TABLE OF CONTENT

CHAPTER 1: INTRODUCTION 4

1.1 Purpose of the Study.................................................................................................4

1.2 Context and Significance of Study..................................................................................4

CHAPTER 2: LITERATURE REVIEW 6

CHAPTER 3: RESEARCH METHODS AND PROCEDURES 11

3.1 Research Objectives................................................................................................11

3.2 Research Questions.................................................................................................11

3.3 Hypothesis..............................................................................................................11

3.4 Data Collection.......................................................................................................11

3.5 Research Design.....................................................................................................12

3.6 Limitations..............................................................................................................12

CHAPTER 4: DATA ANALYSIS AND FINDINGS 13

4.1 Review of Methodology..........................................................................................13

4.2 Results of Research Questions................................................................................13

4.2.1 Business Performance.....................................................................................13

4.2.2 Efficiency........................................................................................................18

4.2.3 Profit Earning Capacity..................................................................................23

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 28

5.1 Summary of Findings..............................................................................................28

5.2 Suggestions.............................................................................................................29

5.3 Conclusion..............................................................................................................29

References 30

LIST OF TABLESTable 4. 1 Business Performance of Nationalised...................................................................14Table 4. 2 Correlation Matrix between Business Performance Variables...............................15Table 4. 3 ANNOVA..............................................................................................................16Table 4. 4 Regression Analysis...............................................................................................17Table 4. 5 Efficiency of Nationalised Banks(rupees in lakhs).................................................18Table 4. 6 Correlation matrix between efficiency variables....................................................20Table 4. 7 ANOVA.................................................................................................................21Table 4. 8 Regression analysis................................................................................................22Table 4. 9 Profit earning capacity of Nationized banks...........................................................23Table 4. 10 Correlation Matrix................................................................................................24Table 4. 11 ANNOVA............................................................................................................25Table 4. 12 Regression Analysis..............................................................................................26

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 StudyIn 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

—temporal, 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 variables—interest 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 1992-

2000. 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

results of their study relating to revenue maximization efficiency, technical

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

study—borrowed 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; director’s fees;

auditor’s 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 bank’s 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 person’s 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

borrower’s 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 capacity,

efficiency and profitability of nationalized banks.

To evaluate inter-relationship between selected variables among

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 in million)

Year No. of offices no of employees deposits advances investments total business

2006-07 39255 466400 16799930 12036784 5360181 28836714

2007-08 40956 462926 21057056 15197619 6550419 36254675

2008-09 43452 473041 25839338 18430819 8281248 44270157

2010-11 46288 471727 31265862 23102793 9503797 54368655

2011-12 50013 491132 35969893 27263212 10867544 63233105

MEAN 43992.8 473045.2 26186415.8 19206245 8112637.8 45392661.2

S.D 4285.79394 10902.14308 7682026.27 6086242 2211888.758 13763285.35

C.V 0.097420349 0.023046726 0.293359211 0.316889 0.272647296 0.303205077

C.V(%) 9.742034925 2.304672593 29.33592107 31.68887 27.26472958 30.32050774

CAGR(%) 4.963326255 1.038743787 16.44647189 17.76421 15.18353168 17.00374093

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 employees deposits advances investments

total business

No. of offices 1 no of employees 0.89929848 1 Deposits 0.993153386 0.849360458 1 Advances 0.99684313 0.862048089 0.998533048 1 investments 0.988207133 0.851070105 0.997679589 0.993199201 1 total business 0.995144551 0.855278511 0.999713309 0.999543223 0.996059491 1

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 = β0+ β1NO+ β2NE+ β3 DP+β4IN+β5 AD+β6TB + εi

Where

Xi1 = Number of Branches

Xi2 = Number of Employees

Xi3 = Deposits

Xi4 = Investments

Xi5 = Advances

Xi6 = Total Business

Εi = Error term

The underlying 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

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

1 1.000a 1.000 1.000 9741.951

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

ANOVAb

Model

Sum of

Squares df Mean Square F Sig.

