General problems of carrying out the comparative analysis of the banks functioning and development are considered. The essence of a micro-situation for carrying out the comparative analysis of the banks functioning and development is revealed. Various types of micro-situations are generalized when carrying out the banks functioning comparative analysis.
The approach to comparison of the banks functioning and development based on Wilcoxon criterion is offered. Key words: bank, analysis, micro-situation, statistical conclusion, Wilcoxon criterion. India has a well developed banking system. Most of the banks in India were founded by Indian entrepreneurs and visionaries in the pre-independence era to provide financial assistance to traders, agriculturists and budding Indian industrialists. The origin of banking in India can be traced back to the last decades of the 18th century.
The General Bank of India and the Bank of Hindustan, which started in 1786 were the first banks in India. Both the banks are now defunct. The oldest bank in existence in India at the moment is the State Bank of India. The State Bank of India came into existence in 1806. At that time it was known as the Bank of Calcutta. SBI is presently the largest commercial bank in the country. The role of central banking in India is looked by the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India.
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Reserve Bank was nationalized in 1947 and was given broader powers. In 1969, 14 largest commercial banks were nationalized followed by six next largest in 1980. But with adoption of economic liberalization in 1991, private banking was again allowed. The commercial banking structure in India consists of: Scheduled Commercial Banks and Unscheduled Banks. Scheduled commercial Banks constitute those banks, which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI includes only those banks in this schedule, which satisfy the criteria laid down vide section 42 (6) (a) of the Act.
Indian banks can be broadly classified into public sector banks (those banks in which the Government of India holds a stake), private banks (government do not have a stake in these banks; they may be publicly listed and traded on stock exchanges) and foreign banks. Bank Fixed Deposits Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period.
It is higher in case of longer maturity period. There is great flexibility in maturity period and it ranges from 15days to 5 years. Current Account Current Account is primarily meant for businessmen, firms, companies, public enterprises etc. that have numerous daily banking transactions. Current Accounts are cheque operated accounts meant neither for the purpose of earning interest nor for the purpose of savings but only for convenience of business hence they are non-interest bearing accounts Demat Account Demat refers to a dematerialised account.
Demat account is just like a bank account where actual money is replaced by shares. Just as a bank account is required if we want to save money or make cheque payments, we need to open a demat account in order to buy or sell shares. Recurring Bank Deposits Under a Recurring Deposit account (RD account), a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor.
Reserve Bank of India The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though initially RBI was privately owned, it was nationalized in 1949. Its central office is in Mumbai where the Governor of RBI sits. Savings Bank Account Savings Bank Accounts a meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety. Senior Citizen Saving Scheme 2004
The Senior Citizen Saving Scheme 2004 had been introduced by the Government of India for the benefit of senior citizens who have crossed the age of 60 years. However, under some circumstances the people above 55 years of age are also eligible to enjoy the benefits of this scheme. Foreign Banks in India Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India. Nationalised Banks
Nationalised banks dominate the banking system in India. The history of nationalised banks in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Private Banks in India Initially all the banks in India were private banks, which were founded in the pre-independence era to cater to the banking needs of the people. In 1921, three major banks i. e. Banks of Bengal, Bank of Bombay, and Bank of Madras, merged to form Imperial Bank of India.
Objectives of the research study: The purpose of this paper is to analyze Indian banks’ performance which is reflected on their financial statements and to provide some comments to improve their banking business. This study is carried out by comparing the eight Indian banks’ past five years performance results with other banks in the States of India. Other banks include Asian banks other than Indian banks owned by such Asians (e. g. , Chinese and Japanese) and American banks owned by other ethnic groups of Americans (e. g. , “white” American).
Comparative financial analysis indicates that Indian banks are relatively conservative in managing operations and lending and are more actively involved in their services for International business and sales activities in SBA loans. The analysis also indicates that Indian banks’ loan quality is relatively low and their loan market appears to have been saturated. We recommend on the basis of the analysis that Indian banks adopt a more active marketing strategy to expand and create their own market, consider tighter control for their operations with understanding banking regulations (e. g. Financial Institutions Reform, Recovery, and Enforcement Act. ) and adopt the loan policy in a way that they can make a loan decision with more reliable cash flow analysis. Background for Indian Banks The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India’s banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India.
