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Performance of banks in india 2011
- 1. Performance of Banksin India Under Guidance of Prof V. K. Nangia Presented By: Mayank Jain DoMS, IIT Roorkee
- 2. Highlights Total No. of Schedule Commercial Banks in India in 80 Deposits in Scheduled Commercial Banks - Rs 56,16, 432 Crores ( 71 % of India’s GDP 2010-11) Credit Portfolio* of Financial Sector Entities - Rs 49 trillion (62 % of India’s GDP 2010-11) Credit Growth# 24% CAGR over Last 8 years SBI with Market Capitalization of $20 billion is ranked 49th in world. # Source : RBI- Data as on 31 March 2011. * Source : ICRA Report – Indian Banking Sector, June 2011 2/43 Performance of Banks in India March 31, 2012
- 3. Objective : Tounderstand the trends in Indian Banking. Methodology: Understanding the performance of Indian banking by grouping Scheduled Commercial Banks . Scope : Cooperative banks, Developmental banks, Regional Rural Bank not included in the study. Limitation : Comparison is done only among the Banks operating in India and is based on the data up to 31 March 2011. Analysis of Investments by banks not included in study 3/43 Performance of Banks in India March 31, 2012
- 4. Abbreviations SCBs - Schedule Commercial Banks PSBs - Public Sector Banks NBs - Nationalised Banks OPRBs - Old Private Banks NPRBs - New Private Banks FBs - Foreign Banks 4/43 Performance of Banks in India March 31, 2012
- 5. CAMELS Framework Uniform financial institution rating system to evaluate and monitor the banks. Capital Adequacy – Cushion for Operational & Abnormal Losses Asset Quality – Concentration of Loans and related Party Exposure Management – Operating cost per unit of money lent, Earning – Return on Equity, Return on Asset, Interest Spread Liquidity – Asset Liability Management Sensitivity to Market Risk – Maturity of Debt Investments Source – D Subbarao (2010), ‘Five Frontier Issues in Indian Banking’ 5/43 Performance of Banks in India March 31, 2012
- 6. Objectives of SCBsin India Foster Financial Inclusion Contribute to GDP Growth Effectively Allocate Capital and Manage Stability Efficiently Manage Intermediation Cost Return Shareholder Value 6/43 Performance of Banks in India March 31, 2012
- 7. Operational Statistics ofSCBs In 2011 Old New Public Foreign Private Private SCB Sector Banks Sector Sector No. of Banks 26 14 7 33 80 No. of Offices 64,412 5011 6957 316 76,696 No. of 10,04,18 7,57,535 55,075 1,63,604 27,969 Employee 2 Business per Employee 1013.63 814.90 826.07 1559.74 987.38 (in Rs Lakhs) Profit per Employee 5.93 5.63 8.63 27.59 7.00 ( in Rs Lakhs) Source: A Profile of Banks,2011- RBI 7/43 Performance of Banks in India March 31, 2012
- 8. Progress of Financial Inclusion No. Indicator 2009-10 2010-11 1 Credit-GDP 53.4 54.6 2 Credit-Deposit 73.6 76.5 3 Population per Bank Branch 14,000 13,466 4 Population per ATM 19,700 16,243 Percentage of Population 5 having deposit accounts 55.8 61.2 Percentage of Population 6 having credit accounts 9.3 9.9 Percentage of Population 7 having debit cards 15.2 18.8 Percentage of Population 8 having credit cards 1.53 1.49 Source: Operations and Performance of Commercial Banks 2010-11, RBI 8/43 Performance of Banks in India March 31, 2012
- 9. Growth of SCBs Year 1969 1975 1980 1985 1990 1995 2000 2005 2011 No. of SCBs (Excluding 73 74 75 81 74 88 101 88 80 RRBs) No. of Offices 8,262 18,575 32,412 52,638 60,515 63,817 67,339 54,063 76,993 Growth Rate of Offices( YoY 124.82 74.49 62.40 14.96 5.46 5.52 (19.72) 42.41 %) Source: RBI , publications -Statistical Tables Relating to Banks of India, 2011 9/43 Performance of Banks in India March 31, 2012
- 10. Growth of SCBsin last 5 Years All SCB Aggregates (in Rs. Crore) Item 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Capital and Reserves & 1,83,181 2,19,179 3,15,488 3,67,947 4,30,161 5,09,813 Surplus Growth Rate ( 19.65 43.94 16.63 16.91 18.52 YoY %) Source: A Profile of Banks, RBI , 2011. 10/43 Performance of Banks in India March 31, 2012
- 11. Growth of SCBsin last 5 Years All SCB Aggregates (in Rs. Crore) Items 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Deposits 21,64,682 26,96,937 33,20,062 40,63,201 47,46,920 56,16,432 Growth Rate (YoY 24.59 23.10 22.38 16.83 18.32 %) Investments 8,66,508 9,50,982 11,77,330 14,49,551 17,29,006 19,16,053 Growth Rate (YoY 9.75 23.80 23.12 19.28 10.82 %) Advances 15,16,811 19,81,236 24,76,936 29,99,924 34,96,720 42,98,704 Growth Rate (YoY 30.62 25.02 21.11 16.56 22.94 %) Source: A Profile of Banks, RBI , 2011. 11/43 Performance of Banks in India March 31, 2012
- 12. Credit and Depositsof SCBs Year 1969 1975 1980 1985 1990 1995 2000 2005 2010 Deposits 8,51,59 (in Rs. 4,646 12,545 33,377 77,075 1,73,515 3,86,859 3 18,35,003 47,52,456 Crore) Growth Rate 18.00 21.62 18.22 17.62 17.39 17.09 16.60 20.96 (YoY %) Credits 4,54,06 (in Rs. 3,599 8,955 22,068 50,921 1,05,450 2,11,560 9 11,50,326 34,97,054 Crore) Growth Rate 16.41 19.77 18.20 15.67 14.94 16.50 20.43 24.90 (YoY %) Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 CDR 57 58 70.9 75.1 71.8 74.6 73.8 73.7 76.5 IDR 41.3 45 47.3 40 35.3 35.5 35.7 36.4 34.1 CDR – Credit Deposit Ratio. IDR – Investment Deposit Ratio Source: Banking Statistics 1972-95 (Summary Tables), RBI 12/43 Performance of Banks in India March 31, 2012
