Comparative Study of Banks

PERFORMANCE OF COMMERCIAL BANKS IN INDIA:
A COMPARATIVE STUDY OF DIFFERENT
CATEGORIES OF BANKS
Research Project Report
Submitted to the Punjab Agricultural University

in partial fulfillment of the requirements
for the degree of
MASTER OF BUSINESS ADMINISTRATION

in
FINANCIAL MANAGEMENT
(Minor Subject: Economics)
By
Vinay Behl
(L-2006-BS-33-MBA)
Department of Business Management

College of Basic Sciences and Humanities
PUNJAB AGRICULTURAL UNIVERSITY
LUDHIANA- 141004
2008
1
CHAPTER I
INTRODUCTION
It has been around one and a half decade since financial sector reforms were
initiated in India. As banks are the major segment of the financial sector in India, reform
measures are primarily aimed at improving the performance of the banking sector. The
importance of banking system in India is noted by the fact that aggregate deposits stood
at 61 percent of Gross Domestic Product (GDP) and bank credit to government and
commercial sector stood at 29 per cent and 38 per cent of GDP respectively. An efficient
banking system has significant positive externalities, as it increases the efficiency of
economic transaction in general. Therefore, one of the important objectives of financial
sector reforms was to improve the efficiency of banking system. In this backdrop it is
essential to study the efficiency levels of Indian commercial banks to understand the
impact of financial sector reforms on its performance.
In this research an attempt has been made to study the performance of commercial
banks in India: A comparative study of different categories of banks. The concept of
banking and Indian banking system have been defined as under:
Banking industry in India, during the course of its evolution and growth, has
traversed through innumerable twists and turns. The industry has emerged victorious
against all odds, by the sheer strength of its teeth. It has braved many challenges,
weathered many storms, withstood many onslaughts and has emerged as one of the
dynamic and vibrant industry. The secret of success lies in its ability to adapt to changes
in most admirable manner. Like an oscillating pendulum, the industry has witnessed
extremely opposite and diverse conditions over the years. Whether it is class banking or
2
mass banking, whether private ownership or public sector status, whether state of
administered interest rate regime or state of operational freedom, whether bound by
antiquated manual process or a scenario witnessing unleashing of technological blitzkrieg
– the industry has its own experience to narrate.
Banking is an important segment of the tertiary sector and acts as backbone of
economic and social progress. The banks have played a stellar role in the development of
the nation with its high social content and commitment. The banks render vital services to
the masses belonging to the various sectors of the economy like agriculture, industry
whether small scale or large scale. The banking system is one of the few institutions that
impinge on the economy and affect its performance for better or worse. They act as a
development agency and are the source of hope and aspirations of the masses.
The banking sector continues to be dominant in our financial system. More than
70 per cent of the financial system’s assets are owned by banking sector. Even within
banking sector, the public sector banks own more than 80 per cent of the Commercial
Banking assets. Development banks are also owned by the public sector banks.
Indian Banking System and Policy Change
After independence, the major development in the Indian banking sector was
nationalisation of commercial banks in 1969. In the post nationalisation period there was
a rapid expansion of banks in terms of coverage and also in terms of deposit mobilisation.
Policies at that time ensured credit flows to certain important sectors of the economy.
Importantly, the Government also used banking sector as an instrument to finance its own
deficit. While this was facilitated through high Cash Reserve Ratio (CRR) and Statutory
3
Liquidity Ratio (SLR), to keep the borrowing cost of the Government low, the interest
rate on bank loan was fixed at lower than market rates. Along with high CRR and SLR,
the operational freedom of the banks was curtailed with high priority sector lending
norms (as high as 40 per cent of the total lending). While some of these measures were
adopted to enhance social welfare, they affected the efficiency of the banking sector
adversely. As some of the priority sector loans were not economically profitable the Non
Performing Assets (NPA) increased from 14 per cent in 1969 to 35.4 per cent in 1990.
Also, due to the expansionary policy pursued by RBI, banks had to open certain number
of branches in the rural areas. Many of these branches were economically not viable due
to which the number of loss making branches increased which whittled away resources of
the banking industry. This affected profitability and the efficiency of banks. Further due
to restrictions on the operations of private and foreign banks the dominance of the public
sector banks prevailed resulting in lack of competition.
In 1991, Indian economy faced a major balance of payment crisis. The foreign
exchange resources had almost disappeared. The fiscal deficit was high and the inflation
rate reached double digits. To overcome this crisis India introduced economic reforms for
many areas of the economy, which included, amongst others, the financial sector reforms.
The financial sector reforms in India began as early as in 1985 with the implementation
of the recommendations of the Committee to Review the Working of the Monetary
System. But the real momentum was given to it in 1992 with the implementation of the
recommendations of the Committee on Financial System (CFS). Almost all of the
recommendations of the CFS have been implemented in a phased manner. In 1998,
another committee, viz., the committee on Banking Sector Reforms (BSR) was
4
constituted. The recommendations of the BSR committee have also been implemented in
a phased manner. Important financial sector reforms introduced after 1992 are as follows:
Reduction in the statutory pre-emption: This includes reductions in CRR and SLR. At
one stage (in 1991) CRR applicable to incremental deposit was as high as 15% and SLR
was 38.5 per cent; thus pre-empting 53.5 per cent of incremental deposits. These ratios
were reduced in a phased manner since 1992. By 2005, SLR was reduced to 25 per cent
and CRR to 4.5 per cent of the total deposit.
Interest rate liberalization: Before 1991, interest rates, both on deposits and loans were
controlled by RBI. But after liberalization these rates were made market determined in a
phased manner. The RBI now directly controls only the interest rates charged on credit to
exports, and also there is a ceiling on lending rate on small loans (i.e., up to Rs 2 lacs).
On the deposit side, except the interest rate paid on savings deposits, all other interest
rates have been deregulated.
Increased autonomy and competition: Considerable operational autonomy has been
provided to the banks by reducing the government’s stake in banks. Competition has been
infused by allowing new private sector banks and more liberal entry of foreign banks (at
the end of march 2001, there were 8 new private sector banks, 23 old private sector banks
and 42 foreign banks as against 23 foreign banks in 1991).
Regulatory Norms: These were aimed at reducing the vulnerability of financial
institutions in the face of fluctuations in the economic environment. Important among
them is the norm on maintaining a Capital Adequacy Ratio. Following the CFS report the
capital adequacy ratio was fixed at 8 per cent. It was increased to 9 per cent following the
BSR recommendation. Apart from this, various prudential norms related to income
5
recognition, asset classification, provisioning for bad assets (NPAs) and assigning risk to
various types of assets have been introduced.
These reforms are expected to have an impact on the operations of banks. With
reduced statutory requirements banks will have more funds at their disposal for
commercial lending and interest rate liberalisation is expected to bring flexibility and
competition into the banking system. Competition is also infused by opening up banking
sector for the private and foreign banks. Along with these flexibilities, certain regulatory
reforms are also introduced, which are meant to make banks strong enough to face
fluctuations in the economy. Overall, these reforms are aimed at improving the
performance of banks. Given this background it is important to examine how far such
reform measures have been successful in their objective of improving the performance of
the commercial banks. While performance of a bank can be measured in various ways, in
the present study we use technical efficiency as a measure of the performance of Indian
commercial banks.
Commercial Banking in India
The beginning of commercial banking in India was made in the 17th Century when
the British established agency houses in the country but commercial banking in a
systematic form was initiated in the early part of the 19th century when Presidency Banks
were established. In 1913, eighteen such commercial banks were functioning. The
Imperial Bank of India was set up in 1920 with the merger of three Presidency Bank. In
1955, this bank was nationalized and renamed as the State Bank of India.
6
In 1949, The Banking Regulation Act, 1949, was passed and the Reserve Bank
was thus vested with regulatory power over the commercial banks. In 1950-51, there
were nearly 430 commercial banks in India but due to mergers and acquisitions, the
number reduced to 256 in 1960-61. In 1969, 14 major commercial banks were
nationalized. At present there are 27 such nationalized banks including the SBI group. In
1995-96, total number of scheduled commercial banks operating in the country was 271
and number further reduced to 183 in 2006-07.
Commercial banks are the most important constituents of banking system. These
are the banks which do banking business to earn profit. Some have used the term
"commercial bank" to refer to banks which focus mainly on companies. In some English-
speaking countries outside North America, the term "trading bank" was and is used to
denote a commercial bank. These banks raise funds by collecting deposits from
businesses and consumers via checkable deposits, savings deposits, and time (or term)
deposits. They make loans to businesses and consumers. They also buy corporate bonds
and government bonds. Their primary liabilities are deposits and primary assets are loans
and bonds. Functions of commercial banks can be divided into three parts namely,
primary functions, secondary functions and social and developmental functions.
Role of Commercial Banks in Social-Economic Development
The banks have become the foundation of economic and social development of a
nation. If any country wants to increase its rate of capital formation, it is very important
to build an efficient commercial banking system equipped with an adequate coverage so
that, apart from mobilizing savings, it may also be able to foster the banking habits in a
7
society. The commercial banks create the awareness among the rural and urban people
about society’s wasteful spending and provide them enough opportunities to make their
investment in more generating assets.
The commercial banks help the agricultural sector in a number of ways. They
open a network of branches in rural areas to provide agricultural credit. They also finance
agriculture sector for modernization and mechanization of farms, for providing irrigation
facilities, for high yielding seeds and fertilizers for insecticides-pesticides, for
developing/improving land etc. They also provide financial assistance for animal
husbandry, dairy farming, sheep breeding, poultry farming and horticulture. The Regional
rural banks fulfill the credit requirements of almost all types of rural people and help in
upliftment of rural areas.
Commercial banks play a significant role in economic growth and development of
developing countries like India. Banks lubricate the entire monetary and financial system
and ensure smooth operation. Commercial banks are the nerve-centre of the capital
market, industrial and trading activities of a country. The commercial banks are the most
important financial institutions and play an important role in the economic development
of a country.
The monetary policy of the central bank of the country is a very important
instrument of economic policy in a liberalized economy. The monetary policy must be
implemented effectively and efficiently to manage the crucial factors of sound health of
economy. The effectiveness of the monetary policy depends upon the co-operation of
commercial banks. It would not be possible to carry out effective implementation of any
monetary policy in the country without the active co-operation of commercial banks. In
8
fact commercial banks constitute the centre-stage of any monetary programme of the
Government or the Central Bank of the country.
The commercial banks help in developing both internal and external trade of a
country. The banks provide loans to retailers, traders, wholesalers for their inventory and
also help in transferring of goods from one place to another by providing all types of
facilities, such as discounting and accepting bills of exchange, providing overdraft
facilities, issuing draft etc.
Another crucial role of banks is to finance exim activities and providing foreign
exchange facilities to importers and exporters of goods. Commercial banks have been
facilitating the flow of foreign receipts and payments. In order to encourage better
participation of commercial banks in the area of finance, some countries have established
a system of guarantee and ensure banks against fluctuations in exchange values and
dangers of non-realisation of payment due to commercial or political reasons.
Banks act as bankers for the issue of new capital. They help their customers in
marketing of securities and send the dividends to customer’s account directly. They
undertake the issue of credit instruments like letters of credit, the acceptance of bills of
exchange and documents, acting as a referee to the respectability and financial standing
of customers and providing specialised advisory services to the customers. Most of the
banks have introduced new technology in their operations. Among the new services
introduced during the last few years, the bank guiro, ATMs, credit cards and
Bancassurance deserve special mention. The bank guiro is a system by which a bank’s
customer with many payments to make, instead of drawing a cheque for each item, may
simply instruct his bank to transfer to the bank accounts of his creditors the sum due from
9
him and he writes one cheque debiting his account with the total amount. By providing
these diversified services banks help in the overall growth of trade and industry to a great
extent.
Modern commercial banks have diversified their activities with their entry into
new non-traditional areas of business such as mutual funds, merchant banking, portfolio
management, corporate counseling, project counseling, hire purchase finance equipment
leasing, venture capital and factoring service etc. These new activities by banks and their
subsidiaries result in the development of domestic and international business.
To sum up, the commercial banks are very important instrument of macro-
economic policy to stabilize economy. They have become an omnibus institution in the
modern times to which people of varied interests look for help and success. They give life
and sustenance to their customers and, in turn, get vitality and vigour from them, to
become an effective tool of social transformation and rejuvenation. A succulent and
resilient banking system in a country portends health and vigour whereas a sterile and
malevolent system in crippling and strait jacketing of a country’s economy.
Objectives of the study
Following were the objectives of the study:
1. To study the trends in the performance of different categories of the banks on the
basis of selected parameters.
2. To compare the performance of different categories of the banks.
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CHAPTER II
REVIEW OF LITERATURE
A large number of studies have been conducted on the topics related to
performance of commercial banks in India: A comparative study of different categories
of banks. In this chapter an attempt has been made to present in brief, a review of
literature available on the studies done so far. The review of past studies has been
presented in chronological order to provide a glimpse of work done in this area.
Buser et al (1981) studied the capitalization ratio of banks and argued that banks
generally have an optimal capitalization ratio and need to remain well capitalized when
they have a high franchise value. They confirmed the positive relationship whether we
use interest margin or return on assets as a dependant variable and in all specifications.
This indicated that well-capitalized banks support lower expected bankruptcy costs for
themselves and their costumers, which reduce their cost of capital.
Vashisht (1987) critically evaluated the trends and progress of
commercial banks in India during the period 1971-1983. The ratio
analysis was used to evaluate the performance of commercial banks
with respect to different indicators. He analysed that commercial banks
did very well with respect to branch expansions, deposit mobilization
and priority sector advances.
Amandeep (1990) evaluated the profits and profitability of
nationalized banks. The study analysed the factors that influence the
profitability of banks and suggested that in order to improve the banks’
profitability, the banks need to focus attention on the management of
11
spread, burden, establishment expenses, income and deposit
composition.
Berg et al (1992) studied the impact of deregulation on efficiency of different
banking sectors. They used the stochastic frontier technique to study the impact and the
study showed that financial liberalisation has positively affected the efficiency and
productivity of commercial banks and deregulation has significant impact on efficiency.
Molyneux and Thornton (1992) explored thoroughly the determinants of bank
profitability on a set of countries. They use a sample of 18 European countries during the
1986-1989 period. They found a significant positive association between the return on
equity and the level of interest rates in each country, bank concentration and government
ownership.
Presely (1992) focused on asset and liability management in the banking sector.
The literature concerning the asset and liability management for banks strongly suggests
that risk management issues and its implications must be concentrated by the banking
industry. He concluded from his study that there is a need for greater risk management in
relation to more effective portfolio management, and this requires a greater emphasis
upon the nature of risk and return in bank asset structure, and greater diversification of
assets in order to spread and reduce the bank's risks.
Jain (1993) studied the various aspects of bank marketing and
suggested the areas where weaker and underdeveloped sections
needed support. He highlighted the merging issues relating to banker-
customer relationship and pointed out that disparities in branch
expansion and credit deployment should be reduced.
12
Avkiran (1995) studied the financial performance of banks by
using combination of financial ratio analysis, benchmarking, measuring
performance against budget and concluded that most of the banks
registered huge difference with respect to performance as compared
to the ideal one.
Berger (1995) examined the relationship between the return on equity and the
capital asset ratio for a sample of US commercial banks for the 1983-1992 time period.
Using the Granger Causality Model, he showed that the return of equity and capital to
asset ratio tend to be positively related. He concluded that the relationship between bank
concentration and performance in the US depend critically on what other factors are held
constant.
Angbazo (1997) investigated the determinants of bank net interest margins for a
sample of US banks for 1989-2003 period. The results for the pooled sample documents
that default risk, the opportunity cost of non-interest bearing reserves, leverage and
management efficiency are all positively associated with bank interest spread.
Edris (1997) determined the importance of selection factors used by Kuwait
business consumers in choosing domestic and foreign banks. Findings of this study
showed that the highest – ranking determinant factors of selection a bank in Kuwait by
business firms were size of bank assets, personnel efficiency, banking experience,
friendliness of staff, reputation, and availability of branches abroad.
Bhatia and Verma (1998) determined the factors influencing
profitability of public sector banks in India by applying the technique of
multiple regression analysis. The analysis revealed that priority sector
13
advances, fixed/current deposit ratio and establishment expenses
affected the profitability of public sector banks negatively and net
spread influenced the profitability of banks positively and significantly.
Barajas et al (1999) documented significant effects of financial liberalization on
banks’ interest margins. Although the overall spread has not declined after financial
reform, the relevance of the different factors behind the bank spreads were affected by
such measures. Another change linked with the liberalization process was the increase of
the coefficient of loan quality after the liberalization.
Demerguç-Kunt and Huizingha (1999) examined the determinants of bank
interest margins and profitability using a bank level data for 80 countries in the 1988-
1995 period. The set of variables included several factors accounting for bank
characteristics, macroeconomic conditions, taxation, regulations, financial structure and
legal indicators. They reported that a larger ratio of bank assets to GDP and a lower
market concentration ratio lead to lower margins and profits.
Patel (2000) highlighted the problem of bad loans growing level
of non-performing assets in the commercial banks in the post-reformed
period. It was observed that it is important for the banks and
supervisory authorities to adopt more effective lending practices. It
was also emphasized that corporate entities should follow more
stringent disclosure and transparency practices and corporate
governance principles.
Ben and Goaied (2001) investigated the determinants of the Tunisian banks’
performances during the period 1980-1995. The study used panel data regression analysis
14
to find the underlying determinants of Tunisian banking industry performance. They
indicated that the best performing banks are those who have struggled to improve labour
and capital productivity, those who have maintained a high level of deposit accounts
relative to their assets and finally, those who have been able to reinforce their equity.
Abreu and Mendes (2002) investigated the determinants of banks’ interest
margins and profitability for some European countries in the last decade. They reported
that well capitalized-banks face lower expected bankruptcy costs and this advantage
“translate” into better profitability. Although with a negative sign in all regressions, the
unemployment rate is relevant in explaining bank profitability. The inflation rate is also
relevant.
Guru et al (2002) attempted to identify the determinants of successful deposit
banks in order to provide practical guides for improved profitability performance of these
institutions. The study was based on a sample of seventeen Malaysian commercial banks
over the 1986-1995 period. The profitability determinants were divided in two main
categories, namely the internal determinants (liquidity, capital adequacy and expenses
management) and the external determinants (ownership, firm size and external economic
conditions). The findings of this study revealed that efficient expenses management was
one of the most significant in explaining high bank profitability. Among the macro
indicators, high interest ratio was associated with low bank profitability and inflation was
found to have a positive effect on bank performance.
Mazhar (2003) discussed the development and performance of domestic and
foreign banks in Arab gulf countries. The main contribution of his study was to make
financial comparison based on return on assets, return on equity, return on deposits, and
15
other financial banking activities as credits and deposits to determine the performance
and showed that local and foreign banks in these countries have performed well over the
past several years. Moreover, he added that banks in these economies are well capitalized
and the banking sector is well developed with intense competition among the banks.
Chien and Danw (2004) showed in their study that most previous studies
concerning company performance evaluation focus merely on operational efficiency and
operational effectiveness which might directly influence the survival of a company. By
using an innovative two-stage data envelopment analysis model in their study, the
empirical result of this study was that a company with better efficiency does not always
mean that it has better effectiveness.
Elizabeth and Elliot (2004) studied the correlation between
customer service and financial performance among Australian financial
institutions. They applied the coefficient of correlation and concluded
that all financial performance measures as interest margin, ROA, and
capital adequacy are positively correlated with customer service
quality scores.
Sensarma (2005) examined the efficiency of scheduled
commercial banks for the period 1986-2003. He employed the
technique of stochastic frontier analysis to estimate bank-specific cost
and profit efficiency and concluded that the cost efficiency of the
banking industry increased during the period and profit efficiency
underwent a decline.
16
Tektas and Gunay (2005) discussed the asset and liability management in
financial crisis. They argued that an efficient asset-liability management requires
maximizing bank's profit as well as controlling and lowering various risks, and their
study showed how shifts in market perceptions can create trouble during crisis.
Drehmann et al (2007) studied the integrated impact of
correlated credit risk and interest rate risk on commercial banks in
perspective of economic value and capital adequacy. It was
emphasized that by modeling the whole balance sheet of a bank and
taking account of the repricing characteristics of all exposures, we
cannot only assess the impact of credit and interest rate risk on the
bank’s economic value but also on its future earnings and capital
adequacy.
Based on the above literature, we can say that there are some studies about banks
in India and in some other countries also has been done on analyzing the performance by
using various techniques like stochastic frontier analysis and panel data regression
analysis. In this study an attempt has been made to study the performance of commercial
banks in India on the basis of certain indicators such as net profit, operating profit,
interest earned, interest expended, spread, establishment expenses etc.
17
CHAPTER III
RESEARCH METHODOLOGY
It is imperative to decide upon and document a research methodology well in
advance to carry out the research in the most effective and systematic way. This chapter
describes the research methodology adopted to serve the objectives of the study in an
effective manner. This chapter consists of the following sections:
• Conceptual Framework
• Sample design
• Collection of data
• Tools of analysis
• Hypothetical formulation
• Limitations of study
These sections are discussed as follows:
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3.1 CONCEPTUAL FRAMEWORK
In this study, ‘Performance of commercial banks in India: A comparative study of
different categories of banks’, the performance of different categories of banks was
analysed on the basis of certain performance indicators. The following performance
indicators were proposed to be included in this study:
• Net Profit
• Operating Profit
• Interest Earned
• Interest Expended
• Spread
• Establishment Expenses
• Total Deposits
• Total Advances
• Total Volume
• Return on Assets
Three different categories of banks were chosen from Public sector, Private Sector
and Foreign Banking Sector. In this research, the performance of different categories of
banks have been analysed on the basis of certain performance indicators such as Net
Profit, Operating Profit, Total Deposits, Spread, Total Advances, Return on Assets etc.
and in order to compare the banks of different categories, various statistical tools have
been applied viz., Trend Analysis, Compounded Annual Growth rate, Arithmetic,
Standard Deviation, Coefficient of Variation and Test of Significance.
19
3.2 SAMPLE DESIGN
The sample for the study consisted of total of six banks from three different
categories of banks called strata’s viz., Public Sector, Private Sector and Foreign Banking
Sector and each bank was the unit of population. The population for the study comprised
of all the commercial banks from public sector, private sector and foreign banking sector.
The public sector banks comprised of 20 nationalised banks and 8 banks of the State
Bank Group. The private sector banks consisted of 21 old private banks and new 9
private sector banks. The foreign banking sector comprised of 33 foreign banks. Thus, the
total of 91 banks was there in population for the study. The sampling technique used was
stratified random sampling. The selected banks were – ICICI Bank, AXIS Bank, HDFC
Bank, State Bank of India, Punjab National Bank and CITI Bank.
3.3 COLLECTION OF DATA
The entire structure of data for the study rests solely on secondary sources of
information. The study was carried out for the period from 2001-02 to 2006-07. Data
relating to performance indicators i.e. Net Profit, Operating Profit, Interest Earned,
Interest Expended, Establishment Expenses, Spread etc. of banks under study has taken
from Bank Quest, Credit Information Review, IBA Bulletins, Annual Reports of the
banks and websites such as Moneycontrol.com, Money.rediff.com and websites of the
banks. Only those banks were selected for the purpose of the study for which data for
completed 12 months from 2001-02 to 2006-07 was available. The raw data in the form
of various for the sample banks was first recorded in a master table and then subsequent
statistical tools for the analysis were applied.
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3.4 TOOLS OF ANALYSIS
Analysis and interpretation of performance indicators was done to compare the
different categories of banks selected, which in turn helped in studying the performance
of the commercial banks taken under the study. To compare the different categories of
banks on the basis of various performance indicators such as net profit, interest earned,
establishment expenses, total advances etc. various statistical tools have been applied
viz., Trend Analysis, Arithmetic, Standard Deviation, Coefficient of Variation,
Compounded Annual Growth rate and Test of Significance. Following were the tools
used to analyse the secondary data.
3.4.1 TREND ANALYSIS
Trend Analysis is one quantitative method use to determine patterns in data
collected over time. It is also used to detect patterns of change in statistical information
over regular intervals of time. Trend represents the long term direction of the time series.
The method of Least Squares has been used to figure out the trend. It is a mathematical
method and used to fit a straight line trend.
The straight line trend is represented by the equation
Yc = a + bX
where:
Yc is the estimated value of the dependent variable
X is the independent variable (time in trend analysis)
a is the Y-intercept (the value of Y when X=0)
21
b is the slope of the trend line
a and b can be calculated as:
∑Y
a=
N
∑ XY
b=
∑ X2
where:
N represents the number of years (months or any other period) for which data are given.
3.4.2 ARITHMETIC MEAN
The Arithmetic Mean is an average. The formula for arithmetic mean is:
A.M. (X ) = X1 + X2 + X3 + ……………………… + Xn

