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TABLE OF CONTENT CHAPTER 1: INTRODUCTION........................................................................4 1.2 Context and Significance of Study......................................................4 CHAPTER 2: LITERATURE REVIEW................................................................

6 CHAPTER 3: RESEARCH METHODS AND PROCEDURES..............................11 CHAPTER 4: DATA ANALYSIS AND FINDINGS.............................................13 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS..............................28 References................................................................................................30

LIST OF TABLES

Measuring operational efficiency and profitability of Nationalised Banks in India Arpit Jain

Introduction and Statement of Problem: Nationalised banks dominate the banking system in India. In the post-Independence period, all the nationalised banks are fanning new branches throughout the country. The Government of India embarked on a comprehensive banking reforms plan in 1992 to establish a more diversified, profitable, efficient and resilient banking. A detailed analysis about macro and micro level studies on banking, it have been concluded that many studies have not found any significant difference between the efficiency indicators of nationalised banks and other banks in the post reforms period. The most recent study by Reserve Bank of India also concluded that in the Indian banking sector, ownership has no definite relationship with efficiency. The researcher identified this area as research gap and hence, this study. Research Design: The current study is explorative. 20 nationalized banks were considered as samples. The study is based on secondary data collected from banking statistics published by Reserve Bank of India and Indian Banking Association. Business performance, efficiency, profit earning capacity and profitability were considered for the study. The study period was 2007-08 to 2010-11. Statistical and econometric tools such as mean, compound growth rate, correlation, multiple regression, t-test and ANOVA.

CHAPTER 1: INTRODUCTION

1.1 Purpose of the Study The shape of the Indian Banking Industry has changed due to the World Trade Organization, increasing international risk triggered by Basel III norms (laid down by Basel committee under the supervision of Bank for International Settlements (BIS)), Free Trade Agreements (FTAs) and the Reserve bank of India guidelines. It needs every banker to design innovative banking products and uses information technology to reduce their cost of operation. New concepts like personal banking, retail banking, bankassurance, internet banking, phone banking, mobile banking, and rural banking have emerged. In this situation, the banks have to track their performance to improve their profitability by paying attention to the key influencing factors for its timely correction and for future growth.

With increased competition in the banking Industry, the Net Interest Margin (NIM) of banks have come down over the last one decade. Hence, it is necessary to improve their operational efficiency while meeting the customer requirements. Product innovations and process re- engineering will be the order of the day. All banks therefore to go for rejuvenating their costing and pricing to segregate profitable and non-profitable business. Banking industry is fragmented in its structure and has restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations. Besides this, increase in the number of foreign players poses threat to both public and private sector Banks. Therefore, it is appropriate to know the answer for the following research questions: 1. Is there any possibility of finding the factor influencing the profitability? 2. Is there any possibility of improving the profitability? 3. Is there any avenue to identify the efficient bankers? 1.2 Context and Significance of Study In recent days, the growing Universalization and internationalization of banking operations, driven by a combination of factors, such as the continuing deregulation, heightened competition and technological advancements have altered the face of the banks from mere intermediator to provider of quick, efficient and consumer friendly services. The use of mass customization in banks and other service companies can meet the market demand and enhance the competitiveness by customized products

that are designed and provided for individual customers to meet their individual needs. Moreover, banks today have to adopt strategies that embrace both a closer reaction to the customers needs and efficiency by custom-tailored services to meet customers diversified and changing needs at near mass production price. Therefore, this research paper is to explore the possibility of getting more deposits by efficient and timely service and measure the impact of variables of E-banking products on customer satisfaction and five service quality dimensions namely reliability, responsiveness, assurance, empathy and tangibles have been established based on the need and requirement of the customers. The study is based on the sound methodology which covering both primary and secondary data. Extensive reviews have been made on the available banking products introduced by banks globally and the growth of deposits of sample banks has been analysed with ten years data of the sample banks of three categories namely, private sector, public sector and foreign banks performed in India. Primary data has been collected by well framed comprehensive questionnaire and monitored on selected sample respondents who are really representatives of the universe.

