Banking business in India grew 15 per cent in 2012-13 compared with 17.6 per cent in 2011-12 as real GDP growth decelerated from 6.2 per cent to 5 per cent.
The extent of corrosion in business growth can be appreciated if we consider the growth of the real economy and banking business in the preceding year. The business growth was as high as 25.7 per cent in 2010-11 when growth registered a sturdy 9.3 per cent. The numbers reinforce the notion that behaviour of the banking business mirrors the performance of the real economy
The deceleration in business growth in 2012-13, however, has not been uniform across the banking spectrum. Banks in India can be classified into two broad composite categories — public sector banks and private banks.
While SBI and nationalised banks (NBs) constitute public sector banks (PSBs), private banks comprise new and old private sector banks. Amongst these banks, PSBs had a market share of around 80 per cent and private banks 20 per cent as on March 2013. Within PSBs, SBI has the largest market share of 19.1 per cent, and the balance 20 NBs account for 60.6 per cent.
The NPBs (new private banks) and OPBs (old private banks) account for 15.8 per cent and 4.5 per cent of the market share respectively. The various categories of banks differ in their ownership structure, business philosophy, geographical presence, customer base, technology adoption, manpower profile and governance practices.
How far these differences have influenced the performance of different categories of banks? We consider all the banks in each category, barring eight of the 14 old private banks, and examine their performance across five dimensions — business growth, interest margin (NIM), asset quality (GNPA), operating efficiency (cost-to-income ratio) and profitability (RoA).
Comparing the performance of banks in 2012-13 vis-à-vis 2011-12, we find that as NBs account for the largest share of the banking business, their performance has weighed upon the performance of the industry in all parameters except the cost-to-income ratio. Thus, for the banking industry, RoA, GNPA percentages and NIMs declined in 2012-13.
The cost-to-income ratio improved for the system despite NBs reporting deterioration as OPBs saw a major improvement.
Business dynamics
While it is customary to analyse the results on an annual basis to decipher performance on different dimensions and identify areas for improvement, taking a medium-term view helps in identifying the changing business dynamics. Here we consider the changing business dynamics as it has affected the different segments of banking in the last 3-4 years.
In all the years during 2010-13, PSBs reported lower RoA compared to the private banks. Given the dynamics of business growth, the PSBs have lost market share by 1.3 per cent over the last four years which has been the gain of private sector banks.
Within PSBs, NBs lost 0.5 per cent and SBI 0.8 per cent of the market share. As far as private sector banks are concerned, the NPBs gained market share by 1 per cent and the OPBs by 0.3 per cent between 2013 and 2010.
The loss in market share was higher in the deposits front rather than the advances front. Thus we find, while PSBs have suffered in their market share both in the deposits and the advances front, the problem has been more acute on the deposit mobilisation front than credit disbursement.
This is despite the larger branch network of PSBs. While PSBs have stuck to the regulatory minimum 4 per cent on SB deposits since interest rates on them were deregulated in October 2011, some private banks have been more ingenious in attracting larger deposits by offering higher rates.
NPBs have enjoyed better pricing power over NBs in all the four years during 2009-10 and 2012-13. During 2009-10 and 2010-11, NBs had better asset quality represented through GNPA percentages than NPBs. However, NBs have ceded the advantage of better asset quality in the last two years.
Challenging period
The last three years have been quite challenging for the banking system in general and nationalised banks in particular. Apart from reeling under the weight of a declining real sector, certain sector specific developments have affected their performance.
In 2010-11, NBs were required to make higher provisioning on account of AS-15 (superannuation-related provisions), a legacy cost, which adversely affected their performance.
In 2011-12, banks were mandated to migrate to the system driven tracking of NPAs. The system-tracked NPAs resulted in banks reporting much higher levels of NPAs in that year.
The problem continued in the subsequent year as some NBs had adopted a graduated approach to system tracking of NPAs given the limitations of their technological backbone.
However, in 2012-13, the lagged and cumulative effect of high interest rates over the last two years was reflected in large amounts of loans referred to restructuring. Banks not only lose income from the restructured portfolio but are required to make provisioning for such loans.
Provisioning norms
The RBI has been making the provisioning norms more stringent which has put PSBs in a fix.
PSBs should be make earnest efforts to imbibe the business sense of new private banks to remain relevant in the changing business context. The PSBs must make sincere efforts to avoid concentration risk in their credit portfolio and chase bulk deposits which is the easiest route for meeting lofty business growth targets but entails a price disadvantage.
(The author is Professor and Acting Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)