n
n = ∑ Xi/n
i=1
3.4.3 STANDARD DEVIATION
The Standard Deviation is an absolute measure of dispersion that expresses variation in
the same units as the original data. The formula for standard deviation is:
S.D. (σ ) √=(Xi - X )2 / (n-1)
3.4.4 COEFFICIENT OF VARIATION
The Coefficient of Variation is one relative measure of dispersion. It relates the standard
deviation and the mean by expressing the standard deviation as a percentage of the mean.
22
The unit of measure, then, is “percent” rather than the same units as the original data.
The formula for coefficient of variation is:
σ
Coefficient of X
=
Variation
(C.V.)
3.4.5 COMPUNDED ANNUAL GROWTH RATE
The Compounded Annual Growth Rate of the performance indicators such as
Establishment Expenses, Spread, etc. can be calculated for a period of six years i.e. 2001-
02 to 2006-07. The formula for calculating compounded annual growth rate (CAGR) is:
CAGR = [(Final Value / Initial Value)1/n - 1] x 100
3.4.6 TEST OF SGINIFICANCE
In order to study the variation of performance between the growth rates of net profit,
operating profit, interest earned etc. of different banks with banking industry, the
following test of significance was applied:
X - µ
t=
S
where:
23
X is the mean of the sample
µ is the actual or hypothetical mean of the population
n is the sample size
S is the standard deviation
3.5 HYPOTHESIS FORMULATION
The following are the hypothesis of the study:
Null Hypothesis (Ho): There is no significant difference between the performances of
different categories of banks on account of various indicators.
Alternate Hypothesis (Ha): There is a significant difference between the performances
of different categories on account of various indicators.
3.6 LIMITATIONS OF THE STUDY
The study has following limitations:
1. The study concentrated only on the analysis of quantitative financial data. The
qualitative aspects of performance of banking industry were not covered by the
study.
2. The study was primarily dependent on secondary data. In such a case, limitations
of secondary data were inherent in the study.
3. The accuracy of the research is limited by the knowledge of the researcher.
24
4. As the study was to be completed in a short time, the time factor acted as a
considerable limit on the scope and extensiveness of the study.
CHAPTER IV
RESULTS AND DISCUSSIONS
To meet the first objective of the research, trend analysis of the banks under
consideration has been determined by using method of least square. The trend graphs
have been plotted of each performance indicator. To determine the second objective, the
various statistical tools have applied to compare the performance of the banks under
consideration, such as Arithmetic Mean, Standard Deviation, Coefficient of Variation,
Compounded Annual Growth Rate and test of Significance. Following is the comparison
of the banks on the basis of various performance indicators.
4.1 NET PROFIT
Table 4.1: Net Profit of the Commercial Banks