- 13. Deposit (in percent) (as ON 31 MARCH 2011) PSB OPRB NPRB FB SCB Demand 9.38 9.17 18.24 30.29 11.43 Saving 24.77 18.80 24.30 16.47 24.07 Term 65.86 72.03 57.46 53.24 64.5 Total 100.00 100.00 100.00 100.00 100.00 Deposits 100% Term 50% Saving Deman 0% d PSB OPRB NPRB FB SCB Source : RBI - Data as on 31 March 2011. 13/43 Performance of Banks in India March 31, 2012
- 14. Deposit (in percent) (as ON 31 MARCH 2011) New Old Private Schedule Public Private Foreign Sector Commercial Sector Sector Bank Bank Bank Bank Demand 63.89 3.77 20.98 11.36 100.00 Saving 80.12 3.67 13.28 2.93 100.00 Term 79.49 5.25 11.72 3.54 100.00 Total 100% Deposits 77.86 4.70 13.15 4.29 100.00 80% 60% FB 40% 20% NPR 0% B Demand Saving Term Source : RBI - Data as on 31 March 2011. 14/43 Performance of Banks in India March 31, 2012
- 15. Deposit (in RsCrores) (as ON 31 MARCH 2011) New Old Private Schedule Public Private Foreign Sector Commercial Sector Sector Bank Bank Bank Bank Demand 4,10,109 24,222 1,34,707 72,900 6,41,939 Saving 10,83,001 49,667 1,79,463 39,650 13,51,782 Term 28,79,874 1,90,268 4,24,432 1,28,138 36,22,712 Total 43,72,985 2,64,157 7,38,602 2,40,689 56,16,432 Deposits 100% Term 50% Saving Demand 0% PSB OPRB NPRB FB SCB Source: A Profile of Banks, RBI, 2011. 15/43 Performance of Banks in India March 31, 2012
- 16. Deposit & Creditby Geography (as ON 31 MARCH 2011) Per Capita Per Capita Credit Deposit ( in Credit ( in Rs) Deposit Rs) Ratio ( in %) Northern Region 83,485 69,039 82.7 North Eastern 21,597 7,086 32.8 Region Eastern Region 23,727 12,139 51.2 Central Region 20,174 9,554 47.4 Western Region 1,01,940 79,572 78.1 Southern Region 46,963 44,169 94.1 Total ( All India) 46,321 34,800 75.1 Source : RBI - Data as on 31 March 2011. 16/43 Performance of Banks in India March 31, 2012
- 17. Credit Distribution accordingto Occupation (as ON 31 MARCH 2011) No. of Credit Accounts as a Occupation as a percent of percent of Total credit Total Accounts Agriculture 11.67 36.05 Industry 40.51 2.74 Transport Operators 2.56 0.81 Professional and other Services 9.13 3.81 Personal Loans 16.71 42.72 Trade 9.13 5.74 Finance 7.27 0.90 All Other 3.02 7.24 Source: Operations and Performance of Commercial 100.00 Total Bank Credit Banks 2010-11, RBI 100.00 17/43 Performance of Banks in India March 31, 2012
- 18. Domestic Credit PortfolioComposition of SCBs (as ON 31 MARCH 2011) Credit Portfolio As % of Total Credit Portfolio As % of Total Credit Credit Agriculture and Allied 13 % Housing Loan 9% Activities Commercial Real 3% Other Retail 7% Estate Loans Loan Loans to NBFC 5% Vehicle Loan 2% Power Sector Loans 7% Other infrastructure 7% Loans Other Corporate 47% Loans Source - ICRA Report – Indian Banking Sector, June 2011 18/43 Performance of Banks in India March 31, 2012
- 19. Credit Distribution overthe years Source: Reserve Bank of India, 2009 19/43 Performance of Banks in India March 31, 2012
- 20. Composition of Earningof SCBs (as ON 31 MARCH 2011) 2010 - 11 Interest Commission, earned on Exchange Investments and 22% Brokerage 8% Other non Interest income 6% Interest/ Other Discount on Interest Advances/Bil income ls 2% 62% Source: A Profile of Banks,2011- RBI Performance of Banks in 20/43 India March 31, 2012
- 21. Composition of Expensesof SCBs (as ON 31 MARCH 2011) Other 2010-11 Operating Expenses 12% Payment to and Provision for Employees 17% Interest paid Other on Deposits Interest 62% Expenses 6% Interest paid on Borrowing 3% Source: A Profile of Banks,2011- RBI 21/43 Performance of Banks in India March 31, 2012
- 22. Cost of Fundand Return on Fund 2010 -11 (as ON 31 MARCH 2011) Foreign New Private Nationalise Old Private SBI Group Bank Sector d Bank Sector Cost of 3.1 % 4.3% 4.8% 4.9% 5.5% Fund Return on 8.1% 8.4% 8.2% 8.5% 9% Fund Spread 5% 4.2% 3.4% 3.6% 3.5% Source: Operations and Performance of Commercial Banks 2010-11, RBI 22/43 Performance of Banks in India March 31, 2012
- 23. Few Key Indicesfor SCBs All SCB Aggregates (in %) Items 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Cost of Funds (CoF) 4.39 4.82 5.80 5.96 5.09 4.73 Return on advances adjusted to 3.80 4.12 4.12 4.53 4.19 4.45 CoF Wages as % to total expenses 20.11 17.32 14.01 13.60 14.83 17.05 Return on Assets 1.01 1.05 1.12 1.13 1.05 1.1 CRAR* 12.32 12.28 13.01 13.98 14.58 14.17 * CRAR – Capital Risk Adjusted Ratio Source: A Profile of Banks, RBI Performance of Banks in 23/43 India March 31, 2012
- 24. Financial Intermediation NIM Net Interest Margin Source: Operations and Performance of Commercial Banks 2010-11, RBI 24/43 Performance of Banks in India March 31, 2012
- 25. Returns (as ON 31 MARCH 2011) New Old Private Scheduled Public Private Foreign Sector Commercial Sector Sector Bank Bank Bank Bank Return 0.96 1.12 1.51 1.74 1.1 on Asset Return 16.9 14.11 13.62 10.28 14.96 on Equity Source: Operations and Performance of Commercial Banks 2010-11, RBI 25/43 Performance of Banks in India March 31, 2012
