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Volume2,No.7,July2013
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A Comparative Study on the Performance of Selected Public
Sector and Private Sector Banks in India
Cheenu Goel, Assistant Professor,Management Department,PCTE,Ludhiana
Chitwan Bhutani Rekhi, Assistant Professor,Management Department,PCTE,Ludhiana
ABSTRACT
Efficiency and profitability of the banking sector in India has assumed primal importance due to intense
competition, greater customer demands and changing banking reforms. Since competition cannot be observed
directly, various indirect measures in the form of simple indicators or complex models have been devised and
used both in theory and in practice. This study attempts to measure the relative performance of Indian banks. For
this study, we have used public sector banks and private sector banks. We know that in the service sector, it is
difficult to quantify the output because it is intangible. Hence different proxy indicators are used for measuring
productivity of banking sector. Segmentation of the banking sector in India was done on bank assets size. Overall,
the analysis supports the conclusion that new banks are more efficient that old ones. The public sector banks are not
as profitable as other sectors are. It means that efficiency and profitability are interrelated. The key to increase
performance depends upon ROA, ROE and NIM.
The commercial Banking system provides a large ROE = Net profit after taxes / equity capital
portion of the medium of exchange of a given country, There is a direct relationship between return on assets
and is the primary instrument through which Monitory (which measures how efficiently the bank is run) and
policy is conducted, through their deposit mobilization the return on equity (which measures how well the
and lending operations. Commercial banks make the owners are doing on their investment).
productive utilization of ideal funds, thus assists the Another commonly used measure of bank performance
society to produce wealth. Commercial Banks are the is called the net interest margin (NIM). NIM is the
institutions specifically designed to further the capital difference between interest income and interest
formation process through the attraction of deposits and expenses as a percentage of total assets.
extension of credit.
NIM = (Interest income - Interest expenses) / Assets
Measure of Banks Performance One of the bank's primary intermediation functions is to
Although net income gives us an idea of how well a issue liabilities and use the proceeds to purchase
bank is doing, it suffers from one major drawback. It income earnings assets. If a bank manager has done a
does not adjust for the bank's size, thus making it hard good job of asset and liability management such that
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Volume2,No.7,July2013
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the bank earns substantial income on its assets and have traditional banks which led to the retail boom in India.
low costs on its liability, profits will be high. How well People not only just demanded more from their banks
a bank manages its asset and liabilities is affected by but also received more. Today Banking in India is
the spread between the interest earned on the bank's generally fair and mature in terms of supply, product
assets and the interest cost on its liabilities. This spread range and reach though in rural India still remains a
is exactly what net interest margin measures. If the challenge for the private sector and foreign banks.
bank is able to raise funds with liabilities that have low Banking in terms of quality of assets and capital
interest costs and is able to acquire assets with high adequacy, banks in India are considered to have clean,
interest income, the net interest margin will be high and strong and transparent balance sheets relative to other
the bank is likely to be highly profitable. If the interest banks in comparable other economies.
cost of its liabilities rises relatively to the interest
earned on its assets, the net interest margin will fall, and Review of Literature
bank profitability will suffer. Jha and Sarangi (2011) analyzed the performance of
seven public sector and private sector banks for the year
Indian Banking Industry 2009-10. They used three sets of ratios, operating
Indian Banking Industry originated in the first decade performance ratios, financial ratios, and efficiency
of 18th century as The General Bank of India came ratios. In all eleven ratios were used. They found that
into existence in the year 1786. And then later Bank of Axis Bank took the first position, followed ICICI Bank,
Hindustan was started. A couple of decades later in the BOI, PNB, SBI, IDBI, and HDFC, in that order.
year 1850 the foreign banks like Credit Lyonnais
started their operations in Calcutta. Calcutta was the Dangwal and Kapoor (2010) evaluated the financial
most active trading port at that time which was during performance of nationalized banks in India and
the British Empire, due to these reasons the banking assessed the growth index value of various parameters
activity took roots there and prospered. In the year through overall profitability indices. The data for 19
1865, the first fully Indian owned bank was established nationalized banks, for the post-reform period from
in Allahabad. 2002-03 to 2006-07, was used to calculate the index of
spread ratios, burden ratios, and profitability ratios.
The Indian Banking Industry in 1960 became an They found that while four banks had excellent
important tool to facilitate the financial development of performance, five achieved good performance, four
the Indian economy. Simultaneously it emerged as a attained fair performance, and six had poor
large employer and debate prevailed that ensured about performance.
the possibility of nationalization of the banking
industry. The then Prime Minister of India, Indira Sharma (2010) assessed the bank failure resolution
Gandhi expressed the intention of the GOI in the annual mechanism to analyze the powers given by the
conference of the All India Congress Meeting. This was countries to their regulators to carry out resolution of
received with positive enthusiasm by the whole nation. failed banks among 148 countries during 2003. She
Later the GOI was issued an ordinance and nationalized used 12 variables for correlation and regression
the 14 largest commercial banks with effect from the analysis. Her study revealed that the countries which
midnight of July 19, 1969. In 1980 for the second time had faced systemic crisis were more prone to providing
nationalisation of 6 more commercial banks was done. liquidation powers to their regulators. These countries
The nationalization was done to give the government had a tendency to protect their regulators through
more control of credit delivery. With this the GOI immunity, rather than any legal action. Systemic crisis
controlled around 91% of the banking business of India. did not significantly influenced the regulators powers
The next stage for the Indian Banking Industry was to for the restructuring of the banks.
setup with the proposed relaxation in the norms for
Foreign Direct Investment, where voting rights were Pat (2009) made an assessment of the RBIs Report on
given to all the Foreign Investors in banks which could Trend and Progress of Banking in India, 2007-08,
exceed the present cap of 10%, at present it has gone up which reported a relatively-healthy position of the
to 49% with some restrictions. Indian Banking Industry Indian banking system. He noted that the various
was completely shocked with the new policy. Till this groups of banks reported improvements in net profits,
time the Bankers used to the follow the 4-6-4 method return on assets and return on equity. Two basic
(Borrow at 4%; Lend at 6%; Go home at 4) of indicators of sound banking system, namely, capital to
functioning. This new wave ushered in a modern risk weighted assets and quality of assets, also revealed
outlook and tech-savvy methods of working for considerable improvements over the years.
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Makesh (2008) evaluated the financial management Muniappan (2002) studied paradigm shift in banks from
practices of Federal Bank and Dhanlakshmi Bank, a regulator point of view in Indian Banking : Paradigm
along with the SBI, for the financial year 2006-2007. Shift, IBA Bulletin, No 24 -3. He concluded the
He revealed that all the three banks maintained capital positive effect of banking sector reforms on the
in excess of the stipulated norms of the RBI. Federal performance ofbanks. He suggested many effective
Bank had the lowest NPA Ratio to net advances and measures to strengthen the Indian banking system. The
had the maximum return on equity. Dhanalakshmi Bank reduction of NPAs, more provisions for standards of the
maintained a very high liquidity. But Federal Bank banks, IT, sound capital bare are the positive measures
performed well in cost management, as compared to the for a paradigm shift. A regulatory change is required in
SBI and Dhanalakshmi Bank. the Indian banking system
Joshi Vijaya (2007) observed that on the eve of banking Need of the Study
reforms Indian Banking Sector was financially Significance of performance evaluation in an
unsound, unprofitable and inefficient. They made a organization, for sustainable growth and development,
critical examination of the changes that have taken has been recognized since long. This calls for a system
place in the banking sector after reforms. Further, what that first measures and evaluates the performance, and
remains to be done with respect ofpre-emption of bank then brings out the strengths and weaknesses of the
resources, directed credit, deregulation of interest rates, organization for the purpose of further improvement.
etc. in the field of banking sector were also elaborately Efficient performance evaluation system encompasses
discussed. all aspects of an organization. With the advances in
computational tools, performance evaluation systems
SamwelKakukuLopoyetum (2005) in his article have evolved over a period of time from single-aspect
elaborated that the profitability performance of the systems to more comprehensive systems covering all
UCBs can be improved by strengthening the magnitude aspects of an organization. Moreover, almost every
of burden ratio. The spread ratio can be increased by industry, that envisages importance of evaluation, can
increasing the interest receipts faster than the interest adopt many methods to evaluate the performance. It
payments. The burden ratio can be lowered by prove to be better for performance measurement,
decreasing the manpower expenses, other expenses and evaluation and strategic planning for future growth and
increasing other incomes development of the Indian banks in the light of
changing requirements of this sector so to analyze the
Qamar (2003) identified the differences in terms of comparative profitability performance of banks for the
endowment factor, risk factor, revenue diversification, financial periods 2009-2012. By examining the
profitability, and efficiency that might have existed relationship among banks equity, assets and deposit size
among 100 scheduled commercial banks, divided into to profitability such as ROE, ROA and NIM. The banks
three groups for the year 2000-2001. His study revealed will be ranked based on their profitability performance
that the public sector banks were better endowed in and growth percentage. This will help the banking
terms of their assets base, share capital and industry f o r t h e i mp r o v e me n t o r c h a n g e in
shareholders equity than other banks, whereas foreign t h e ir b u s in e s s mo d e l.
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Objectives of the Study Amounts that are lying in the savings and current
1. To compare the profit earning of the selected accounts are known as demand deposits because they
publicsectorbanksandprivatesectorbanksfrom can be used at any point of time.
theyear2009to2012 Demand Deposit Ratio = Demand Deposit / Total
2. To investigate the factors affecting the profit Deposit.
earningoftheselectedbanksduringtheperiod.
Table 1
YEAR SBI PNB BOB ICICI HDFC AXIS
Research Methodology
2009 14.92 8.97 7.51 9.91 19.92 21.15
Research Design: This present study is conducted by 2010 15.24 9.51 7.85 15.34 22.24 22.77
following a Descriptive Design.
