Public Vs Private Banks

Private vs. Public Bank Comparison
Prasann Patel
Money Banking & Public Finance - EPP 210
November 2, 2017

Privatevs. Public Bank Comparison | Prasann Patel Page 1 of 13
Abstract
The banking system is major part of financial sector and it plays an important part in the
growth of economy. Comparing their products and performance gives a better idea about
economic stability and scalability. Efficiency and profitability of the banking sector in India
has assumed primal significance due to intense competition, greater customer demands
and changing banking reforms. And with recent shifts in economic trends due to
involvement of other sectors like information and technology, determining the
performance gives a better insight into the variables affecting the changes in day to day life.
Since competition cannot be observed directly, various indirect measures in the form of
simple indicators or complex models have been devised and used both in theory and in
practice. This study attempts to measure the relative performance of Indian banks. For this
study, we have used public sector banks and private sector banks. Overall, the analysis
supports the conclusion that new banks are more efficient that old ones. The public sector
banks are not as profitable as other sectors are.
Introduction
Banks are key financial intermediaries or institutions that serve as “middle man” in the
transfer of fund from servers to those who invest in real assets as house, equipment and
factories. Banking sector is the backbone of the county’s economy. Banks are important
financial intermediaries in the most of countries and it provide a package of different
services that are beneficial to both the housing sector as well as business sector which are
two standing pillars on which the Indian economy stands upon. In performing this function
financial intermediaries improve the well-being of both saver and investor. By improving
economic efficiency they raise living standard of the society and the velocity of currency.
The banking sector is considered to be an important source of financing for most
businesses. They play a very important role in the effort to attain stable prices, high level of
employment and sound economic growth. They make funds available to meet the needs of
individuals, businesses and the government. In doing this, they facilitate the flow of goods
and services and the activities of governments.
The commercial Banking system provides a large portion of the medium of exchange of a
given country, and is the primary instrument through which Monitory policy is conducted,
through their deposit mobilization and lending operations. Commercial banks make the
productive utilization of ideal funds, thus assists the society to produce wealth. Commercial
Banks are the institutions specifically designed to further the capital formation process
through the attraction of deposits and extension of credit.

Method
Banking Regulation Act of India, 1949, defines Banking as “accepting, for the purpose of
lending or of investment of deposits of money from the public, repayable on demand or
otherwise or withdraw able by cheque, draft order or otherwise.” But, nowadays
various other services are also offered by banks such as issuance of credit and debit
card, providing safe custody to valuable items, ATM services, online transfer and
payment etc.
Therefore in this assignment both the products i.e. the services provided by the banks
and its performance is taken into consideration.
Subjects covered
The study consists of a detailed explanation of the various services offered by banks
and how they affect the bank. Banks are just not a medium of exchanging money but
also are a profit making organisation.
To get a better understanding of the project, we have compared the services offered
by public banks and private banks and how they affect the efficiency of the banks.
Apparatus (or Research Instruments/Tools)
Although net income gives us an idea of how well a bank is doing, it suffers from
one major drawback. It does not adjust for the bank's size, thus making it hard to
compare how well one bank is doing relative to another. A basic measure of bank
profitability that corrects for the size of the bank is the return on assets (ROA).
Secondly, because the owners of a bank must know whether their bank is being
managed well, ROA serves as a good method to identify it.
ROA = Net profit after taxes / assets. The return on assets provide information on
how efficiently a bank is being run because it indicates how much profits are
generated by each dollar of assets. However, what the bank's owners (equity
holders) care about most is how much the bank is earning on their equity
investment. This information is provided by the other basic measure of bank
profitability, the return on equity (ROE).
ROE = Net profit after taxes / equity capital There is a direct relationship between
return on assets (which measures how efficiently the bank is run) and the return on
equity (which measures how well the owners are doing on their investment).
Another commonly used measure of bank performance is called the net interest

margin (NIM). NIM is the difference between interest income and interest expenses
as a percentage of total assets.
NIM = (Interest income - Interest expenses) / Assets. One of the bank's primary
intermediation functions is to issue liabilities and use the proceeds to purchase
income earnings assets. If a bank manager has done a good job of asset and liability
management such that the bank earns substantial income on its assets and have low
costs on its liability, profits will be high. How well a bank manages its asset and
liabilities is affected by the spread between the interest earned on the bank's assets
and the interest cost on its liabilities. This spread is exactly what net interest margin
measures. If the bank is able to raise funds with liabilities that have low interest
costs and is able to acquire assets with high interest income, the net interest margin
will be high and the bank is likely to be highly profitable. If the interest cost of its
liabilities rises relatively to the interest earned on its assets, the net interest margin
will fall, and bank profitability will suffer.
Other tools used for comparison include Non-performing assets (NPA) which is a
loan or advance for which the principal amount or the interest payment remained
overdue for a period of 90 days. Higher amount of NPA of a bank (like SBI) will
cause a significant reduction in its net profit. Number of banks and their branches
also serve as a apparatus for comparison.
Also, different products and facilities given by banks are compared along with how
efficient the services have penetrated in the banking market.
Objective
1. To compare the profit earning of the selected public sector banks and private
sector banks from the year 2011 to 2014/16
2. To investigate the factors affecting the profit earning of the selected banks during
the period.
3. To analyses the products and services offered by banks of both sectors.

Performanceanalysis
For analysis of the profitability and performance, three major public sector and
three private sector banks are selected on the basis of their assets.
Public Sector Banks: State Bank of India (SBI), Punjab National Bank (PNB) and
Bank of Baroda (BoB).
Private Sector Banks: ICICI Bank, HDFC Bank and Axis Bank.
Data Analysis and Interpretation
Total Assets
As seen from the general trend we can see that the total assets of PUB is higher than
that of the Private sector banks which is directly related to scalability i.e. PSB have
much higher amount of penetration in India market both urban and rural. Private
sector banks usually lack in rural expansion as they tend to have higher rate of
profitability margins than that of PSB. Also, Public Sector banks dominate the Indian
banking system, by the total market share of 72.9%, which is followed by Private
sector banks, by 19.7%. Public sector banks are established since long, while private
sector banks emerged a few decades ago, and so the customer base of public sector
banks is greater than the private ones.

Demand & Saving Deposits Ratio
The sum of money that is given to a bank but can be withdrawn as per the
requirement of the depositor. Amounts that are lying in the savings and current
accounts are known as demand deposits because they can be used at any point of
time.
Demand Deposit Ratio = Demand Deposit / Total Deposit.
Saving Deposit Ratio = Saving Deposit / Total Deposit.
0
5
10
15
20
25
2012 2013 2014 2015 Mean
Demand DepositeRatio
SBI PNB BoB ICICI HDFC Axis

As shown in table the ratio of demand deposit is more in HDFC bank (20.71)
followed by another private sector bank AXIS (20.37). Demand deposit is more in
private sector banks than in public banks it may be because no interest is paid on
these accounts except in special cases where a large dormant balance is kept which
could otherwise be transferred to the savings deposits.
Similarly, ratio of savings deposit to total deposit is maximum in case of SBI (32.36)
followed by Axis bank. It is an account at a bank in which the customer deposits
money for any non-immediate use. For example, one may utilize a savings deposit to
save funds for an expensive purchase, such as a house or a car. Because most
customers keep money in a savings deposit for a longer period than a checking
account, a savings deposit pays a slightly higher interest rate. The savings deposit
ratio is uncorrelated to the type of banking sector.
Net Interest Margin (NIM)
The net interest margin helps a company determine whether or not it has made
wise investment decisions. A negative net interest margin indicates that interest
expenses exceed investment returns and that the company therefore has a net
negative return. A positive net interest margin indicates the opposite.
Net Interest Margin = (Interest Received - Interest Paid)/ total Assets. It is also
termed as spread. This difference is used to cover all sorts of expenses incurred by
bank. The more is the spread, the more is the profit of the bank.
Year SBI PNB BoB ICICI HDFC Axis
2011 2.3 2.8 2.4 2.2 4.2 2.6
2012 2.4 3 2.2 2.1 3.9 2.9
2013 2.9 3.2 2.6 2.1 4.1 2.8
2014 3.3 3 2.4 2.3 3.9 2.9
Mean 2.72 3 2.4 2.17 4.02 2.8
Source: Journal of Business Management& Social Sciences Research (JBM&SSR)

As shown in table NIM of HDFC is more than others i.e. 4.02 which shows that
interest earned by HDFC bank is much more than expended and other banks are
earning less interest. Interest earned by bank is there foremost income which is
more in case of HDFC and other banks following are almost at same level and chart
shows that there is very less variation in case of HDFC bank and more variation in
SBI bank. So here HDFC banks remains as an outlier and rest all ranks from both
sector fall under a similar curve.
Debt-Equity Ratio
The debt-to-equity ratio is a financial ratio indicating the relative proportion of
entity's equity and debt used to finance an entity's assets. If the ratio is increasing,
the company is being financed by creditors rather than from its own financial
sources which may be a dangerous trend. A debt-to-equity ratio is calculated by
taking the total liabilities and dividing it by the shareholders' equity as
Debt-to-equity ratio = Debt / Equity
Year SBI PNB BoB ICICI HDFC Axis
2011 15.4 14.1 15.5 15.4 10.1 12.9
2012 14.9 14.7 16.5 14.9 8 9.9
2013 16.7 15.5 15.2 16.7 8.7 11.3
2
2.5
3
3.5
4
4.5
2011 2012 2013 2014
Net Intrest Margin

2014 14.8 14.6 14.6 14.8 9 11.2
Mean 15.45 14.72 15.45 15.45 8.95 11.32
Sources: 1. JBM&SSR 2. Blue Ocean Research Journals
We can see from the data that banks like SBI and BoB suffer from high debt/equity
ratio and banks like Axis and HDFC which are private have a much lower ratio. In
PSB this happens much more often as they are driven by the government and hence
they have a lot of political pressure from above there power level and therefore
sometimes they have to loan money to those borrowers which have poor credit
score in terms of re-payment. A good example of such a disastrous loaning is the
power sector.
Return on Assets and Equity
Return on assets is the ratio of annual net income to average total assets of a
business during a financial year. It measures efficiency of the business in using its
assets to generate net income. One of the most important profitability metrics is
return on equity. Return on equity reveals how much profit a company earned in
comparison to the total amount of shareholder equity found on the balance sheet.
2
4
6
8
10
12
14
16
18
2011 2012 2013 2014 Mean
Debt-Equity Ratio

2012 2013 2014 2015
SBI 0.8 0.8 0.6 0.8
PNB 1.3 1.3 1.2 1.1
BoB 1 1.1 1.3 1.1
ICICI 0.7 1 1.1 1.3
HDFC 1.2 1.3 1.4 1.5
Axis 1.2 1.4 1.4 1.5
0.5
0.7
0.9
1.1
1.3
1.5
Return on Assets
2012 2013 2014 2015
SBI 15.1 14.1 12.8 14.4
PNB 20.5 21.2 20.2 17.2
BoB 17.9 20.2 20.3 18.4
ICICI 7.6 9.1 11 12.5
HDFC 14.9 13.9 15.6 17.4
Axis 17.8 15.5 17.7 18.6
7
9
11
13
15
17
19
21
23
Return on Equity

The return is closely related to the overall profitability. In this case banks like HDFC
and Axis have about 15-20% higher RoA than banks that fall under public sector.
Previously derived conclusions also support this this trend.
On the other side ROE seems to be almost similar in almost all the banks with
minute variation. Here, PNB and BoB seem to be having the highest ROE which in
turn points toward towards fairly better performance than its competitors,
Non-Performing Assets (NPAs)
A Non-performing asset (NPAs) is said as the credit facility with respect of which the
interest and installment of Bond finance principal has remained past due for the
specified period of time. The NPA is used by financial institutions that refer to the
loans that are in jeopardy of default. When the borrower has failed to make interest
or principle payments for 90 days then the loan is said to be a non-performing asset.
The non-performing assets are much problem full for the financial institutions since
they depend on the interest payments for the income. The troublesome pressure
from economy can lead to sharp increase in the non-performing loans and often
results in massive write-downs.
(Various ratios of thePSU banks for FY-2011-12 toFY-2015-16)
NPA Ratios FY-2011-2012 FY-2012-2013 FY-2013-2014 FY-2014-2015 FY-2015-2016
Gross NPA (SBI) 39,676.46 51,189.39 61,605.35 56,725.34 98,172.80
Net NPA (SBI) 15,818.85 21,956.48 31,096.07 27,590.58 55,807.02
% Growth of Net NPA (SBI) 0.00% +15.38% +22.38% -17.5% +79.71%
Gross NPA (PNB) 8,719.62 13,465.79 18,880.06 25,694.86 55,818.33
Net NPA (PNB) 4,454.23 7,236.50 9,916.99 15,396.50 35,422.57
% Growth of Net NPA (PNB) 0.00% +54.6% +21.27% +42.45% +112.06%
Average% of NNPA of PSU Banks 1.67 2.225 2.71 3.09 6.21
Average% of NNPA Growth of PSU 0.00% +33.23% +21.79% +14.02% +100.97%
(Various ratios of thePrivateBanksfor FY-2011-12to FY-2015-16)
NPA Ratios FY-2011-2012 FY-2012-2013 FY-2013-2014 FY-2014-2015 FY-2015-2016
Gross NPA (HDFC) 1,999.39 2,334.64 2,989.28 3,438.38 4,392.83
Net NPA (HDFC) 352.33 468.95 820.03 896.28 1,320.37
% Growth of Net NPA (HDFC) 0.00% 0.00% +50% -33.34% +40%
Gross NPA (ICICI) 9,475.33 9,607.75 10,505.84 15,094.69 26,221.25
Net NPA (ICICI) 1,860.84 2,230.56 3,297.96 6,255.53 12,963.08
% Growth of Net NPA (ICICI) 0.00% +5.47% +25.97% +65.97% +85.09%
Avg% of Net NPA of PrivateBanks 0.465 0.485 0.635 0.905 1.59
Average% Growth of NNPA of
PrivateBanks
0.00% +4.3% +30.92% +42.51% +75.69%
Source: International Journal ofAdvanced Research in CS Vol. 8 No. 1 Feb -2017 – Dr. Miyan

The results and trends show that NPAs are having a downward trend over the study
period from earlier, but Non Performing Assets of public sector banks are still
higher than private sector banks. The returns on the assets have also the downward
trends but this is much lower in PSU banks as compared to private banks. The core
management of private sector banks is more professional, much competent and
expertise than the PSU banks. So, they are more competent in making plans to
recover funds from borrowersincluding both institutional and individuals. The
public sector banks are required to lend money to the poorer sections of the society
also, where the recovery chances is very low. That is why, the NPAs of public sector
banks have sharp declining trend, and still it is much higher than private sector
banks. Now the various steps have been taken by the government for recovery and
reducing the NPAs of PSU banks. The one time settlement scheme i.e., compromise
scheme, Debt Recovery Tribunals and Lok Adalats.
Product comparison
Both Public and Private Sectors banks are striving very hard to win the customers
with varieties of innovative services. Though Private Sectors banks are
comparatively having less experience in Indian market but they have quickly well
understood Indian Consumers. Those Public Sector Banks which have reinvented
their marketing approach remained competitive. Customers start perceiving both
public and private banks equally in terms of service quality, knowledge of
employees and overall marketing approach of banks. Private sector banks
successfully woo more number of young customers. So both public and private
sector banks will have opportunities and threats generated by initiatives of each
other. But in terms of customer satisfaction and availing services, private sector
banks perform much better and have the potential to offer more amount of services
and with better quality of service as they have much less customer base than that of
public sector banks and their customer base in concentrated more in urban area
compared to rural area where public is unaware of latest upcoming technology due
to poor education system as well as lower internet access which serves as a major
source of information in today’s world. Also, private sector banks do not have to
worry so much about their customer’s ability to grasp and trust new technologies
that may involve use of other already present resources like a smartphone and
internet access. Private sector banks in general as more adaptive to latest
innovations in technologies and often have enough funds to collaborate with other
sectors like the information and communication technology sector which helps

