“IMPACT OF THE GLOBALISATION ON THE PROFITABILITY OF BANKS”

“A Comparative Study of Public, Private & Foreign Banks in India”

Synopsis submitted to the

AMITY UNIVERSITY HARYANA

For the Degree of

DOCTOR OF PHILOSOPHY

(In Management)

2011

Supervised By: Submitted By:

Prof (Dr) Vikas Madhukar Monika SharmaDy. Director, Amity Business SchoolDirector-EventsAmity University HaryanaGurgaon (Manesar)

INTRODUCTION

There has been a silent revolution in the banking industry in the past decade. Banking system

has simply become more challenging as a result of the increased size, geographic scope,

complexity, globalization and diversity of banking organization. Only by working together,

can the markets, the political process, and the regulators ensure that we optimize our

advantage while maintaining the safety and soundness of our banking system. The process of

Globalization and Liberalizations has strongly influenced the various fields of economic

activities including banking. The basic objective of globalization & Liberalization in India

has been to achieve a steady economic growth rate with stability, self sufficiency,

modernization & social justice. The Indian banking sector is inextricable linked to its global

counterparts. Globalization compels domestic banks in emerging market countries to adapt

international best practices in order to stay competitive. The main impact includes higher

efficiency levels in the banking system in terms of more capital allocation, better

profitability, prudent risk management and greater competition. Strengthening financial

systems has been one of the central issues facing emerging markets and developing

economies. This is because sound financial systems serve as an important channel for

achieving economic growth through the mobilization of financial savings, putting them to

productive use and transforming various risks. Banks play very important role in the

economic life of the nation. The health of the economy is closely related to the soundness of

its banking system. Initially all the banks in India were private banks, which were founded in

the pre-independence era to cater to the banking needs of the people. In 1921, three major

banks i.e. Banks of Bengal, Bank of Bombay, and Bank of Madras, merged to form imperial

Bank of India. In 1935, the Reserve Bank of India (RBI) was established and it took over the

central banking responsibilities from the Imperial bank of India, transferring commercial

banking functions to IBI. In 1955, after the declaration of first-five year plan, Imperial bank

of India was subsequently transformed into State Bank of India (SBI). Following this,

occurred the nationalization of major banks in India on 19 July 1969. The government of

India issued an ordinance and nationalized the 14 largest commercial banks of India,

including Punjab National Bank (PNB), Allahabad Bank, Canara bank, central Bank of India,

etc. Thus, public sector banks revived to take up leading role in the banking structure. In

1980, the GOI nationalized 6 more commercial banks, with control over 91% of banking

business of India. In 1994, the reserve Bank of India issued a policy of Liberalization to

license limited number of private banks, which came to be known as New Generation tech-

savvy banks. Global Trust bank was, thus, the first private bank after Liberalization; it was

later amalgamated with Oriental Bank of Commerce (OBC). The Housing Development

Finance Corporation Limited (HDFC) became the first (still existing) to receive an ‘in

principle’ approval from the Reserve Bank of India (RBI) to set up a bank in the private

sector. At present, Private Banks in India includes leading banks like ICICI Banks, ING

Vysya Bank, Jammu & Kashmir bank, Karnataka Bank, Kotak Mahindra Bank, SBI

Commercial and International Bank, etc. Undoubtedly, being tech-savvy and full of expertise,

private banks have played a major role in the development of Indian banking industry. They

have made banking more efficient and customer friendly. In the process they have jolted

public sector banks out of complacency and forced them to become more competitive.

Background of the Study:

Liberalization and Financial sector reforms during the last one decade have brought the issues

of profitability of banks into the limelight. Profit ability of the banks has been under strain on

account of declining net interest margin and increasing competition. The comfortable

business of accepting deposits and lending at administered rates has been dented following

deregulation of interest rate and increase in competition after the entry of private and foreign

banks. In the changing context, banks with the high a high degree of cost effectiveness,

increases efficiency and customer centric approach would survive. Use of modern risk

management practices, exploring waste to increase non-fund based income analysis and

control over expenses and greater use of information technology have become imperative to

protect their bottom- lines in the de regulated environment.

The objective of banking sector reform was to promote a diversify, efficient and competitive

banking and financial system with the ultimate objective of improving the competence of

recourses through operational flexibility, economic viability institutional strengthen and

superior level of productivity. In order to meet the real challenge of value creation in

corporate world, we need to make the employs quite productive and need to relate their

compensation with goals achievements level, which would yield the overall productivity in

place in such organization.