In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India’s growth process. The government’s regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza.
Money have become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: •Early phase from 1786 to 1969 of Indian Banks •Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms. •New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas.
It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks.
This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: •1949: Enactment of Banking Regulation Act. •1955: Nationalisation of State Bank of India. •1959: Nationalisation of SBI subsidiaries. •1961: Insurance cover extended to deposits. •1969: Nationalisation of 14 major banks. •1971: Creation of credit guarantee corporation. •1975: Creation of regional rural banks. •1980: Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations.
Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
Public borrowings (i. e. , deposits) than other Asian banks. However, they may charge less interest and/or pay higher interest than other banks. Ratio of noninterest income to average assets. The average ratio of Indian banks is the highest (1. 89%) among the three groups. Its ratio more than doubles, compared with other Asian banks. It may indicate that Indian banks are more actively involved in their services for international business and sales activities in SBA loans than the other banks.
Ratio of overhead expenses to average assets Indian banks’ average ratio is the highest (5. 91%) among the three groups. Other Asian banks’ ratio is 3. 96% while that of American banks is 5. 65%. It may indicate that the operation of Indian banks may not be as efficient as that of the other groups, especially other Asian banks. Domestic loan growth ratio. Indian banks have grown most rapidly in their loans among the three groups for the past five years. Their loan growth ratio exceeds 30 % from 1998 to 2010, compared with about 20 % growth rate for their counterparts.
However, such growth rate fell down to about 10% in 2010 which is lower than the growth rate of American banks. These growth ratios indicate that Indian banks were more severely affected by the recent recession and a series of Indian disasters including the civil unrest. Ratio of domestic loans to deposits The ratios of Indian banks have been the lowest among the three groups over the past -five years. Their average ratio is about 76% while those of other Asian banks and other banks are 88% and 80%, respectively. This lowest ratio may indicate that loan demand from Indian banks is relatively low.
It may also indicate that Indian banks have more conservative lending policy than the other two groups. Ratio of net charge-offs to average loans The ratios of Indian banks have been similar to their counterparts prior to 2000. However, the ratio (1. 89%) was the highest among the groups in 2000. This highest charge off ratio indicates that the Indian banks’ market has been severely damaged from the recent recession and the series of recent disasters in India and thereby their borrowers have not been as able to pay their obligations.
Ratio of nonperforming loans to gross loans The average ratio of Indian banks over the past five years is similar to other banks. Their ratios were the lowest until 1990. However, their ratios became the highest among the groups beginning in 1991. It indicates that Indian banks’ borrowers have become difficult in paying their payments as results of the above mentioned recent economic condition in India. It also indicates that Indian banks’ future charge-offs may be the highest among the groups Comments on Indian Banks’ Performance
This section provides some comments on Indian banks’ performance over the past five years as reflected in the banks’ financial data. Our major emphasis is on the issue of why Indian commercial banks’ performance has not been as good as other banks. We attempt to relate the results of financial analysis to Indian banking practices which we personally observed and/or obtained from various sources (e. g. , Indian newspapers, Journal articles, management discussion in banks’ annual reports and personal interviews with Indian banks’ top management) available to us.
As such, our comments are quite subjective. Several factors may contribute to Indian banks’ negative rate of return over the past five years. Most Indian banks’ annual reports indicate that their recent performance results are due to downscaled Indian businesses as a result of recent uncontrollable economic disasters such as a prolonged recession in the India, the 2000, Indian banks since major borrowers of Indian banks have been seriously damaged because of these disasters. However, it is believed that those are not the only factors.
The following will discuss some areas which have contributed to such negative returns. Increased Market Competition As indicated in the background section, Indian banks have grown within a relatively narrow geographical area to serve the same customers (Indian owned businesses). Also, as results of several economic disasters, Indian businesses were severely downsized. As a result, competition has become severe among Indian banks. In addition, the Indian market was threatened by the major American banks (e. g. , Bank of America).