them largely to penetrate into the market. Whereas on the other side, public banks
are liable to public and they have to suit the needs of the majority of the Indian
population which involves them to not just to scale in urban area where the ratio of
their profit is more but they also have to concentrate on the poor regions of the
country and their upbringing which drains lot of their resources. Also, as seen
before public sector banks have lower profit margins, higher debts, and higher NPAs
which reflects largely in their product performance. Private sector on the other
hand can provide variety of services like Checking accounts Savings accounts, Debit
& credit cards, Insurance, Wealth management, Business loans, Checking accounts,
Savings accounts, Debit and credit cards, Merchant services (credit card processing,
reconciliation and reporting, check collection), Cash management (payroll services,
deposit services, etc.), Online, mobile, and tablet banking, Mobile check deposit, Text
alerts, E-Statements, E -wallets, Online bill pay, Personal loans, Home equity loans,
Home equity lines of credit, Home loans, Business loans etc.. Though, since last
decade PSU banks have improved tremendously in lots of ways to stay in the game.
Results& Findings
The foregoing analysis of SBI shows that even though this public sector bank has
penetrated fundamentally resulting in high assets available in the Indian economy
more than any other banks it keeps lower profit margin keeping the fact in mind
that it is a public sector bank. So, SBI needs to escalate it’s NIM in order to gain more
profit. Their deposits are being utilized in a decent manner as their CDR is well
associated and interest is also given on it. Also their debt-equity ratio is fairly high
while their return on assets as lower in comparison to other private sector banks
which effects there net profit. The biggest concern for SBI is it’s tremendously high
NPAs which need to be lower significantly to make a change.
In case of PNB, their overall performance is satisfying when compared to other
public sector banks considering it’s size but their NIM is very less which indicates an
unwise investment. Also, similar to SBI it also needs to concentrate on it’s debt-
equity ratio depending upon costumer credibility. NPAs of PNB should also be kept
a regular check upon as it is increasing with a positive slope.
For BoB, the most important parameter which prohibiting better performance is it’s
very poor NIM. But, on the brighter side it has very loyal and punctual customers
indicated by one of the highest returns on both assets and equity which is a good
indicator in terms of performance.

For most of the private sector banks their NIM are fairly high and their demands and
savings deposits are also high. But ICICI has the lowest NIM out of all 6 banks in this
study case which is a very poor indicator as it is a private bank. It also have
consistently high debts and poor returns as well. All factors combined ICICI is
performing very much under the weather. Its NPAs statistics are also not helping its
performance matric at all.
For HDFC, it has very high CDR which is a great sign for increase in profitability and
in this case NIM are an outlier on a positive edge and deposits are high which has
drastically impacted the Net Profit. It has low debts and high returns which
contribute more towards performance. Its low NPAs also rightly sustaining and
boosting its performance. Out of all six banks HDFC seems to be doing the best
based on the data analyzed in this study.
Lastly, Axis bank is performing moderately in most of the variables making it one of
the most stable banks in terms of performance. It has very high rate of returns
which is worthy of commendable performance review specially with lower profit
margins in association with others.
References
Journal of Business Management & Social Sciences Research (JBM&SSR) ISSN No: 2319‐ 5614
Volume 2, No.7, July 2013
International Journal of Advanced Research in Computer Science A Comparative Statistical
Approach Volume 8, No.1, Jan-Feb 2017 towards NPA of PSU and Private SectorBanks in
India Dr. Mohammad Miyan
Indian Brand Equity Foundation Annual bank report www.ibef,org
RBI Bulletin
ICFAI Journal of Bank Management No7vol 3 Jan 2008
Citing InternetSources
https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx
http://www.moneycontrol.com/
http://www.equitymaster.com/

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