1 Regression 7.577E14 3 2.526E14 2661282.960 .000a

Residual 94905603.970 1 94905603.970

Total 7.577E14 4

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

b. Dependent Variable: total business

Table 4. 4 Regression Analysis

Coefficientsa

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig.

95.0% Confidence Interval for B

B Std. Error Beta Lower Bound Upper Bound

1 (Constant) 11493357.873 395239.942 29.079 .022 6471358.244 16515357.502

No. Of employees -25.379 .885 -.020 -28.681 .022 -36.623 -14.136

Advances 1.767 .007 .782 247.265 .003 1.677 1.858

Investments 1.474 .019 .237 77.637 .008 1.233 1.715

a. Dependent Variable: total business

Excluded Variablesb

Model Beta In t Sig.

Partial

Correlation

Collinearity

Statistics

Tolerance

1 No. of offices .823a . . 1.000 1.849E-7

deposits .558a . . 1.000 4.021E-7

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 2 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 (β).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 influenced by investments,

advances and number of employees.

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 EMPLOYEES BPE DPE APE PPE BPB DPB APB PPB OFFICES

2007-08 466400 61.83 36.02 25.81 0.38 734.6 427.97 306.63 4.48 39255

2008-09 462926 78.32 45.49 32.83 0.49 885.21 514.14 371.07 5.49 40956

2009-10 473041 93.59 54.62 38.96 0.57 1018.83 594.66 424.17 6.17 43452

2010-11 471727 115.25 66.28 48.97 0.7 1174.57 675.46 499.11 7.14 46288

2011-12 491132 128.75 73.24 55.51 0.7 1264.33 719.21 545.12 6.83 50013

MEAN 473045.2 95.548 55.13 40.416 0.568 1015.508 586.288 429.22 6.022 43992.8

S.D 10902.1431 27.05588 15.08871 11.97917 0.138094 213.9574 118.2792 95.85491 1.070687 4285.794

C.V 0.02304673 0.283165 0.273693 0.296397 0.243124 0.21069 0.201743 0.223323 0.177796 0.09742

C.V(%) 2.30467259 28.31653 27.36932 29.63968 24.31235 21.069 20.17426 22.33235 17.77959 9.742035

CAGR(%) 1.03874379 15.80028 15.25 16.55117 12.99595 11.471 10.94008 12.19551 8.79991 4.963326

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 less

homogeneity.

At a glance it is evidenced that the growth rate of business, deposits,

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

  EMPLOYEES BPE DPE APE PPE BPB DPB APB PPB OFFICES

EMPLOYEES 1

BPE 0.824627088 1

DPE 0.81671348 0.999657 1

APE 0.833768986 0.999446 0.998231 1

PPE 0.70607418 0.981073 0.984552 0.975706 1

BPB 0.801243835 0.997838 0.999139 0.995196 0.988461 1

DPB 0.788812621 0.994866 0.997122 0.991014 0.99066 0.999331 1

APB 0.815105457 0.999664 0.999784 0.998522 0.983924 0.998981 0.996662 1

PPB 0.616178818 0.946918 0.953546 0.937593 0.990696 0.962376 0.968974 0.952461 1

OFFICES 0.89929848 0.987937 0.984686 0.991069 0.939492 0.978164 0.971324 0.9848 0.886495 1

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= β0+ β1 BPE + β2 PPE + β3 DPE +β4 APE +β5 DPB +β6 APB + β7 TBPB + β8PPB +εi

Where

Xi1 = Business per employee

Xi2 = Profit per employee

Xi3 = Deposits per employee

Xi4 = Advances per employee

Xi5 = Deposits per branch

Xi6 = Advances per branch

Xi7 = Total business per branch

Xi8 = Profit per branch

Εi = 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

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

1 1.000a .999 .997 .00730

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

advances per employee

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression .076 3 .025 476.867 .034a

Residual .000 1 .000

Total .076 4

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

b. Dependent Variable: profit per employee

Table 4. 8 Regression analysis

Coefficientsa

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig.

