Banking

Comprehensive Pack

1
•Overview :3

•Advances :8

•Deposits : 23

•Investments : 40

•NPAs : 48

•Operating Expenditures : 74

•Net Profitability margin : 89

2
Overview

3
 Global slowdown and weak credit demand from corporates
deteriorated the health of PSBs
• The bank’s total business (advances and deposits) grew at a CAGR of
approx. 15.3% to Rs. 168,232 billion in 2014-15, from Rs. 82,436 billion
in 2009-10. SBI & associates, which constitute around 22% of overall
business in 2014-15, grew at 13.6% CAGR from 2009-10 to 2014-15,
while the growth in nationalized banks was 15% CAGR over same
period.
• Private sector banks outperformed during the same period and their
total business grew by 18.6% CAGR.
• The banking industry experienced a slowdown in their total business.
• The total advances growth rate on y-o-y basis is decreased by 9.7
percent in 2014-15 (from 14.5 percent in 2013-14), on the other hand,
deposits grew by 10.6 percent y-oy from 14.9% in 2013-14. 4
Global slowdown and weak credit demand from corporates
deteriorated the health of PSBs
• The reason for decline in growth of advances is mainly due to the
poor performance of PSBs (grew only by 7.4 percent yo- y basis
from 14 percent in the previous year), due to the slowdown in
capital intensive sectors and weak working capital requirements.

5
Bank group-wise share in total business

6
PSBs lead the pack

Note: Funds deployed include loans and advances, investments, overall cash and bank
balances.

7
Advances

8
Public sector banks observed slowest growth among all bank
groups
• Total advances of scheduled commercial banks (SCBs) grew at a
CAGR of 16.1% to Rs. 73,882 billion in 2014-15 from Rs 34,967 billion
in 2009-10.
• However, on a year-on-year (y-o-y) basis, growth in advances slowed
to 9.7% (from 14.5% in 2013-14) due to the slowdown in industrial
activity not only in India but in entire world economy.
• Private sectors were largely unaffected given their large presence in
retail segment, where the growth is consistent.
• Working capital/short-term loans grew at a CAGR of 17.2% from
2009-10 to 2014-15, while term loans recorded a 15.3% CAGR.

9
Public sector banks observed slowest growth among all bank
groups
• However, on a y-o-y basis, in 2014-15, both working capital and term
loan showed downward pressure and recorded only 8% and 11%
growth respectively, owing to sluggish growth in the economy,
shelving of capital expenditure plans by companies and risk aversion
by banks (on account of rising level of non-performing assets).
• The share of working capital loans in total advances subtracted to
45% in 2014-15 from 46% a year ago.
• 2015-16 was estimated to be another slow year for overall advances
growth due to aforementioned factors as well as the asset quality
review (AQR) initiative taken by the RBI forced banks to recognize
adequate provisioning in stressed advances.

10
Overall break-up of advances

Break-up of advances 11
Public sector banks
• Advances of public sector banks increased at a CAGR of 15.2%
between 2009-10 and 2014-15 to Rs 54,762 billion.
• Of this, term loans grew at a CAGR of 14.5%, while working capital
loans grew at a CAGR of 15.9%.
• However, on a y-o-y basis, in 2014-15, total advances of PSBs grew
by only 7.4% from 14% in the previous year.
• Both working capital and term-loan recorded slowdown in advances
and the growth was 6% and 8% respectively.
• In 2014-15, the share of working capital loan and term-loan was 47%
and 53% respectively from 48% and 52% in previous year
respectively.

12
Public sector banks

13
Private sector banks
• Advances by private sector banks grew at a CAGR of 20.2% to Rs
15,843 billion in 2014-15 from Rs 6,324 billion in 2009-10.
• Of this, working capital loans grew at a CAGR of 24.8%, while term
loans grew at a CAGR of 18.0%.
• However, on a y-o-y basis, overall growth in advances increased to
18% in 2014-15 from 17% growth in previous year.
• During this period, working capital and term-loans grew by 16%
19% respectively.
• The share of working capital loans and term-loan remained almost
stable at 36% and 64% respectively in 2014-15.