CHAPTER 2: LITERATURE REVIEW (Swammy, 2001) Studied the comparative performance of different bank groups since 1995-96 to 1999-2000. An attempt was made by researcher to identify factors which could have led to changes in the position of individual banks in terms of their share in the overall banking industry. He concluded that in many respects nationalized public sectors banks are much better than private banks, even they are better than foreign banks. (Lopoyetum, 2005) in his article elaborated that the profitability performance of the UCBs can be improved by strengthening the magnitude of burden ratio. The spread ratio can be increased by increasing the interest receipts faster than the interest payments. The burden ratio can be lowered by decreasing the manpower expenses, other expenses and increasing other incomes. (Bhattacharyya, 1997)measured the technical efficiency of 70 commercial banks operating in India for the period 1986-91 using Data Envelopment Analysis (DEA). They used a two-stage approach: in the first stage, they calculated the radial technical efficiency scores using DEA. In the second stage, they used stochastic frontier analysis to attribute variation in efficiency scores to three sources tem poral, ownership, and noise component. They considered advances, investment, and deposits as outputs while interest expense and operating expense were taken as the inputs. They found that the public sector banks had much higher efficiency as compared to the private and foreign banks. (Ravisankar, 2000) examined the efficiency of the Indian public sector banks in two phases during the period 1992-95. In the first phase, certain key ratios such as deposit to establishment expenses and advances to establishment expenses, and deposits to staff and advances to staff were considered. The banks were plotted in a two dimensional graph to identify the better performing banks. Their study considered four input variablesinterest expenditure, establishment expenditure, non- establishment expenditure and six output variables: deposits, advances, investments, non-interest income, interest spread, and total income. Their results indicated that the performance of the public sector banks (with the exception of a few) had improved over the years of study.

(Ray, 2004)compared the performances of 58 public, private sector, and foreign banks using a revenue maximization efficiency approach for the period 19922000. Loans, investments, and other incomes were taken as bank outputs. Their study considered deposits and operating costs as inputs. They argued that during the period, Indian banks did not have much freedom in trimming costs, especially the cost of labor. Under the circumstances, revenue maximization best describes the objective that banks have been focusing during the period. The technical results of their study relating to revenue maximization efficiency, efficiency, and allocative efficiency reveal: Public sector banks are significantly better placed than private sector banks on revenue maximization efficiency but there is no difference between public sector banks and foreign banks Public sector banks are significantly better than private banks in respect of technical efficiency but not in respect of allocative efficiency (Sarkar, 2005) used the stochastic cost frontier analysis to examine the efficiency of the Indian banking system using panel data for the period 1986-2000. They used a translog specification of the cost frontier to estimate the efficiency of the individual banks. The dataset related to 27 public sector banks and 23 private sector banks. Their results indicated that Indian banks, on average, do exhibit the presence of cost inefficiency in their operations. However, there is a tendency for inefficiencies to decline over time. Further, they found that deregulation in the Indian banking sector resulted in an increase in the cost inefficiency of the Indian banks and a decline in the rate of inefficiency reduction. (Das, 2005) examined the output-oriented technical efficiency, cost efficiency, revenue maximizing efficiency, and profit efficiency of Indian (public, private and foreign) banks for the period 1997-2003. They considered four inputs for their studyborrowed funds (deposits and other borrowings), number of employees, fixed assets, and equity. They included in their study only those banks which had at least three branches during the entire study period. Their results indicated that the Indian banks are still not much differentiated in terms of input or output oriented

technical efficiency or cost efficiency. However, they differ sharply in respect of revenue and profit efficiencies (Nath, 2005) studied the efficiency of 68 commercial banks operating in India for the period 1996-99 using the output oriented Charnes et al. (1978) DEA model. The parameters considered as outputs of the banking industry are: (1) deposits; (2) net profits; (3) advances given by the banks; (4) non-interest income; and (5) interest spread which is the difference between the interest earned by the bank and the interest paid by it. The five input parameters taken are: (1) net worth of the banks; (2) borrowings of the banks; (3) operating expenses which are the non-interest related expenses such as sum of establishment expenses; rent, taxes, and electricity; printing and stationery; advertising; depreciation; directors fees; auditors fees; law charges; post, telegram and telephone expenses; repair and maintenance; insurance and miscellaneous other expenses, (4) number of employees in the country; and (5) number of bank branches in the country The results of the study indicate that the private commercial banks have the highest efficiency figures and the least variation, whereas the foreign- owned banks exhibit the least average efficiency figure and maximum variation. The public sector commercial banks come in between (Sinha, 2006)estimated the efficiency of Indian commercial banks using the data envelopment and free disposal hull approaches respectively. They have taken net interest income, non-interest income, and loan as the output indicators. Number of bank branches and borrowed capital were taken as two inputs. The results were for 1996-97, 1998-99, 2000-01, and 2002-03 respectively. The results suggest an improvement in the performance if net interest income or non-interest income is taken as the output indicator but a decline in the performance if loan is taken as the output indicator (Sinha, 2006)estimated efficiency of Indian commercial banks (under constant returns to scale) using the data envelopment analysis. He considered loan as the output indicator. Number of bank branches and borrowed capital were taken as two inputs. The results were for 1996-97, 1998-99, 2000-01, and 2002-03 respectively. The results suggest superior performance by the observed private

sector commercial banks as compared to the observed public sector commercial banks. (Mohan, 2003) conceptualised lazy banking while critically reflecting on

banks investment portfolio and lending policy. In a study of institutional finance structure and implications for industrial growth, Mohan (2004) emphasised on key lending terms of credit, such as maturity and interest-terms of loans to corporate sector. The Indian viewpoint alluding to the concepts of credit culture owing to Reddy (2004) and lazy banking owing to Mohan (2003a) has an international perspective since several studies in the banking literature agree that banks lending policy is a major driver of non-performing loans (McGoven, 1993, Christine 1995, Sergio,1996, Bloem and Gorters, 2001).