95.0% Confidence Interval for B

B Std. Error Beta Lower Bound Upper Bound

1 (Constant) 1.487 .314 4.729 .133 -2.508 5.481

deposit per employee .017 .005 1.851 3.670 .169 -.042 .076

advances per employee -.008 .006 -.657 -1.246 .431 -.085 .070

No. of employees -3.270E-6 .000 -.258 -4.755 .132 .000 .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. R2 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

(β).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. Essentially, banks must

give a fair return on capital after providing adequately for business risks. This

has warranted banks to earn profit.

Table 4. 9 Profit earning capacity of Nationized banks

YEAR II OI IE OE TI TE NP2007-08 1426469 209794 1010933 296700 1636262 1307633 3286292008-09 1838924 263936 1316762 354160 2102860 1670922 4319382009-10 2080289 304996 1457115 407922 2385285 1865037 5202482010-11 2563064 287249 1641351 538193 2850314 2179544 6707702011-12 3412524 324674 2396879 574750 3737197 2971628 765569MEAN 2264254 278129.8 1564608 434345 2542384 1998953 543430.8S.D 762306.3 44279.12 519158.7 118924.3 800205.8 628921.9 176542.2C.V 0.33667 0.159203 0.331814 0.273801 0.314746 0.314626 0.324866C.V(%) 33.667 15.92031 33.18139 27.38014 31.47463 31.46257 32.4866CAGR(%) 19.05912 9.126667 18.84605 14.13853 17.96105 17.84244 18.42835

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 2003-

04 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 OI IE OE TI TE NPII 1 OI 0.848156 1 IE 0.990287 0.847218 1 OE 0.955628 0.822105 0.906005 1 TI 0.99957 0.863321 0.990265 0.955859 1 TE 0.998157 0.85481 0.996792 0.936975 0.998183 1 NP 0.974832 0.867927 0.937518 0.994661 0.976689 0.961979 1

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 = β0+ β1INI+ β2OI+ β3IE+β4OE+β5TI+β6TE+ β7NP+ εi

Where:

Xi1 = Interest income Xi2 = other income

Xi3 = Interest expenditure

Xi4 = Operating expenses

Xi5 = Total income

Xi6 = Total expense

Xi7 = Net profit treated

εi = 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

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

1 1.000a 1.000 1.000 1197.075

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

OTHER ESPENSE

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 1.247E11 3 4.156E10 28999.325 .004a

Residual 1432988.754 1 1432988.754

Total 1.247E11 4

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 2 value depicts 99 per

cent variations between the profit earning capacity variables tested for the nationalised bank

Table 4. 12 Regression Analysis

Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

95.0% Confidence Interval

for B

B Std. Error Beta Lower Bound Upper Bound

1 (Constant) -154779.301 4611.785 -33.562 .019 -213377.590 -96181.012

OTHER INCOME .442 .026 .111 16.846 .038 .109 .775

OTHER

ESPENSE

1.106 .015 .745 76.266 .008 .922 1.290

TOTAL

EXPENSE

.047 .003 .169 15.773 .040 .009 .086

a. Dependent Variable: NET PROFIT

Excluded Variablesb

Model Beta In t Sig.

Partial

Correlation

Collinearity

Statistics

Tolerance

1 INTEREST INCOME 4.316a . . 1.000 6.171E-7

INTEREST EXPENSE .a . . . .000

TOTAL INCOME 4.533a . . 1.000 5.595E-7

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 (β). 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 RECOMMENDATIONS5.1 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 Efficiency— 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 Banking—A 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 Efficiency— 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. Andhra Bank 11. Indian Bank

2. Allahabad Bank 12. Oriental Bank of Commerce

3. Bank of Baroda 13. Punjab National Bank

4. Bank of India 14. Punjab and Sind Bank

5. Bank of Maharashtra 15. Syndicate Bank

6. Canara Bank 16. Union Bank of India

7. Central Bank of India 17. United Bank of India

8. Corporation Bank 18. UCO Bank

9. Dena Bank 19. Vijaya Bank

10. Indian Overseas Bank 20. idbi Bank