14
Private sector banks
• At 18% y-o-y growth in 2014-15, private banks grew faster than their
public sector and foreign counterparts, largely owing to:
• Higher focus on retail segment
• Better marketing focus
• Opening of a larger number of branches
• Base effect

15
Private sector banks
Break-up of advances

16
Foreign banks
• Total advances by foreign banks grew at a CAGR of 14.9% to Rs
3,276 billion in 2014-15, from Rs 1,633 billion in 2009-10.
• During this period, working capital loans registered a CAGR of
15.8%, while term loans recorded a CAGR of 13.7%.
• On a y-o-y basis, growth in advances registered growth of 13% in
2014-15 from 10% in 2013-14.
• The growth was driven by 16% rise in working capital loans and a
9% increase in term loans.

17
Foreign banks
Break-up of advances

18
 Priority sector advances
• Credit to priority sectors has received a boost from the Reserve Bank
of India's (RBI's) initiatives in recent years.
• Prioritysectors comprise agriculture, small-scale industries,
education and housing.
• Targets and sub-targets under priority sector lending are linked to
the adjusted net bank credit (ANBC) or credit equivalent amount of
off-balance sheet exposure (CEOBSE).
• In August 2011, RBI set up a committee under Shri M V Nair to re-
examine the existing classification and suggest revised guidelines
pertaining to priority sector lending.
• The broad recommendations of the committee were adopted by RBI
in July 2012.
19
Priority sector advances
• Under the revised guidelines, there was no change in the overall
target of priority sectors.
• However, with the growing presence of foreign banks in India, the
priority sector lending target was increased for a specific segment
of foreign banks from 32% to 40%, at par with domestic banks.
• RBI modified the guidelines again in April 2014.

20
Group-wise trends in priority sector advances
• Private banks recorded the highest growth of 16% in priority sector
advances in 2014-15, and public sector banks recorded a growth of
9%.
• The share of public sector banks in the overall priority sector
lending has been around 79% and has come down marginally over
the years.

21
 Group-wise trends in priority sector advances
Advances to priority sectors by banks

Note: With effect from April 30, 2007, the targets and sub-targets under priority sector
lending have been linked to ANBC 22
Deposits

23
Deposits growth at decadel low in 2015-16
• Growth in overall bank deposits was 9% y-o-y in 2015-16, lowest in
a decade, due to low aggression by the banks to accumulate
liability in muted credit demand environment.
• Deposit growth is a direct function of funds demand from
corporates.
• So as the credit growth was lower, overall deposits growth were
subdued.

24
Overall break-up of deposits

25
Overall growth in total deposits and share of low-cost deposits
• With companies opting to put money in more attractive market
instruments, the share of current account deposits in banks‘ total
deposits has begun to shrink.
• Moreover, current account transactions have reduced.
• The growth in CASA deposits was around 9%, reaching Rs 33,646
billion.
• The composition of deposits remained almost similar, with the
share of CASA deposits at around 32.7% in 2015-16.
• Also, the share of term deposits in total incremental deposits
declined to 66% in 2015-16 from 73% in 2013-14, while the share of
CASA deposits in total incremental deposits increased to 34% in
2015-16 from 27% in 2013-14.
26
Overall growth in total deposits and share of low-cost deposits

27
Public sector banks
• Public sector bank deposits grew at a CAGR of 12% between 2010-
11 and 2015-16 to Rs 77,449 billion.
• On a y-o-y basis, however, growth decline to 8%.
• PSBs which are major lender to corporates were reluctant for
deposits as there is very low fund requirements from underlying.

28
Public sector banks
Break-up of deposits

29
Public sector banks
Break-up of deposits

• The growth in CASA deposits was around 8%, reaching Rs 23,968

billion.
• Deposits in all three segments de-grew.
• Term deposits registered a growth of 13% CAGR between 2010-11
and 2015-16.
• CASA deposits grew by 8% in 2015-16, within which, savings
deposits rose by 8%, while current deposits grew by only 5%
(versus 7% growth in the previous year).

30
Growth in total deposits and share of low-cost deposits
Break-up of deposits

31
Growth in total deposits and share of low-cost deposits

32
Growth in total deposits and share of low-cost deposits

33
Private sector banks

• Private sector bank deposits grew at a CAGR of 16% to Rs 20,808

billion between 2010-11 and 2015-16.
• On a y-o-y basis, the group registered a growth of 13% in 2015-16,
highest among all bank groups, supported by their higher endeavor
to raise low-cost CASA deposits and more fund requirements by
them as they are primarily focused on retail segment which grew
by almost 20% in 2015-16.
• Also the growth in deposits can be partly attributed to the fact that
some private banks revised their savings bank deposit rates
upward after the deregulation of savings bank interest rates by the
Reserve Bank of India in October 2011.

