ASSOCHAM Eco Pulse

Study

Banking Sector in Emerging Economies

October 2008

Prepared by:
GAURAV SHARMA
ASSOCHAM RESEARCH BUREAU
Indian banking sector at sixth position among emerging economies: AEP

The Indian banking sector though stands unhurt by the ongoing international financial
crisis, has got a long way to go in competing with the banks of other emerging economies
of the world. It ranks at sixth position in terms of efficiency, productivity and soundness
among the 11 emerging economies, stated an Assocham Eco Pulse (AEP) study.

The AEP “Banking Sector in Emerging Economies” reports that Malaysia has topped
among the emerging economies as measured on the basis of financial health indicators. It
was followed by Korea and China at second and third place respectively. India fell at
sixth position following Russia (fourth) and Chile (fifth), whilst Brazil (seventh), Mexico
(eighth), Thailand (ninth), Philippines and Indonesia (joint tenth) were down below India
in the rankings as per the analysis.

Among the BRIC nations, the banking sector of India stands at third position lagging
behind China and Russia. “Even as India is second fastest growing economy in terms of
GDP, its banking sector falls at sixth place among the worlds’ emerging economies. We
need to pursue the financial sector reforms more diligently in order to come up to the
level of other developing economies”, said Mr. Sajjan Jindal, President, Assocham.

While India ranks favorably in terms of income ratios at fourth position, it is the cost
ratios and profitability ratios which have led India falling to overall sixth rank among the
11 emerging economies. India is ranked at sixth and seventh position in terms of cost
ratios and profitability ratios respectively.

The AEP study analyzed the standing of Indian banking sector vis-à-vis other emerging
economies based on eight financial parameters relating to cost, income and profitability
taken for the financial year 2006-07. The efficiency, productivity and soundness of the
banking sector was determined by taking into consideration various financial ratios
including cost ratios (Cost to Income ratio, Ratio of Personnel Expenses to Earning
Assets, Ratio of Non-Labour Cost to Total Earning Assets), income ratios (Net Interest
Margins, Ratio of other Operating Income to Total Income) and profitability ratios
(Return on Assets and Return on Equity).

BANKING SECTOR EFFICIENCY, PRODUCTIVITY AND SOUNDNESS

ACROSS EMERGING ECONOMIES

COUNTRY RANK
MALAYSIA 1

KOREA 2

CHINA 3

RUSSIA 4

CHILE 5

INDIA 6

BRAZIL 7

MEXICO 8

THAILAND 9

PHILIPPINES 10

INDONESIA 10

Source: Assocham Research Bureau

Data Source: RBI and Bank Scope

Within the BRIC countries, India ranked at third position, behind China (first) and Russia
(second), but ahead of Brazil (fourth) in the overall standing. However, with respect to
the income ratios, Indian banking sector was best performing among the BRIC countries,
it ranked second in terms of cost ratios and third in terms of profitability ratios.

China ranked first in terms of cost ratios whereas it shared joint second position with
Russia in income ratios. In terms of profitability ratios, Russia shared the first position
with Brazil.
 BRIC ANALYSIS

COUNTRY RANK RANK RANK Overall

(Cost ratios) (Income ratios) (Profitability ratios) Rank
BRAZIL 4 4 1 4
RUSSIA 3 2 1 2
INDIA 2 1 3 3
CHINA 1 2 4 1
Source: Assocham Research Bureau
Data Source: RBI and Bank Scope

INDIAN BANKING SECTOR

S.No. FINANCIAL PARAMETER in per cent

1 Cost to Income 56.09

2 Personnel Expenses to Earning Assets 1.20

3 Non-Labour Cost to Total Earning Assets 1.99

4 Net Interest Margins 3.00

5 Other Operating Income to Total Income 15.88

6 Return on Assets 0.85

7 Return on Equity 14.76

Source: RBI and Bank Scope