(Rs. crores)
Years
Banks Mar' Mar' Mar' Mar' Mar' Mar' C.V. C.G.R
Mean S.D. t-value
02 03 04 05 06 07 (in %) (in %)
ICICI
Bank 258 1206 1637 2005 2540 3110 1792.67 918.57 51.24 51.55 0.161*
25
%
change 367.44 35.74 22.48 26.68 22.44
AXIS
Bank 134 193 271 324 485 659 344.33 178.76 51.92 30.48 2.201*
%
change 44.03 40.41 19.56 49.69 35.88
HDFC
Bank 297 438 602 853 1116 1382 781.33 379.16 48.53 29.27 0.608*
%
change 47.47 37.44 41.69 30.83 23.84
SBI
2432 3105 4379 4304 4406 4541 3861.17 799.75 20.71 10.99 1.146*
%
change 27.67 41.03 -1.71 2.37 3.06
PNB
562 842 1108 1410 1439 1540 1150.17 352.51 30.65 18.33 0.264*
%
change 49.82 31.59 27.26 2.06 7.02
CITI
Bank 325 391 572 600 706 900 582.33 191.25 32.84 18.54 1.594*
%
change 20.31 46.29 4.90 17.67 27.48
Trend Graph of Net Profit
6000
5000
4000
Value in crores
3000
2000
1000
0
Mar' 02 Mar' 03 Mar' 04 Mar' 05 Mar' 06 Mar' 07
No. of Years
ICICI Bank AXIS Bank HDFC Bank SBI PNB CITI Bank
Fig. 4.1 Trend Growth in Net Profit
26
Net Profit is one of the most driving and motivating force for every business
concern. Profits must be earned to: a) pay the dues to stakeholders, b) expand or diversify
the business
Table 4.1 showed Net Profit for all the commercial banks taken under study
through 2001-02 to 2006-07 and provided that the maximum average net profit
amounting to Rs.3,861.17 crores was earned by State Bank of India followed by ICICI
Bank and Punjab National Bank was amounting to Rs.1,792.67 crores and Rs.1,150.17
crores, respectively. The minimum average net profit amounting to Rs.344.33 crores was
earned by the AXIS bank followed by the CITI Bank and HDFC Bank amounting to
Rs.582.33 crores and Rs.781.33 crores, respectively. The maximum standard deviation of
net profit was noticed in ICICI Bank followed by State Bank of India and HDFC Bank.
The major reason behind high standard deviation of ICICI Bank was of steep increase in
the net profit from the 2001-02 to 2002-03. The minimum standard deviation was of CITI
Bank. The coefficient of variation revealed the consistency and it was maximum in the
case of AXIS Bank (51.92%) followed by the ICICI Bank (51.24%) and HDFC Bank
(48.53%), respectively. The least coefficient of variation was noticed in the State Bank of
India (20.71%) and it also showed the maximum consistency. The laudable compounded
annual growth rate of net profit has been attained by ICICI Bank (51.52%0 followed by
AXIS Bank (30.48%) and HDFC Bank (29.27%), respectively and the minimum growth
rate has been noticed by State Bank of India (10.99%). The reason for high growth rate of
ICICI Bank was due to sharp increase of 968 per cent in interest earned during the period
of the study and moreover, the bank is gaining market share in private banking, retail
banking, credit cards and most of the other verticals in which it is present whereas, there
27
was only 32.47 per cent increase in interest earned of State Bank of India during the
period of the study. The t-values in the table 4.2.1 revealed that there was no significant
difference between the performances of all the banks taken under study and the banking
industry on account of various indicators.
In figure 4.1, the growth in percent of trend showed that all the banks
performances increased and decreased over the time period of the study and the
maximum fluctuations was recorded in case of ICICI Bank. In the year 2001-02 highest
growth in percent of trend was recorded by the HDFC bank (128.57%) followed by the
AXIS Bank (150.56%) and CITI Bank (105.01%), respectively and the least was
recorded by ICICI Bank (55.72%) but it has shown the highest growth in the next year
i.e. 2002-03 and this was due to sharp increase of 335 per cent in interest earned in the
year 2002-03. In the year 2005-06, each bank has shown similar growth in percent of
trend and it also showed the maximum increased and decreased over the period of the
study.
4.2 OPERATING PROFIT
Table 4.2: Operating Profit of the Commercial Banks

(Rs. Crores)
Years
Mean S.D. t-value
02 03 04 05 06 07 (in %) (in %)
ICICI
Bank 545 1250 1988 3077 3949 4749 2593.00 1476.78 56.95 52.25 0.162*
%
change 129.36 59.04 54.78 28.34 20.26
AXIS
Bank 407 319 435 562 867 1166 626.00 297.90 47.59 27.55 3.263
%
change -21.62 36.36 29.20 54.27 34.49
HDFC
Bank 545 623 839 1153 1587 2628 1229.17 716.28 58.27 36.88 1.041*
28
%
change 14.31 34.67 37.43 37.64 65.60
SBI
6045 5188 5860 9786 11151 10249 8046.50 2396.96 29.79 16.84 0.748*
%
change -14.18 12.95 67.00 13.95 -8.09
PNB
1474 1540 1997 2603 2881 2932 2237.83 599.62 26.79 17.29 0.619*
%
change 4.48 29.68 30.35 10.68 1.77
CITI
Bank 853 868 1233 1172 1577 2180 1313.83 457.76 34.84 20.17 1.564*
%
change 1.76 42.05 -4.95 34.56 38.24
Trend Graph of Operating Profit
12000
10000
8000
Value in crores
6000
4000
2000
0
No. of Years
Fig. 4.2 Trend Growth in Operating Profit
Every economic identity should generate sufficient profits from its primary
operations. The operating profit refers to the pure profit of the firm generated by the
operations of the firm. It is calculated by total income less total expenditure.
29
Table 4.2 showed Operating Profit for all the commercial banks taken under study
through 2001-02 to 2006-07 and provided that the maximum average net profit
amounting to Rs.8,046.50 crores was earned by State Bank of India followed by ICICI
Bank and Punjab National Bank was amounting to Rs.2,593 crores and Rs.2,237.83
crores, respectively. The minimum average net profit amounting to Rs.626 crores was
earned by the AXIS bank followed by the HDFC Bank and CITI Bank amounting to
Rs.1,229.17 crores and Rs.1,313.83 crores, respectively. The maximum standard
deviation of operating profit was noticed in State Bank of India followed by ICICI Bank
and HDFC Bank. The reason behind high standard deviation of State Bank of India was
because of lot many variations in the operating expenses occurred during the period of
study. The minimum standard deviation was of AXIS Bank. The coefficient of variation
revealed the risk and it was maximum in case of HDFC Bank (58.27%) followed by the
ICICI Bank (56.95%) and AXIS Bank (48.53%), respectively. The least coefficient of
variation was noticed in the Punjab National Bank (26.79%) and it also showed the
maximum consistency. The laudable compounded annual growth rate of operating profit
has been attained by ICICI Bank (43.55%) followed by HDFC Bank (30.05%) and AXIS
Bank (19.22%), respectively and the minimum growth rate has been noticed by State
Bank of India (9.22%). The highest growth in ICICI Bank was due to combined effect of
rise in provisions and contingencies and net profit that increased from Rs.43.95 crores to
Rs.1,638.68 crores and Rs.1,206.16 crores to Rs.3,110.22 crores, respectively. The t-
values in the table 4.2 revealed that there was no significant difference between the
performances of all the banks except AXIS Bank and the banking industry on account of
various indicators. AXIS Bank only showed the significant difference.
30
In figure 4.2, the growth in percent of trend showed that all the banks
performances increased and decreased over the time period of the study and State Bank
of India has increased and decreased very quickly as compared to rest of the banks under
consideration, this was due to huge fluctuation in the provisions and contingencies
through out the period of the study.
4.3 INTEREST EARNED
Table 4.3: Interest Earned of the Commercial Banks

