How cost-efficient are Indian banks? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

How cost-efficient are Indian banks?

Oct 8, 2013

Banks form the core of the country's financial system. Hence healthy and profitable banks help in ensuring stability and resilience of the entire financial system. The recent decline in economic growth and global uncertainties have proved challenging to banks. This has resulted in rising impairment of assets, pressures on margins and volatility in non-interest income. Further, increased competition, higher cost of operation and regulatory tightening have added to their woes. In this backdrop, Indian banks have some achievements to their credit. Focus on technology, processes and people have enabled them in achieving greater efficiencies. But have Indian banks really fared well?

An analysis of cost parameters for Indian banks reveals certain interesting results. On the efficiency and productivity front, public sector banks have demonstrated perceptible improvement vis-a-vis its private peers. The following cost based parameters reveal the state of Indian banks:

Table 1: Cost parameters-Operating expenses ratios
All Banks (%)199219931995199719992001200320052007200920112013
Operating Exp to Avg. Assets2.602.823.003.012.882.842.352.322.121.871.861.75
Operating Exp to Avg. Business2.092.272.512.512.392.341.931.851.591.391.361.26
Cost Income Ratio55.5872.4663.4161.0064.3063.3848.3649.5650.1344.6845.2345.02
Source: The Reserve Bank of India- RBI

While public sector banks have shown a significant decline in these ratios, the private and foreign banks instead have shown increase.

Another distinct trend has been observed. During the period 1992-2013, the overall operating expenses grew at a CAGR of 14.65% (as per the RBI data). The staff expenses during the same period grew at a CAGR of 13.63%. Importantly, the public sector banks have reported the lowest CAGR for operating expenses. Operating efficiency parameters decide the health of the bank. But margins and effective deployment of assets tells us their balance sheet strength. Have a look at the table below:

Table 2: Margins and Profitability parameters- Improving trend
All Banks (%)199219931995199719992001200320052007200920112013
Net Interest Margin3.302.653.263.403.033.062.913.082.862.622.912.79
Gross Income to Avg. Assets4.683.894.724.934.484.484.864.674.244.194.123.89
Net Profit to Average Assets0.371.140.470.700.530.541.050.971.001.101.061.02
Source: RBI

The above parameters definitely indicate susceptible improvement in productivity and efficiency of Indian banks. Also, public sector lenders have performed better than the private and the foreign peers. However, this progress has not been consistent and sustainable. And this can best be proved in comparison with global standards.

Back home Indian banks have made considerable progress on the efficiency and productivity front. But benchmarking the Indian banks against the global productivity standards reveals the true picture. Considering the objective of extending affordable banking services to the unbanked poor, India needs to target a level which is at par with other countries.

Table 3: Global comparison-India lags behind
Parameters (%)YearIndiaChinaIndonesiaMalaysiaKoreaUKCanada
Operating expenses to Total Assets20032.241.633.392.073.741.343.23
20062.131.433.971.912.071.392.57
20091.710.922.851.271.200.862.09
20121.650.803.291.271.051.031.74
Net Interest Margin20032.772.334.902.672.840.862.36
20062.812.305.902.152.721.061.76
20092.392.275.603.112.170.941.82
20122.702.755.302.382.401.021.85
Net Profit to Total Assets20031.000.491.661.100.020.370.75
20060.880.621.560.990.980.530.95
20091.010.862.601.200.600.060.57
20120.981.282.601.600.700.090.86
Source: RBI

On the global platform, Indian banks are yet to catch-up. In terms of operating costs to assets ratio, Indian banks lag behind their Asian peers and ones in the developed world.

Enhancing operational efficiency does not merely imply curtailing costs. Neither passing on the inefficiencies to customers and putting up a good profitability show is a sign of healthy bank. There is more to do with efficiency. Efficiency is more about staff, capital and franchise management. Three key changes in our view would prove instrumental in strengthening the footing of Indian banks:

  1. Implementing robust IT systems to ensure quick breakeven of new franchises

  2. Increasing focus on retail and SME business with tight control on asset quality

  3. Improving pricing stability both for liability and asset products
Thus while Indian banks have some way to go before becoming cost competent with their global peers, a gradual move towards it will be rewarding for shareholders..

Equitymaster requests your view! Post a comment on "How cost-efficient are Indian banks?". Click here!

  

More Views on News

7 Stocks that Mutual Funds Can't get Enough of (Views On News)

Dec 1, 2021

Come hell or high water, these are the top Indian stocks which mutual funds never leave.

5 Indian Banks with the Lowest NPAs. Here's How they Did It... (Views On News)

Sep 27, 2021

These banks have managed to maintain their asset quality even in the middle of a pandemic.

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Dec 6, 2021 03:36 PM

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS