IUP1

Benchmarking Performance of Public Sector Banks in India 57
Benchmarking Performance
of Public Sector Banks in India
Bhagirathi Nayak* and C Nahak**
Introduction
Prior to reforms, the Indian banking sector was functioning in a highly-regulated environment.
Controlled interest rate, pre-emption of credit, high Statutory Liquidity Ratio (SLR) and Cash
Reserve Ratio (CRR) requirements were putting pressure on efficiency and financial stability of
the banking sector. Profitability of Indian banks was extremely low despite rapid growth in
deposits. The survival of the Indian banking system was questioned as a consequent of erosion
of capital, which led to the appointment of the new Committee on Financial System (CFS) in
1991. Pursuant to the recommendations of the Committee, gradual reform measures were
initiated to improve efficiency, productivity, competition and stability of the banking sector.
Basel Committee recommendations have been implemented in a phased manner so as to
align Indian banks with international best practices. At present, Indian public sector banks
are performing well and they are at par with the best banks in the world. The paper
has carried out a performance analysis of public sector commercial banks using
* Research Schol ar, Department of Computer Science, North Orissa University, India.
E-mail: nayakbr@hijli.iitkgp.ernet.in
** Associate Professor, Department of Mathematics, IIT Kharagpur, India. E-mail: cnahak@maths.iitkgp.ernet.in
2011 IUP. All Rights Reserved.
The paper analyzes the performance of public sector banks in India during the
post-liberalization period. There has been a significant improvement in the performance
of public sector banks after reform measures. The paper has used various accounting
ratios pertaining to profitability, financial efficiency, operational efficiency and financial
soundness to build performance index for banks. Principal Component Analysis method
has been used to construct index and rank performance of banks over the last 10 years.
Twenty-two parameters pertaining to operational and financial efficiency of banks have
been considered to construct the performance index for public sector banks. Altman
Z-Score of solvency analysis has been applied to banking sector with suitable financial,
operational and other efficiency ratios. Logit model is used to construct the Altman
Z-Score for public sector banks in India. The logit model is found to be robust as per its
predictability of financial health of the public sector banks. It is found that reform measures
have impacted positively in enhancing the stability and soundness of the public sector
banks in India. The analysis has found that State Bank of India continues to be the number
one bank in India and there is competition between Punjab National Bank, Canara Bank,
Bank of India and Bank of Baroda for the number two place in different years.
The IUP Journal of Bank Management, Vol. X, No. 2, 2011 58
Principal Component Analysis (PCA) and logit model. It has ranked the public sector banks
as per their performance indices and financial health over the last 10 years.
Indian Banking Sector: A Retrospect
Pre-Reform Period
Government intervention in the banking sector had its origin in nationalist thinking. Colonial
banking was perceived to be biased in favor of the working capital loans to trade and large
capitalist enterprises and against rural areas and the common man. This legacy combined with
socialist ideology culminated in the nationalization of all the large banks in 1969. The nationalized
banks have explicitly set quantitative targets to expand their network in rural areas and to direct
credit to priority sector. Over time, banks also became a major source of lending to the government
and thus of financing fiscal deficits. By 1991, the country had created an unprofitable, inefficient
and financially unsound banking sector. The profitability of Indian banks was extremely low in
spite of the rapid growth of deposits. The Indian banking sector was operated under a
highly regulatory environment. The banking system had serious survival problem due to lack of
profit and consequent erosion of capital. Besides these, low internal and organizational efficiency
and lack of competition were other factors, because of which the banking sector in India had
to face the problem of survival.
Post-Reform Structural Transformation
The Committee on the Financial System under the chairmanship of Narasimham was appointed
in August 1991. The major problem faced by the banking system was on account of constraint
mainly in terms of massive pre-emption of banks resources to finance governments budgetary
needs and administered interest rates. Pursuant to the recommendations of the Narasimham
Committee, prudential regulations such as income recognition, asset classifications and
provisioning and capital adequacy have been implemented for the banks. Both deposit and
lending rates were substantially deregulated/rationalized. Directed investment by way of SLR
has been reduced. The element of cross-subsidy has been reduced considerably over time.