34
Private sector banks
• Growth in current and savings deposits is increased by 15% and
16% in 2015-16, respectively, (from 17% and 18%, respectively, in
2014-15).
• Term deposits at 12% in 2015-16 from 14% in 2014-15.

35
Foreign banks

• Foreign banks generally cater to high net worth individuals and

NRIs.
• Besides, only a few banks, such as HSBC Bank, Standard Chartered
Bank, Citibank and ABN AMRO Bank, are involved in retail
banking.
• Over 2010-11 to 2015-16, growth in foreign banks' deposits grew at a
CAGR of 14%.
• On a y-o-y basis, however, growth was about 13% in 2015-16 (as
against 15% in 2014-15).

36
Foreign banks
Break-up of deposits

37
Foreign banks
Growth in total deposits and share of low-cost deposits

38
Foreign banks
Growth in total deposits and share of low-cost deposits

• Foreign banks generally prefer to cater to corporate clients with

sound cash management, who maintain current deposits.
• Over the past 5 years, current deposits grew at a CAGR of 9%,
while savings deposits at a 4% CAGR.
• The share of lowcost deposits declined marginally to 34.2% in
2015-16 from 34.6% in 2014-15 as a result of expected 14% y-o-y
rise in term deposits in 2015-16 as against a 12% rise in CASA
deposits in same period.

39
Investments

40
 Statutory liquidity ratio (SLR) investments:

• Government securities and other government-approved securities

Non-SLR investments:

• Commercial papers, shares, bonds and debentures issued by

companies, units of UTI and other mutual funds
• As per the Banking Regulation Act, 1949, banks have to invest a
prescribed minimum of their net demand and time liabilities (NDTL) as
liquid assets in government and other approved securities.
• The ratio of liquid assets to NDTL is known as SLR.
• As part of the financial sector reforms undertaken in the 1990s, the SLR
requirement for banks was gradually reduced to 25% in October 1997
from 38.5% in February 1992.
• In 2015-16, the SLR requirement was further reduced to 21.5%.
• As on August 31, 2016, it stood at 21%. 41
SLR investments
Scheduled commercial banks (SCBs)

• Although during 2014-15, the RBI reduced the SLR requirements by

50 bps but almost 78% of the banking sector's total investments were
in SLR securities, mainly to meet the Reserve Bank of India (RBI)
norms and gain access to the short term money market, also lack of
lending opportunities in the market led the banks to park money in
SLR securities.
• In 2015-16, total investments in SLR securities is estimated to have
come down given the RBI’s endeavor to bring down SLR to 20% by
March 2017, which will release the fund as well as expected pick-up
in the industrial activities and growth in investments scenario will
increase the credit demand in the market.
42
SLR investments
Investment in SLR securities

43
SLR investments
Public sector banks:
• In 2014-15, growth in investments by public sector banks in SLR
securities was 10.3% compared to 11% in 2013-14.

44
Bank group-wise investment in SLR securities

45
Bank group-wise investment in SLR securities
Private sector banks:

• In 2014-15, private banks' investments in SLR securities grew by

18% against only 3% rise in the previous year.

Foreign banks:

• Foreign banks' investments in SLR securities increased by just 6%

in 2014-15 against a 27% increase in the previous year.

46
 Non-SLR investments
• The share of non-SLR investments in SCBs' total investments remains
at 22% in 2014-15 from 23% in previous year.
• The composition of non-SLR investments of banks has changed since
2004-05.
• The share of banks' investment in shares, commercial papers and
mutual funds has been growing, while the share of investment in
bonds/debentures has been declining, partly reflecting the changing
risk appetite of Indian banks.

47
NPAs

48
• Asset quality of SCBs to deteriorate further, Gross NPA level to touch
double digit by 2017-18 with major contribution from PSBs
• The quality of assets have significantly worsened in the banking
industry in recent years and the risk pertaining to outstanding
advances have also increased with global economic instability, poor
investment demand and bad health of corporates.
• The overall level of stressed assets has increased by almost 400 bps
from FY12 to FY16.
• The biggest contributor to the pool of gross NPA are state-owned-
banks where the stressed asset ratio is significantly high.
• Elevated levels of NPAs, coupled with weak capital positions have
smashed overall credit growth of the Indian banking system.