2011 14.04 8.58 7.57 15.42 22.27 19.51
Sample Unit: Any single bank operating in India 2012 9.43 7.5 7.52 13.69 18.41 18.06
Sample Size: For the in-depth analysis of the Mean 13.41 8.64 7.61 13.59 20.71 20.37
profitability, three major public sector and three private SD 2.70 0.85 0.16 2.57 1.88 2.03
sector banks are selected on the basis of their CV 20.15 9.84 2.10 18.98 9.11 9.99
Total Assets from the year 2009 to 2012.
Data Analysis and Interpretation MEAN 32.36 29.73 21.09 26.13 28.66 30.25
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As shown in table NIM of HDFC is more than others 2010 14.9 14.7 16.5 14.9 8 9.9
i.e. 4.02 which shows that interest earned by HDFC
2011 16.7 15.5 15.2 16.7 8.7 11.3
bank is much more than expended and other banks are
earning less interest. Interest earned by bank is there 2012 14.8 14.6 14.6 14.8 9 11.2
foremost income which is more in case of HDFC and
other banks following are almost at same level and MEAN 15.45 14.72 15.45 15.45 8.95 11.32
chart shows that there is very less variation in case of SD 0.87 0.57 0.79 0.87 0.87 1.22
HDFC bank and more variation in SBI bank.
CV 5.65 3.93 5.13 5.65 9.76 10.84
4) Credit Deposit Ratio
The proportion of loans generated by banks from
the deposits received. As shown in table debt equity is ratio is maximum in
Credit Deposit Ratio= Credit / Deposit case of three banks i.e. SBI , BOB and ICICI and
variation is least in case of PNB and maximum in case
of AXIS
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2012 14.4 17.2 18.4 12.5 17.4 18.6 2009 19.5 21.8 18.2 14.13 19.87 22.13
2010 16.96 24.63 20.27 16.95 24.36 25.58
MEAN 14.1 19.77 19.2 10.05 15.45 17.4
2011 16.97 21.85 22.49 22.8 30.58 27.43
SD 0.96 1.76 1.23 2.14 1.47 1.32
2012 16.29 19.09 19.3 21.99 27.19 24.13
CV 6.82 8.93 6.40 21.34 9.54 7.63 MEAN 17.43 21.84 20.06 18.96 25.5 24.81
SD 1.41 2.26 1.82 4.13 4.53 2.24
As shown in table ROE is maximum in case of PNB CV 8.12 10.35 9.09 21.80 17.77 9.04
19.77 followed by 19.2 of BOB and BOB has least
variation in this and ICICI is having more variation.
As shown in table operating margin of HDFC is
maximum 25.5 followed by AXIS 24.81 operating
margin is directly concerned with profitability. SBI is
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DD 1
SD -.582 1
TD -.096 -.753 1
The table shows that credit deposit ratio and saving positively associated with net profit and net interest
deposits have a high degree of positive association income and credit deposit ratio are negatively
(.966) , capital adequacy ratio and return on equity associated with net profit which is significant at 5
have very high positive association (.991) and return percent level.
on equity , capital adequacy ratio , time deposit are
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2) Correlation Co-efficient Matrix :PNB Bank
This table shows that saving deposit is highly and demand deposit, saving deposit and demand
positively associated with net profit at .976 and deposit are associated with each other at positive 5
highly negatively associated with net profit at -.958 percent significance level. Time deposit and return on
further net profit is also positively correlated with equity are negatively associated at 5 percent whereas
demand deposit, return on equity and return on assets time deposit and demand deposit , time deposit and
which is significant 5 percent level. It also shows that saving deposit are highly negatively associated at 1
return on equity and saving deposit , return on assets percent significance level.
This table shows shows net profit and return on assets 1 percent significance level. Net profit association
are highly positively associated .995 and time deposit with other variables is almost same.
and saving deposit are negatively associated -.993 at
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4) Correlation Co-efficient Matrix : ICICI Bank
DD SD TD NIM CDR ROA ROE CAR NP
DD 1
SD .858 1
TD -.936 -.984* 1
NIM -.470 -.006 .166 1
CDR -.563 -.063 .238 .848 1
ROA .681 .944 -.884 .313 .165 1
ROE .562 .906 -.817 .398 .352 .973* 1
CAR .940 .962* -.986* -.139 -.300 .886 .787 1
NP .676 .950* -.887 .175 .227 .932 .966* .829 1
*Correlation is significant at .05 level (2-tailed)
**Correlation is significant at .01 level (2-tailed)
This table shows that savings deposit and net profit , capital adequacy and term deposit , return on equity
are positively associated at .950 , net profit is and return on asset are highly negatively associated at
positively associated with return on equity at .966 , -.962 , -.986 , -.973. Term deposit and demand
net profit and return on asset are positively deposit are negatively associated at -.936 . These
associated , capital adequacy ratio and saving deposit values are significant at .05 level.
DD 1
SD .297 1
TD -.711 -.882 1
This table shows that saving deposit and net profit are Return on assets and capital adequacy ratio are highly
highly positively associated at .979 and net profit is positively associated at .975 these relations are
positively associated with credit deposit ratio at .938 . significant at .05 level.
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6) Correlation Co-efficient Matrix : AXIS Bank
DD SD TD NIM CDR ROA ROE CAR NP
DD 1
SD .278 1
TD .901 .506 1
NIM .170 .057 .182 1
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