- 26. Trends in NetProfit of SCBs 40 80 Growth in net Profits( %) Absolute Net Profit in Rs ,000 Return on Assets & 30 60 Absolute Net 20 40 Profit Return on Asset 10 20 Growth in Net Profit Crore 0 0 Source: Trends and Progress in Indian Banking 2010- 26/43 Performance of Banks in India 11, RBI March 31, 2012
- 27. Composition of Off-BalanceSheet Exposures of the Banking Sector 2010-11 SBI Group Nationalise d Bank 6% Forward 86.8 % 10% Exchange Contract New Sector Private Bank 16 % 16 Acceptan 12.5 % ce Old Sector Foreign Bank Guarante 0.7 % Private Bank 67% es 1% Source: Operations and Performance of Commercial Banks 2010-11, RBI March 31, 2012 27/43 Performance of Banks in India
- 28. Source: Operations andPerformance of Commercial Banks 2010- 11, RBI Performance of Banks in India March 31, 2012 28/43
- 29. Off Balance SheetExposure over the years Source: Operations and Performance of Commercial Banks 2010- 29/43 Performance of Banks in India 11, RBI March 31, 2012
- 30. Basel Accords Basel I Credit Risk Basel II Market Risk, Credit Risk, Operational Risk First pillar – Minimum Capital requirement Second pillar - Supervisory Review Process Third Pillar - Market Discipline Basel III Macro-prudential regulation for system wide risks 30/43 Performance of Banks in India March 31, 2012
- 31. Core Capital Tier 1 Shareholder Equity Capital + Disclosed Reserve Tier 2 Undisclosed Reserve Capital + Revaluation Reserve + General Provisions + Hybrid Capital Instrument + Subordinated term debt 31/43 Performance of Banks in India March 31, 2012
- 32. Non Performing Asset- NPA Net NPA = ( Gross NPA ) – Balance in Interest Suspense account – DICGC/ECGC claims received and held pending adjustment – Part payment received and kept in suspense account – Total provisions held. 32/43 Performance of Banks in India March 31, 2012
- 33. Capital Adequacy ofSCBs (as ON 31 MARCH 2011) Basel I Basel II Bank group 2010 2011 2010 2011 Public Sector 12.1 11.8 13.3 13.1 Old private Sector 13.8 13.3 14.9 14.6 New private sector 17.3 15.5 18.0 16.9 Foreign banks 18.1 17.7 17.3 17.0 Schedule Commercial 13.6 13.0 14.5 14.2 Banks Tier I Capital 9.4 9.2 10.1 10.0 Tier II Capital 4.1 3.8 4.4 4.1 Source: Operations and Performance of Commercial Banks 2010-11, RBI 33/43 Performance of Banks in India March 31, 2012
- 34. CRAR of Banksin Different Countries Source: Financial Soundness Indicators (FSI), IMF 34/43 Performance of Banks in India March 31, 2012
- 35. Gross NPA Ratios-CrossCountry Source: World Development Indicators (WDI), World Bank 35/43 Performance of Banks in India March 31, 2012
- 36. Gross NPAs ofSCBs Source: Indian Banking 2020 , BCG 36/43 Performance of Banks in India March 31, 2012
- 37. Trends in thegrowth of Gross Advances and Gross NPAs of SCBs Growth in Gross Advances Growth in Gross NPAs Source: Trends and Progress in Indian Banking 2009- 10, RBI Performance of Banks in India March 31, 2012 37/43
- 38. NPA Recovery 2010-11 No. of Recovery cases Amount Amount Recovery channel referred involved recovered Percent i) Lok Adalats 616,018 5,254 151 2.87 ii) DRTs 12,872 14,092 3,930 27.89 iii) SARFAESI Act 118,642 30,604 11,561 37.78 DRTs- Debt Recovery Tribunals. SARFAESI Act - The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 38/43 Performance of Banks in India March 31, 2012
- 39. Performance Attributed to Implementation of SARFAESI Act 2002. Setting up of Credit Information Bureaus. Internal improvements such as upgrade of Technology Infrastructure. Tightening of the Appraisal and Monitoring Processes. Strengthened Prudential Norms. 39/43 Performance of Banks in India March 31, 2012
- 40. Favorable Factors forthe Banking Sector Enhanced the Payment System. Good Internal Capital Generation. Reasonably Active Capital Markets. Governmental Support Ensured Good Capitalisation for PSB. High Levels of Public Deposit. Good Economic Growth over the Last Decade. 40/43 Performance of Banks in India March 31, 2012
- 41. Challenges : BankingIndustry Increase in Interest Rates and Deregulation of Interest Rates on Saving Deposits. Tighter monetary policy and Large government deficit. Increasing Infrastructure Loans and Increased stress in some sectors (such as, State utilities, airlines, and microfinance),. Restructured loan accounts, Unamortized pension/gratuity liabilities. Implementation of Basel III. State and Road Ahead. Annual Source: Indian Banking System : The Current Survey, 2010 FICCI 41/43 Performance of Banks in India March 31, 2012
- 42. Challenges ( cont.) Asset Liability Mismatch in Indian Banking Sector. Human Resource Management. Discontinuous growth. Competition from foreign banks. Demographic shifts resulting from changes in age profile and household income. 42/43 Performance of Banks in India March 31, 2012
- 43. References Publications from Reserve Bank of India, www.rbi.org.in ICRA Report – Indian Banking Sector, June 2011 Speech D Subbarao (2010), ‘Five Frontier Issues in Indian Banking’, Speech delivered at ‘BANCON 2010’, Mumbai, December. NCFM, Commercial Banking in India Module, June 2011 NCFM, Banking Sector Module, June 2011 Indian Banking 2020 , BCG 43/43 Performance of Banks in India March 31, 2012
- 44.
