Compare the Performance of the Three Major Public and Private Sector Banks.

QPAC is a 360-degree analysis i.e. economy, business and financial analysis of a sector following the E-I-C framework. It provides the major highlights of the industry in the quarter and also provides the global and Indian scenario of the banking industry analyzing industry trends in the quarter and against the quarter of the previous year. It presents the outlook of the industry. QPAC makes a comparative analysis of the three major public sector banks and three major private sector banks separately. Private sector banks have been analysed on the parameters like operational performance (operating profit margin, Net NPA), financial performance (profit after tax PAT, net interest margin, capital adequacy ratio CAR) and stock performance while the Public sector banks have been analysed on the parameters like operational performance (operational profit vs OPM, segmented income, provisioning vs net income) , financial performance (net profit vs net profit margin, CAR) and the stock performance. QPAC provides the company analysis of the major players in question along with the projections for the coming quarters, year as a whole and the next year with the Industry aggregate.

NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS

OBJECTIVES OF THE STUDY

Primary Objectives:

•To evaluate Gross NPA and Net NPA in different banks.•To study the past trends of NPA.

Secondary Objectives:

•To calculate the weighted of NPA in risk management in Banki•To analyze financial performance of banks at different level of

RESEARCH METHODOLOGY

•In this project Descriptive research methodologies were use.•At the first stage theoretical study is attempted.•At the second stage Historical study is attempted.•At the Third stage Comparative study of NPA is undertaken.

Sampling Methods

•To prepare this Project we have taken five banks from public sector as well as five banks from private sector.

Limitations of the study

•Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector.

CATEGORIES OF NPAs

•Substandard Assets – Which has remained NPA for a period less than or equal to 12 months.

•Doubtful Assets – Which has remained in the sub-standard category for a period of 12 months?

•Loss Assets – where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

Provisional norms:

Asset Classification

Provision requirements

Standard assets (a) direct advances to agricultural & SME sectors at 0.25 per cent;(b) residential housing loans beyond Rs. 20 lakh at 1 per cent;(c) advances to specific sectors, i.e., personal loans (including credit card receivables), loans and advances qualifying as Capital

Market exposures, Commercial Real Estate loans etc. at 2 per cent(d) all other advances not included in (a), (b) and (c) above, at 0.40 percent

Substandard assets

10 per cent of the total out standings for substandard assets.

Doubtful assets 20% - 50% of the secured portion depending on the age of NPA, and 100% of the unsecured portion.

Loss assets It may be either written off or fully provided by the bank. The entire asset should be written off.

FACTORS FOR RISE IN NPAsEXTERNAL FACTORS:-

–Ineffective recovery tribunal –Natural calamities–Industrial sickness

INTERNAL FACTORS

–Inappropriate technology–Poor credit appraisal system–Absence of regular industrial visit

Types of NPA

[A] Gross NPA:-

•Gross NPA reflects the quality of the loans made by banks. It consists of all the non-standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:•Gross NPAs Ratio = Gross NPAs / Gross Advances

[B] Net NPA:-

•Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. It can be calculated by following •Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

Impact of NPA

•Profitability •Liquidity •Involvement of management •Credit loss

ANALYSIS DATA ANALYSIS AND INTERPRETATION

Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08

BANKS Gross NPA Net NPABANK OF BRODA 1.10BANK OF INDIA 1.08DENA 1.48PUNJAB NATIONAL BANK 1.67UBI 1.34

Performance measurement of Banks -NPA analysis & credentials of Parameters

Over the last few years Indian Banking, in its attempt to integrate itself with the global banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding claims and lofty achievements. In a developing country like ours, banking is seen as an important instrument of development, while with the strenuous NPAs, banks have become helpless burden on the economy. Looking to the changing scenario at the world level, the problem becomes more ironical because Indian

banking, cannot afford to remain unresponsive to the global requirements. The banks are, however, aware of the grim situation and are trying their level best to reduce the NPAs ever since the regulatory authorities i.e., Reserve Bank of India and the Government of India are seriously chasing up the issue. Banks are exposed to credit risk, liquidity risk, interest risk, market risk, operational risk and management/ownership risk. It is the credit risk which stands out as the most dreaded one. Though often associated with lending, credit risk arises whenever a party enters into an obligation to make payment or deliver value to the bank. The nature and extent of credit risk, therefore, depend on the quality of loan assets and soundness of investments. Based on the income, expenditure, net interest income, NPAs and capital adequacy one can comment on the profitability and the long run sustenance of the bank. Further, a comparative study on the performance of various banks can be done using a ratio analysis of these parameters. There are a number of ratios that can be used to comment on the different aspects :

 The essential ratios that can be used for assessing the banks' profitability and sustenance are

Profitability

Intermediation Costs/Total Assets

Assets

Net Interest Income/Total Assets

Other Income/Total Assets

Asset Quality

NPAs/Total Assets

NPAs/Advances

Staff Productivity

Net Profit/ Total Number of Employee

Sustenance

Capital/RWAs

 For commenting on the Bank's performance, a comparison to the total assets of the bank will give a true picture.

    Controlled Expenses

The intermediation costs of a bank refer to the operating cost of the bank and include all the administration and operational costs incurred while offering its services. The ratio of the intermediation costs of the bank to the total assets should be kept low to ensure greater profitability. As mentioned

earlier, a technology savvy bank will always be in a better position to reduce its operating costs. Consider the operating expenses of the various banking sectors and the industry average for the year 1999-2000. The costs for the entire SCBs rose by 9.1 percent. The maximum rise of 25.1 percent has been witnessed in the new private sector banks while the foreign banks experienced a decline in the operating costs by 3.3 percent. The ratio of the intermediation costs to the total assets indicates a decline. The maximum decline was in the case of new private sector banks and the foreign banks.