Commercial banks have been given functional autonomy with respect to their loan appraisal.
Prudential norms are being introduced gradually to meet the international standards. The
purpose of prudential system of recognition of income, classification of assets and provisioning
of bad debts is to ensure that the books of commercial banks reflect their financial position
more accurately and in accordance with internationally accepted accounting practices. Public
sector banks were allowed to expand their capital base with equity participation. Diversification
of ownership has led to greater market accountability and improved efficiency. Institutional
and legal reforms were undertaken in relation to the banking sector. Board for Financial
Supervision (BFS) was constituted for supervision of financial system in general and banking
sector in particular. An effective payment system is the cornerstone of banking sector and for
this, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has
also been constituted. Banks are directed to maintain a separate Investment Fluctuation Reserve
(IFR) out of profits, towards interest rate risk.
Banks Performance Index
Methodology for Index Construction
Since 1999, many research organizations and financial newspapers have been ranking banks
in India on the basis of various operational and efficiency parameters. This exercise has
many lacunae in the sense that it lacks objective valuation. Weights to different parameters
have been assigned in an arbitrary manner. Despite these drawbacks, the ranking of banks
has some significance as it provides some insights to understand how various parameters
play in the overall performance of a bank. The ranking process has been divided into financial
and operational ranking. The entire ranking exercise has been carried out on the basis of
22 parameters and weights are assigned as per the importance of each parameter on the
performance of banks.
Further, the paper has used PCA for identifying principal variables and relative weights for
construction of performance index. The principal component procedure standardized the
proficiency scores into a Z-Score form. In this form, all proficiency scores have a common
standard deviation of 1 unit, and the total performance variation is equal to the number of
proficiency measures. The indicator approach to macroeconomic measurement has a long
and successful history. This approach works because in a market-oriented economy, in cycle
after cycle, economic indicators reach turning points in a known sequence. Basically, leading
indicators turn before coincident indicators, which turn before lagging indicators. PCA is a
multivariate statistical technique used to reduce the number of variables in a data set into a
smaller number of dimensions. In mathematical terms, from an initial set of n correlated
variables, PCA creates uncorrelated indices or components, where each component is a
linear weighted combination of the initial variables.
For example, from a set of variables X
i
through to X
n
,
1 11 1 12 2 1
....
n n
PC a X a X a X = + + +
= + + +
1 1 2 2
....
m m m mn n
PC a X a X a X
where a
mn
represents the weight for the m
th
principal component and the n
th
variable. The
weights for each principal component are given by the eigenvectors of the correlation
matrix, or if the original data were standardized, the covariance matrix. The variance for
each principal component is given by the eigenvalue of the corresponding eigenvector. The
components are ordered so that the first component (PC
1
) explains the largest possible
amount of variation in the original data, subject to the constraint that the sum of the
squared weights (
2 2 2
11 12 1n
.... a a a + + + ) is equal to one. The second component is completely
uncorrelated with the first component, and explains additional but less variation than the
first component, subject to the same constraint. Subsequent components are uncorrelated
with previous components; therefore, each component captures an additional dimension
in the data, while explaining smaller and smaller proportions of the variation of the original
variables. The higher the degree of correlation among the original variables in the data, the
fewer components required to capture common information. The paper has segregated
these parameters into two primary heads, viz., Financial Ranking and Operational Ranking
(Table 1). The paper has assigned 66% weight to financial ranking and 34% weight to
operational ranking.
Capital Adequacy Ratio
This ratio relates a banks core net worth to its risk-weighted assets. This ratio is an internationally-
accepted, risk-driven measure of a banks degree of capitalization. It is an excellent indicator of
a banks long-term solvency.