Editor's Notes
- #2 The banking sector is the core segment of the Indian financial system which decides the progress of the country. Banks play an important role in the mobilization and allocation of resources in an economy. The sound financial position of a bank is the guarantee not only to its depositors but equally important for the whole economy of the nation. Several committees have emphasized the need to improve the performance of the commercial banks. Indian banks, the dominant financial intermediaries in India, have made good progress over the last five years.While banks have benefited from an overall good economic growth over the last decade, implementation of SARFAESI , setting up of credit information bureaus, internal improvements such as upgrade of technology infrastructure, tightening of the appraisal and monitoring processes, and strengthening of the risk management platform have also contributed to the improvement. Significantly, the improvement in performance has been achieved despite several hurdles appearing on the way, such as temporary slowdown in economic activity (in the second half of 2008-09), a tightening liquidity situation, increases in wages following revision, and changes in regulations by the Reserve Bank of India (RBI), some of which prescribed higher credit provisions or higher capital allocations.
- #3 As per the current globalleague tables based on the size of assets, our largest bank, the State Bank of India (SBI), together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145The Indian financial sector (including banks, non-banking financial companies, or NBFCs, and housing finance companies, or HFCs) reported a compounded annual growth rate (CAGR) of 19% over the last three years and their credit portfolio stood at close to Rs. 49 trillion (around 62% of 2010-11 GDP) as on March 31, 2011. Banks accounted for nearly 86% of the total credit, NBFCs for around 10%, and HFCs for around 4%. Within banks, public sector banks (PSBs), on the strength of their country-wide presence, continued to be the leader, accounting for around 76% of the total credit portfolio.
- #6 The CAMEL Methodology is practised by the bank regulators to assess the financial and managerial soundness of commercial banks. The CAMELS framework was first used by the regulaters in the United States. Based on this, they rated the banks on a scale of 5 – the strongest was rated as 1; the weakest was rated as 5.• Capital Adequacy This is a measure of financial strength, in particular its ability to cushion operational and abnormal losses. It is calculated based on the asset structure of the bank, and the risk weights that have been assigned by the regulater for each asset class.• Asset Quality This depends on factors such as concentration of loans in the portfolio, related party exposure and provisions made for loan loss.• Management Management of the bank obviously influences the other parameters. Operating cost per unit of money lent and earnings per employee are parameters used.• Earnings This can be measured through ratios like return on assets, return on equity and interest spread.• Liquidity In order to meet obligations as they come, the bank needs an effective asset-liability management system that balances gaps in the maturity profile of assets and liabilities. However, if the bank provides too much liquidity, then it will suffer in terms of profitability. This can be measured by the Loans to Deposit ratio, separately for short term, medium term and long term. • Sensitivity to Market Risk Longer the maturity of debt investments, more prone it is to valuation losses, if interest rates go up. More sensitive the portfolio is to market risk, the more risky the bank is.
- #7 Because of the maturity mismatch between their assets and liabilities, however, banks are subject to the possibility of runs and systemic risk.Enhancing efficiency and performance of public sector banks (PSBs) is a key objective of economic reforms in many countries including India. It is believed that private ownership helps improve efficiency and performance. Accordingly, the Indian government started diluting its equity in PSBfrom early 1990s in a phased manner. “as a part of financial sector reforms and with a view to giving the PSBs operational flexibility and functional autonomy the stake of the Indian government was diluted to 51 per cent.”The Reserve Bank of India (2003) stated that “dilution of government stake….could provide greater operational freedom to banks which could have a positive impact on their efficiency.”By the very nature of their business, banks are highly leveraged. They accept large amounts of uncollateralised public funds as deposits in a fiduciary capacity and further leverage those funds through credit creation. Banks are interconnected in diverse, complex and opaque ways underscoring their ‘contagion’ potential. If a corporate fails, the fallout can be restricted to the stakeholders. If a bank fails, the impact can spread rapidly through to other banks with potentially serious consequences for the entire financial system and the macro economy. While regulation has a role to play in ensuring robust corporate standards in banks, the point to recognise is that effective regulation is a necessary, but not a sufficient condition for good corporate governance. In this context, the relevant issues pertaining to corporate governance of banks in India are bank ownership, accountability, transparency, ethics, compensation, splitting the posts of chairman and CEO of banks and corporate governance under financial holding company structure, which should engage adequate attention.
- #9 Out of every 1000 persons, only 99 had a credit account and 600 had a deposit account as at end-March 201011. This underlined the need to strengthen the financial inclusion drive through well thought out policies.Financial inclusion has been one of the top priorities of the Reserve Bank during the recent years. Accordingly, the Reserve Bank has been encouraging the banking sector to expand the banking network both through setting up of new branches and also through BC model by leveraging upon the information and communication technology (ICT).
