OPREATIONAL EFFICENCY OF INDIAN BANKING INDUSTRY: AN INTER SECTROAL ANALYSIS. DR.

Anshul Sharma Associate Professor SDCM, ISRANA, PANIPAT

Vineet Kumar Sachdeva Assistant Professor

The present study has been attempt made the analysis and comparison the operational efficiency of Indian banking industry. The present has study based on four variables. First is net profit as percentage of total assets second is Operating profit as percentage of total assets, third is Net NPAs as percentage of net advances and last is CRAR as percentage of total assets. For this purpose median test has been apply. After analysis the data we found that there is significant difference in the operational efficiency of Indian banking industry. The operational efficiency of foreign banks is better than public and private banks.

Key words:

Operational Efficiency, Indian banking industry,

comparison, Net profit, Operating profit, Net NPAs, CRAR, Median Test, Chi square Test, Ranking.

Introduction:
Banking institutes have been playing a vital role in national economic development of the different countries in the world (Anand Kodan 2009, Ritu Kapoor 2009), because banking sector constitutes a predominant component of the financial services industry and the performance of any economy, to a large extent, is dependent on the performance of banks (B.S. Bodla 2006). So, an efficient and diversified banking system is must for promoting saving and channellising them into investment (Ross 1997) and help to achieve a faster rate of economic growth (Dilip Chanda 2007). Thus, the good health of an economy is reflected in the good health of banking system (Robert G. et al. 1999). In a modern economy, bans are considered not only as the dealers in money but also the leaders of development (K. Rajender 2007, Kodan 2009).The banking sector is dominant in India as it accounts for more than

half the assets of the financial sector. Banking industry has received great attention in current scenario. Indian banking industry has faced many challenges before financial and banking sector reform viz low profit, low assets qualities, more legal laws, and bad disclosure practices. So, the Govt. of India was constituted a committee under the chairmanship of M. Narshima in 1991 and second committee was constituted under same chairman ship in 1998. The paper investigates the performance of Indian commercial banking industry during the post reform period 19982008.The present study has judged the operational efficiency on the base of four variables. First is net profit as percentage of total assets. Second is operating profit as percentage of total assets. Third is net NPAs as percentage of net advances and last is CRAR. The present study restricted to commercial banks only. The present paper has arranged in four parts. First is introductory part, second is research methodology. Third is data analysis and last is concluding remarks.

Objectives of the Research Paper:

1. To analysis and compare the trend of Net Profit as percentage of total assets of Indian banking Industry. 2. To analysis and compare the trend of operating profit as percentage of total assets of Indian banking Industry. 3. To analysis and compare the trend of Net NPAs as percentage of total assets of Indian banking Industry. 4. To analysis and compare trend of CRAR as percentage of total assets of Indian banking Industry.

5. To give the ranking of different bank sector on the base of four variables.

Research Methodology:
Research type: Analytical. Data type: Secondary. Data source: Report trend and progress of banking in India (RBIPublication). Time Period: Ten Years. Research Tool: Parametric and Non Parametric Test. o o Parametric test includes; Mean Maximum, Minimum and S.D. Non Parametric; Median Test.

Hypothesis
1. H01=there is not significant difference of the net profit of Indian banking industry, 2. H02=there is not significant difference of the opreating profit of Indian banking industry,

3. H03=there is not significant difference of the net NPAs of Indian banking industry, 4. H04=there is not significant difference of the CRAR of Indian banking industry

Variables:
1) Net profit as percentage of total assets. 2) Operating profit as percentage of total assets. 3) Net NPAs as [percentage of net advances. 4) CRAR.

Procedure of Median Test:

Median Test is non-Parametric test that required less restrictive assumptions concerning the level of Data Measurement and does not require the assumptions.

Hypothesis Testing Procedure:

A test is accurate when sample is 25 or more and when no individual sample less than 5. The first step in the Median Test procedure is arranged for the combine data in ascending order calculate the Median value for the combined data. The next step is classified combined data according two criteria: the number of percentage which is less than the median and the number of percentage more than the Median for each sample. This test statistics is approximately chi-square. The observed frequencies and chisquare value are calculated to test the above-framed hypothesis.

Expected frequency in each cell = (RT CT)/N N = total Number of all the observations RT = Row Total CT = Coloum Total. Final step of the test is comparing the calculated and table and draw the result.

Chart 1: Composition of schedule commercial banks in India.

Scheduled Commercial Banks

Public Sector Banks

Private Sector Banks (27)

Foreign Banks (29)

Regional Rural Banks (133)

Nationalize d Banks (20)

State Bank of India and its associates

Old Private Sector Banks

New Private Sector Banks

Source: Reserve Bank of India, Report on Trend and Progress of Banking in

India, 2007.

Note: Figure in brackets indicate the number of institutions at end March 2006.

Table -1

Net profit/loss as percentage of Total Assets of SCBs in India.

Net profit/Loss as percentage of total Assets Year s Nationalize d Banks. 0.37 0.44 0.42 0.72 0.96 1.12 0.87 Private sector Banks. 0.68 0.88 0.7 0.66 1 0.95 0.83 Foreign sector Banks

1998 -99 1999 -00 2000 -01 2001 -02 2002 -03 2003 -04 2004 -05

0.69 1.17 0.93 1.32 1.56 1.65 1.29

2005 -06 2006 -07 Mea n. Max. Min. S.D.

0.82 0.83

0.58 0.7

1.54 1.65

0.727778 1.12 0.37 0.262811

0.775556 1.00 0.66 0.144405

1.311111 1.65 0.69 0.334569

Source: Report on Trend and progress of banking in India 2003-04, 2006-07 Table 1 depicts that the trend of profit as percentage of total assets of SCBs operating in India. The data revels that the trend of private bank is batter. Because it has shows less consistency as comparison to public and foreign bank. Median test indicate that the performance of foreign banks are batter then public and private sector banks. Because the null Hypothesis it is rejected. The value of 2 at 0.05% level is 5.99 and calculated value is 8.0360. It is more than chi-square value. It is concluded that there is a significant difference in the profitability performance of SCBs operating in India during the period under study. The profitability performance of foreign Banks is better in some extent followed by public Banks and private banks. This Significant difference is due to the best performance of foreign Banks. 9 out of 10 percentages of foreign Banks are higher than the median public banks has 7 out of 10 while private banks has only 3 out of 10 percentages are more than the median.

Table -2 Operating profit as percentage of Total Assets of SCBs in India. (Sector wise)
Banking Sectors Years Public Sector Banks. Private Sector Banks. Foreign Sector Banks

199899 199900 200001 200102 200203 200304 200405 200506 200607 200708 Mean Max. Min. S.D.

2.66 2.53 2.72 2.29 2.25 2.21 2.09 2.05 1.77 1.54 2.211 2.72 1.54 0.373496

2.07 1.83 1.87 1.44 1.99 2.02 2.03 2.11 2.06 2.16 1.958 2.16 1.44 0.207996

3.59 3.22 3.05 3 2.79 2.77 2.88 2.94 2.82 2.84 2.99 3.59 2.77 0.251882

Source: Report on Trend and progress of banking in India 2003-04, 2007-08

Table 2 depicts that the trend of operating profit as percentage of total assets of SCBs operating in India. The data revels that the trend of private bank is batter. Because it has shows less consistency as comparison to public and foreign bank. Median test indicate that the performance of foreign banks is batter then public and private sector banks. Because the null Hypothesis it is rejected. The value of 2 at 0.05% level is 5.99 and calculated value is 25.2. It is more than chi-square value. It is concluded that there is a significant difference in the operating performance of SCBs in India during the period under study. The operating efficiency of foreign banks is

better in some extent followed by public sector banks and private sectoring Banks. This Significant difference is due to the all 10 percentage out of 10 percentages of foreign sector banks are more than the median and the percentage of public sector banks are only 5 is more then the median while the same ratio of private sector bank is always less than median. On other words we can says that the performance of foreign banks is very good than public sector banks and private sector banks in context of operating efficiency while the operating efficiency of private sector bank is very weak in whole banking industry in India.

Table 3 Net Non-performing Assets as percentage of Net Advances of SCBs India

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Net NPAs as Percentage of net Advances Years 199798 199899 199900 200001 200102 200203 200304 200405 200506 200607 Mean. Max. Min. S.D. Public Banks. 8.15 8.13 7.42 6.74 5.82 4.53 2.98 2.06 1.32 1.05
4.82 8.15 1.05 2.809539

Private Banks. 5.26 7.41 5.41 5.44 5.73 4.95 2.84 1.85 1.01 0.97
4.087 7.41 0.97 2.24069

Foreign Banks. 2.25 2.94 2.41 1.82 1.89 1.76 1.49 0.86 0.83 0.73
1.698 2.94 0.73 0.73377

Source: Report on trend and Progress of Banking in India, 2000-01, to 2006-07.