SIGNIFICANCE OF THE RESEARCH:

1) This study will make banks more competitive in era of catering modern needs of the

society.

2) The real impact of globalization will be judged by statistical data. Thus the research

will help in evaluating the impact of globalization.

3) The research will be helpful in knowing the gradual approach to the privatization of

banks been successful or not?

4) The study will be helpful in knowing the extent to which Foreign and Private banks

performance of the whole banking sector.

5) The study will helpful for improving the profitability of banks.

REVIEW OF EXISTING LITERATURE:

Analysis of bank performance has always been a popular research subject. Various

researchers have analyzed the performance of banking sector from time to time. Researchers

thinks to study and review the large numbers of study, research papers, reports, articles,

comments, books, journals, magazines & news papers and other literature related to banking

sectors so that different aspects may included to chalk out the plan of the research. The

objective of this exercise to augment the knowledge based and applies methodology used by

the other researchers to evaluate the profitability of the sector. Some of the reviews which

have been made so far may by summarized as follows:-

1. Employees Productivity & cost- A comparative study of banks in India during 1997-

2008 Shard Kumar & M. Sreeramulu ( 2008) The study compare the employees

productivity & employees cost ratio between traditional banks and modern banks

from 1997-2008. The study concludes that the performance of the modern banks

(Foreign & New Private sector banks) was much superior to the traditional banks

(Public sector & old private sector banks). However, there gap between the

performance of modern & traditional banks on all the 5 variables has shown a

decreasing trend, which has significantly reduced during the period of 12 years under

study, on the account measures taken by the traditional banks during the period.

2. Bodla & Verma (2006) made a comparative analysis of performance of SBI &ICICI

from 2000-01 to 2004-05 using the parameter of CAMEL model. The study

concluded that both the banks have performed excellently. In some parameter of

performance SBI has outperformed ICICI Bank but in the whole ICICI Bank has

performed batter that SBI

3. Satish Sharath & Surender (2005) analyzed the performance of 55banks for the year

2004-05. They concluded that the Indian banking system looks sound and information

technology will help the banking system grow in the future.

4. Sathye (2002) studied the impact of privatization of the bank’s performance and

efficiency for the period 1998-2002 and found that partially privatized banks have

performed better than fully public sector banks and they are catching up with the

banks in the private sector.

5. Another study by Ram Mohan (2000) covers a recent period, 1996-97 to 1999-2000.

He found that over these years the profitability of the Public Sector Banks did

improve in comparison to the Private and Foreign Banks, but they have lagged behind

in their ability to attract deposits at favorable interest rates and have been slow in

technology up gradation and improving staffing and employment practices, which

may have negative implications on their longer-term profitability. Researchers have

earlier opined that the major reasons for declining bank profitability are increasing

pre-emption for CRR, SLR, rigorously structured interest rate, the burden of social

banking and enormous increase in the establishment cost. Recently, there has been an

increased amount of stress on soundness of the Balance sheet as well as on the

profitability. It is recognized that Public Sector Banks must have a strong balance

sheet and should be profitable. It also implies that bank interest and other earnings

should be sufficient to cover its financial & administrative expenses. Stronger balance

sheet also means that the banks have sufficient surplus for provisions of bad debts, tax

liabilities & depreciation of financial assets, to pay dividends and to pay augment

reserves. A bank’s strong balance sheet also implies that it has sufficient capital &

reserve to protect its depositors and other creditors from the risks it bears on its assets.

The major reasons identified for declining levels of profitability of Public Sector

Banks are mismanagement, liquidity, credit policies, increased lending to priority &

preferred sector, mounting agriculture over dues & incidences of sickness of industrial

units, rise in operation cost, lack of efforts in manpower planning (Bist, Mishra, &

Balwal).

6. A study by Das (1998) Compares performance of public sector banks for three years

in the post reform period, 1992. 1995, 1998. He notes that while there is welcome

increase in emphasis of no-interest income , Banks have the tended to sure risk over’s

behavior by opting for relatively risk free investments over risky loans.

7. Sarkar &Das (1995) compared performance of public sectors banks, private banks, &

foreign banks for the year 1994-1995 on their profitability, productivity & financial

management. They found that public sector bank poorly with the other two categories

banks.

8. Bhattacharyya, Lovelly, & Sahay (1996) examined the relative performance of

commercial banks under three different kinds of ownership (Private, Public, and

Foreign). During the post de regulation period and found that private banks neither are

generally nor cost efficient than public banks.