- #10 Prior to nationalization, banking services were largely confined to metropolitan areas, and a major consequence of nationalization was the spread of services to suburban and rural areas. Thus at the end of 1964 only 10% of commercial banks were located in rural areas. This proportion increased to 45% in 1994. As a result, the number of bank branches increased from 8262 in 1969 to around 60000 in 1991, and the population served per branch declined from 65000 in 1969 to around 12000 in 1991 200042 Foreign banks19 Nationalized32 Private bank2005 31 foreign banks 28 private bank- Bank of madura, Benarus state bank, GTB, nedungadi , sangli ( kotak and yes) 2011 Private 21 Ganesh Bank of Kurundwad . United Western BankLord Krishna Bank , Centurion Bank,Bank of Punjab . Bharat Overseas Bank , Bank of Rajasthan
- #12 Historically, the banking sector‟s credit portfolio has been growing at over 20% per annum over the last several years (except in 2009-10, when the growth rate moderated to 17% mainly because of the decline in ICICI Bank‟s credit portfolio). Over the years, credit growth has outpaced deposits growth; the credit portfolio reported a CAGR of 24% over the last eight years, while deposits achieved a CAGR of 19% and the investment portfolio of 14% over the same period. The higher growth in credit could be achieved because of the slower growth in investments and the increase in capital. In 2010-11, while deposits growth for SCBs slowed down to 17%, credit growth was maintained at 21% with the growth in investments being just 13%. The higher credit growth versus deposits growth led to an increase in the credit deposits ratio (CD ratio) from 72.2% as in March 2010 to 75.7% as in March 2011, although the CD ratio moderated to 74.2% as on May 27, 2011, largely because of the slow credit growth in comparison with deposits during the first two months of 2011-12.Due to the accommodation of highercredit growth, there was an overall decelerationin the growth of investments in securities in2010-11 as compared with the previous year. In2010-11, almost three fourths of the totalinvestments of the banking sector were inGovernment securities held in India, mainly tomeet the SLR requirements prescribed by theReserve Bank and to raise funds from the shorttermmoney market. However, investments ofthe banking sector in Government securitiesheld in India recorded lower growth in 2010-11as compared with the previous year in tune withthe reduction in SLR requirements from 25per cent to 24 per cent with effect fromDecember 18, 2010.The non-SLR investments of SCBswitnessed a decline in March 2011 as comparedwith those during the corresponding period ofthe previous year. This was primarily due to adecline in the investments in commercial paperin 2010-11 over those during the previous year.Investments in commercial paper are short-terminvestments of the banking sector to reapeconomic gain out of short-term surplus funds.The decline in such investments reflected tightliquidity conditions during 2010-11. On theother hand, banks’ investments in shareswitnessed increase in 2010-11 over the previousyear. Alongside, banks’ investments in bonds/debentures also witnessed a marginal increaseduring 2010-11 as compared with theprevious year
- #13 Deposits, which constitute 78 per cent of total liabilities of the banking sector registered higher growth in 2010-11 in contrast to the trend observed in the recent years. This was mainly because of the accelerated deposit mobilisation of new private sector banks in 2010-11 over the previous year. The higher growth in deposits emanated mainly from term deposits. As alluded to earlier, this could be due to the higher interest rate environment leading to an increase in term deposit rates. While accelerated growth rate of term deposits is a welcome development from the point of view of stability of balance sheet as it strengthens the retail deposit base and reduces asset liability mismatches; it may increase the interestexpenses of the banking sector, thus, adversely impacting profitabilityHistorically, the banking sector‟s credit portfolio has been growing at over 20% per annum over the last several years (except in 2009-10, when the growth rate moderated to 17% mainly because of the decline in ICICI Bank‟s credit portfolio). Over the years, credit growth has outpaced deposits growth; the credit portfolio reported a CAGR of 24% over the last eight years, while deposits achieved a CAGR of 19% and the investment portfolio of 14% over the same period. The higher growth in credit could be achieved because of the slower growth in investments and the increase in capital. In 2010-11, while deposits growth for SCBs slowed down to 17%, credit growth was maintained at 21% with the growth in investments being just 13%. The higher credit growth versus deposits growth led to an increase in the credit deposits ratio (CD ratio) from 72.2% as in March 2010 to 75.7% as in March 2011.Total banking credit stood at close to Rs. 39 trillion as on March 25, 2011 and reported a strong 21.4% growth in 2010-11, led by credit to the infrastructure sector and to NBFCs.
- #14 Geographical reach and responsiveness to customer need …for high value demand depositDemand Deposit – Provide convenient operation facility via continous liquidity.PSB 77.86OPRB 4.70NPRB 13.15FB 4.30
- #15 Demand Deposit – Provide convenient operation facility via continous liquidity.PSB 77.86OPRB 4.70NPRB 13.15FB 4.30
- #16 Casa ratio Psb – 34%Old 28 %New private 42.5Foreign banks 47SCB 35.5
- #18 Agriculture include Direct and indirectPersonal loans include – education vehicle and housing credit card.Industry include micro small medium and large.
- #19 During 2010-11, the infrastructure sector, particularly power, and NBFCs were the key drivers of the credit growth achieved by the banking sector. Credit to the power sector reported a growth of 43%, while other infrastructure credit grew by 34% during 2010-11, against an overall credit growth of 21%. As in March 2011, the infrastructure sector (including power) accounted for 14% of the total credit portfolio of banks. Within the power sector, historically banks have been taking exposure to State power utilities as well as independent power producers (IPPs). Going forward, with many banks approaching the exposure cap on lending to the power sector and given the concerns hovering over the prospects of the sector itself, the pace of growth of credit to this segment could slow down. However, in the short to medium term, the undisbursed sanctions to power projects are likely to provide for a moderate growth. As for bank credit to NBFCs, the same increased by 55% in 2010-11 and accounted for around 5% of the banks‟ total credit portfolio as in March 2011. Moreover, around half of this went to infrastructure related entities, and the rest mainly to NBFCs engaged in retail financing. Most of the NBFCs are focused on secured assets classes, have reported low NPA percentages , and are well-capitalised. As for banks‟ retail lending, this continued to lag overall credit growth during 2010-11. Retail credit grew by 17% in 2010-11 against the overall credit growth of 21%, although the 17% figure marked a significant increase over the 4.1% reported in 2009-10. Credit to commercial real estate also increased in 2010-11, reporting a 21% growth that year as against nil in 2009-10 Large government borrowings may allow for just 17-18% credit growth in 2011-12 the RBI‟s tight monetary stance may exert a downward pressure on the demand for credit, considering the anticipated GDP growth (around 8%), investments in infrastructure and lower funds flow from the capital markets, credit demand could still remain high. However, banks‟ capacity to meet credit demand could get constrained by the volume of deposits they are able to mobilise and by the large amount of funds they would need to keep aside to fund the government deficit.