(Sergio, 1996)) in a study of non-performing loans in Italy found evidence that, an increase in the riskiness of loan assets is rooted in a banks lending policy adducing to relatively unselective and inadequate assessment of sectoral prospects. Interestingly, this study refuted that business cycle could be a primary reason for banks NPLs. The study emphasised that increase in bad debts as a consequence of recession alone is not empirically demonstrated. It was viewed that the bank-firm relationship will thus, prove effective not so much because it overcomes informational asymmetry but because it recoups certain canons of appraisal.

(McGooven, 1993)In a study of loan losses of US banks, argued that character has historically been a paramount factor of credit and a major determinant in the decision to lend money. Banks have suffered loan losses through relaxed lending standards, unguaranteed credits, the influence of the 1980s culture, and the borrowers perceptions. It was suggested that bankers should make a fairly accurate personality-morale profile assessment of prospective and current borrowers and guarantors. Besides considering personal interaction, the banker should (i) try to draw some conclusions about staff morale and loyalty, (ii) study the persons personal credit report, (iii) do trade-credit reference checking, (iv) check references from present and former bankers, and (v) determine how the

borrower handles stress. In addition, banks can minimise risks by securing the borrowers guarantee, using Government guaranteed loan programs, and requiring conservative loan-to-value ratios.

CHAPTER 3: RESEARCH METHODS AND PROCEDURES 3.1 Research Objectives

To evaluate the business performance in relation to profit earning To evaluate inter-relationship between selected variables among

capacity, efficiency and profitability of nationalized banks. nationalised banks. 3.2 Research Questions

Whether efficiency expands with business performance?

Is there any possibility of finding the factor influencing the profitability? Whether efficiency raises profit earning capacity?

Is there any possibility of improving the profitability? Is there any avenue to identify the efficient bankers?

3.3

Hypothesis

H01: There is no significant relationship between total business

carried out by nationalised banks and the deposits, investments, advances, number of offices and number of employees.
H02: There is no significant relationship between Profit earning

capacity of the nationalised banks and other operational expenses met and other incomes.
H03: There is no significant relationship between Total business per

branch of the nationalized banks and the efficiency factors. 3.4 Data Collection

Data is collected from various bulletins published by the Reserve Bank of India and the data available on the websites of various banks.

3.5

Research Design

The current study is explorative in nature. 19 nationalized banks were considered as samples. The study is based on secondary data collected from banking statistics published by Reserve Bank of India and Indian Banking Association. The study period was 2007-08 to 2010-11. The following statistical tools had been applied between the financial parameters of sample Nationalised Banks. They are: Mean Standard deviation Coefficient of variation Coefficient of correlation Multiple linear regression

These formulas are applied in Microsoft Excel and SPSS software.

3.6 Limitations The study is mainly based on the secondary data only and the number of the employees per bank may differ due their transfer or retirement which could affect the productivity and profit earning capacity of individual banks.

CHAPTER 4: DATA ANALYSIS AND FINDINGS 4.1 Review of Methodology

The research is majorly based on secondary data gathered from various journals and bulletins published by various government bodies and banks. Excel and SPSS were used to analyse the data and make interpretations. Statistical tools such as coefficient of variation, correlation coefficient and multiple linear regression are used. 4.2 Results of Research Questions

The focus of all banks in India has shifted their approach to 'cost', determined by revenue minus profit. This means that all the resources should be used efficiently to better the efficiency and ensure a win-win situation. To survive in the long run, it is essential to focus on cost saving. Previously, banks focused on the 'revenue' model which is equal to cost plus profit. After the banking reforms, banks shifted their approach to the 'profit' model, which meant that banks aimed at higher profit maximization. 4.2.1 Business Performance

The current section of the study analyses the business performances of the nationalised banks in relation to expansion of branches, recruitment of employees, deposits, advances, investments and total business carried out by the nationalized banks in India during the period 2007-08 to 2011-12.

