Aug 10, 2002|
Public sector banks: FY02 and beyond
One of the basic reflections of financial development of an economy is the contribution of finance related activities in real GDP. The share of real GDP originating from finance related activities experienced a steady increase from 2.2% during the first half of seventies to 4.7% in 1993-99. Within the service sector also, the share of banking and insurance sector gradually rose to 12% during nineties.
The banking sector plays an important role in the overall development of the economy and public sector banks (PSBs) are the dominant force within this. Until the advent of liberalization, these banking giants were moving at a snail’s pace in terms of their business strategies and venturing into new areas. The entry of private sector banks and their retail financial products took the initiatives away from PSBs, as they cut into their banking pie.
Nevertheless, PSBs still account for nearly 80% of deposits, advances and total income of the sector. Consequently, they are the major influencing factor to the working of the financial system and overall performance of the sector. Financial year 2002 was the tough year for the economy and the banking system. The index of industrial production (IIP) grew by a measly 2.7% in FY02, the slowest rate of growth in the IIP since the 2.5% growth it recorded in FY93. Slowdown in the industrial activity impacted banks’ loan growth. Credit growth in FY02 was lower for the second consecutive year at 12.4% from 14.1% in FY01 (21.9% in FY00).
Despite tough business environment, public sector banks including SBI and its subsidiaries (total of 27 nationalized banks) managed growth rate of 13% in total income, which was marginally lower than 14% shown by the group in FY01. The double-digit growth in total interest income was however, fueled by an impressive 34% rise in non-interest income. Not surprisingly, this higher growth was on the back of treasury gains recorded by PSBs in light of the significant reduction in interest rates. Their commission & exchange and forex businesses, which forms major part of fee based income is facing stiff competition from private sector banks. Customer services and delivery time has become the driving factor for these stream of revenues. As a result, until PSBs put in place their IT system and improve services, they are likely to lose revenues in the coming years.
Snapshot of financial performance
* Change compared to FY01
|Income from operations
|Net interest income
|Total provisions (including tax)
|Operating Profit Margin (%)
|Net profit margin (%)
|Cost to income ratio (%)
|Other income to total income (%)
|Net NPAs to advances (%)
|Capital adequacy ratio (CAR) (%)
While the topline growth was satisfactory, bottomline jumped by 88% to Rs 81 bn in FY02. This speaks volumes about the sector’s streamlining efforts. Starting with VRS, PSBs are slowly moving towards tech integration to align themselves with private sector peers. Their efforts are reflected in a sharp jump in operating margins to over 5% in FY02 from below 2% in the last two years. Operating profits of public sector banking sector witnessed a CAGR of 83% over the last three years. The major contributor to this exponential rise was a steep reduction in staff costs. In FY01, over 100,000 employees (12% of the staff) of public sector banks, opted for VRS. Although the VRS package costed the sector Rs 125 bn, these banks are expected to save Rs 21 bn annually in wage cost as a result of this exercise. That represents sizable savings for PSBs as wage cost accounted for over 65% of their operating expenses.
The reduction in manpower also provided a fillip to automation efforts of PSBs and banks have begun addressing their technology requirements more seriously. In FY02, out of 46,507 public sector branches, around 9,219 had been partially computerized and 6,982 were fully computerized (forming 70% of business volumes). They are also seeing ATMs as an independent and cost saving delivery channels. SBI has already launched over 1,000 ATMs, half of which are networked. Though the transformation process has just begun, there is still a long way to go for PSBs to catch up on technology with private sector banks.
Non-performing assets is another major problem worrying the sector. The gross non-performing assets (NPAs) of the public sector banks escalated to Rs 565 bn as on March 2002 from Rs 547 bn in the previous year. Introduction of asset reconstruction company (ARC) and foreclosure laws could help the sector in improving asset quality. However, considering the slow recovery in the industrial activity, the picture could worsen with rise in loan defaults. This would lead to higher provisions by banks, which will trim their profit growth. Already in FY02, aggressive NPA provisions have kept net NPAs constant at Rs 280 bn.
Growth rates: Sustainable?
|Increase in gross NPAs
|Incremental Net NPAs
The current fiscal year, 2002-03 has begun on a weak note for the economy. Poor rainfalls in the first two months of monsoon season are likely to impact industrial growth. CMIE has already lowered the IIP growth estimate by 50 basis points to 3%. However, with recovery in commodity prices, banks have seen a strong pick up in loan demand (over 20-fold rise in non-food credit during the period April-June 2002). It is difficult tough to predict if the trend would continue in the coming months too. Nevertheless, now with the sector’s diversification into retail finance, changing business strategies and pick up in activity in commodity sectors (specially steel, textiles and chemical), PSBs could manage double-digits growth in advances in current fiscal. As seen in FY02, buoyancy in earnings growth is likely to continue with lower staff cost and advantage of technology. But as said, PSBs will have to change and evolve constantly in line with global trends in the finance sector for their survival.
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