49
• An asset quality review (AQR) conducted by RBI to enhance the
transparency of bank exposures, including the adequacy of asset
and collateral valuation and related provisions have changed the
picture of Indian banking industry a lot from 2014-15 as the total
provisioning and GNPAs surged after that.
• Under this initiative, the RBI is concentrating on the loans that are of
concern, as well as loans that have potential weaknesses.
• Also the apex bank intends to clean and fully provision bank
balance sheets by March 2017.
• The asset quality also suffered as many large projects ran into
difficulties because of poor project evaluation, extensive project
delays, poor monitoring and cost overruns creating pressure on
borrowers to repay loans.
50
• Public sector banks, suffering with high amount of bad loans,
witnessed a sharp slowdown in credit growth in past two years.
• During 2015-16, wholesale lending credit (loan to large corporates)
for banks expanded only by 7 per cent as against the overall bank
credit growth of about 9 per cent on a y-o-y basis.
• The deviation is attributed to a sluggish investment cycle.
• GNPA levels are expected to surge high on account of:
• Business disruptions in SME, real estate and and other cash
intensive segments on account of demonetisation
• Weak credit outlook for investment-led sectors continue
• Corporate cash flows continue to be strained
• Some slippage is likely from loans restructured during the past 2-3
years, primarily from the infrastructure (especially power) and
construction sectors
51
• Recoveries to reduce due to lower ARC sales
Trend in GNPA ratio of scheduled commercial banks (PSBs and
private banks)

52
Increasing stressed advances of PSBs and private banks

53
Substantial increase in restructuring in 2014-15 and 2015-16

54
Substantial increase in restructuring in 2014-15 and 2015-16
• CRISIL Research believes that GNPA levels will be significantly
higher at 9.8% for 2016-17 on account of falling credit growth,
inadequate recognition of bad assets in the past, and lower asset
sales to asset reconstruction companies (ARCs) during the year and
high slippage to NPAs mainly from restructured standard
accounts.
• Demonetisation which has impacted the retail credit growth and
create business disruptions in cash intensive industries in the
second half of 2016-17 will further uplift the asset quality concerns
for the banks with higher exposure in housing and SME segments.
• We believe that the overall gross NPA level will touch the double
digit by 2017-18.
55
Substantial increase in restructuring in 2014-15 and 2015-16

• However flexible restructuring of project loans under 5/25 scheme

and the new S4A guidelines (discussed in detail later) will benefit
banks in the long term.
• Slippages (NPA additions) would have been higher without this
enabler.
• 5/25 has largely made up for the absence of restructuring. Strategic
debt restructuring (SDR) scheme would also help limit rise in
GNPAs.

56
Demonetisation to give a rise in asset quality concerns

• The ban on the old high denomination currency notes is expected

to increase the strain of already stressed banking industry.
• Mounting gross NPAs and stressed advances levels will see some
upward shift as few of the major retail sectors (eg. housing, auto)
along with SMEs are struggling in terms of credit growth after
major business disruptions in the initial period post note ban.
• The 60 day holiday in repayment of interest allowed by RBI on
account of demonetisation will also have a critical impact on NPA
and the rise in NPAs will be visible in the first half of 2017-18.
• As housing and SME segment involve significant cash transactions,
early signs post demonetisation suggest that the demand of credit
have slowed down and banks have become cautious in lending to
57
the segment due to existing uncertainty.
Stressed advances for PSBs increased significantly, expected to
elevate further till 2017-18
• Public sector banks (PSBs) reported substantial high GNPAs at
9.3% as of March 2016 vis-Ã -vis 5% as of March 2015.
• Over the same period, the GNPAs of private banks were relatively
healthy at 2.8% as of March 2016 but private sector also felt the
pain due to AQR initiative by the RBI.
• The marked deterioration in the asset quality of PSBs can be
attributed to the weak monitoring and recovery mechanisms,
slowdown in economic growth, sharp rise in interest rates, and
volatility in the currency and commodity markets.
• Sectors that mainly contributed to higher NPAs were priority
sectors (agriculture), construction, metals (iron and steel),
engineering, aviation and infrastructure (power and telecom). 58
Risk for PSBs increasing with high amount of restructuring
• Regulatory forbearance on loan restructuring ended on April 1,
2015.
• Post the sub-prime crisis in 2008, the RBI allowed banks to
restructure stressed assets while maintaining the asset
classification, i.e. the asset does not become nonperforming as was
the case earlier.
• The special regulatory treatment helped banks limit the rise in
GNPAs.
• Currently, banks have to allocate lower provisions for standard
restructured advances - 5%, compared with 15% for sub-standard
assets (the first level of NPAs - when interest or principal is due for
more than 90 days).
59
Risk for PSBs increasing with high amount of restructuring
• As per the RBI's mandate, after April 2015, banks will have to treat
all restructured new standard advances as NPAs and make
provisions accordingly.
• Though the fresh restructuring have fallen by more than 70% in
2015-16, weak investment scenario, falling demands and
uncertainty in global economy led to a more than 50% fall in
upgradation of restructured loans and increased slippages of such
loans into NPLs.
• The sign of weakness in restructured loans will continued to
remain under pressure in 2016-17 and 2017-18 unless economic
growth improves sharply.