Table 4. 1 Business Performance of Nationalised


(Rupees
Year 200607 200708 200809 201011 201112 MEAN S.D C.V C.V(%) CAGR( %) No. of offices 39255 40956 43452 46288 50013 43992.8 4285.79394 0.09742034 9 9.74203492 5 4.96332625 5 no of employees 466400 462926 473041 471727 491132 473045.2 10902.14308 0.023046726 2.304672593 1.038743787 deposits 16799930 21057056 25839338 31265862 35969893 26186415. 8 7682026.2 7 0.2933592 11 29.335921 07 16.446471 89 advanc es 120367 84 151976 19 184308 19 231027 93 272632 12 192062 45 608624 2 0.3168 89 31.688 87 17.764 21

in million)
total business 28836714 36254675 44270157 54368655 63233105 45392661.2 13763285.35 0.303205077 30.32050774 17.00374093

investme nts 5360181 6550419 8281248 9503797 10867544 8112637.8 2211888.7 58 0.2726472 96 27.264729 58 15.183531 68

The above table shows the business performance of nationalised banks in India during the period 2007-12. The number of branches of all nationalised banks grew from 39255 in 2007-08 to 50013 in 2011-12. It registered an annual growth of 4.96 per cent, with an average of 43992 branches functioning every year. The number of employees of all nationalised banks increased from 466400 in 2006-07 to 4730452 in 2011-12. It registered annual growth of 1.03 per cent, with an average of 473045 employees working every year. The deposits of all nationalised banks grew from 16799930 million in 2007-08 to 35969893 million in 2011-12. It registered an annual growth of 16.44 per cent, with an average of 26186415.8 million deposits every year. The advances of all

nationalised banks grew from 12036784 million in 2007-08 to 27263212 million in 2011-12. It registered an annual growth of 17.76 per cent, with an average of 19206245 million advances every year. The investments of all nationalised banks grew from 5360181 million in 2007-08 to 10867544 million in 2011-12. It registered an annual growth of 15.18 per cent, with an average of 8112637.8 million investments every year. The total business of all nationalised banks grew from 28836714 million in 2007-08 to 63233105 million in 2011-12. It registered an annual growth of 17.00 per cent, with an average of 45392661.2 million businesses every year.
The co-efficient of variation of branch expansion and employees recruitment are relatively low. The group which has less coefficient of variation is said to be more stable. The coefficient of variation of other variables such as deposits, advances, investments and total business are high. A high coefficient of variation indicates less consistency or less homogeneity. At a glance it is evidenced that the growth rate of deposits, advances and total business is more than the growth of branch expansion and employee recruitment. It shows that the business performance of nationalised banks is improved during the study period.

Table 4. 2 Correlation Matrix between Business Performance Variables


No. of offices No. of offices no of employees Deposits Advances investment s total business 1 0.899298 48 0.993153 386 0.996843 13 0.988207 133 0.995144 551 no of employees deposits advances investme nts total business

1 0.84936045 8 0.86204808 9 0.85107010 5 0.85527851 1

1 0.998533 048 0.997679 589 0.999713 309

1 0.993199 201 0.999543 223

1 0.996059 491

The above table explains the correlation between the business performances variables. It is found that branch expansion, employee recruitment, deposits, advances, investments and business performance are positively

correlated to other variables.

The multiple regression models had been framed business performance parameter considered dependent variable and the other related variables were considered as independent. The linear regression model, with normal error terms, simply of X variables is shown in equation. BP = 0+ 1NO+ 2NE+ 3 DP+4IN+5 AD+6TB + i Where Xi1 Xi2 Xi3 Xi4 Xi5 Xi6 i The = = = = = = = underlying Number of Branches Number of Employees Deposits Investments Advances Total Business Error term assumptions of linearity, normality, constant

variation and independence of error terms must be satisfied in order to get a more valid model. The TB treated as dependent variable and NO, NE, DP, IN and AD are independent variables and the following hypothesis is being tested.

H01 : The total business carried out by the nationalised banks was not directly influenced by deposits, investments, advances, number of offices and number of employees Table 4. 3 ANNOVA
Model Summary Adjusted R Model 1 R 1.000
a

Std. Error of the Estimate 9741.951

R Square 1.000

Square 1.000

a. Predictors: (Constant), investments, No. Of employees, advances

ANOVAb Sum of Model 1 Regression Residual Total Squares 7.577E14 94905603.970 7.577E14 df 3 Mean Square 2.526E14 F 2661282.960 Sig. .000a

1 94905603.970 4

a. Predictors: (Constant), investments, No. Of employees, advances b. Dependent Variable: total business

Table 4. 4 Regression Analysis


Coefficientsa Standardized Unstandardized Coefficients Model 1 (Constant) No. Of employees Advances Investments a. Dependent Variable: total business B 11493357.873 -25.379 1.767 1.474 Std. Error 395239.942 .885 .007 .019 -.020 .782 .237 Coefficients Beta t 29.079 -28.681 247.265 77.637 Sig. .022 .022 .003 .008 95.0% Confidence Interval for B Lower Bound 6471358.244 -36.623 1.677 1.233 Upper Bound 16515357.502 -14.136 1.858 1.715

Excluded Variablesb Collinearity Partial Model 1 No. of offices deposits Beta In .823a .558
a

Statistics Tolerance 1.849E-7 4.021E-7

t . .

Sig. . .

Correlation 1.000 1.000

a. Predictors in the Model: (Constant), investments, No. Of employees, advances b. Dependent Variable: total business

It has been revealed from the above econometric analysis R value depicts 99 per cent variations between the business performances variables tested for the nationalised banks. In order to access the individual factors influences on the business performances t test had been conducted on the individual regression co-efficient ().Baed on the above

results we reject H0 in favour of H1 Hence it been concluded that the total business carried out by the nationalised banks was directly advances and number of employees. influenced by investments,

4.2.2 Efficiency

Efficiency is defined as the ratio of output to input. The indicators commonly used for assessing the efficiency of banks are business per employee/ branch, advances per employee/ branch, number of accounts per employee / branch etc. a. Employee Performance: Employee performance is considered the most relevant factor in banking sector. Employee performance is measured in relation to total business per employee, advances, deposits and profit per employee of the nationalized banks. b. Branch Performance: Branch performance is considered the most relevant factor in banking sector. It is measured in relation to total business per employee, advances, deposits and profit per employee of the nationalized banks.

Table 4. 5 Efficiency of Nationalised Banks(rupees in million)


YEAR 200708 200809 200910 201011 EMPLOYE ES 466400 462926 473041 471727 BPE 61.83 78.32 93.59 115.25 DPE 36.02 45.49 54.62 66.28 APE 25.81 32.83 38.96 48.97 PPE 0.38 0.49 0.57 0.7 BPB 734.6 885.21 1018.83 1174.57 DPB 427.97 514.14 594.66 675.46 APB 306.63 371.07 424.17 499.11 PPB 4.48 5.49 6.17 7.14 OFFICE S 39255 40956 43452 46288

201112 MEAN S.D C.V C.V(%) CAGR( %)

491132 473045.2 10902.14 31 0.023046 73 2.304672 59 1.038743 79

128.75 95.548 27.055 88 0.2831 65 28.316 53 15.800 28

73.24 55.13 15.088 71 0.2736 93 27.369 32 15.25

55.51 40.416 11.979 17 0.2963 97 29.639 68 16.551 17

0.7 0.568 0.1380 94 0.2431 24 24.312 35 12.995 95

1264.33 1015.5 08 213.95 74 0.21069 21.069 11.471

719.21 586.288 118.27 92 0.2017 43 20.174 26 10.940 08

545.12 429.22 95.854 91 0.2233 23 22.332 35 12.195 51

6.83 6.022 1.0706 87 0.1777 96 17.779 59 8.79991

50013 43992.8 4285.79 4 0.09742 9.74203 5 4.96332 6

The above table shows the efficiency performance of nationalised banks during the period 2007-12. The business per employee of all nationalised banks grew from 61.83 million in 2007-08 to 128.75 million in 2011-12. It registered an annual growth of 15.8 per cent, with an average of 95.54 million. The deposits per employees of all nationalised banks increased from 36.02 million in 2007-08 to 73.24 million in 2011-12. It registered an annual growth of 15.25 per cent, with an average of 55.13 million. The advances per employee of all nationalised banks grew from 25.81 million in 2007-08 to 55.51 million in 2011-12. It registered an annual growth of 16.55 per cent, with an average of 40.41 million. The profit per employee of all nationalised banks grew from .38 million in 2007-08 to .7 million in 2011-12. It registered an annual growth of 12.99 per cent, with an average of . 5 million. The business per branch of all nationalised banks grew from 734.6 million in 2007-08 to 1264.33 million in 2011-12. It registered an annual growth of 11.47 per cent, with an average of 1015.50 million. The advances per employee of all nationalised banks grew from 306.3 million in 2007-08 to 545.12 million in 2011-12. It registered an annual growth of 12.19 per cent, with an average of 429.22 million. The profit per employee of all nationalised banks grew from 4.48 million in 2007-08 to 5.16 million in 2011-12. It registered an annual growth of 8.799 per cent, with an average of 6.02 million. The deposit per branch of all nationalised banks grew from 427.97 million in 2007-08 to 719.21 million in 2011-12. It registered an annual growth of 10.94 per cent, with an average of 586.2 million.

The co-efficient of variation of all variables are relatively high. The group which has high Coefficient of Variation is said to be more volatile or homogeneity. At a glance it is evidenced that the growth rate of business, deposits, less

advances and profit per employee and branch are high. It shows that the efficiency performance of employees and branches are improved during the period.