Table 1: Parameters for Ranking
Financial Assumed Weight
CRAR 6
Net NPA 5
Int. Inc./AWF 6
Op. Profit/AWF 5
ROA 6
Net Worth 6
Investments 4
Advances 4
Total Assets 4
Total Income 4
Operating Expenditure/Total Liability 3
Operating Profit/Total Assets 3
Operating Profit 5
Net Profit 5
Operational
NII/AWF 6
BPE 4
PPE 4
Deposits 4
Low Cost Deposits 4
Total Liability 4
NII 4
Op. Exp./Total Exp. 4
NPA Ratio
According to international norm, the Gross NPA ratio should be less than 3% and net NPA
should not be more than 1%.
Interest Income to Average Working Funds (II/AWF)
This ratio shows a banks ability to leverage its average total resources in enhancing its mainstream
operational interest income.
Operating Profit to Average Working Funds (Op. Profit/AWF)
This ratio indicates the strength of the bank in leveraging its working funds for enhancing the
operating profit.
Return on Assets (ROA)
It indicates the percentage of return to assets deploy. It is a standard measure of
profitability.
Non-Interest Income to AWF (NII/AWF)
This ratio denotes a banks ability to earn from non-conventional sources. In a liberalized
environment, this ratio assumes significance. For, it mirrors a banks ability to take full advantage
of its operational freedom.
Business and Profit per Employee (BPE and PPE)
These ratios together indicate how well a banks human resources are being deployed in the
creation of business and ultimately profit for the bank. Together, these ratios reflect the degree
of branch productivity of banks.
Operating Expenditure/Total Liability
This ratio indicates per unit cost of mobilizing deposits and borrowings for the bank. Lower the
cost, lower will be the operating expenditure or higher will be the efficiency.
Each parameter is multiplied with the assigned weights and the aggregate number is arrived at
for each head of Financial Ranking and Operational Ranking. Final ranking is arrived at by
taking into consideration the weighted average rank for financial parameters and operational
parameters.
Assessment of Banking HealthLogit Model
Altman Z-Score is generally used to assess the solvency character of any manufacturing
company using various kinds of ratio parameters. However, for assessing the health of the
banking sector, Altman Z-Score needs to be redesigned with various ratios pertaining to
profitability, risk and capital adequacy. In this analysis, the Indian banking sector, particularly
the public sector banks have been considered for assessing their health after the reform
period. The paper has used the following ratios for estimating Altman Z-Score using the
logit model.
Return on Assets
Total Income to Total Assets
Net Worth to Total Assets
Operating Expenditure to Total Assets
Operating Profit to Total Assets
Regulatory Capital to Risk-Weighted Assets
The banking health has been assessed on the basis of net NPA ratio. The bank which has a
net NPA ratio of more than 6% is considered to be of poor health with a score of 0 and the
bank which has a net NPA of less than 6% is considered to be of good health with a score
of 1. In the logit model, banking health is considered as dependent variable and the
above-mentioned ratios are independent variables.
Logistic regression is a part of statistical models called generalized linear models. The
dependent variable in a logistic regression usually takes the value 1 with a probability of
success P, or the value 0 with a probability of failure 1 P. This type of variable is called
binary variable. The independent variable in the logistic regression can take any form. The
relationship between the independent variable and the dependent variable may not be a linear
function in the logistic regression. It can be a function in the form of a log transformation
equation, which is as follows:
( )
( )
i i
i i
x ... x x
x ... x x
e
e

+ + + +
+ + + +
+
=
2 2 1 1
2 2 1 1
1
...(1)
where is the intercept of the equation and is the coefficient of the independent variable.
The log transformation of the above equation is as follows:
( )
( )
( )
1 1 2 2
log it log ...
1
i i
x
X x x x
x
(
( = = + + + +
(

(

...(2)
The above logistic regression estimates the probability of success or failure. A Wald test is
used to test the statistical significance of each coefficient mentioned in the above model. The
model has been tested for goodness of fit for sensitivity test and prediction purposes. The
model can be used to assess the Financial Health Status of commercial banks. With various
ratio parameters and indicators of good and sick health criteria, the above-mentioned logistic
model is redefined in the following manner.
The dependent variable is named as HEALTH with the following scores: HEALTH = 1,
if the bank has a net NPA ratio less than 6% and 0 if the bank has a net NPA ratio more
than 6%.
( )
( )
( )
1 1 2 2
log it log ...
1
i i
x
X x x x
x
(
( = = + + + +
(

(

...(3)
where,
= Intercept and s are Coefficients
x
1
= Return on Assets
x
2
= Income to Assets
x
3
= Net Worth to Assets
x
4
= Operating Expenditure to Assets
x
5
= Operating Profit to Assets
x
6
= Regulatory Capital to Risk-Weighted Assets
x
7
= Health Parameter (Net NPA Ratio)
Log (Health) signifies log (P/l P), where P is the probability of Not Getting Sick and
1 P signifies the probability of Getting Sick.
log
1
P
X
P
| |
=
|
\ .
| |
=
|
\ .
1
X
P
e
P
( )
=
+1
X
X
e
P
e
The cut-off value for P has been estimated from the average score for health given by the
estimated equation:
( )
( )
( )
1 1 2 2
log it log ...
1
i i
x
X x x x
x
(
( = = + + + +
(

(

...(4)
where,
= Intercept and s are Coefficients
x
1
= Return on Assets
x
2
= Income to Assets
x
3
x
4
x
5
x
6
x
7
= Health parameter (Net NPA Ratio)
Data and Period of Study
The study has considered 27 Indian public sector banks for performance ranking over the last
10 years, starting from 2000 end to 2009. Data were collected from various publications of the
Reserve Bank of India.
Results and Discussion
Ranking on the Basis of Financial Parameters
Financial parameters carry a weight of 66% involving parameters like capital adequacy, ROA,
net worth, funds efficiency management, etc. for ranking banks as per their financial strength.
As per the results, SBI continued to be the number one bank during the period 2000-09.
Canara Bank, Bank of India, Bank of Baroda and Punjab National Bank, in different years,
have interchangeably ranked ranging from 2 to 4. State Bank of Indore, State Bank of
Saurashtra, State Bank of Bikaner & Jaipur, Vijaya Bank and United Bank of India continued
to be at the bottom during the period 2000-09. Though the financial and banking sector
reforms have improved the efficiency of public sector banks, they could not alter the ranking
positions across the public sector banks.
Ranking on the Basis of Operational Parameters
Operational efficiency parameters carry a weight of 34%, particularly operating expenditure,
other income to AWF, low cost deposits and operating expenditure to total expenditure.
Over the years, starting from 2000 to 2009, SBI continued to be the number one bank as
per operational efficiency parameters. Canara Bank, Bank of India, Bank of Baroda and
Punjab National Bank, in different years, have interchangeably ranked ranging from
2 to 4. State Bank of Indore, State Bank of Saurashtra, State Bank of Bikaner & Jaipur,
Vijaya Bank and United Bank of India have continued to be at the bottom during the
period 2000-2009.
Combined Ranking
The weighted average of financial and operational ranking has been considered as final
ranking. During the period 2000-09, SBI continued to be the number one bank as per overall
ranking (Tables 2 to 5). Canara Bank, Bank of India, Bank of Baroda and Punjab National
Bank, in different years, have interchangeably ranked ranging from 2 to 4. State Bank of
Indore, State Bank of Saurashtra, State Bank of Bikaner & Jaipur, Vijaya Bank and United
Bank of India continued to be at the bottom for the period 1998 to 2007. Percentile rank is
created by giving the number one bank 100 score and distributing the scores of the banks as
a percentage to number one banks score. This rank indicates the position of the other banks
relative to the number one bank. Over the years, from 2000 to 2009, SBI was the number
one bank and the other banks position in relation to SBI has changed over the years.
Performance Index: Principal Component Analysis
As per the discussed methodology, the following variables have been considered to construct
the principal components (Tables 6 to 9) among them.
Allahabad Bank 13 12 12 13 13 13 13 13 13
Andhra Bank 20 21 21 19 19 19 17 17 17
Bank of Baroda 3 3 3 3 3 3 2 2 2
Bank of India 2 2 2 2 2 2 5 5 5
Bank of Maharashtra 17 16 17 18 18 18 19 18 19
Canara Bank 4 4 4 4 4 4 4 4 4
Central Bank of India 6 6 6 6 6 6 6 6 6
Corporation Bank 16 17 16 15 15 15 15 16 15
Dena Bank 15 15 15 16 16 16 16 15 16
Indian Bank 9 10 10 10 10 10 12 12 12
Indian Overseas Bank 8 8 8 8 8 8 9 8 9
Oriental Bank of
Commerce
12 13 13 12 12 12 10 10 10
Punjab & Sind Bank 23 23 23 23 22 23 24 23 24
Punjab National Bank 5 5 5 5 5 5 3 3 3
State Bank of Bikaner
& Jaipur
24 24 24 24 24 24 23 24 23
State Bank of Hyderabad 18 18 18 17 17 17 18 19 18
State Bank of India 1 1 1 1 1 1 1 1 1
State Bank of Indore 27 27 27 27 27 27 27 27 27
State Bank of Mysore 25 25 25 25 25 25 25 25 25
State Bank of Patiala 19 19 19 20 21 21 20 21 20
State Bank of Saurashtra 26 26 26 26 26 26 26 26 26
State Bank of Travancore 22 22 22 22 23 22 22 22 22
Syndicate Bank 10 9 9 9 9 9 8 9 8
UCO Bank 11 11 11 11 11 11 11 11 11
Union Bank of India 7 7 7 7 7 7 7 7 7
United Bank of India 14 14 14 14 14 14 14 14 14
Vijaya Bank 21 20 20 21 20 20 21 20 21
Table 2: Ranking as per Assigned Weights (2000-2002)
Name of the Bank
2000 2001 2002
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Allahabad Bank 13 13 13 13 13 13 13 13 13
Andhra Bank 15 15 15 18 18 18 16 18 16
Bank of Baroda 4 4 4 5 5 4 5 4 4
Bank of India 5 5 5 4 4 5 4 5 5
Canara Bank 3 2 2 3 3 3 3 3 3
Dena Bank 19 19 19 19 19 19 20 20 20
Indian Bank 12 12 12 12 12 12 9 12 11
Oriental Bank of Commerce 10 10 10 9 9 9 10 11 12
Punjab & Sind Bank 24 23 24 24 24 24 24 24 24
23 24 23 23 23 23 23 23 23
& Jaipur
State Bank of India 1 1 1 1 1 1 1 1 1
Syndicate Bank 9 9 9 10 10 10 11 10 9
UCO Bank 11 11 11 11 11 11 12 9 10
Vijaya Bank 22 20 21 22 22 21 21 21 21
Name of the Bank
2003 2004 2005
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Allahabad Bank 13 13 13 12 12 12 12 12 12
Andhra Bank 18 18 18 16 17 16 17 14 16
Bank of Baroda 4 4 4 5 4 4 4 4 4
Bank of India 5 5 5 4 5 5 5 5 5
Canara Bank 3 3 3 3 3 3 3 3 3
Dena Bank 22 22 22 22 22 22 23 22 23
Indian Bank 12 12 12 13 13 13 13 13 13
Oriental Bank of Commerce 11 11 11 9 9 9 11 11 11
Punjab & Sind Bank 24 24 24 26 24 26 26 24 26
& Jaipur
23 23 23 23 23 23 22 23 22
Syndicate Bank 9 8 9 10 10 10 9 8 9
UCO Bank 10 10 10 8 8 8 8 9 8
Vijaya Bank 20 20 20 19 20 20 20 20 20
Name of the Bank
2006 2007 2008
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Table 5: Ranking as per Assigned Weights (2009)
Allahabad Bank 12 12 12
Andhra Bank 16 16 16
Bank of Baroda 4 4 4
Bank of India 5 5 5
Bank of Maharashtra 20 20 20
Canara Bank 2 3 3
Central Bank of India 7 7 7
Corporation Bank 14 14 14
Dena Bank 23 23 23
Indian Bank 13 13 13