(Rs. Crores)
Years
Mean S.D. t-value
02 03 04 05 06 07 (in %) (in %)
ICICI
Bank 2152 9368 8894 9410 13784 22994 11100.33 6317.44 56.91 45.23 0.014*
%
change 335.32 -5.06 5.80 46.48 66.82
AXIS
Bank 1179 1465 1586 1924 2888 4560 2267.00 1158.44 51.10 29.29 2.767
%
change 24.26 8.26 21.31 50.10 57.89
HDFC
Bank 1703 2023 2549 3093 4475 6889 3455.33 1775.05 51.37 31.42 1.556*
%
change 18.79 26.00 21.34 44.68 53.94
SBI
29810 31087 30460 32428 35795 39491 33178.50 3424.63 10.32 5.55 2.427*
%
change 4.28 -2.02 6.46 10.38 10.33
PNB
6648 7485 7779 8460 9584 11537 8582.17 1598.93 18.63 10.78 0.533*
%
change 12.59 3.93 8.75 13.29 20.38
CITI
Bank 1910 1979 2280 2203 3064 4384 2636.67 867.14 32.89 16.78 3.537
%
change 3.61 15.21 -3.38 39.08 43.08
31
Trend Graph of Interest Earned
40000
35000
30000
Value in crores
25000
20000
15000
10000
5000
0
No. of Years
Fig. 4.3 Trend Growth in Interest Earned
The major chunk of a banks’ income flows in from interest earned which
comprises the following as per schedule 13 of Banking Regulation Act 1949, a)
Interest/discount on advances/bills, b) Income on investments, c) Interest on balances
with Reserve Bank of India and others. All banks intend to maximum the interest income
by improving credit deposit ratio and extending long-term loans especially in the
deregulated environment when the interest rate witnessed a declining trend.
Table 4.3 represented the position as regards interest earned and provided that the
maximum average interest earned amounting to Rs.33,178.50 crores was earned by State
Bank of India followed by ICICI Bank and Punjab National Bank was amounting to
Rs.11,100.33 crores and Rs.8,582.17 crores, respectively. The minimum average interest
earned amounting to Rs.2267 crores was earned by the AXIS bank followed by the CITI
Bank and HDFC Bank amounting to Rs.2,636.67 crores and Rs.3,455.33 crores,
32
respectively. The maximum standard deviation of Interest Earned was noticed in State
Bank of India followed by ICICI Bank and HDFC Bank. The minimum standard
deviation was noticed by AXIS Bank. The coefficient of variation revealed the risk and it
was maximum in case of ICICI Bank (56.91%) followed by the HDFC Bank (51.37%)
and AXIS Bank (51.10%), respectively. The least coefficient of variation was noticed in
State Bank of India i.e. 10.32 per cent, and it was the highest consistent performer
because it manages all aspects of its business much better than other banks do. The
compounded annual growth rate revealed that splendid performance was recorded by
ICICI Bank (48.53%) followed by HDFC Bank (26.29%) and AXIS Bank (25.34%),
respectively and the minimum growth rate has been noticed by State Bank of India i.e.
4.81 per cent. The reason for high growth rate of ICICI Bank was due to sharp increase of
316 per cent in advances during the period of the study whereas, there is only 179 per
cent increased in advances of State Bank of India during the period of the study. The t-
values in the table 4.3 revealed that only AXIS Bank and CITI Bank were having
significant difference between their performances and the banking industry on account of
various indicators. Rest of the banks under consideration showed no significant
difference.
In figure 4.3, the growth in percent of trend has shown that all the banks, under
consideration, performances increased and decreased over the period of the study and out
of these, ICICI Bank has shown the maximum fluctuations over the time period. As in the
year 2001-02, the highest growth rate was recorded in case of HDFC Bank (164.14%)
followed by AXIS Bank (161.62%) and CITI Bank (125.16%), respectively. The least
growth was recorded by ICICI Bank (80.49%) whereas, in 2002-03, the highest growth
33
was recorded by ICICI Bank (154.98%) much higher than the other banks taken under
study and this was due to tremendous increase of 335 per cent in interest earned in the
year 2002-03. From period 2003-04 to 2006-07, ICICI Bank, HDFC Bank, AXIS Bank
and CITI Bank were all showing the similar fashion in growth of percent of trend
whereas State Bank of India and Punjab National Bank were showing the similar fashion
in growth of percent of trend.
4.4 INTEREST EXPENDED
Table 4.4: Interest Earned of the Commercial Banks

(Rs. Crores)
Years
Mean S.D. t-value
02 03 04 05 06 07 (in %) (in %)
ICICI
Bank 1559 7944 7015 6571 9597 16358 8174.00 4410.72 53.96 41.93 0.127*
%
change 409.56 -11.69 -6.33 46.05 70.45
AXIS
Bank 980 1142 1021 1193 1810 2993 1523.17 712.29 46.76 22.56 2.692
%
change 16.53 -10.60 16.85 51.72 65.36
HDFC
Bank 1074 1192 1211 1315 1929 3179 1650.00 737.36 44.69 21.97 2.536*
%
change 10.99 1.59 8.59 46.69 64.80
SBI
20729 21109 19274 18483 20159 23437 20531.83 1566.89 7.63 1.25 3.279
%
change 1.83 -8.69 -4.10 9.07 16.26
PNB
4353 4361 4155 4453 4917 6023 4710.33 631.16 13.40 6.04 1.156*
%
change 0.18 -4.72 7.17 10.42 22.49
34
CITI
Bank 1103 1030 924 752 1006 1696 1085.17 294.31 27.12 5.51 7.069
%
change -6.62 -10.29 -18.61 33.78 68.59
Trend graph of Interest Expended
25000
20000
Value in crores
15000
10000
5000
0
No. of Years
Fig. 4.4 Trend Growth in Interest Expended
Among the expenses incurred by a bank, interest expended the leading amount of
expenses. As per schedule 15 of Banking Regulation Act 1949, the interest expended
comprises of a) Interest on deposits, b) Interest on Reserve Bank of India/Inter Bank
Borrowings and others
The study of interest expended as presented in table 4.4 revealed that amount of
average interest expended to the tune of Rs.20,531.83 was maximum in case of State
Bank of India followed by ICICI Bank, Rs.8,174 crores, and Punjab National Bank,
Rs.4,710.33 crores, respectively and minimum has been noticed in case of CITI Bank
Rs.1,085.17 crores. The maximum standard deviation of interest expended was noticed in
35
ICICI Bank followed by State Bank of India and HDFC Bank. The minimum standard
deviation was noticed by CITI Bank. The coefficient of variation of 53.96 per cent is
highest in case of ICICI Bank followed by the AXIS Bank (46.76%) and HDFC Bank
(44.69%), respectively. The least coefficient of variation was noticed in State Bank of
India i.e. 7.63 per cent, and it was a more consistent performer as it manages all aspects
of its business much better than other banks do. The compounded annual growth rate
revealed that splendid performance was recorded by ICICI Bank (48.08%) followed by
AXIS Bank (20.50%) and HDFC Bank (19.87%), respectively and the minimum growth
rate has been noticed by State Bank of India i.e. 2.07 per cent. The t-values in the table
4.4 depicted that half of the banks namely, AXIS Bank, State Bank of India and CITI
Bank were having significant difference between their performances and the banking
industry on account of various indicators, and remaining half of the banks under
consideration, namely, ICICI Bank, HDFC Bank and Punjab National Bank showed no
significant difference.
consideration, performances increased and decreased over the period of the study and out
of these, ICICI Bank has shown the maximum fluctuations over the time period. As in the
year 2001-02, the highest growth rate was recorded by ICICI Bank (165.17%) much
higher than the other banks taken under study and this was due to tremendous increase of
409.55 per cent in interest expended in the year 2002-03. From period 2003-04 to 2006-
07, ICICI Bank, HDFC Bank, AXIS Bank and CITI Bank were all showing the similar
fashion in growth of percent of trend whereas State Bank of India and Punjab National
Bank were showing the similar fashion in growth of percent of trend.
36
4.5 SPREAD
Table 4.5: Spread of the Commercial Banks

(Rs. Crores)
Years
Mean S.D. t-value
02 03 04 05 06 07 (in %) (in %)
ICICI
Bank 593 1424 1879 2839 4187 6635 2926.17 2006.22 68.56 56.71 0.232*
%
change 140.13 31.95 51.09 47.48 58.47
AXIS
Bank 199 322 565 732 1078 1567 743.83 464.79 62.49 50.05 2.752
%
change 61.81 75.47 29.56 47.27 45.36
HDFC
Bank 629 831 1338 1778 2546 3710 1805.33 1058.98 58.66 42.99 0.834*
%
change 32.11 61.01 32.88 43.19 45.72
SBI
9531 9977 11186 13944 15635 16054 12721.17 2619.09 20.59 12.67 1.216*
%
change 4.68 12.12 24.66 12.13 2.68
PNB
2295 3124 3625 4006 4667 5515 3872.00 1037.37 26.79 17.65 0.109*
%
change 36.12 16.04 10.51 16.50 18.17
CITI
Bank 807 950 1356 1451 2058 2688 1551.67 647.12 41.70 27.09 1.512*
%
change 17.72 42.74 7.01 41.83 30.61
37
Trend Graph of Spread
18000
16000
14000
12000
Value in crores
10000
8000
6000
4000
2000
0
No. of Years
Fig. 4.5 Trend Growth in Spread
Spread Management focuses on maintaining an adequate spread (gap) between
interest earned and interest expended to ensure an acceptable profit margin regardless of
interest rate fluctuations. Mathematically, spread can be expressed as:
Spread = Interest earned – Interest expended
The analysis of data contained in table 4.5 indicated that the mean spread of
Rs.12,721.17 crores was again highest in case of State Bank of India followed by Punjab
National Bank, Rs.3,872 crores, and ICICI Bank, Rs.2,926.17 crores, respectively and
lowest has been noticed in case of AXIS Bank Rs.743.83 crores. The maximum standard
deviation of spread was noticed in State Bank of India followed by ICICI Bank and
HDFC Bank. The minimum standard deviation was noticed by AXIS Bank. The
coefficient of variation of 68.56 per cent was highest in case of ICICI Bank followed by
38
the AXIS Bank (62.49%) and HDFC Bank (58.66%), respectively. The least coefficient
of variation was noticed in case of State Bank of India (20.59%), and it was a more
consistent performer. It manages all aspects of its business much better than other banks
do. The analysis of compounded annual growth rate reveals that ICICI Bank was leading
by recording a growth rate of 49.67 per cent followed by AXIS Bank (41.15%) and
HDFC Bank (34.50%0, respectively and the minimum growth rate has been noticed by
State Bank of India i.e. 9.10 per cent.
The t-values in the table 4.5 revealed that only AXIS Bank was having significant
difference between their performances and the banking industry on account of various
indicators, and rest of the banks showed no significant difference.
consideration, performances increased and decreased over the period of the study and this
increase or decrease was not huge in all the banks over the time period taken under study.
During the period 2001-02, the highest growth of 546.54 per cent was recorded by ICICI
Bank followed by AXIS Bank (244.17%) and HDFC Bank (206.23%), respectively. The
minimum growth of 97.06 per cent was recorded by Punjab National Bank. The reason
for the maximum growth of ICICI Bank was because of huge percentage increase in
spread of 140.13% during 2002-03. In the years from 2002-03 to 2006-07, all the banks
taken under study showed similar growth in percent of trend.
39
4.6 ESTABLISHMENT EXPENSES
Table 4.6: Establishment Expenses of the Commercial Banks