Objectives of the Study

1. To evaluate the impact of the globalization on profitability of Public, Private and

Foreign banks in India.

2. To make a comparative analysis of the profitability of Public, Private and Foreign

banks in India.

3. To find out the reasons for increasing or decreasing in profitability of Public, Private

and Foreign banks in India.

4. To suggest some concrete ways to improve the profitability of Public, Private and

Foreign banks in India.

RESEARCH METHODOLOGY :

REFERENCE PERIOD:

The researchers aims at the reviewing the progress of selected banks in India. The central

focus of the study would be on the period of 2000-01 to 2010-11. Since the main objective of

the study evaluate the profitability of selected banks in India: The researchers think to take in

to account the period ranges from 2002 to 2011. The logic of selection of this period is to find

out the impact of governments de controlled and liberalized policies on the public sector

banks as compared to other categories of banks like private sector banks & foreign banks.

The other reason is that the new private sector started their business commercially from the

year 1996 onwards: so it’s more appropriate to select this period.

RESEARCH DESIGN

The present study is quite descriptive in nature. It is the most commonly used and the basic

preseason to carry out descriptive research is to identify the cause of something that is

happening. In some other ways it can be analytical in that manner to analysis the effect why it

is so.

POPULATION & SAMPLE

The population of the study is banking sector. The sample encompasses the nationalized

banks, SBI Group, New & old generation private sector banks and foreign banks of NCR in

India.

27 Public sector banks consisting of SBI & its associates (8) and nationalized banks

(19).

30 Private sector banks consisting of old private sector (21) and new private sector

banks (9).

33 Foreign banks in India.

Sample: The sample used for the study will be selected randomly which are as follows:

20 Public Sector Banks in India.

20 Private Sector Banks in India.

20 Foreign Banks in India.

PROCEDURE OF DATA COLLECTION:

The data base used in the study will include Primary as well as Secondary data. It will in

include the Questionnaire from the Bank employees. It will also include the published

documents of proven authenticity. Researcher thinks to refer a large number of authentic

documents and websites to collect the data. Data will be collected from the various volumes

of banking statistics published by RBI, Indian Banking Association (IBA) & CMIE database

prowess and journal like the Banker Indian Journal of Commerce.

TOOLS & TECHNIQUE:

After collecting the data from the secondary source, they will be analyzed to find out the

profitability of various banks in India. To facilitate the comparative analysis of the data of

public sector banks with other categories of banks like Private Banks and Foreign banks,

Researcher will use ratio analysis. Ratio analysis is a powerful tool of financial analysis. A

tool used by individuals to conduct a quantitative analysis of information in a company’s

financial statements. Ratios are calculated from current year numbers and are then compared

to previous years, other companies, the industry, or even the economy to judge the

performance of the Banks.

Ratios used for measuring the profitability of the banks are as under:

Interest earned Ratio= Total Interest Earned/ Volume of Business

Interest paid Ratio = Total interest paid/ Volume of Business

Non-Interest Income Ratio = Total Income-Interest Income/ Volume of Business

Other Operating Expenses Ratio = Total Expenses- Interest Expenses/Volume of

Business

Establishment Expenses Ratio = Establishment Expenses /Volume of Expenses

Spread Ratio= Interest Earned Ratio- Interest Paid Ratio

Burden Ratio= Other Operating Expenses Ratio- Non interest Income Ratio

Profitability Ratio= spread Ratio- Burden Ratio

SCOPE OF THE STUDY:

The study tackles the following fundamental Questions:

1) In what way has the globalization affected the behavior of Public Sector Banks?

2) To what extent have Foreign and new domestic banks contributed to the performance

of the whole banking sector?

3) Has India’s gradual approach to the privatization of Banks been successful?

The process of globalization and Liberalization has strongly influenced the Indian

banking Sector. The ongoing reforms in the Banking Sector, with their thrust on

transparency, efficiency and profitability, have forced the Indian banking Sector to adopt

suitable strategies with focus on productivity, profitability, competitiveness, and

sustainability. The study focuses on India’s banking sector, which are attracting

increasing attention since 1991. It assesses whether the reform programmes has been

successful so far in restructuring Public-Sector banks and if so, what elements of the

programmes have contributed.

LIMITATIONS OF THE STUDY:

1) The study could not cover all the banks existing in India due to shortage of resources

and human limitations.

2) The information, so obtained, which is based on Secondary data suffers the limitation

of reliability and also affects the result of the study adversely.