- #20 The critical role and place of the MSME sector in the Indian economy in employment generation, exports and economic empowerment of a vast section of the population is well known. The sector accounts for 45 per cent of the manufactured output and 8 per cent of the Gross Domestic Product (GDP). MSMEs contributed close to 40 per cent of all exports from the country and employ nearly 6 crore people which is next only to the agricultural sector. MSME is the best vehicle for inclusive growth, to create local demand and consumption.
- #21 Earning 571230 CroreOther /interest income – Interest income from the balances with rbi and other interbank depositOther non interest income include – profit from sale of investments, revaluation of investment, profit from sale of land building leased asset etcProfit on exchange , income from financial lease, income earned by way of dividend from subsidiary etc
- #22 Total Expenses 422020 CroreOther interest expense – interest on rbi borrowing and interbank borrowingOther operating expense – rent, taxes lighting , printing , stationary, advertisement etc
- #23 Cost of Funds = (Interest paid on deposits + Interest paid on borrowings) / (Deposits + Borrowings)Return on Advances = Interest earned on advances and bills / Advances
- #24 Cost of fund = (Interest paid on deposit + interest paid on Borrowing)/ (Average of current year and previous year’s deposit and borrowing)Return on Advances = Interest earned on advances and bills / AdvancesReturn on Advances adjusted to Cost of Funds = Return on Advances – Cost of FundsDespite widespread concerns with regard to profitability on account of higher interest expenses on the one hand and, higher nonperforming assets and the consequent higher provisioning requirements, and lower interest income on the other, the financial performance of SCBs improved in 2010-11 as compared with the previous year.The consolidated net profits of the banking sector recorded higher growth in 2010-11, in contrast to the deceleration experienced in 2009-10, primarily because of higher growth in interest income. The implementation of the Base rate system with effect from July 1, 2010, which prohibited sub-prime lending to the corporate sector might have contributed to the higher interest income in 2010-11 apart from robust credit growth. Although, interest expenses also witnessed accelerated growth in 2010-11 owing to the higher interest rate environment, it was considerably lower than the growth in interest income. Accordingly, the net interest margin (NIM) of SCBs improved in 2010-11 over the previous year. In contrast, the operating expenses of the banking sector grew at a higher rate in 2010-11 as compared with the previous year mainly onaccount of pay hikes implemented in the banking sector during the last one year. Further, provisions and contingencies also witnessedhigher growth in 2010-11 as compared with the previous year, mainly on account of increase in gross non-performing assets (GNPAs) (inabsolute terms). The depreciation in the value of investments owing to the higher interest rate environment also increased the provisioningrequirements of the banking sector. As the provisioning requirements for various categories of NPAs were increased in May 2011, it isexpected to increase further in future
- #25 The net interest margin (NIM), operating expenses and ‘other income’ are crucial in determining profitability of the banking sector. While maintaining profitability is a sine qua non for the financial soundness of the banking sector, efficient financial intermediation is important from the point of view of economic growth.On the other side, one of the indicators, which is used to assess efficiency of the banking sector is NIM. NIM indicates the margin taken by the banking sector while doing banking business. In this context, there is a need to bring down NIM from an efficiency point of view, nevertheless, from a profitability point of view; there is a need to increase it. A balanced approach would be to bring down NIM, which will improve efficiency of financial intermediation, along with an increase in income from other sources and reduction in operating expenses to maintain profitability (Subbarao, 2010). n India, during the last one decade, NIM was in the range 2.5 per cent to 3.1 per cent. The NIM, which witnessed a declining trend during the period 2004 to 2010, improved during 2010-11. The NIM of the Indian banking sector continues to be higher than some of the emerging market economies of the world. The decomposition of NIM into NIM from core banking business, (i.e., calculated as the difference between interest income from loans and advances minus interest expenses on deposits as a per cent of average total assets), and NIM from others (i.e., mainly the difference between all other interest income and interest expenses) showed that NIM from core banking business witnessed substantial increase during the last one decade. In contrast, NIM from others witnessed a decline, leaving the total NIM more or less stable during the same period. The increase in the NIM from core banking business indicates that the cost of financial intermediation increased in the economy during the last one decade. Thus, there is a need to bring down NIM from core banking business to bring the overall NIM downThe Indian banking sector has recorded an impressive improvement in productivity overthe last 15 years; many of the productivity/efficiency indicators have moved closer to the global levels. There has been a particularly discernible improvement in banks’ operating efficiency in recent years owing to technology up-gradation and staff restructuring. However, to sustain high and inclusive growth, there is a need to raise the level of domestic savings and channel those savings into investment. This implies that banks need to offer attractive interest rates to depositors and reduce the lending rates charged on borrowers - in other words, reduce the net interest margin (NIM). The NIM of the Indian banking system is higher than that in some of the other emerging market economies even after accounting for mandated social sector obligations such as priority sector lending and credit support for the Government’s anti-poverty initiatives. By far the most important task is to further improve operating efficiency on top of what has already been achieved by optimising operatingcosts, i.e., non-interest expenses including wages and salaries, transaction costs and provisioning expenses. This will enable banks to lower lending rates while preserving their profitability.