60
Slippages to remain high in 2016-17
• High slippages in 2015-16 were mainly due to increased slippages
from large corporate accounts withdrawal of forbearance on
restructuring.
• As of September 2016, many of the major banks have seen
significant growth in slippages on yoy basis.
• Slippages growth will decline but still remain at high levels in 2016-
17 due to higher slippages from the fresh restructuring carried out
in 2014-15 and 2015-16.
• Around 40% of the assets restructured during 2011-14 have slipped
into NPA.

61
Credit cost to remain sizeable yet will be lower than 2015-16 for
PSBs
• The last two years has seen a substantial increase in slippage ratios of
banks.
• Slippages are basically fresh additions to NPLs and they belong to a
sub-standard category, where the provisioning requirements are low.
• As they age, they move into higher categories of doubtful debts D1,
D2, D3 where provisioning requirements are 40-100%.
• The recent trends in stressed asset formation of public banks shows
that though stressed asset formation has decreased, credit costs have
actually gone up in H1FY17 on year on year basis, indicating that
these banks are heavily underprovisioned and as bad loans season or
age, provisioning on them goes up.

62
Credit cost to remain sizeable yet will be lower than 2015-16 for
PSBs
• However, considering a drastic rise in the provisioning cost of PSBs
in the last two quarters of 2015-16, overall credit cost will be lower
for them in 2016-17.
• NIMs are expected to be marginally lower in 2016-17, on account of
lower yields and higher GNPAs (especially of PSBs).
• With a contraction in NIMs, profitability (return on assets) of PSBs to
remain under significant pressure in 2016-17 due to higher
provisioning requirements following increase in GNPAs.

63
Industry-specific issues compounded the issue of stressed assets
within banking sector

• The stressed advances ratios for most of the sector where banks
have high amount of exposure have increased significantly from
March 2016 levels to September 2016.
• Secors such as mining and quarrying, metals, construction,
infrastructure, gems and jewellery, and textiles are relatively at a
worse stage at present.

64
Highly stressed industries as on September 2016

65
Poor recovery rates continued
• Despite of constant efforts from the government to strengthen the
recovery process, recovery rates remained at lower levels for the
banks whereas the gross NPA levels have increased intensely over
past two years.
• Methods used for recovery includes Lok Adalats, Debt Recovery
Tribunals (DRTs) and the SARFAESI Act.
• Though the recovery rates have improved marginally for all the
channels in 2015-16 from 2014-15, it is nowhere close to the earlier
levels as in 2011-12.
• The time taken to resolve cases of insolvency is very high for the
Indian banking industry.
• The recovery rate is best for the SARFAESI act which has recovered
more than 16% of the amount in 2015-16. 66
Poor recovery rates continued
• However considering the continuously increasing gross NPA
amount, the recovery levels are far below than required.
• Though SARFAESI has done better in terms of recovery percentage
compared to lok adalats and DRTs, it still lags effectiveness because
of poor enforcement of act.
• The inefficiencies in the recovery have led to delay in attempts by
lenders to liquidate assets and consequently affected the
profitability of the industry.