(Rs. Crores)
Years
Mean S.D. t-value
02 03 04 05 06 07 (in %) (in %)
ICICI
Bank 147 403 546 737 1082 1616 755.17 480.59 63.64 54.61 0.865*
%
change 174.15 35.48 34.98 46.81 49.35
AXIS
Bank 51 85 121 177 240 381 175.83 110.34 62.75 47.27 5.726
%
change 66.67 42.35 46.28 35.59 58.75
HDFC
Bank 109 152 204 276 487 777 334.17 232.26 69.50 47.55 2.466*
%
change 39.45 34.21 35.29 76.45 59.55
SBI
5153 5688 6447 6907 8123 7932 6708.33 1085.25 16.18 9.87 1.661*
%
change 10.38 13.34 7.14 17.61 -2.35
PNB
1316 1476 1654 2121 2115 2352 1839.00 378.24 20.57 12.85 0.032*
%
change 12.16 12.06 28.23 -0.28 11.21
CITI
Bank 163 189 252 244 294 376 253.00 69.63 27.52 16.93 8.662
%
change 15.95 33.33 -3.17 20.49 27.89
40
Trend Graph of Establishment Expenses
9000
8000
7000
6000
Value in crores
5000
4000
3000
2000
1000
0
No. of Years
Fig. 4.6 Trend Growth in Establishment Expenses
In banking parlance, establishment expenses refer to the amount expended on
employees in the form of salaries and provisions (contribution to gratuities funds,
provident funds and pension funds etc. Establishment cost is inseparable part of any
banking organization.
The analysis of data contained in table 4.6 indicated that the mean establishment
expenses of Rs.6,708.33 crores was again highest in case of State Bank of India followed
by Punjab National Bank, Rs.1,839 crores, and ICICI Bank, Rs.755.17 crores,
respectively and lowest has been noticed in case of AXIS Bank Rs.175.83 crores. The
maximum standard deviation of establishment expenses was noticed in State Bank of
41
India followed by ICICI Bank and Punjab National Bank. The minimum standard
deviation was noticed by CITI Bank. The coefficient of variation of 69.50 per cent is
highest in case of HDFC Bank followed by the ICICI Bank (63.64%) and AXIS Bank
(62.75%), respectively. The least coefficient of variation was noticed in case of State
Bank of India (16.18%), and it also showed the maximum consistency. The analysis of
compounded annual growth rate revealed that ICICI Bank was leading by recording a
growth rate of 49.23 per cent followed by AXIS Bank (39.91%) and HDFC Bank
(38.82%), respectively and the minimum growth rate has been noticed by State Bank of
India i.e. 7.47 per cent. As we have seen in the table 4.6 that the average establishment
expense was maximum in case of public sector banks i.e. State Bank of India and Punjab
National Bank but the compounded annual growth rate of public sector was much less
than that of private sector i.e. ICICI Bank, AXIS Bank and HDFC Bank and foreign
banking sector i.e. CITI Bank. This happened because of private banks are employing
personnel with professional skill and experience in large number whereas, in public
sector they are about to overstaffed. The t-values in the table 4.6 revealed that AXIS
Bank and CITI Bank were having significant difference between their performances and
the banking industry on account of various indicators, and rest of the banks showed no
significant difference.
increase and decrease was very minute in all the banks over the time period taken under
study. In the year 2001-02 highest growth in percent of trend was recorded by the HDFC
bank (573.68%) followed by the AXIS Bank (242.86%) and ICICI Bank (210%),
42
respectively and the least was recorded by State Bank of India (99.85%). From the year
2002-03 to 2006-07, public sector banks and foreign banking sector showed similar trend
and all the private sector banks showed similar trend.
4.7 TOTAL DEPOSITS
Table 4.7: Total Deposits of the Commercial Banks

(Rs. Crores)
Years
Banks C.V.
Mar' Mar' Mar' Mar' Mar' Mar' C.G.R
Mean S.D. (in t-value
02 03 04 05 06 07 (in %)
%)
ICICI
Bank 32085 48169 68108 99819 165083 230510 107295.67 69839.49 65.09 48.92 0.053*
%
change 50.13 41.39 46.56 65.38 39.63
AXIS
Bank 12287 16964 20954 31712 40113 58785 30135.83 15807.10 52.45 36.24 2.051*
%
change 38.06 23.52 51.34 26.49 46.55
HDFC
Bank 17654 22376 30408 36354 55797 68298 38481.17 18035.75 46.87 31.87 1.624*
%
change 26.75 35.90 19.55 53.48 22.40
SBI
270560 3E+05 318618 367047 380046 435521 344652.50 55578.63 16.13 9.79 1.525*
%
change 9.45 7.60 15.20 3.54 14.60
PNB
64123 75813 87916 103167 119685 139859 98427.17 25786.36 26.20 16.78 0.269*
%
change 18.23 15.96 17.35 16.01 16.86
CITI
Bank 15242 17743 20465 21484 27912 37875 23453.50 7535.54 32.13 18.56 4.631
%
change 16.41 15.34 4.98 29.92 35.69
43
Trend Graph of Total Deposits
450000
400000
350000
300000
Value in crores
250000
200000
150000
100000
50000
0
No. of Years
Fig. 4.7 Trend Growth in Total Deposits
Acceptance of deposits is the primary activity of banking system. More and more
deposits should be mobilized at cheaper rates of interest to enhance advances. The
various types of deposits mobilized by banks are: a) term deposits, b) saving fund
deposits, c) current deposits, d) recurring deposits, e) miscellaneous deposits.
The analysis of data contained in table 4.7 indicated that the mean total deposits
of Rs.3,44,652.50 crores was again highest in case of State Bank of India followed by,
ICICI Bank Rs.1,07,295.67 crores, and Punjab National Bank, Rs.98,427.17 crores,
respectively and lowest has been noticed in case of CITI Bank i.e. Rs.23,453.50 crores.
The maximum standard deviation of total deposits was noticed in ICICI Bank followed
by State Bank of India and Punjab National Bank. The minimum standard deviation was
noticed by CITI Bank. The coefficient of variation of 65.09 per cent was highest in case
44
of ICICI Bank followed by the AXIS Bank (52.45%) and HDFC Bank (46.87%),
respectively. The least coefficient of variation was noticed in case of State Bank of India
(16.13%), and it also showed the maximum consistency. The analysis of compounded
annual growth rate revealed that ICICI Bank was leading by recording a growth rate of
39 per cent followed by AXIS Bank (29.88%) and HDFC Bank (25.35%), respectively
and the minimum growth rate has been noticed by State Bank of India i.e. 8.27 per cent.
ICICI Bank was showing highest growth rate because it was focusing on growth, taking
on slightly more risk than other banks. The t-values in the table 4.7 revealed that only
CITI Bank was having significant difference between their performances and the banking
industry on account of various indicators, and rest of the banks under consideration
showed no significant difference.
increase and decrease was not huge in all the banks over the time period taken under
study. In the year 2001-02 highest growth in percent of trend was recorded by the ICICI
bank (352.16%) followed by the AXIS Bank (157.51%) and HDFC Bank (137.83%)
respectively and the least was recorded by State Bank of India (102.37%). The reason for
huge growth in percent of trend of ICICI Bank in the year 2001-02 was because of huge
growth 617.43 per cent of total deposits during the period of study. From the year 2002-
03 to 2006-07, all the public sector banks i.e. State Bank of India and Punjab National
Bank, foreign banking sector i.e. CITI Bank and the private sector banks i.e. ICICI Bank,
AXIS Bank and HDFC Bank showed similar growth in percent of trend.
45
4.8 TOTAL ADVANCES
Table 4.8: Total Advances of the Commercial Banks

