BANKING SECTOR IN INDIA PUT UP A GOOD SHOW DURING GLOBAL FINANCIAL CRISIS

T.V.Gopalakrishnan

The performance of various bank groups as on March 2009 and March 2010 had been impressive despite constraints faced by them due to slow down in the economy because of the global financial crisis and adverse real economic scenario witnessed all over the world.

A few selected parameters indicating bank group-wise performance as at end March 2009 & 2010 is furnished in the table below.

Performance parameters during the two-year period showed that the banking sector exhibited remarkable resilience in withstanding the impact of global economic crisis. Increase in net NPAs or fall in return on assets during the period was marginal whereas the cost of funds registered a significant decline. Analysis of bank group-wise performance was as follows:

Cost of funds

The cost of funds had come down considerably during 2009-10 although it continued to be high for all bank groups except for foreign banks.

The cost of funds which ranged between 4.46 per cent and 6.67 per cent for different bank groups in March 2009 came down considerably and worked out between 2.82 per cent and 6.13 per cent in March 2010.

Foreign banks could bring down their cost of funds from 4.46 per cent to 2.82 per cent during the period, whereas the State Bank group and nationalised banks could bring down their cost only from 5.94 per cent to 5.32 per cent and 6.09 per cent to 5.35 per cent respectively.

While the new private sector banks could bring down their cost of funds sharply by 1.63 per cent, the old private sector banks could bring down their cost of funds only by 0.54 per cent during the period.

Cost of funds for public sector banks and old private sector banks continued to remain high and is a matter of concern.

The reasons perhaps could be high overhead costs because of comparatively low penetration of computerisation, information technology, high wages of their human resources as they are comparatively in the higher age profile and relatively higher rate of interest offered on deposits and high cost of deposits. The cost of funds in general and interest rate on advances in particular have to be necessarily brought down to remain competitive in business and improve the credit portfolio.

Return on advances adjusted to cost of funds:

Return on advances adjusted to cost of funds in respect of various bank groups remained in the range of 3.95 per cent and 8.14 per cent as at end Mach 2009 and 3.60 per cent and 7.17 per cent as at end March 2010. State Bank Group had the lowest return on advances for both the years.

Foreign banks outperformed the entire bank groups as their return on advances adjusted to cost of funds stood at 8.14 per cent and 7.17 per cent as at end March 2009 and 2010 respectively. The new private sector banks also did well as compared with all other bank groups with 5.23 per cent and 5.13 per cent during the two years. Sustenance of this sort of return will be a major task for all bank groups in a dynamic financial market.

Return on assets

In respect of return on assets, while the foreign bank group scored well as compared with the other bank groups, State Bank group stood lowest even compared with old private sector banks.

It is noteworthy to observe that while the new private sector banks increased their return on assets from 1.12 per cent in March 2009 to 1.38 per cent in March 2010, all other bank groups, including foreign banks, registered a decline on their return on assets.

Net NPAs

Barring the State Bank group, nationalised banks, and foreign banks, the other bank groups could show a reduction in their net NPAs during the period 2009 -10. The benefit of restructuring of assets might have come to the rescue of banks to improve their NPAs position.

Analyses of different parameters indicate that foreign banks displayed comparatively a better show and there is scope for public sector banks and old private sector banks to better their performance. The economy is doing well except perhaps on inflationary front and the time augurs well for the banks to widen their business further taking advantage of the gaps in the area of financial inclusion, infrastructure funding and financing of agriculture and related industries.

(The author is former Chief General Manager, Reserve Bank of India.)

SOURCE: http://www.thehindubusinessline.com/2010/10/25/stories/2010102551020600.htm