Banks put up good show during the global financial crisis

Banks in India put up good show during the global financial crisis:

The performance of various bank groups as on March 2009 and March 2010 had been impressive despite constraints faced by them due to slow down in the economy because of global financial crisis and adverse real economic scenario witnessed all over the whole world. A few selected parameters indicating Bank Group-wise Performance as at end March 2009 & 2010 is furnished below.

(Fig in per centage)
Bank Groups Cost of fund Return on adva Return on Net NPAs
adj to cost assets
of funds


2009 2010 2009 2010 2009 2010 2009 2010
SBI & Subsidiaries 5.94 5.32 3.95 3.60 1.02 0.91 1.47 1.50
Nationalised Banks 6.09 5.35 4.09 3.83 1.03 1.00 0.68 0.91
Old Private Sector Bks 6.67 6.13 5.15 4.81 1.15 0.95 0.90 0.83
New Private Sector Bks 6.06 4.43 5.23 5.13 1.12 1.38 1.40 1.09
Foreign Banks 4.46 2.82 8.14 7.17 1.99 1.26 1.81 1.82
All Sch.Commercial Bks 5.96 5.09 4.53 4.19 1.13 1.05 1.05 1.12
Source: Reserve Bank of India- A profile of banks 2009-10.


Performance Parameters during the two year period showed that banking sector exhibited its remarkable resilience in withstanding the impact of global economic crisis. Increase in Net NPAs or fall in return on assets during the period was marginal whereas the cost of funds registered a significant decline. Analysis of bank group-wise performance was as follows.
Cost of funds:
The cost of funds had come down considerably during the year 2009-10 although it continued to be high for all bank groups except for foreign banks. While the cost of funds which ranged between 4.46 per cent and 6.67 per cent for different bank groups in March 2009 came down considerably and worked out between 2.82 per cent and 6.13 per cent in March 2010. Foreign banks could bring down their cost of funds from 4.46per cent to 2.82 per cent during the period, whereas the state bank group and nationalized banks could bring down their cost only from 5.94 per cent to 5.32 per cent and 6.09 per cent to 5.35 per cent respectively. While the new private sector banks could bring down their cost of funds sharply by 1.63 per cent, the old private sector banks could bring down their cost of funds only by 0.54 per cent during the period. Cost of funds for public sector banks and old private sector banks continued to remain high and is a matter of concern. The reasons perhaps for their high cost of funds could be due to high overhead costs because of comparatively low penetration of computerization, information technology, high wages of their human resources as they are comparatively in the higher age profile and relatively higher rate of interest offered on deposits and high cost of deposits. The cost of funds in general and interest rate on advances in particular have to be necessarily brought down to remain competitive in business and improve the credit portfolio.
Return on advances adjusted to cost of funds:
Return on advances adjusted to cost of funds in respect of various bank groups remained in the range of 3.95 per cent and 8.14 per cent as at end Mach 2009 and 3.60 per cent and 7.17 per cent as at end March 2010. Among various bank groups State Bank Group had the lowest return on advances for both the years March 2009 and March 2010. Foreign banks outperformed the entire bank groups as their return on advances adjusted to cost of funds stood at 8.14 per cent and 7.17 per cent as at end March 2009 and 2010 respectively. The new private sector banks also did well as compared to all other bank groups with 5.23 per cent and 5.13 per cent during the two years. Sustenance of this sort of return will be a major task for all bank groups in a dynamic financial market.
Return on assets:
In respect of return on assets, while the foreign bank group scored well as compared to the other bank groups, state bank group stood lowest even compared with old private sector banks. It is noteworthy to observe that while the new private sector banks increased their return on assets from 1.12 per cent in March 2009 to 1.38 per cent in March 2010, all other bank groups including foreign banks registered a decline on their return on assets during the period.
Net NPAs:
Barring state bank group, nationalized banks, and foreign banks, the other bank groups could show a reduction in their Net NPAs during the period 2009 -10. The benefit of restructuring of assets might have come to the rescue of banks to improve their NPAs position.
Analyses of different parameters indicate that foreign banks displayed comparatively a better show and there is scope for public sector banks and old private sector banks to better their performance. The economy is doing well except perhaps on inflationary front and the time augurs well for the banks to widen their business further taking advantage of the gaps in the area of financial inclusion, infrastructure funding and financing of agriculture and related industries.
T.V.Gopalakrishnan
(This appeared in Business Line dt25/10/10