(Rs. Crores)
Years
Banks C.V.
02 03 04 05 06 07 (in %)
%)
ICICI
Bank 47035 53279 62095 91405 146163 195865 99307.00 54493.19 54.87 35.16 0.163*
%
change 13.28 16.55 47.20 59.91 34.00
AXIS
Bank 5352 7180 9363 15603 22314 36876 16114.67 10885.58 67.55 47.33 2.031*
%
change 34.16 30.40 66.65 43.01 65.26
HDFC
Bank 6814 11755 17744 25566 35061 46945 23980.83 13758.06 57.37 46.21 1.394*
%
change 72.51 50.95 44.08 37.14 33.90
SBI
120806 1E+05 157933 202374 261641 337336 202974.67 75860.31 37.37 23.22 0.626*
%
change 14.03 14.65 28.14 29.29 28.93
PNB
34369 40228 47224 60412 74627 96596 58909.33 21437.33 36.39 23.07 0.287*
%
change 17.05 17.39 27.93 23.53 29.44
CITI
Bank 11385 12629 15259 18111 24455 32861 19116.67 7474.02 39.10 23.74 2.808
%
change 10.93 20.83 18.69 35.03 34.37
46
Trend Graph of Total Advances
350000
300000
250000
Value in crores
200000
150000
100000
50000
0
No. of Years
Fig. 4.8 Trend Growth in Total Advances
Advances are the major product of banking system. The advances must gain
momentum if the banks are to improve its operating performance. A bank sanctions
advances in various forms like: a) bank overdrafts, b) cash credits, c) discounting of bills,
d) term loans and others.
The analysis of data contained in table 4.8 indicated that the mean total deposits
of Rs.2,02,974.67 crores was recorded highest in case of State Bank of India followed by,
ICICI Bank Rs.99,307 crores, and Punjab National Bank, Rs.58,909.33 crores,
respectively and lowest has been noticed in case of AXIS Bank i.e. Rs.16,114.67 crores.
The maximum standard deviation of total deposits was noticed in State Bank of India
followed by ICICI Bank and Punjab National Bank. The minimum standard deviation
was noticed by CITI Bank. The coefficient of variation of 67.55 per cent was highest in
47
case of AXIS Bank followed by the HDFC Bank (57.37%) and ICICI Bank (54.87%),
respectively. The least coefficient of variation was noticed in case of Punjab National
Bank (36.39%), and it also showed the maximum consistency. The analysis of
compounded annual growth rate revealed that AXIS Bank and HDFC Bank are leading
by recording a growth rate of 38.03 per cent followed by ICICI Bank (26.90%) and CITI
Bank (19.37%), respectively and the minimum growth rate has been noticed by State
Bank of India i.e. 18.71 per cent. ICICI Bank was showing highest growth rate because it
was focusing on growth, taking on slightly more risk than other banks. The t-values in the
table 4.8 revealed that only CITI Bank was having significant difference between their
performances and the banking industry on account of various indicators, and rest of the
banks under consideration showed no significant difference.
consideration, performances increased and decreased over the period of the study and the
fluctuations were very minute in all the banks over the time period taken under study. In
the year 2001-02 highest growth in percent of trend was recorded by the AXIS Bank
(458.42%) followed by the ICICI Bank (194.71%) and HDFC Bank (166.36%),
respectively and the least was recorded by Punjab National Bank i.e. 121.14 per cent. The
reason for huge growth in percent of trend of AXIS Bank in the year 2001-02 was
because of huge growth 589.01% of total advances during the period of study. From the
year 2002-03 to 2006-07, all the public sector banks i.e. State Bank of India and Punjab
National Bank, foreign banking sector i.e. CITI Bank and the private sector banks i.e.
ICICI Bank, AXIS Bank and HDFC Bank showed similar growth in percent of trend.
48
4.9 TOTAL VOLUME
Table 4.9: Total Volume of the Commercial Banks

(Rs. Crores)
Years
Banks C.V.
02 03 04 05 06 07 (in %)
%)
ICICI
Bank 79120 1E+05 130204 191224 311246 426375 206602.83 124252.90 60.14 41.58 0.042*
%
change 28.22 28.35 46.86 62.77 36.99
AXIS
Bank 17639 24144 30317 47315 62427 95662 46250.67 26663.02 57.65 39.88 2.044*
%
change 36.88 25.57 56.07 31.94 53.24
HDFC
Bank 24468 34130 48152 61920 90857 115242 62461.50 31736.73 50.81 36.68 1.527*
%
change 39.49 41.08 28.59 46.73 26.84
SBI
391366 4E+05 476552 569422 641687 772857 547627.50 130676.55 23.86 14.55 1.013*
%
change 10.86 9.83 19.49 12.69 20.44
PNB
98942 1E+05 135140 153838 160739 185048 141624.67 28631.26 20.22 12.87 0.663*
%
change 17.28 16.46 13.84 4.49 15.12
CITI
Bank 26627 30372 35724 39595 52367 70736 42570.17 14988.85 35.21 20.56 3.728
%
change 14.06 17.62 10.84 32.26 35.08
49
Trend Graph of Total Volume
800000
700000
600000
Value in crores
500000
400000
300000
200000
100000
0
No. of Years
Fig. 4.9 Trend Growth in Total Volume
Total Volume of the business refers to the sum total deposits and advances.
Mathematically, Volume of Business = Deposits + Advances. It is said high volume of
business leads to reduced cost per unit and improves profit. Those banks are efficient
which create more advances from a given volume of deposits.
The analysis of data contained in table 4.9 indicated that the mean total volume of
Rs.5,47,627.50 crores was recorded highest in case of State Bank of India followed by,
ICICI Bank Rs.20,602.83 crores, and Punjab National Bank, Rs.1,41,624.67 crores,
respectively and lowest has been noticed in case of CITI Bank i.e. Rs.42,570.17 crores.
The maximum standard deviation of total deposits was noticed in State Bank of India
followed by ICICI Bank and HDFC Bank. The minimum standard deviation was noticed
by CITI Bank. The coefficient of variation of 60.14% is highest in case of ICICI Bank
50
followed by the AXIS Bank, 57.65%, and HDFC Bank, 50.81%, respectively. The least
coefficient of variation was noticed in case of Punjab National Bank, 20.22%, and it also
showed the maximum consistency. The analysis of compounded annual growth rate
reveals that AXIS Bank was leading by recording a growth rate of 32.62% followed by
ICICI Bank, 32.48%, and HDFC Bank, 29.54%, respectively and the minimum growth
rate has been noticed by Punjab National Bank i.e. 11.02%. The t-values in the table 4.9
revealed that only CITI Bank was having significant difference between their
performances and the banking industry on account of various indicators, and rest of the
banks under consideration showed no significant difference.
consideration, performances increased and decreased over the period of the study and the
fluctuations were very minute in all the banks over the time period taken under study. In
the year 2001-02 highest growth in percent of trend was recorded by the ICICI Bank i.e.
237.83%, followed by the AXIS Bank and HDFC Bank, 196.68% and 144.74%
respectively and the least was recorded by Punjab National Bank i.e. 98.98%. The reason
for huge growth in percent of trend of ICICI Bank in the year 2001-02 was because of
huge growth 438.89% of total advances during the period of study. From the year 2002-
03 to 2006-07, all the public sector banks i.e. State Bank of India and Punjab National
Bank, foreign banking sector i.e. CITI Bank and the private sector banks i.e. ICICI Bank,
AXIS Bank and HDFC Bank showed similar growth in percent of trend.
51
4.10 RETURN ON ASSETS
Table 4.10: Return on Assets of the Commercial Banks