- #26 Return on Equity = Net Profit / (Capital + Reserves and Surplus)The high ROA of foreign banks are attributable to their extremely high levels of off-balance-sheet transactions.Despite widespread concerns with regard to profitability on account of higher interest expenses on the one hand and, higher nonperforming assets and the consequent higher provisioning requirements, and lower interest income on the other, the financial performance of SCBs improved in 2010-11 as compared with the previous year.The consolidated net profits of the banking sector recorded higher growth in 2010-11, in contrast to the deceleration experienced in 2009-10, primarily because of higher growth in interest income. The implementation of the Base rate system with effect from July 1, 2010, which prohibited sub-prime lending to the corporate sector might have contributed to the higher interest income in 2010-11 apart from robust credit growth. Although, interest expenses also witnessed accelerated growth in 2010-11 owing to the higher interest rate environment, it was considerably lower than the growth in interest income. Accordingly, the net interest margin (NIM) of SCBs improved in 2010-11 over the previous year.Resultantly, the consolidated net profits of the banking sector registered higher growth in 2010-11 as compared with the decelerating trend observed during the recent past. The return on assets of SCBs also marginally increased to 1.10 per cent in 2010-11 from 1.05 per cent in 2009-10, mainly owing to higher NIM. The return on equity also witnessed an improvement over the same period. However, the SBI group was an exception to this general trend. The marginal decline in both RoA and RoE recorded by the SBI group was partly on account of the provisioning requirements for housing loans extended at teaser interest rates. The Reserve Bank had increased provisioning requirements for such loans (classified as standard assets) in December 2010due to the risk of delinquencies upon repricing of such loans going forward (Table IV.11 and Chart IV.6).
- #27 The consolidated net profits of the banking sector recorded higher growth in 2010-11, in contrast to the deceleration experienced in2009-10, primarily because of higher growth in interest income. The implementation of the Base rate system with effect from July 1, 2010, which rohibited sub-prime lending to the corporate sector might have contributed to the higher interest income in 2010-11 apart from robust credit growth. Although, interest expenses also witnessed accelerated growth in 2010-11 owing to the higher interest rate environment, it was considerably lower than the growth in interest income. Accordingly, the net interest margin (NIM) of SCBs improved in 2010-11 over the previous year.
- #28 Forward Exchange contract – 86.8%Acceptance – 12.5%Gurantees 0 .7 %At present under the WTO commitments, there is a limit that when the assets (on balancesheet as well as off-balance sheet) of the foreign bank branches in India exceed 15% ofthe assets of the banking system, licences may be denied to new foreign banks.
- #29 The recent global financial turmoil demonstrated the risk involved in accumulating large amount of off-balance sheet exposures(OBS). Recognising the risky and uncertain nature of OBS, the Reserve Bank tightened the prudential norms on OBS in August 2008
- #31 The Basel Committee is a committee of bank supervisors consisting of members from each of the G10 countries. The Committee is a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks‘ activities worldwide. BIS fosters co-operation among central banks and other agencies in pursuit of monetary and financial stability. Basel Committee on Banking SupervisionBasel I The Basel Accord of 1988 (Basel I) focused almost entirely on credit risk. It defined capital, and a structure of risk weights for banks. Minimum requirement of capital was fixed at 8% of risk-weighted assets. Basel II The first Pillar – Minimum Capital Requirements Three tiers of capital have been defined: o Tier 1 Capital includes only permanent shareholders’ equity (issued and fully paid ordinary shares and perpetual non-cumulative preference shares) and disclosed reserves (share premium, retained earnings, general reserves, legal reserves) o Tier 2 Capital includes undisclosed reserves, revaluation reserves, general provisions and loan-loss reserves, hybrid (debt / equity) capital instruments and subordinated term debt. A limit of 50% of Tier 1 is applicable for subordinated term debt. o Tier 3 Capital is represented by short-term subordinated debt covering market risk. This is limited to 250% of Tier 1 capital that is required to support market risk.The Basel Capital Accord is an Agreement concluded among country representatives in 1988 to develop standardised risk-based capital requirements for banks across countries. The Accord was replaced with a new capital adequacy framework (Basel II), published in June 2004. Basel II is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks face. These three pillars are: minimum capital requirements, which seek to refine the present measurement framework supervisory review of an institution's capital adequacy and internal assessment process; market discipline through effective disclosure to encourage safe and sound banking practices
- #32 The Basel Committee is a committee of bank supervisors consisting of members from each of the G10 countries. The Committee is a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks‘ activities worldwide. BIS fosters co-operation among central banks and other agencies in pursuit of monetary and financial stability. Basel Committee on Banking SupervisionBasel I The Basel Accord of 1988 (Basel I) focused almost entirely on credit risk. It defined capital, and a structure of risk weights for banks. Minimum requirement of capital was fixed at 8% of risk-weighted assets. Basel II The first Pillar – Minimum Capital Requirements Three tiers of capital have been defined: o Tier 1 Capital includes only permanent shareholders’ equity (issued and fully paid ordinary shares and perpetual non-cumulative preference shares) and disclosed reserves (share premium, retained earnings, general reserves, legal reserves) o Tier 2 Capital includes undisclosed reserves, revaluation reserves, general provisions and loan-loss reserves, hybrid (debt / equity) capital instruments and subordinated term debt. A limit of 50% of Tier 1 is applicable for subordinated term debt. o Tier 3 Capital is represented by short-term subordinated debt covering market risk. This is limited to 250% of Tier 1 capital that is required to support market risk.The Basel Capital Accord is an Agreement concluded among country representatives in 1988 to develop standardised risk-based capital requirements for banks across countries. The Accord was replaced with a new capital adequacy framework (Basel II), published in June 2004. Basel II is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks face. These three pillars are: minimum capital requirements, which seek to refine the present measurement framework supervisory review of an institution's capital adequacy and internal assessment process; market discipline through effective disclosure to encourage safe and sound banking practices
- #34 Good internal capital generation, reasonably active capital markets, and governmental support ensured good capitalisation for most banks during the period under study, with overall capital adequacy touching 14% as on March 31, 2011. At the same time, high levels of public deposit ensured most banks had a comfortable liquidity profile.