These banks have attempted to attract Indian owned businesses by providing more convenient services using high-tech. Marketing Strategy Indian banks have been marketing-oriented in their strategy to promote their growth as reflected in domestic loan growth ratio analysis. However, their growth has depended on the growth of Indian businesses. As long as there are enough demands for bank services and there is no severe competition, the banks may have the opportunity to grow without any creative activities while waiting for their customers.
However, as mentioned above, Indian markets have gotten more competitive starting in the beginning of 20th century. Thus, such passive banking strategy may not be good enough. Their market orientation should be more active in seeking their potential customers and more valuable product. Inefficient Management Operation Indian banks have had a relatively weak control in their bank operations as reflected in the highest ratio of overhead expenses to average assets. This implies that Indian banks’ management have not been as efficient as other banks.
This may result from several factors such as high turnover in top management of Indian banks as indicated in the section of “Background for Indian Banks” and the lack of bank management experience including professional knowledge of the banks’ boards of directors. It may also result from the recent 1999 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) which amended the Community Reinvestment Act (CRA) enacted by Congress in 1977. The FIRREA requires that the federal financial supervisory agencies evaluate an institution’s CRA performance based on a four-tiered descriptive rating system (i. . , “outstanding,” “satisfactory,” “need to improve,” and “non-compliance”). Since then, the bank regulatory agencies evaluate the banks’ degree of compliance with CRA which encourage the banks to help meet the credit needs of their local communities, including low and moderate income neighborhoods. Since all Indian banks’ target markets are Indian-owned businesses, it was not easy for the Indian banks to comply with such requirements. As a result, several Indian banks were criticized as “need to improve” in the last few years.
To cope with such problems, Indian banks have spent lots of resources which resulted in increasing Indian banks’ overhead costs. The researcher obtained the Indian banks’ most recent CRA ratings and those for some of the sampled American banks used for the previous section. The data indicates that two Indian banks were rated as “need to improve” and the remaining six banks were rated as “satisfactory” while all of the American banks were rated as “satisfactory. Lending Practices As reflected in financial analysis, Indian banks have the highest loan charge-offs and nonperforming loan ratios among the three groups studied in this study.
This may result from the downscaled Indian businesses as a result of recent economic disasters in India, area as mentioned earlier. However, it may also result from Indian banks’ weak lending practices. In general, bankers are suggested to consider the following six aspects of borrowers when they make lending decisions: capital, coverage, capacity, circumstances, collateral and character (Barrett, 1990). These suggested items indicate that cash flow analysis is an essential part of the loan application evaluation.
However, Indian banks’ lending practices have not been based on proper analysis of borrowers’ future cash flows from their businesses. Rather, they have relied heavily on the estimated value of borrowers’ collateral. Several chief credit officers of Indian banks indicated that such lending practices have resulted from the lack of understanding of Indian businessmen regarding usefulness of financial statements. They also indicated that it would be almost impractical for Indian banks to request their customers to provide the reliable financial statements because this request burdens Indian businesses with extra financial costs.
As a result, one of the CEOs stated at his inauguration that Indian lending practice has been nothing different from lending practices conducted by small pan shops. It is suggested that the Indian banks should discipline their customers in such a way that these customers can provide reliable financial information. Fortunately, there are several educational seminars conducted in Indiantown including the accounting education for nonprofessional businessmen by several institutions (e. g. , UCLA Indian Business Extension Course). The banks should design the seminar programs together to educate their potential borrowers with such institutions.
Conclusions Hence the methods for performing the comparative analysis of functioning and development of both the banking system as a whole, and separate banks in particular are offered in the given work. The essence of such methods consists in presentation of the banking activity in the form of a set of microsituations, each of them characterizing such activity based on definite finance flows which in turn reflect one or another index of separate banks activities. In this case non-parametric tests based on Wilcoxon criterion are used for the microsituations comparison.
Adequacy and efficiency of the offered methods are approved using the real data concerning one of the banking activity directions. This makes it possible to use the given methods for carrying out the extended comparative analysis of various directions of both separate banks, and banking system as a whole. References Azarenkova G. M. Models and methods for financial flows analysis pg. 119 Barrett, Gene R. (1990, April). “What Bankers Want to Know Before Granting a Small? Business Loan,” Journal of Accountancy: 47-53 Watshem T. G. , Parramaw K. Quantitative methods in finances pg. 527