(Rs. Crores)
Years
Banks C.V.
02 03 04 05 06 07 (in %)
%)
ICICI
Bank 0.25 1.13 1.31 1.19 1.02 0.91 0.97 0.34 35.63 18.89 0.972*
%
change 352.00 15.93 -9.16 -14.29 -10.78
AXIS
Bank 0.93 0.98 1.12 0.86 0.97 0.89 0.96 0.08 8.72 -1.46 3.966
%
change 5.38 14.29 -23.21 12.79 -8.25
HDFC
Bank 1.24 1.44 1.42 1.66 1.52 1.52 1.47 0.13 8.68 3.89 4.076
%
change 16.13 -1.39 16.90 -8.43 0.00
SBI
0.7 0.83 1.07 0.94 0.89 0.81 0.87 0.11 13.17 2.34 2.624
%
change 18.57 28.92 -12.15 -5.32 -8.99
PNB
0.77 0.97 1.08 1.12 0.99 0.95 0.98 0.11 11.39 3.34 3.052
%
change 25.97 11.34 3.70 -11.61 -4.04
CITI
Bank 1.51 2.88 3.55 2.84 3.07 1.86 2.62 0.71 26.97 -1.57 1.134*
%
change 90.73 23.26 -20.00 8.10 -39.41
52
Trend Graph of Return on Assets
2.5
2
Value in crores
1.5
0.5
0
No. of Years
Fig. 4.10 Trend Growth in Return on Assets
Return on Assets measures the relationship between the net profits and assets. It is
defines as the ratio of net profit after tax to total assets. It shows the efficiency with
which banks deploy their assets.
In the table 4.10, the mean analysis showed that the maximum return of 2.72% is
recorded by CITI Bank followed by HDFC Bank and Punjab National Bank, 1.47% and
0.98% respectively. The maximum standard deviation was again recorded highest by
CITI Bank followed by ICICI Bank and HDFC Bank, respectively. The minimum was
recorded by the AXIS Bank. The reason for showing maximum mean return by CITI
Bank was due to the bank’s strategy of expanding its portfolio of services has paid off
handsomely. The coefficient of variation was maximum shown by ICICI Bank which
revealed that there was more risk involved and the minimum return was noticed by
53
HDFC Bank and it also showed that it was more consistent. The reason for the highest
coefficient of variation in ICICI Bank was because from the year 2001-02 to 2003-04, the
return kept on increasing, then started decreasing from 2004-05 to 2006-07 and this is
due to percentage increase in total assets was more than the percentage increase in net
profit in the later years of the study. The maximum compounded annual growth rate is in
case of ICICI Bank i.e. 24.08% followed by Punjab National Bank and CITI Bank,
3.57% and 3.54% whereas AXIS Bank recorded the least with negative growth rate,
-0.73%,. The reason for this was that percentage increase in total assets is much more
than the percentage increase in net profit during the period of the study. The t-values in
the table 4.10 revealed that only ICICI Bank and CITI Bank are having no significant
difference between their performances and the banking industry on account of various
indicators, and rest of the banks under consideration showed significant difference.
In figure 4.10, the growth in percent of trend has shown that all the banks, taken
under study, performances has increased and decreased over the period of the study and
there were huge fluctuations in all the banks over the time period taken under study. The
maximum fluctuation was recorded by CITI Bank and these fluctuations were all because
of the change in percentage of net profits is different from that of change in total assets in
each time period.
54
CHAPTER V
SUMMARY
The research project ‘Performance of Commercial Banks in India: A comparative
study of different categories of banks’ was undertaken with the following objectives:
1. To study the trends in the performance of different categories of the banks on the
basis of selected parameters.
2. To compare the performance of different categories of the banks.
The performance of different categories of banks was analysed on the basis of
certain performance indicators such as Net profit, Operating profit, Interest expended,
Spread, Return on Assets etc. The study was carried out for six years period from 2001-
02 to 2006-07. Only those banks were chosen for which completed data of 12 months for
the study period was available. The selected banks were – ICICI Bank, AXIS Bank,
HDFC Bank, State Bank of India, Punjab National Bank and CITI Bank. To achieve the
first objective, the growth of percent of trend has been done by applying the method of
least square and to achieve second objective, various statistical tools have been applied
such as Coefficient of Variation, Compounded Annual Growth Rate and Test of
Significance.
5.1 Findings of the study
1. The maximum average net profit is captured by State Bank of India followed by
the ICICI Bank and Punjab National Bank whereas, in case of compounded annual
growth rate, ICICI Bank recorded the highest value followed by AXIS Bank and
HDFC Bank and the high growth rate of ICICI Bank was due to sharp increase of 968
55
per cent in interest earned during the period of the study and moreover, the bank is
gaining market share in private banking, retail banking, credit cards and most of the
other verticals in which it is present. All the banks showed insignificant difference.
2. The maximum average operating profit was recorded by State Bank of India and
the minimum was recorded by AXIS Bank. In case of compounded annual growth
rate, the major chunk was captured by ICICI Bank followed by HDFC Bank and
AXIS Bank. This means net profits in public sector banks have arisen on account of
recovery of ‘provisions and Contingencies’.
3. The interest earned growth rate was maximum in case of ICICI Bank followed by
HDFC bank and AXIS bank and the minimum was recorded by State Bank of India.
This high growth rate of ICICI Bank was all due to maximum increase in advances
during the period of the study than other banks. Only AXIS Bank and CITI Bank
were having significant difference between their performances and the banking
industry on account of various indicators.
4. The interest expended was also increased at fastest rate in private banks viz.;
ICICI Bank, AXIS Bank and HDFC Bank because the growth rate in deposits was
highest in private sector banks as compared to public sector banks and foreign
banking sector. AXIS Bank, State Bank of India and CITI Bank were having
significant difference between their performances and the banking industry on
account of various indicators.
5. Establishment expenses being major item of expenses has grown at a lesser rate in
public sector banks than in public sector banks and foreign banking sector and this is
because private banks are employing personnel with professional skill and experience
56
in large number whereas, in public sector they are about to overstaffed. AXIS Bank
and CITI Bank were having significant difference between their performances and the
banking industry on account of various indicators, and rest of the banks showed no
significant difference
6. As regards total deposits, though State Bank of India because of its vast network,
was leading in total deposits but the growth rate analysis revealed that ICICI Bank
topped the chart followed by AXIS Bank and HDFC Bank whereas, least growth has
been recorded in case of State Bank of India. The reason for high growth in ICICI
Bank was due to its prima facie focus on growth, taking on slightly more risk than
other banks and same was the case with total advances.
7. The maximum average return on assets has been noticed in CITI bank. The reason
for showing maximum mean return by CITI Bank was that the bank’s strategy of
expanding its portfolio of services has paid off handsomely and moreover, bank is
investing huge in computers and infrastructure. ICICI Bank and CITI Bank showed
insignificant difference.
5.2 Suggestions
1. As the growth in total deposits, total advances and total volume was very low in
case of public sector banks viz.; State Bank of India and Punjab National Bank, it is
recommended that public sector banks should adopt the policies and practices of
private sector banks.
2. The growth rate of public sector banks viz.; State Bank of India and Punjab
National Bank were the lowest in every performance indicator taken under
57
consideration. It is recommended that these banks must go for higher disposable
incomes, higher consumption and they must have greater appetite for risk.
3. Banks that are able to innovate to keep up with emerging market trends are likely
to be more successful and will establish long-term leadership positions. So every
bank must do this.
4. To attain higher growth, the banks must focus on every segment especially, rural,
retail and agri credit areas because there are ample of opportunities lying for one’s
growth.
5.3 Scope for further study
There is ample scope for subsequent studies in this dynamic sector of the
economy. The studies may be taken by studying other variables and furthermore studies
may be undertaken to analyze the impact of new products on the performance of banks.
Still more, studies may be conducted on the qualitative aspects and analysis scaling
techniques. On the basis of findings of the study, it is purposed that micro level studies on
the various variables be conducted in order to facilitate SWOT analysis of each bank.
58
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PERFORMANCE OF COMMERCIAL BANKS IN INDIA:

A COMPARATIVE STUDY OF DIFFERENT

Research Project Report

Submitted to the Punjab Agricultural University

MASTER OF BUSINESS ADMINISTRATION

Department of Business Management

banking system has significant positive externalities, as it increases the efficiency of

economic transaction in general. Therefore, one of the important objectives of financial

impact of financial sector reforms on its performance.

banks in India: A comparative study of different categories of banks. The concept of

banking and Indian banking system have been defined as under:

administered interest rate regime or state of operational freedom, whether bound by

antiquated manual process or a scenario witnessing unleashing of technological blitzkrieg

– the industry has its own experience to narrate.

Banking is an important segment of the tertiary sector and acts as backbone of

Indian Banking System and Policy Change

sector banks prevailed resulting in lack of competition.

of the recommendations of the Committee to Review the Working of the Monetary

recommendations of the Committee on Financial System (CFS). Almost all of the

recommendations of the CFS have been implemented in a phased manner. In 1998,

and CRR to 4.5 per cent of the total deposit.

rates have been deregulated.

Increased autonomy and competition: Considerable operational autonomy has been

and 42 foreign banks as against 23 foreign banks in 1991).

Regulatory Norms: These were aimed at reducing the vulnerability of financial

institutions in the face of fluctuations in the economic environment. Important among

various types of assets have been introduced.

Commercial Banking in India

number reduced to 256 in 1960-61. In 1969, 14 major commercial banks were

and number further reduced to 183 in 2006-07.

primary functions, secondary functions and social and developmental functions.

Role of Commercial Banks in Social-Economic Development

to build an efficient commercial banking system equipped with an adequate coverage so

investment in more generating assets.

upliftment of rural areas.

Commercial banks play a significant role in economic growth and development of

instrument of economic policy in a liberalized economy. The monetary policy must be

Government or the Central Bank of the country.

facilities, such as discounting and accepting bills of exchange, providing overdraft

facilities, issuing draft etc.

dangers of non-realisation of payment due to commercial or political reasons.

management, corporate counseling, project counseling, hire purchase finance equipment

subsidiaries result in the development of domestic and international business.

become an effective tool of social transformation and rejuvenation. A succulent and

malevolent system in crippling and strait jacketing of a country’s economy.

Objectives of the study

Following were the objectives of the study:

basis of selected parameters.

2. To compare the performance of different categories of the banks.

A large number of studies have been conducted on the topics related to

performance of commercial banks in India: A comparative study of different categories

presented in chronological order to provide a glimpse of work done in this area.

themselves and their costumers, which reduce their cost of capital.

Vashisht (1987) critically evaluated the trends and progress of

commercial banks in India during the period 1971-1983. The ratio

analysis was used to evaluate the performance of commercial banks

with respect to different indicators. He analysed that commercial banks

did very well with respect to branch expansions, deposit mobilization

and priority sector advances.

Amandeep (1990) evaluated the profits and profitability of