Table 4. 6 Correlation matrix between efficiency variables


EMPLOYE ES EMPLOYE ES BPE DPE APE PPE BPB DPB APB PPB OFFICES 1 0.8246270 88 0.8167134 8 0.8337689 86 0.7060741 8 0.8012438 35 0.7888126 21 0.8151054 57 0.6161788 18 0.8992984 8 BPE DPE APE PPE BPB DPB APB PPB OFFICE S

1 0.9996 57 0.9994 46 0.9810 73 0.9978 38 0.9948 66 0.9996 64 0.9469 18 0.9879 37

1 0.9982 31 0.9845 52 0.9991 39 0.9971 22 0.9997 84 0.9535 46 0.9846 86

1 0.9757 06 0.9951 96 0.9910 14 0.9985 22 0.9375 93 0.9910 69

1 0.9884 61 0.99066 0.9839 24 0.9906 96 0.9394 92

1 0.9993 31 0.9989 81 0.9623 76 0.9781 64

1 0.9966 62 0.9689 74 0.9713 24

1 0.9524 61 0.9848

1 0.8864 95

The above table explains the correlation between the efficiency performances variables. It is found that business, deposits, advances and profit per employee and branch are positively correlated to other variables. It shows that all the efficiency parameter variables are inter-related to each other. The linear regression model, with normal error terms, simply of X variables is shown

in equation: E= 0+ 1 BPE + 2 PPE + 3 DPE +4 APE +5 DPB +6 APB + 7 TBPB + 8PPB +i Where Xi1 Xi2 Xi3 Xi4 = = = = Business per employee Profit per employee Deposits per employee Advances per employee

Xi5 Xi6 Xi7 Xi8 i

= = = = =

Deposits per branch Advances per branch Total business per branch Profit per branch Error term

TBPB treated as dependent variable and BPE, PPE, DPE, APE, DPB, APB and PPB are independent variables and the following hypothesis is being tested.

H02: Total business per branch of the nationalized banks was more dependent on the efficiency factors.

Table 4. 7 ANOVA
Model Summary Adjusted R Model 1 R 1.000a R Square .999 Square .997 Std. Error of the Estimate .00730

a. Predictors: (Constant), No. of employees, deposit per employee, advances per employee

ANOVAb Model 1 Regression Residual Total Sum of Squares .076 .000 .076 df 3 1 4 Mean Square .025 .000 F 476.867 Sig. .034a

a. Predictors: (Constant), No. of employees, deposit per employee, advances per employee b. Dependent Variable: profit per employee

Table 4. 8 Regression analysis


Coefficientsa Standardized Unstandardized Coefficients Model 1 (Constant) deposit per employee advances per employee No. of employees B 1.487 .017 -.008 -3.270E-6 Std. Error .314 .005 .006 .000 1.851 -.657 -.258 Coefficients Beta t 4.729 3.670 -1.246 -4.755 Sig. .133 .169 .431 .132 95.0% Confidence Interval for B Lower Bound -2.508 -.042 -.085 .000 Upper Bound 5.481 .076 .070 .000

a. Dependent Variable: profit per employee

It been revealed from the above econometric analysis that F ratio 476.86 is statistically significant at 5 per cent level of significance. R
2

value

depicts 99 per cent variations between the efficiency variables tested for the nationalised banks. In order to access the individual factors influences on the Efficiency t test had been conducted on the individual regression co-efficient ().Bases on the above results we conclude that H0 is accepted. Hence it been concluded that there exists no direct relation between the TBPB and BPE, PPE, DPE, APE, DPB, APB and PPB of the nationalised banks.

4.2.3 Profit Earning Capacity Banks are commercial organisations and like any such organisation all of their activities should be directed towards earning profit. has warranted banks to earn profit. Essentially, banks must give a fair return on capital after providing adequately for business risks. This

Table 4. 9 Profit earning capacity of Nationized banks


YEAR 200708 200809 200910 201011 201112 MEAN II 14264 69 18389 24 20802 89 25630 64 34125 24 22642 54 OI IE OE TI TE NP 20979 10109 29670 16362 13076 4 33 0 62 33 328629 26393 13167 35416 21028 16709 6 62 0 60 22 431938 30499 14571 40792 23852 18650 6 15 2 85 37 520248 28724 16413 53819 28503 21795 9 51 3 14 44 670770 32467 23968 57475 37371 29716 4 79 0 97 28 765569 27812 15646 43434 25423 19989 543430 9.8 08 5 84 53 .8

S.D C.V C.V(% ) CAGR( %)