- #37 Improved Quality of Asset.Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held)‘
- #38 Over the last two years, PSBs‟ Gross NPAs rose from 2% to 2.3%, while private banks‟ NPAs declined from 2.9% to 2.3%. The Gross NPA percentage of the PSBs got impacted by slippages from restructured accounts, “agri debt relief”, and slippages because of automation of asset classification. In 2008-09, the RBI allowed a second time restructuring of corporate advances (excluding commercial real estate advances) and a one-time restructuring of commercial real estate advances. As part of this exercise, banks mostly allowed deferment of principal repayment by eligible borrowers by allowing a moratorium of six to 12 months. The exposure of banks to the power sector increased from Rs. 602 billion as in March 2006 (around 4% of total banking credit) to Rs. 2,692 billion as in March 2011 (around 7% of total banking credit). Banking credit to the power sector as a percentage of banks‟ total net worth also increased from 33% as in March 2006 to 56% as in March 2011. The exposure to the power sector includes that to State power utilities and IPPs. Within these, loans given to fund the cash losses of State utilities are estimated at 30-40% of the total power-sector exposures. Since the financial health of the State power utilities remains poor, it is likely that they will find it difficult to service debt on time, and this could be a problem for banks unless power-sector reforms gain pace. Further, any reduction in credit flow from the banking system to such entities, with somebanks hitting the exposure caps for the entities/sector, could also trigger defaults, although State government guarantees for some of the exposures would mitigate the eventual credit loss to an extent. In the context of power-sector reforms, the GOI has set up a committee to assess the total losses of State power utilities. Timely assessment of such losses and speedy initiation of steps to lower them (via technical and commercial loss reduction measures, tariff revisions, etc.) would be critical for improving the financial viability of State utilities and also for reducing the counter-party credit risks of entities serving the power sector. Restructured advances accounted for around 4% of SCBs‟ total advances as on March 31, 2011. For PSBs, restructured advances were higher at 4.5% as in March 2011 because of their higher lending to the corporate sector, while for private banks, such advances were lower at around 1% of their credit portfolio as in March 2011. Some of these restructured accounts have slipped into the NPA category over the last two years (in the range 8-20% for various banks), and with the operating environment deteriorating, slippages from restructured advances could continue into 2011-12 as well. During 2010-11, higher interest rate environment not only caused concerns about slowdown in credit growth, but also increasedthe possibility of deterioration in asset quality on the back of the possible weakening of the repayment capacities of borrowers in general
- #39 The credit profiles of borrowers could weaken in 2011-12 because of a tight liquidity situation, higher interest rates, and moderation in GDP growth rate. The vulnerability of banks because of their increasing exposure to State power utilities is likely to increase, unless tariffs are revised upwards. However, these may not reflect in the Gross NPA percentage as there may be some regulatory respite.In 2010-11, there was 51 per cent increase in the number of cases referred to under the SARFAESI Act. Further, out of the total amount involved, more than one third was recovered in 2010-11. In 2010-11, the number of cases referred to DRT registered a whopping growth of 114 per cent over the previous year. Due to the speedy recovery in LokAdalats, the number of cases referred to LokAdalats is much more as compared with other channels of recovery. However, in 2010-11, the number of cases referred to LokAdalats witnessed a decline over the previous year. Moreover, the percentage of amount recovered to amount involved was comparatively lower in LokAdalats as compared with DRT in 2010-11, though there was an improvement over the previous year
- #40 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, 2002 (SARFAESI Act, 2002) was enacted to provide banks and financial institutions with a more effective framework to enforce the security structure underlying loans and advances given by them, and recover their dues expeditiously. As is evident from the name, it addresses the regulation of three distinct areas:• Securitisation• Reconstruction of Financial Assets• Enforcement of Security Interest
- #42 SB deposits are estimated to account for 22-23% of total bank deposits (as of March 31, 2011). The increase in interest rate on SB deposits could raise the cost of deposits. In May 2011, the RBI decided to raise the SB deposit interest rate from 3.5% to 4.0%.In 2010-11, PSBs reopened the pension option for employees who had not opted for pension earlier (including retired employees) and also enhanced the gratuity limits from Rs. 3.5 lakh to Rs. 10 lakh following the amendment to the Payment of Gratuity Act, 1972. With the likely switch to International Financial Reporting Standards (IFRS) from April 1, 2013 (as scheduled for the Indian banking industry), the full unamortised liability would be knocked off from the opening balance of reserves, and consequently, banks may have to absorb the entire liability over the next two to three financial years. For the 24 PSB the total unamortised pension and gratuity liabilities were around Rs. 203 billion (11% of their net worth). If the unamortised liability is adjusted against the Tier I capital of PSBs as on March 2011, then the Tier I capital declines by 30-35 bps from the 9% level At an aggregate level, Indian banks fare well against the Basel III requirement for capital. Considering the stricter deductions from Tier I and the fact that some of the existing perpetual debt (around Rs. 250 billion) would become ineligible for inclusion under Tier I, some banks may need to infuse superior or core capital (equity capital or Tier I). Additional capital may also be required to support a growth rate that exceeds the internal capital generation rate, which is likelyof March 2011.
- #43 On the financing side, almost 23 per cent of short-term liabilities were used to finance almost 20 per cent of long-term assets in the banking sector.at the aggregate level, the long-term assets are financed by short-term liabilities.An increase in the proportion of infrastructure loans (from the current 14% of domestic credit) and deregulation of saving rates could worsen the asset-liability management (ALM) profile and increase the interest rate sensitivity of banks.