Table 3 depicts the trend of net NPAs as percentage of net advances of SCBs operating in India. The datas revel that the trend of net NPAs of public banks is batter. Because the standard deviation of public banks indicate that the net NPAs as percentage of net advances trend very fustily

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decreased as comparison to private and foreign banks. But the median test indicates that the foreign banks are batter then public and private sector banks. This is because the null Hypothesis it is rejected. The value of 2 at 0.05% level is 5.99 and calculated value is 8.295. It is concluded that there is a significant difference in the management practice of Net Non-performing Assets of SCBs operating in India during the period of study. The performance of foreign Bank is better in some extent followed by public banks and private banks. This significant difference is due to the 1 out of 10 percentages of foreign sector banks is higher than the median, 6 out of 10 has more in case of private banks while, the same percentage of public banks has 7out of 10 percentage are higher than median. On other words we can says that the performance of foreign banks is much batter than private and foreign banks. Table 4
Capital Adequacy Ratio (CAR) of India Banking Industry. (Sector wise) Banking Sectors Years Public Sector Banks. 11.23 11.38 11.42 11.8 12.6 13.2 Private Sector Banks. Foreign Sector Banks

199899 199900 200001 200102 200203 200304

12.43 12.61 12.36 12.4 12.05 11.95

45.09 31.57 32.3 12.9 15.2 15

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200405 200506 200607 200708 Mean. Max. Min. SD.

12.9 12.17 12.36 12.51 12.157 13.2 11.8 0.67789

12.3 12.29 12.03 14.23 12.465 12.61 12.03 0.652963

14 13.02 12.39 13.08 20.455 45.09 12.39 11.55452

Source: Report on Trend and progress of banking in India 2003-04, 2007-08. Table 4 depicts the trend of CRAR as percentage of total assets of SCBs operating in India. The datas revels that the trend of CRAR of foreign banks is lass batter then public and private sector banks. This is because the standard deviation of foreign banks is large as against to private and public banks. But the result of median test shows that the position of foreign sector banks is batter than private and public banks. The null Hypothesis is rejected. Because the value of 2 at 0.05% level is 5.99 and Table 3 value is 10.40. It is more than chi-square value. It is concluded that there is a significant difference in the financial health of banking sector in India during the period under study. The financial health of foreign banks is better in some extent followed by public sector banks and private sector Banks. This Significant difference is due to the 9 out of 10 percentages of foreign sector banks are higher than the median. While the percentage of private sector banks are only 2 is higher then the median. On other words we can says that the performance of private sector banks is very weak than foreign sector banks and public sector banks in context of financial health.

Table: 5

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All Hypothesis Results.

Hypothesiss H01 H02 H03 H04 Source: Author calculated. Table value 5 % Calculated level. value. 5.99 5.99 5.99 5.99 8.036 25.20 8.295 10.40 Result. Accept Accept Accept Accept

Table 5 depicts the all hypothesis, significant value of chi square in 5 percent level and calculated value. The table clearly depict that the all hypothesis has been accept. Because all calculated value are more than table values. On the calculation base of median test we can says that the operational performance of foreign sector bank is batter. Table: 6

Ranks& Position: Non Parametric Test.

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Banks Public Banks

Items Net profit Operating profit Net NPAs CRAR

Score 2 2 1 2 1 1 2 1 3 3 3 3

Total Score 7

Rank 2

Private Banks

Net profit Operating profit Net NPAs CRAR

Foreign Banks

Net profit Operating profit Net NPAs CRAR

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Source: Author calculated.