Indian Overseas Bank 9 9 9
Oriental Bank of Commerce 10 11 10
Punjab & Sind Bank 26 26 26
Punjab National Bank 3 2 2
State Bank of Bikaner & Jaipur 22 22 22
State Bank of Hyderabad 15 15 15
State Bank of India 1 1 1
State Bank of Indore 25 25 25
State Bank of Mysore 24 24 24
State Bank of Patiala 17 17 17
State Bank of Saurashtra 27 27 27
State Bank of Travancore 21 21 21
Syndicate Bank 8 8 8
UCO Bank 11 10 11
Union Bank of India 6 6 6
United Bank of India 18 18 18
Vijaya Bank 19 19 19
Name of the Bank
2009
Financial
Efficiency Rank
Operational
Efficiency Rank
Final Rank
Table 7: Total Variance Explained
1 11.046 50.210 50.210 11.046 50.210 50.210 10.659 48.452 48.452
2 5.216 23.709 73.918 5.216 23.709 73.918 5.056 22.980 71.432
3 2.227 10.123 84.041 2.227 10.123 84.041 2.720 12.365 83.797
4 1.374 6.247 90.288 1.374 6.247 90.288 1.428 6.491 90.288
5 0.681 3.097 93.385
6 0.464 2.110 95.495
7 0.285 1.296 96.791
8 0.240 1.089 97.880
9 0.173 0.786 98.666
10 0.114 0.518 99.184
11 0.053 0.240 99.424
12 0.045 0.206 99.630
13 0.028 0.127 99.757
14 0.018 0.084 99.841
15 0.015 0.067 99.908
16 0.009 0.043 99.951
17 0.006 0.028 99.978
C
o
m
p
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n
t
s
Initial Eigenvalues
Extraction Sums of
Squared Loadings
Rotation Sums of
Squared Loadings
T
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%

o
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V
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T
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o
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%
Table 6: Principal Component Matrix
Parameters Variables Parameters Variables
V1 CRAR V2 Net NPA
V3 Int. Inc./AWF V4 NII/AWF
V5 Op. Profit/AWF V6 ROA
V7 BPE V8 PPE
V9 Net Worth V10 Deposits
V11 LC Deposits V12 T. Liability
V13 Invst. V14 Advances
V15 T. Assets V16 NII
V17 T. Income V18 Op. Exp./T. Exp.
V19 Op. Profit/TL V20 Op. Profit/TA
V21 Op. Profit V22 Net Profit
Table 8: Component Extraction Analysis
CRAR 0.194 0.666 0.132 0.156
NPA 0.286 0.243 0.699 0.337
Int. Inc./AWF 0.429 0.242 0.770 0.166
NII/AWF 0.030 0.594 0.441 0.489
Op. Profit/AWF 0.145 0.945 0.178 0.061
ROA 0.176 0.845 0.113 0.181
BPE 0.315 0.425 0.716 0.355
PPE 0.288 0.761 0.335 0.326
Net Worth 0.970 0.151 0.015 0.022
Deposits 0.985 0.153 0.034 0.023
LC Deposits 0.976 0.162 0.058 0.027
T. Liability 0.984 0.157 0.054 0.015
Invst. 0.958 0.152 0.124 0.034
Advances 0.967 0.120 0.038 0.049
T. Assets 0.984 0.157 0.054 0.015
NII 0.956 0.085 0.179 0.089
T. Income 0.971 0.168 0.126 0.002
Op. Exp./T. Exp. 0.094 0.048 0.291 0.821
Op. Profit/TL 0.164 0.932 0.213 0.080
Op. Profit/TA 0.164 0.932 0.213 0.080
Op. Profit 0.987 0.014 0.092 0.017
Net Profit 0.980 0.053 0.076 0.036
Components
1 2 3 4
Table 7 (Cont.)