3) The information contained through secondary data which is Questionnaire suffers

from general human limitations like shortage of time.

ORGANISATION OF THE STUDY:

The whole study will be arranged into six sections:

First Chapter will deal with the introductory part in which conceptual & theoretical

backdrop of Indian banking Sector will be studied. It will cover the following points with

the present study:

Introduction

Banking Sector in India

Globalization & Liberalization

Banking Sector Reform

Public Sector Banks/ Private Sector Banks/ Foreign Banks

Second Chapter of literature review will include the review of previous related studies

done in the same area of banking.

Third Chapter of the study will explain the sample, the sources of data& data analysis

methodology which would be applied in the proposed study for comparing the

performance among banks of different categories.

Fourth Chapter will be devoted to the comparative analysis of profitability among banks

of different categories. Therefore, the comparison will certain help the researcher to make

an assessment about the impact of the globalization on profitability of banks in India. It

will include the findings of the study.

Fifth Chapter will throw light on the suggestive measures for better performance of

banks in India; will be based on the findings of the study.

Sixth Chapter will be conclusion of the study. The last part of the proposed study will

include annexure, bibliography & references.

REFERENCE:

Books:

C Rangarajan, Perspective on Impact of banking Sector Reform, Indian institute of

banking & Finance; Financial 7 banking Sector Reform in India.

M r Biju, “development Management under Globalization”, 2006, Publisher: Mittal

Publications.

N.K Thingalaya, “Indian Banks Profitability Popularity and Publicity”, Institute of

Management, Hedge publication (2006).

Pandey, I.M , Financial Management, 2002,Vikas Publishing house Pvt. Ltd, New

Delhi, 109

Verma, S, and Verma, s, “determinants of profitability of SBI Group, Other

Nationalized & Foreign banks in India”. Banking & Financial Sector Reforms in

India.

Annual Reports/Journals/Magazines/Periodicals/Newspapers/Research

Dr. Bimal Jalan “Measuring Bank Efficiency : Productivity versus Profitability”

Business line, 2003 Available from http://www.thehindubusinessline.com .

Bisht, N.S., Mishra, R.C. 7 Belwal, R, “Liberalization & its Effect on Indian

banking”, Finance India, 2001, 16(1), 147-152.

Dr. B.K swain, “Indian Banks in 2010”, IBA Bulletin, Vol XXVI. No. 1, January

2004.

Chakrabarthy T.K, “ Profitability of banks: An Empirical attempt for identification of

Variables of Income and Expenditure of scheduled Commercial banks for Profit

Planning”, paper presented to the Bank Economist Meet,pp 3.17-3.61(1986)

Das, A., Profitability of Public Sector banks: A decomposition Model”, RBI

Occasional Papers, 1999,20.

Divatia V. V. and T.R Vankatachalam, “Operational Efficiency and Profitability of

public Sector Bank:, RBI Occasional Papers, pp. 1-16, (1978).valuation Model, PhD

Thesis, H.P University, Shimla, (1982).

Ganeshan, P, “Determinants of Profit & Profitability of Public Sector Banks in India:

a Profit Approach”, Journal of financial Management & analysis, 2001.

Nayan, K.: Performance Evaluation of Commercial Banks: Development of an

Evaluation Model, Ph.D Thesis, H.P. University, Shimla, (1982).

Pitre V, measuring bank Efficiency: Productivity versus profitability”, Business Line,

2003.

Ritu Goyal & Rajinder Kaur, “ Performance of New Private sector banks in India”,

The Indian Journal of Commerce, quarterly publication, Vol.61, No.3, PP2-3, July-

Sept.2008

Ramamoorthy, “Profitability and Productivity in Indian banking” during the period of

1993-96, (1998).

R. Kannan and B.N Anantha Swamy, “ Profitability of Indian Banks”’ Banking in the

new millennium- Proceedings of the Bank Economist’s Conference (2000).

“Report on Trend and Progress of Banking in India 2001-02”, Reserve Bank of India,

Available from www.rbi.org, Accessed January 21,2003.

RBI, Report On Trend and Progress of banking in India 2004-05, Supplement to RBI

Bulletin, December 2005, “Technological Progress in Banks”.

Shanmugam, K.R, and Das, A Efficiency of Indian Commercial Banks during the

reform period”, Applied Financial Economics, 2004, 14, 681-686.

Tiku, r.N. and Radha K: Profitability and profit planning in banks”, Paper presented

to the Bank Economists Meet (1986).