76230 6.3 0.3366 7 33.667 19.059 12

44279. 12 0.1592 03 15.920 31 9.1266 67

51915 8.7 0.3318 14 33.181 39 18.846 05

11892 4.3 0.2738 01 27.380 14 14.138 53

80020 5.8 0.3147 46 31.474 63 17.961 05

62892 1.9 0.3146 26 31.462 57 17.842 44

176542 .2 0.3248 66 32.486 6 18.428 35

The above table shows the Profit Earning Capacity of nationalised banks during the period 2004-11. The interest income of all nationalised banks grew from 1426469 million in 2007-08 to 3412524 million in 2011-12. It registered an annual growth of 33.67 per cent, with an average of 2264254 million. The other income of nationalised banks increased from 209794 million in 2007-08 to 3 2 4 6 7 4 million in 2011-12. It registered an annual growth of 15.92 per cent, with an average of 278129.8 million. The interest expenditure of all nationalised banks grew from 1010933 million in 2007-08 to 2396879 million in 2011-12. It registered an annual growth of 18.84 per cent, with an average of 1564608 million. The operating expenses of all nationalised banks grew from 296700 million in 2007-08 to 574750 million in 2011-12. It registered an annual growth of 14.13 per cent, with an average of 434345 million. The total income of all nationalised banks grew from 1636262 million in 2007-08 to 3737197 million in 2011-12. It registered an annual growth of 17.48 per cent, with an average of 2542384 million. The total expenditure of all nationalised banks increased from 1307633 million in 200304 to 2971628 million in 2011-12. It registered an annual growth of 17.84 per cent, with an average of 1998953 million. The net profit of all nationalised banks grew from 328629 million in 2007-08 to 765569 million in 2011-12. It registered an annual growth of 18.42 per cent, with an average of 35502.63million. The co-efficient of variation of all variables are relatively high. The group which has high Coefficient of Variation is said to be more volatile or less homogeneity. To sum up the growth rate of interest income and other income is less than the proportionate growth of interest expenses and operating expenses. It creates pressure on profit earnings of nationalised banks.

Table 4. 10 Correlation Matrix


II II OI IE OE TI TE NP 1 0.8481 56 0.9902 87 0.9556 28 0.9995 7 0.9981 57 0.9748 32 OI IE OE TI TE NP

1 0.8472 18 0.8221 05 0.8633 21 0.8548 1 0.8679 27

1 0.9060 05 0.9902 65 0.9967 92 0.9375 18

1 0.9558 59 0.9369 75 0.9946 61

1 0.9981 83 0.9766 89

1 0.9619 79

The above table explains the correlation between the profit earning capacity variables. It is found that interest income, other income, interest expenses, other expenses are positively correlated to net profit as well as with other variables also. It shows that all the profit earning capacity parameter variables are inter-related to each other

Regression Analysis: The linear regression model, with normal error terms, simply of X variables is shown in equation: PEC = 0+ 1INI+ 2OI+ 3IE+4OE+5TI+6TE+ 7NP+ i Where: Xi1 Xi2 Xi3 Xi4 = = = = Interest income other income Interest Operating expenditure expenses

Xi5 Xi6 Xi7 i

= = = =

Total income Total expense Net profit treated Error term

NP as dependent variable and INI, OI Other income, IE, OE, TI and TE are independent variables and the following hypothesis is being tested. H03: Profitability of the nationalised banks was not dependent on the other operating expenses met and incomes earned

Table 4. 11 ANNOVA
Model Summary Adjusted R Model 1 R 1.000a R Square 1.000 Square 1.000 Std. Error of the Estimate 1197.075

a. Predictors: (Constant), TOTAL EXPENSE, OTHER INCOME, OTHER ESPENSE

ANOVAb Model 1 Regression Residual Total Sum of Squares 1.247E11 1432988.754 1.247E11 df 3 1 4 Mean Square 4.156E10 1432988.754 F 28999.325 Sig. .004a

a. Predictors: (Constant), TOTAL EXPENSE, OTHER INCOME, OTHER ESPENSE b. Dependent Variable: NET PROFIT

It has been revealed from the above econometric analysis that F ratio 28999.325 is statistically significant at 5 per cent level of significance. R value depicts 99 per cent variations between the profit earning capacity variables tested for the nationalised bank
2

Table 4. 12 Regression Analysis Coefficientsa Unstandardized Coefficients Model 1 (Constant) OTHER INCOME OTHER ESPENSE TOTAL EXPENSE a. Dependent Variable: NET PROFIT .047 .003 .169 15.773 .040 .009 .086 B -154779.301 .442 1.106 Std. Error 4611.785 .026 .015 .111 .745 Standardized Coefficients Beta t -33.562 16.846 76.266 Sig. .019 .038 .008 95.0% Confidence Interval for B Lower Bound Upper Bound -213377.590 .109 .922 -96181.012 .775 1.290

Excluded Variablesb Collinearity Partial Model 1 INTEREST INCOME INTEREST EXPENSE TOTAL INCOME Beta In 4.316 .
a a

Statistics Tolerance 6.171E-7 .000 5.595E-7

t . . .

Sig. . . .