18 0.003 0.013 99.991
19 0.001 0.006 99.997
20 0.001 0.003 100.000
21 2.69 1.22 100.000
E-11 E-10
22 1.89 8.58 100
E-13 E-13
C
o
m
p
o
n
e
n
t
s
Initial Eigenvalues
Extraction Sums of
Squared Loadings
Rotation Sums of
Squared Loadings
T
o
t
a
l
%

o
f
V
a
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i
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e
C
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%
T
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%

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T
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%

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V
a
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t
i
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e
%
Variables
Table 9: Principal Component Ranking Matrix
Allahabad Bank 12 13 13 13 13 13 13 12 12 12
Andhra Bank 21 19 17 15 18 17 17 16 15 16
Bank of Baroda 3 3 2 4 4 4 4 4 4 4
Bank of India 2 2 5 5 5 5 5 5 5 5
Bank of Maharashtra 17 18 19 17 16 16 14 17 20 20
Canara Bank 4 4 4 2 3 3 3 3 3 3
Central Bank of India 6 6 6 6 6 6 6 7 7 7
Corporation Bank 16 15 15 16 15 14 16 15 16 14
Dena Bank 15 16 16 19 19 20 22 22 22 23
Indian Bank 10 10 12 12 12 12 12 13 13 13
Indian Overseas Bank 8 8 8 8 8 8 8 11 10 9
Oriental Bank of
Commerce
13 12 10 10 10 11 11 10 11 11
Punjab & Sind Bank 23 23 24 24 24 24 24 26 25 26
Punjab National Bank 5 5 3 3 2 2 2 2 2 2
& Jaipur
24 24 23 23 23 23 23 23 23 22
State Bank of Hyderabad 18 17 18 18 17 15 15 14 14 15
State Bank of India 1 1 1 1 1 1 1 1 1 1
State Bank of Indore 27 27 27 27 26 25 26 24 24 25
State Bank of Mysore 25 25 25 25 25 26 25 25 26 24
State Bank of Patiala 19 21 21 21 20 19 18 18 17 17
State Bank of Saurashtra 26 26 26 26 27 27 27 27 27 27
State Bank of Travancore 22 22 22 22 22 22 21 21 21 21
Syndicate Bank 9 9 9 9 9 10 9 9 9 8
UCO Bank 11 11 11 11 11 9 10 8 8 10
Union Bank of India 7 7 7 7 7 7 7 6 6 6
United Bank of India 14 14 14 14 14 18 19 19 18 18
Vijaya Bank 20 20 20 20 21 21 20 20 19 19
Name of the Bank 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
For undertaking PCA, restriction of mutual correlation among variables is set at 0.45. From
the total variance matrix, it is found that first four components are describing nearly 90% of
variation in the model. The PCA has designed four principal components out of 22 variables.
Using the first PC score as weights for each variable, the paper has constructed Banks
Performance Index.
Banking Health: Logistic Regression
Ten years data of 27 public sector banks has given the following logistic regression equation
(see Table 10).
Log (Health) = 1.87 + 3.45 * x
l
2.26 * x
2
0.27 * x
3
4.39 * x
4
+ 1.26 * x
5
+ 0.17 * x
6
where,
x
1
= Return on Assets
x
2
= Income to Assets
x
3
x
4
x
5
x
6
x
7
= Health Parameter (Net NPA Ratio)
The equation is able to predict 78% correct result and it is found to be robust as per the
actual health of the banks. The health status of 27 public sector banks over 10 years has been
provided in Table 11.
Table 10: Logit Maximum Likelihood Estimation
Dependent Variable is Health Parameter (Net NPA Ratio)
Intercept 1.87070 0.48519 3.8556 [0.000]
Return on Assets 3.45140 1.19990 2.8764 [0.004]
Income to Assets 2.25780 0.36915 6.1161 [0.000]
Net Worth to Assets 0.27234 0.14008 1.9442 [0.053]
Operating Expenditure to Assets 4.39030 5.69160 0.77136 [0.441]
Operating Profit to Assets 1.25470 0.48470 2.5885 [0.010]
Regulatory Capital to Risk-Weighted Assets 0.16788 0.17761 0.94524 [0.345]
Regressor Coefficient
Standard
Error
T-Ratio
[Probability]
Table 11: Health Status of 27 Public Sector Banks
1997-98 Sick Good Health Sick Sick
1998-99 Sick Good Health Good Health Sick
1999-00 Sick Good Health Good Health Sick
2000-01 Sick Good Health Good Health Good Health
2003-04 Good Health Sick Good Health Good Health
Year Allahabad Bank Andhra Bank Bank of Baroda Bank of India
1997-98 Sick Sick Sick Good Health
1999-00 Sick Good Health Sick Good Health
2000-01 Sick Good Health Sick Good Health
2001-02 Good Health Good Health Sick Good Health
2003-04 Good Health Good Health Good Health Good Health
2006-07 Sick Sick Good Health Good Health
Year
Bank of
Maharashtra
Canara Bank
Central Bank of
India
Corporation
Bank
2006-07 Good Health Good Health Good Health Sick
Year Dena Bank Indian Bank
Indian Overseas
Bank
Oriental Bank
of Commerce
Table 11 (Cont.)