Table 6 depict that the score of individual item held by individual bank and as well as total score held by individual bank. The table further depicts the relatively operational efficiency of Indian banking industry. Foreign banks held first position with the score of 12 and followed by public and private bank with the score of 7 and 5 respectively. The table 6 score based on more than and less than percentage to median. Table -7 Ranks& Position: Parametric Test
Variables Net profit as percent of total assets. Values Average Maximum Minimum S.D. Score Value of Operating profit as percent of total assets. variable Ist Average Maximum Public banks 0.727778(1) 1.12(2) 0.37(1) 0.262811(2) 6 2.211(2) 2.72(2) Private banks 0.775556(2) 1.00(1) 0.66(2) 0.144405(3) 8 1.958(1) 2.16(1) Foreign banks 1.311111(3) 1.65(3) 0.69(3) 0.334569(1) 10 2.99(3) 3.59(3)

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Minimum S.D. Score Value of Net NPAs as percentage of net advances. variable IInd Average Maximum Minimum S.D. Score Value of CRAR. variable IIIrd Average Maximum Minimum S.D. Score Value of variable IVth Total Score Position Combined variables Combined variables

1.54(2) 0.373496(3) 9 4.82(1) 8.15(1) 1.05(1) 2.809539(2) 5 12.157(1) 13.2(2) 11.8(1) 0.67789(2) 6

1.44(1) 0.207996(3) 6 4.087(2) 7.41(2) 0.97(2) 2.24069(1) 7 12.465(2) 12.61(1) 12.03(2) 0.652963(3) 8

2.77(3) 0.251882(2) 11 1.698(3) 2.94(3) 0.73(3) 0.73377(3) 12 20.455(3) 45.09(3) 12.39(3) 11.55452(1) 10

26 IIIrd.

29 IInd.

44 Ist.

Source: Author calculated.

Note; Figure in bracket is the score of individual variables.

The parametric test like mean, maximum, minimum and standard devotion indicate that the performance of foreign banks is batter than public and private banks. It result is same as Non parametric test results.

Table: 7
Operational Efficiency of Indian Banking Industry: An Inter Sector wise.

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Indian banking industry.

Remark.

Public Banks

Good

Private Banks Foreign Banks Source: Author calculated.

Poor Excellent

Table 5, 6 and 7 depict the analytical result of Indian banking industry. All tables clearly indicate that the operational efficiency of foreign banks is batter in comparison of public and private banks. The operational efficiency of private banks is very poor.

Conclusion;
The present study indicates that the operational efficiency of foreign banks is batter than domestic bank like public and private sector banks. Because foreign banks have score many more than public and private banks. Many reasons are responsible for bad performance of public and private banks. This is because 40 percent of total advances are given for priority sector is mandatory for all domestic banks in India. Priority sector includes agriculture and SSI. The position of agriculture and SSI is relatively is low than developing countries. Another reason is human side etc.

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Notes:

1. Banks in India can be categorized into two parts: Scheduled Commercial banks and Unscheduled Commercial Banks. Those banks which fulfill the conditions laid down by the Second Schedule of Reserve Bank of India Act 1934, vide section 42 (6), are called Scheduled Commercial Banks. Scheduled Banks of India can be further categorized into Public sector banks, old private sector banks, new private sector banks and foreign banks. 2. Banking industry include public, private and foreign sector bank operating in India. 3. Operating expenses for firm's ordinary business activities the costs arising from the day-to-day activities of running a company. 4. Non Performing Assets. Loans and advances given by banks to its customers is as asset to the bank. But, when repayment of interest and Principal is overdue, such asset is classified as NPA in the financial reports of banks.

5. A bank risk assets ratio is the ratio of a banks risk assets to its capital funds. Risk assets include assets other than hugely rated government and government agency obligations and cash, for example, corporate bonds and loans. The include capital and undistributed reserve. 6. Net NPAs; Net NPA = Gross NPA-(Balance in interest suspense account +DICGC/ECGC claims received and held pending adjustment + part payment received and kept suspense account + Total provisions held)

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Kodan. Anand-Management of NPA SCBs Economic Affairs No 2-3, Vol 3.March 2008.

Kodan. Anand-Deposit and Advances C.Dadria.Haryana.Nov-Dec.2009.

by

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KAIM

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India. (Forth coming) Economic Affairs MARCH-2010.

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 Charan Singh Financial Sector Reforms and State of the Indian Economy. Part II, Indian Journal of Economics and Business, VOL.4, No.4, PP. 1-33. Report on Trend and Progress of Banking in India. Various issues. Hooda.R.P Statistics for Business and Economics Machmillan Business Books, New Delhi 2007. Agarwal. B.L.- Basic Statistics, Wiley Limited, New Delhi, 1991, PP, 295 and 296.

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