Bank Deposits and Risk Perception of Depositors

Bank deposits and risk perception of depositors

As banks have risk assessment for deploying their resources, depositors have their own perception of risk about banks for depositing their savings and to that extent the financial literacy can be considered to be very high and the awareness about market risk is appreciable. This is evident from the position of deposits of various bank groups in India during the period 2008- 2010 ie the beginning of crisis during the crisis and afterwards. The global financial crisis which triggered in September 2008 in US market and subsequently spread all over the world has impacted the Indian banking in several ways although it remained insulated from the severe jolt experienced by its counterparts particularly in advanced countries. The bank group wise figures illustrates that the confidence level of public in private sector banks including foreign banks has witnessed a set back and it has increased considerably in public sector banks during the crisis period. Depositors seem to have perceived more risk in depositing their money with private sector banks and shifted their loyalty to public sector banks as revealed by the figures.

Public confidence in banks depends basically on ownership, sound regulatory and supervisory system in force and insurance coverage for their deposits. They also worry about the inflation risk and they have their calculation on real interest and hedge against this risk. As the insurance coverage for deposits is limited to only Rs 1 lakh per depositor irrespective of the bank (whether private or public) in which the deposit is made, the preference of public for safety of their entire deposits with public sector banks is understandable and is fully justifiable during a crisis period like the one the world experienced since September 2008. Although the Indian banks are well run and financially sound because of efficient and effective regulatory and supervisory mechanism, the preference for public sector by depositors is apparent and well exhibited as revealed by various parameters. For instance, the share of public sector banks in total deposits which stood at 73.91 percent before the crisis ie as at end March 2008, increased to77.61percent as at end March 2009 ie during the crisis and further to 77.68 percent as at end March 2010 after recovery began. The following table will indicate share of deposits to total deposits and rate of growth of deposits in different bank Groups during 2008-10.

Bank groups 2007-08 2008-09 2009-10
Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits Share of deposits to Total deposits Rate of growth of deposits
Public Sector Banks 73.91% 23.05% 76.61% 26.85% 77.68% 18.60%
Old Private Sector Banks 4.99% 19.78% 4.90% 20.34% 4.84% 15.37%
New Private Banks 15.34% 23.13% 13.22% 5.43% 12.48% 10.39%
Foreign Banks 5.76% 26.81% 5.27% 11.99% 5.00% 11.11%

The rate of growth of deposits in general has registered a sharp decline in all bank groups as at end March 2010 as compare to that of end march 2008 perhaps evidencing increased awareness among public to hedge against inflation. While the inflation rate has been on the increase for the past couple of years, the rate of interest has fallen leaving no incentive to save money with the banks. High inflation adversely affects the capacity and propensity to save. In the absence of any real rate of interest, the public seem to have opted to spend more, save less and invest available surplus in alternative assets or instruments such as gold, real estate and other instruments of savings which fetch offer better return than banks. The increase in real estate, commodity prices (particularly gold and silver) and sensex which has recently crossed 20K is a clear indication that public awareness about investment market has gone up and their risk perception, risk assessment and risk management have improved well .

While the share of old private sector banks and foreign banks in total deposits showed a marginal decline during the period 2008 -10, the share of new private sector banks declined considerably from 15.34 percent in 2008 to 12.48 percent in 2010. The rate of fall in deposit during the crisis year ie 2009 is significant in new private sector and foreign banks as compared to other bank groups.

While the investors awareness about market risks and alternative avenues of investments is welcome, the risks they carry on speculative investments in gold and real estates are something of very high order. The markets and the economy also carry heavy risk from this sort of build- up of assets in the long run and need to be taken care of.

Dr.T.V.Gopalakrishnan

(This appeared in Business Line dt4/10/2010)