1997-98 Sick Sick Sick Sick
2000-01 Sick Sick Good Health Sick
Year
Punjab & Sind
Bank
Punjab National
Bank
State Bank of
Bikaner & Jaipur
State Bank
of Hyderabad
1998-99 Good Health Sick Sick Good Health
1999-00 Good Health Sick Sick Good Health
2001-02 Good Health Good Health SICK Good Health
Year
State Bank
of India
State Bank
of Indore
State Bank
of Mysore
State Bank
of Patiala
1999-00 Good Health Sick Good Health Sick
2000-01 Good Health Sick Good Health Sick
2006-07 Sick Good Health Sick Sick
Year
State Bank of
Saurashtra
State Bank
of Travancore
Syndicate Bank UCO Bank
Table 11 (Cont.)
1997-98 Sick Sick Sick
2001-02 Good Health Sick Sick
2002-03 Good Health Good Health Good Health
Year
Union Bank
of India
State Bank
of Indore
Vijaya Bank
Conclusion
The paper has studied the financial and operational efficiencies of the Indian banks in-depth.
Development of various accounting ratios, pertaining to financial and operational efficiencies,
provides some indication of the performance of Indian banks over the last 10 years. Using
these accounting ratios, principal component technique is used to rank these banks and at the
same time, logit model was also used to assess the health of the Indian banks over the last 10
years. It is found that the banking sector reform measures have enhanced the efficiency and
soundness of the Indian banks and there has been improvement in the performance of many
public sector banks in India. The analysis has found that SBI is continuing to be the number
one bank in India and there is competition between Punjab National Bank, Canara Bank,
Bank of India and Bank of Baroda for the number two place in different years. The logit model
is able to predict 78% correct result and it is found to be robust in assessing the health of public
sector banks in India.
Bibliography
1. Bhole L M (1999), Financial Institutions and Markets: Structure, Growth & Innovation,
3
rd
Edition, Tata-McGraw Hill, New Delhi.
2. Das A (1996), Structural Changes and Asset-Liability Mismatch of Scheduled Commercial
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3. Goldstein M and Turner P (1996), Banking Crisis in Emerging Economies: Origin and
Policy Options, BIS Economic Papers, No. 46.
4. Jadhav Narendra (1994), Monetary Economics for India, Macmillan India Limited, Delhi.
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6. Mohanty D, Sardar A and Prasad A (1997), Perspectives in Monetary Developments and
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7. Newbold P (1986), Forecasting Economic Time Series, 2
nd
Edition, Academic Press Inc.,
Orlando, Florida.
8. Oxelheim Lars (1990), International Financial Integration, Springer-Verlag, New York.
9. Pattanaik S (1999), REER: The Leading Indicator, Occasional Papers, RBI, No. 20.
10. Reddy Y V (1999), Financial Sector Reform: Review and Prospect, RBI Bulletin, January,
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11. Report on Currency and Finance, RBI, 1999-2000; 2001-02; 2002-03; 2003-04;
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12. Sachs J and Andrew Warner (1995), Economic Reforms and the Process of Global
Integrations, Brookings Papers on Economic Activity.
Reference # 10J-2011-05-04-01
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Benchmarking Performance of Public Sector Banks in India 57

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