    Margins - Lowered by Subdued Interest Rates

The ratio of the net interest income (Spread) to the total assets gives the net interest margin of the bank. This ratio is the actual measure of the bank's performance as an intermediary, as it examines the bank's ability in mobilizing lower cost funds and investing them at a reasonably higher interest. By borrowing short and lending long, banks can earn higher spreads nevertheless by doing so they will be exposed to greater risks. Hence banks need to be cautious and should not accept risks beyond their ability to control/manage them. Product innovation using the right technology is one approach, which can be followed by the banks to mobilize cheaper funds.

  Asset Quality - NPA burden lowering

The asset quality of the banks can be examined by considering the NPAs. These NPAs should be considered against not just total assets but also against the advances, cause the NPAs primarily arise. When NPAs arise, banks have to make provision for the same as per the regulatory prescriptions. When the provisions are adjusted against the Gross NPAs it gives rise to the net NPAs. Provisions reduce the risk exposure arising due to the NPAs to a reasonable extent as they ensure that the banks sustain the possible loss arising from these assets.

   Capital Adequacy Ratio-Strengthening Further

The one important parameter that essentially relates to the bank's ability to sustain the losses due to risk exposures is the bank's capital. The intermediation activity exposes the bank to a variety of risks. Cases of big banks collapsing due to their bank's inability to sustain the risk exposures is readily available. Considering this, it is highly essential to examine the capital vis-à-vis the risk weighted assets. This is the Capital to Risk Weighted Assets Ratio (CRAR) as given by the Basle Committee. The statutory prescription for CRAR is 9 percent, which has been well surpassed by most banks.

 

LIST of Ratios for Analysis of Performance of Banks

1. Profitability Ratios

Interest Expenses/Total Income Non-Interest Expenses/Total Income Non-Interest Income/ Non-Interest Expenses Interest Income/ Total Assets Interest Expenses/ Total Assets

Net Interest Margin (NIM) = NII/ Total Assets Profit Margin = Net Profit/ Total Income Asset Utilization = Total Income/Total Assets Equity Multiplier = Total Assets/ Equity Return on Assets = Net Profit/ Total Assets Return on Equity = Net Profit/ Equity

Sustenance:

Capital to Risk Weighted Assets (CRAR) = Total Capital/ (RWAs) Core CRAR = Tier I Capital / RWAs Adjusted CRAR = (Total Capital - Net NPAs)/(RWAs - Net NPAs)

 

Staff Productivity

Net Total Income/ Number of Employees Profit per Employee = Net Profit/Number of Employees Business per Employee = (Advances + Deposits)/Number of Employees Break-even Volume of Incremental Cost per Employee = Cost per Employee/ NIM

1. Asset Quality

Gross NPAs/ Gross Advances Gross NPAs/Total Assets Net NPAs/ Net Advances Net NPAs/ Total Assets Provisions for loan losses/Gross Advances Incremental RWAs/ Incremental Total Assets

1. Total Assets

Provisions for loans and investments/Total Assets

(RWA = Risk Weighted Assets)

    

 concepts used in the ratios are as follows:

1. Cash in cash-deposit ratio includes cash in hand and balances with RBI.

2. Investments in investment-deposit ratio represent total investments including investments in non-SLR  Securities.

3. Net interest margin is defined as the total interest earned less total interest paid.

4. Intermediation cost is defined as total operating expenses.

5. Wage bills is defined as payments to and provisions for employees (PPE).

6. Operating profit is defined as total earnings less total expenses, excluding provisions and   Contingencies.

7. Burden is defined as the total non-interest expenses less total non-interest income.

     Definitions of the ratios are as follows:

1. Cash-Deposit ratio = (Cash in hand + Balances with RBI) / Deposits

2. Ratio of secured advances to total advances = (Advances secured by tangible assets + Advances Covered by bank or Govt. guarantees) / Advances

3. Ratio of interest income to total assets = Interest earned / Total assets

4. Ratio of net interest margin to total assets = (Interest earned - Interest paid) / Total assets

5. Ratio of non-interest income to total assets = other income / Total assets

6. Ratio of intermediation cost to total assets = Operating expenses / Total assets

7. Ratio of wage bill to intermediation costs (Operating Expenses) = PPE / Operating Expenses

8. Ratio of wage bill to total expenses = PPE / Total expenses

9. Ratio of wage bill to total income = PPE / Total income

10. Ratio of burden to total assets = (Operating expenses - Other income) / Total assets.

11. Ratio of burden to interest income = (Operating expenses - Other income) / Interest income

12. Ratio of operating profits to total assets = Operating profit / Total assets

13. Return on assets = Net Profit / Total Assets

14. Return on Equity = Net Profit / (Capital + Reserves and Surplus)

15. Cost of Deposits = IPD / Deposits

16. Cost of Borrowings = IPB / Borrowings

17. Cost of Funds = (IPD + IPB) / (Deposits + Borrowings)

18. Return on Advances = IEA / Advances

19. Return on Investments = IEI / Investments

20. Return on Advances adjusted to Cost of Funds = Return on Advances – Cost of Funds

21. Return on Investment adjusted to Cost of Funds = Return on Investments – Cost of Funds

On the basis of these parameters try to compile a comparative assessment as under:

1. All Commercial Banks (or the Banking system) 2. Public Sector Banks 3. Old Private Sector Banks 4. New Private Sector Banks 5. Foreign Banks

This will indicate the comparative performance of your bank in relation to each group and the banking system as a whole. But if one prepare the comparative statistics for the   bank for the last three years, it will also indicate the direction in which the bank is progressing.

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