Correlation 1.000 . 1.000

4.533a

a. Predictors in the Model: (Constant), TOTAL EXPENSE, OTHER INCOME, OTHER ESPENSE b. Dependent Variable: NET PROFIT

In order to access the individual factors influences on the profit earning capacity t test had been conducted on the individual regression co-efficient (). Based on the above results we reject HO in favour of H1 . Hence it has been concluded that profit earning capacity of the nationalised banks during the study period were more influenced by the other operating expenses met, other incomes earnings and total expenses of the nationalized banks

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Summary of Findings The overall objective of the study is to evaluate the efficiency and profitability of the 19 nationalised banks in India. The data collected is subdued into suitable tabulator form for analysis. Quantitative techniques like mean, co-efficient variation and compound growth rate are applied. Having identified the factors which are likely to influence the efficiency and profitability, the significance of the factors so identified have been statistically tested. In order to maintain sequence and continuity conclusion are presented in chronological order. a. Business performance: Right from the second phase of economic liberalisation the Public Sector Banks in India aimed at reduction of manpower and improving their operation feasibility. The Branch expansion growth was considered significant. Deposit mobilization, granting advances and

business expansion of PSBs are gathered momentum with a view to compete with global players. The difference between growth rate of deposit mobilization and advance granted is more. It has been concluded that deposits and number of employees did not directly influenced the business performance. b. Efficiency: With the presence of international banks in India, nationalised banks are in verge to improve their standards. Adoption of technological innovations resulted fostering of the efficiency of employees and branch performances. Even though efficiency of banks improved over the period of study, Indian PSBs are far behind to the performance of global banks. c. Profit Earning Capacity: RBI as an apex body which controls and fixes interest rate. Interest income of all Nationalised banks constantly increased throughout the period due to increase in granting loans and advances. Similarly the interest expenses too. Non-interest income was highly volatile, but the operating expenses steadily increased throughout the period. In general the proportionate growth rate of total income (17.84 %) was almost equal to the growth rate of total expenditure (17.96%), which is not a very good sign as the growth rate of total income should be higher. It been concluded that net profit earning of the nationalised banks was directly influenced by operational factors and except in the case of other income and operating expenses.

5.2

Suggestions

In view of the foregoing issues, it may be meaningful to suggest the following strategies for the nationalized banks for enhancing operational efficiency and profitability. a. Business expansion through setup branches paves way bringing out large geographical area customer coverage by the banks. Thereby exploring the unexplored segment of clients is possible b. Even though efficiency of banks improved over the period of study, Indian banks are far behind to the performance of global banks. Banks have to take steps to improve the efficiency by adopting new technologies

c. Added thrust is required for enhancing the non-interest income.

This can

significantly improve profitability. Non-interest income can be improved through undertaking more of fee based activities, besides the traditional fund based activities like providing credit. In this regard, it may be pointed out that higher investments in technology would help to improve the non-interest income of banks d. It is desirable that all the nationalised banks can be brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament
5.3

Conclusion

Banking industry in India was all poised for a major leap in year 2004. Banking sector witnessed some major positive changes. Going by the performance for the year 2008-09, Indian nationalised banks have not just survived the crisis but appear to have emerged even stronger from the recession and even gone ahead and posted reasonable profits. The profitability of the nationalized banks is expected to remain under pressure due to increased cost of borrowing, declining interest spreads, and lower fee income due to slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-mark provisions on investment portfolios and considerably lower profit on sale of investments, as compared with previous years. Moreover the efficiency factors such as business, deposit and advances per employee improved over the period of study from 2007to 2012.

References
Bhattacharyya. (1997). The Impact of Liberalisation on the Productive Efficiency of Indian Commercial Banks, European Journal of Operational Research, Vol. 98, pp. 332-345. Das. (2005). Liberalisation, Ownership and Efficiency in Indian Banking A Nonparametric Analysis, Economic and Political Weekly, March 19. Nath. (2005). Efficiency Benchmarking of Indian Commercial Banks in

the Deregulated Financial Environment, in Ranjan Ghosh and Chiranjib Neogi (Eds.), Theory and Application of Productivity and Efficienc y Econometric and DEA Approach, Macmillan.

Ravisankar, S. a. (2000). Rating of Indian Commercial Banks: A DEA Approach, European Journal of Operational Research, Vol. 124, No. 1, pp. 187-203. Ray, R. a. (2004). Liberalisation, Ownership and Efficiency in Indian BankingA Nonparametric Analysis, Economic and Political Weekly, March 19. Sarkar, K. a. (2005). Deregulation, Ownership, and Efficiency Change in Indian Banking: An Application of Stochastic Frontier Analysis, in Ranjan Ghosh and Chiranjib Neogi (Eds.), Theory and Application of Productivity and Efficienc y Econometric and DEA Approach, Macmillan. Sinha. (2006). Intermediation Cost Efficiency: A Tale of Two Bank Groups, The Icfai Journal of Bank Management, February, Hyderabad

APPENDICES 1. LIST OF THE NATIONALISED BANKS IN INDIA:


1. 2. 3.

Andhra Bank Allahabad Bank Bank of Baroda

11. Indian Bank 12. Oriental Bank of Commerce 13. Punjab National Bank

4. 5. 6. 7. 8. 9.

Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank

14. Punjab and Sind Bank 15. Syndicate Bank 16. Union Bank of India 17. United Bank of India 18. UCO Bank 19. Vijaya Bank

10. Indian Overseas Bank

20. idbi Bank

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