67
Gross NPA recovery rates for different channels (%)

68
 Banks on takeover drive of defaulting companies through
Strategic debt restructuring (SDR)
• Banks have been taking over companies under the strategic debt
restructuring (SDR) scheme and forcing defaulters to sell assets.
• The SDR scheme was cleared by the Reserve Bank of India in June
2015.
• Under the SDR scheme, banks convert loans into equity and can
change the management of the company.
• The invocation of SDR will not be treated as restructuring for the
purpose of asset classification and provisioning norm for 18 months.
• Unlike in cases where a loan is classified as NPA and banks have to
set aside money to cover the risk of default which hurts their
profitability, SDR gives them the cushion of 18 months to find a buyer
and retain asset classification until that time, hence saving them the
69
higher provisioning.
Banks on takeover drive of defaulting companies through
Strategic debt restructuring (SDR)
• The scheme was introduced because banks felt the corporate debt
restructuring (CDR) scheme failed to help them recover their
money.

70
Scheme for Sustainable Structuring of Stressed Assets (S4A) is
a positive in the long term
• The Reserve Bank of India has provided a fresh tool for lenders and
corporates to deal with the ever growing problem of non-
performing assets.
• The Scheme for Sustainable Structuring of Stressed Assets (S4A)
applies to all projects which have started commercial operations and
have Rs 500 crore of debt.
• The new loan restructuring window allows banks to bifurcate the
debt of stressed borrowers into sustainable and unsustainable
portions.
• The new guidelines are better than the Strategic Debt Restructuring
(SDR) scheme as entire corporate debt need not be classified as non-
performing assets. 71
Scheme for Sustainable Structuring of Stressed Assets (S4A) is
a positive in the long term
• Though the provisioning will go up in the near term led by higher
mark to market losses on conversion of unsustainable debt to
equity.
• Provisioning requirement will come down in the long term
provided sustainable portion of debt is serviced satisfactorily and
there is no further decline in fair value of non-sustainable portion.
• If implemented successfully, S4A could help banks limit fresh
slippages to non-performing assets (NPAs) from large corporate
exposures and consequently will help in reducing NPAs over a
period of time.

72
5/25 refinancing scheme could mask true picture of asset quality
to some extent
• Fresh NPA formation in 2015-16 remained high with stress largely
flowing through corporate book.
• Pace of restructuring has come-off due to absence of regulatory
forbearance, but project refinancing under 5/25 scheme has
gathered pace which may only defer immediate defaults for some
overleveraged groups.
• We believe stress from core sectors including iron and steel still
looms large, while real estate could be a new area of concern.

73
Operating Expenditures

74
• Technology advancement and effective resource utilisation helped
SCBs in cost reduction
• Traditionally, staff costs as a percentage of total operating
expenditure have been significantly higher for public sector banks
(PSBs).
• Hence, a voluntary retirement scheme (VRS) was initiated in the late
1990s to reduce staff costs.
• However, the per employee cost of PSBs continued to rise, given the
changing staff composition and higher provisioning towards
superannuation liabilities.
• In 2014-15, scheduled commercial banks' (SCBs') employee costs
increased by 10% y-o-y against 15% growth in 2013-14.
• Employee costs as a percentage of operating expenses for SCBs
declined to 54% in 2014-15 from 55% in 2013-14. 75
• The costs were the highest for PSBs (61%) and the lowest in case of
private banks (41.4%).
• Staff costs should be viewed in conjunction with the quantum of
funds managed by the staff.
• Hence, to analyze staff costs, the following ratios for different bank
groups have been compared:
• Average advances/staff cost
• Average funds deployed (AFD)/staff cost

76
Average advances/staff cost

77
AFD/staff cost

78
Group-wise performance
State Bank of India (SBI) and associates

• Benefits from VRS, technology upgradation and computerisation of

all branches had helped these banks become more cost-efficient in
recent years.
• During 2014-15, both the average advances-to-total staff cost ratio
and the AFD-to-total staff cost ratio for this category increased
marginally over the year because of subdued advance growth
during the year.
• In 2015-16, the total staff strength for SBI only, reduced by 3% y-o-y.
• The new recruitment in SBI was 3.3% of last year’s total staff
whereas 4.4% of the staff received retirement.

79
SBI and associates

80
Nationalised banks

• The productivity of nationalised banks was the highest among all

bank groups in 2014-15.
• In 2014-15, the total staff cost of nationalized banks increased by 7%
compared to 17% in previous year and its average advances grew by
11% compared to 14%, over the same period of time.

