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Public sector banks: Improving performance

Dec 11, 2002

Public sector banks (PSBs) are undergoing a phase of transition owing to increased competition and a new regulatory environment. This has forced PSBs to shed flab and become more technology oriented. Figures indicate that the new initiatives taken up by these banks have started to bear fruit. To prove the point we took a set of five large PSBs namely SBI, Corporation Bank, Bank of Baroda, Bank of India and Punjab National Bank as our analysis sample.

CAR (in %) FY98 FY99 FY00 FY01 FY02
BoB 12.1 13.3 12.1 12.8 11.3
BoI 9.1 10.6 10.6 12.2 10.7
SBI 14.6 12.5 11.5 12.8 13.4
Corporation Bank 16.9 13.2 12.8 13.3 17.9
PNB 8.8 10.8 10.3 10.2 10.7

le shows that all these PSBs have a high level of capital adequacy compared to the standard norm of 9% as enacted by the Reserve Bank of India (RBI). For that matter Corporation Bank’s CAR (Capital Adequacy Ratio) is better than most of the new Indian private sector banks (AS OF 1HFY03, the CAR of the bank stood in excess of 22%). The improvement in CAR has also been due to the fact that banks are increasing their retail portfolio. Retail loans, especially home loans, have lower capital adequacy requirements. Banks are also flush with funds on account of another key structural shift in norms. The RBI has brought down cash reserve ratio (CRR) and statutory liquidity ratio (SLR) significantly over the last three years, thus unlocking surplus cash. Given the likelihood for further reduction in CRR and higher loan disbursement to the retail sector, one will not be surprise if CAR levels improve over a period of time.

PSBs have shown a good track record of NPA (Non Performing Asset) reduction over the years. Most of the PSBs have appointed private entities to recover dues from defaulting borrowers. The appointment of the debt recovery tribunal (DRT) has also fast tracked the process of loan recovery in recent times. As we go forward, the passing of the new asset reconstruction ordinance in the winter session will go a long way in reducing NPA levels of PSU banks.

  Gross Net
NPAs (as a % of total assets) FY99 FY00 FY01 FY02 FY99 FY00 FY01 FY02
BoB 7.1 6.7 6.6 6.3 3.1 2.9 2.9 2.7
BoI 5.6 6.2 5.8 5.3 3.3 4.0 3.6 3.3
SBI 6.3 5.8 5.0 4.5 2.7 2.4 2.2 2.0
Corporation Bank 2.5 2.6 2.5 2.5 0.8 0.9 0.9 1.1
PNB 6.1 5.8 5.5 5.7 3.7 3.5 3.0 2.5

What is also commendable is the fact that the asset quality of these banks has also shown a marked improvement. Having burnt their fingers at corporate loans in mid 1990s, banks are increasingly looking at enhancing the retail loan portfolio. Retail loans have a lower default rate as well as a higher rate of return compared to corporate loans.

NIM (in %) FY97 FY98 FY99 FY00 FY01 FY02
BoB 3.2 2.9 3.0 2.9 3.1 2.7
BoI 3.0 2.8 2.6 2.3 2.8 2.6
SBI 3.4 3.0 2.7 2.7 2.7 2.6
Corporation Bank 3.9 3.5 2.5 2.7 3.0 2.7
PNB 3.5 3.3 3.6 3.0 3.2 3.2

If we go a step further, Net Interest Margins (NIM) (interest income on advances – interest on deposits) have declined due to competition. However, the fall in margins has been cushioned to a large extent by the fall in the market interest rates (as banks can borrow now at lower interest rates). That said, banks are also at a disadvantage since lending rates have fallen at a faster clip when compared with cost of deposits (the reason being, banks are now lending at sub-prime lending rates).

Op exp as a % of total assets FY97 FY98 FY99 FY00 FY01 FY02
BoB 2.4 2.3 2.3 2.2 2.5 2.2
BoI 2.8 2.5 2.4 2.5 2.9 2.2
SBI 2.9 2.6 2.7 2.4 2.6 2.1
Corporation Bank 2.2 2.1 1.8 1.8 1.7 1.6
PNB 3.0 2.8 3.0 2.8 3.0 2.5

The way forward…
The technology initiatives of PSU banks have also have had a positive effect on efficiency parameters. Many of the PSBs have initiated efforts to implement a core banking software in place (i.e. computerisation). This core banking solution will help these banks in automating the processes considerably, thus reducing processing time as well as manpower requirements. PSU banks have pruned workforce in 2000-01 through a VRS scheme. The results are already visible with cost to income ratios declining noticeably. A second round of VRS is also on the cards. PSBs are further looking at networking all their ATMs and branches in order to decrease the response time as well as to increase customer comfort. These initiatives will go a long way in retaining customers and lowering cost of operations.

All in all, the large Indian PSBs have done well to counter the competition till now. Statistics indicate that on all operational parameters, there is an improvement and fundamentals indicate that they are likely to remain strong over the medium-term (i.e. 3 years). Given this backdrop, one is confident that the inherent advantages of PSUs viz. large reach, big balance sheet and a concerted effort to improve productivity will enable them to counter competition.

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