector banks
and very low in public sector banks. This shows that the foreign banks and
private sector banks are very efficient in managing their banking business in
comparison to public sector banks.

Analysis of parameters of cost of banking operations shows that :-


1. It is very high in case of old private sector banks and public sector banks and
very low in foreign banks showing that foreign banks are very efficient in
having high degree of operational efficiency in getting deposits and borrowing
funds.
2. As far as cost of deposits is concerned it is also very high in all private sector
and public sector banks and very low in foreign banks.
3. The cost of borrowing is very high in foreign banks and private sector banks.

Analysis of spread shows that:-


1. It is very high in case of foreign and new private sector banks and is very low
in public sector banks due to the difference of cost of funds.

REFERENCES
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1983, PP.8-13
4. Bhanot, S.P.: Profitability of Banks, Indian Banking today and tomorrow, Aug.
1988, PP.3-7
5. Chakravarthy, J.K.: Profitability of Banks: An Empirical Attempt for
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Banks for profit planning, paper presented to Bankers Economist Meet, Punjab
National Bank, New Delhi, 1986
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A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

6. Chandan C. L. and Rajput Pawan Kumar (2002) “Profitability Analysis of


Banks in India: A Multiple Regression Approach”, Indian Management Studies
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Interest Margins and Profitability: Some International Evidence’, World Bank
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IJMT, Volume 19, Number 1, January - June 2011 73


A Comparative Study of Profitability of difference groups of Scheduled Commercial Banks in India

24. The Reserve Bank of India, ‘The Report on Trend and Progress of Banking in
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74 IJMT, Volume 19, Number 1, January - June 2011

Common questions

Powered by AI

Public sector banks show a modest return on investment (7.52) juxtaposed with a mid-range cost of funds (4.84), indicating balanced portfolio and fund management. Conversely, foreign banks excel with high returns (7.37) and low costs (3.50), suggesting a stronger correlation where optimized fund costs directly bolster investment returns .

The cost of deposits varies remarkably, with old private sector banks having the highest mean of 5.44, indicating significant interest expenses on deposits, potentially affecting profits. In contrast, foreign banks incur the lowest costs at 3.45, enhancing their competitive advantage in profitability due to reduced financial liabilities .

Public sector banks and foreign banks consistently exhibit high average returns on investments, indicating effective portfolio management of securities. Meanwhile, new private sector banks have the lowest return, implying less efficient management. This disparity suggests that public and foreign banks are more adept at leveraging their investment portfolios for higher returns .

Public sector banks' cost of funds remains relatively stable with a mean of 4.84 and slight year-to-year reductions, but they face the second-highest cost after old private sector banks. This stability may limit their competitive ability to offer lower rates compared to foreign banks, potentially affecting their market share and profitability .

A high cost of borrowing can negatively impact a bank’s profitability as it increases expenses. Foreign banks face the highest cost of borrowing with a mean of 3.88, while new private sector banks encounter the lowest at 2.53. This suggests foreign banks might have to manage higher interest expenses, impacting their net margins unless balanced by higher revenue sources .

Banks with high spreads, like foreign and new private sector banks, demonstrate strong operational efficiency as high spreads reflect effective management in keeping costs low while maximizing returns. This proficiency in balancing funding sources and revenue streams positions these banks as leaders in operational strategy and profitability .

New private sector banks maintain a robust return on advances with a mean value of 8.94, behind old private banks and foreign banks. This high return enhances their revenue from lending activities, potentially offsetting lower returns on investments, and underscores effective credit management that boosts their financial performance relative to competitors .

Foreign banks achieve high spreads through lower costs of funds, with a mean of 3.5, and high returns on funds resulting in a high spread mean of 4.87. This efficiency is evidenced by strategic management leading to high return ratios and low cost operations, which maximizes their spreads .

A low standard deviation in return ratios indicates more stable returns, while a high standard deviation suggests greater volatility. Public sector banks have the lowest standard deviation for return on funds (.48), indicating stable returns, while new private sector banks exhibit high volatility with a standard deviation of .98. Similarly, foreign banks show high variability with a standard deviation of .83 .

A bank's borrowing costs provide insight into its strategic agility. Foreign banks, with higher borrowing costs averaging 3.88, may leverage such costs with a strategy focused on high-value lending activities or diversified income streams. Meanwhile, banks with lower costs may prioritize cost-effective borrowing to maintain competitive lending rates .

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