81
Nationalised banks

82
Private sector banks
• The ratio of average advances to total staff cost for private sector
banks was the second highest among all bank groups in 2014-15.
• During 2014-15, the staff cost increased by 16% compared to 13% in
previous year, whereas the advances grew by 18% compared to 17%
in same time period.
• Private sector banks are more cost-efficient, as they have smaller
branch networks as compared to public sector banks.
• Moreover, they invest heavily in technology, which helps reduce
staff costs.
• For example, an ATM, which is manned by just one person,
performs numerous basic banking operations.
• Private sector banks also employ direct selling agents, which
reduces staff requirements. 83
Private sector banks

84
Foreign banks
• The productivity of foreign banks was the lowest in all bank groups
in 2014-15.
• Total staff costs increased by 11% compared to 4% in previous year,
whereas the advances grew by 13% in 2014-15 from 10% in previous
year.

85
Foreign banks

86
Efficient control of other operating expenses kept entire banking
industry afloat

87
Efficient control of other operating expenses kept entire banking
industry afloat
• In 2014-15, total banking advances grew by just 9.7% compared to
healthy 15% in previous year, which compelled the banking
industry players to rein in their operating outflow to show sound
bottom line.
• During the year 2014-15, overall other operating expenses increased
by 14% from 18% in 2013-14.
• Rent & taxes, which constitute around 18% of other operating
expenses, grew by 13% in 2014-15, compared to 15.5% in 2013-14.
• All other operating expenses like postage, depreciation and
insurance costs declined substantially in 2014-15.

88
Net Profitability Margin

89
SCBs' NPM declined by 15 bps y-o-y to 1.62 per cent in 2014-15
NPM - SCBs

90
SCBs' NPM declined by 15 bps y-o-y to 1.62 per cent in 2014-15
NPM - SCBs
• Net Profitability Margin (NPM) is used to measure the profitability of
a lending business.
• NPM is equivalent to the yield on carry business less cost of
borrowings plus non-fund (fee) income less operating expenses.
• The SCBs' NPM declined by 14 bps y-o-y to 1.62 per cent in 2014-15.
• The spread declined by 10 bps, while operating expenses to average
funds deployed (AFD) decrease by 2 bps.
• Core fee-based income as a percentage of AFD also declined by 5 bps.
• This decline in the banks' NPM can be attributed to a steep decline in
the interest earned by the banks during the year as well as high
operating expenses.
91
SCBs' NPM declined by 15 bps y-o-y to 1.62 per cent in 2014-15
NPM - SCBs
• Moreover, competitive pressures and sluggish credit offtake limited
the banks' pricing power, thereby affecting their profitability.

92
Bank group-wise performance
SBI and associates
NPM - SBI and associates

93
Bank group-wise performance
SBI and associates
NPM - Nationalised banks
• The NPM of SBI and its associates declined by 2 bps y-o-y to 1.53
per cent in 2014-15.
• The spreads declined by 6 bps yo-y to 2.74 per cent in 2014-15.
• The operating expense as a percentage of AFD decrease by 9 bps
and core fee income as a per cent of AFD declined by 2 bps y-o-y to
2.12 per cent and 0.90 per cent, respectively.

94
Nationalised banks

95
Nationalised banks
• The NPM of nationalised banks declined by 19 bps y-o-y to 1.13 per
cent in 2014-15, mainly because spreads declined by 15 bps, while
core fee income as a percentage of AFD went down marginally by 4
bps.
• Operating expenses as a percentage of AFD increased by 1 bps to
1.53 per cent.

96
Private sector banks
NPM - Private sector banks

97
Private sector banks
NPM - Private sector banks

• The NPM of private sector banks registered a decrease of 5 bps

from 2.76 per cent in 2013-14 to 2.71 per cent in 2013-14.
• Their spreads increased by 2 bps y-o-y in 2014-15 to reach 3.61 per
cent.
• As banks are not passing the interest rate benefits to end customers
the spread has increased.

98
Foreign banks
NPM - Foreign banks

99
Foreign banks
NPM - Foreign banks
• The NPM of foreign banks declined by 66 bps y-o-y to 2.83 per cent
in 2014-15.
• Spreads declined by 39 bps y-oy to 3.60 per cent in 2014-15.
• Operating expenses as a percentage of AFD declined by 19 bps in
2014-15 to reach 2.66 per cent.
• The core fee income as a percentage of AFD decreased by 45 bps to
1.90.

100