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Indian Banking Today & Tomorrow - Performance
Assessment of Banks
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In the years immediately after the nationalisation of banks, the assessment their performance was made based parameters identified at that time
These performance parameters continued throughout the Seventies and Eighties. The criteria or yardstick applied was the opening of branches taking banking spread to every nook and corner of the country; mobilising the savings of the people; and re-channeling the same by way of investment in what was considered as the vital sectors of economy for the country. Seen by themselves one cannot find fault with such criteria, which was conceived in the national interest. These are all external oriented in terms of the products/services turned out by the banking institutions. But the main drawback is that under the then existing thinking of emphasis on poverty eradication and creation of self-employment, the importance of the criteria of profitability and recycling of funds by timely recovery of funds lent were overlooked. As banks grew in size and trnover, thier capitalbase has to be widened to withstand additional risks exposed, but it was not paid attention. An individual or an institution can contribute to social and national causes and it cannot but be deemed as laudable. But it is also important that such an individual/institution must be hale and healthy. For the individual, if he suffers from a weakened heart and survives on medication; if he is not able to stand and walk, and depends on others to assist him for such basic functions, his contribution to social or national causes becomes redundant. The same logic applies to Institutions. Banks have a responsibility to their shareholders and depositors, who have entrusted the funds to its custody. Positive contribution to the development of the national economy cannot be under-estimated, but the primary responsibility of Banks is to ensure the safety of funds entrusted and to secure adequate profitability for its own growth and stability. Banking by nature exposes the banks to several risks and to withstand them they must make provisions every year, for which profits are necessary. These are parameters for survival, stability and continuance in the field. The paramount importance of these parameters was realised when the economy the country was opened for global competition in the early Nineties. Indian banks were to accept global standards and compete with major foreign banks, in terms of profitability and working efficiency. It is based on the need for emphasising and ensuring the importance of these primary responsibilities of Banks that the Reforms in Financial and Banking sectors were introduced in the early Nineties. Seen in this perspective the realities of the bank's performance will appear in its capacity to withstand challenges; in its profitability; its asset quality; and its sustainability. The key parameters that reflect the performance and success of a bank are-
Banks will have to ensure better performance in all these areas. Banks' income will depend on the interest rate structure and the pricing policy for the deposits and the credit. With the deregulation of the interest rates banks are given the freedom to price their assets and liabilities effectively and also plan for a proper maturity pattern to avoid asset-liability mismatches. Nevertheless, with the increase in the number of players, competition for the funds and the other banking services rose. The consequential impact is being felt on the income profile of the banks especially due to the fact that the interest income component of the total income is significantly larger than the non-interest income component. The Balance Sheet and Profit & Loss (Income & Expenditure) statements of the Banks have to be analysed to assess their performance keeping in view the aforesaid parameters( income, expenditure, profitability, asset quality and capital adequacy.)
The income earned by Banks is derived from two principal sources
Similarly the expenses of Banks are also accounted under two main categories
As per prudential norms interest income is to charged only on standard assets and provisioning is to be made on other types of assets(sub-standard, doubtful and loss assets). For this purpose Assets are to be classified. The discipline enforced together by these two standards is identified as "Prudential Norms". Prudential norms are intended to ensure the long-term sustainability of the banks and also to provide greater transparency. The prudential norms which relate to income recognition, asset classification and provisioning for bad and doubtful debts serve two primary purposes - firstly, they bring out the true position of a Bank's loan portfolio, and secondly, they help in arresting its deterioration. The productivity of the staff will have a significant bearing on the bank's overall performance. This is the one factor, which can enable the bank to develop a unique competitive advantage. While banks can develop similar products and technology like their competitors, the same may not be possible with the staff performance. Banking being in the service industry, the staff efficiency becomes an important factor for assessing the bank's performance. Using this, a very strong competitive advantage can be developed by individual banks. The staff performance can be reflected in the business/profits of the bank vis-�-vis its employees. The profit per employee is an appropriate measure for this. During the year 1999-2000, the profit per employee as an average of all the PSBs was 0.65; for the private banks it was 1.46 and for the foreign banks it was 5.61. The lower ratio in the case of PSBs can be due to the over-staffing. | ||||
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