Banking sector in India is currently passing through an exciting and challenging phase. The reform measures have brought about sweeping changes in this vital sector of the country's economy. This paper is an attempt to study the trends in important banking indicators for the 25-year period from 1980 to 2005. Analysing the data from balance sheets of banks, the paper draws some important conclusions for the banking sector as a whole as well as for different bank groups.

JEL Classification : G 21

Keywords : Commercial Banks, Annual Accounts, Income and Expenditure, Assets and Liabilities

Introduction

Section I

Number of Banks and Offices

The number of offices of all scheduled commercial banks almost doubled from 29,677 in 1980 to 55,537 in 2005. This rapid increase

in the number of bank offices is observed in the case of all the bank groups. However, the number of banks in the case of foreign bank group and domestic private sector bank group decreased from 42 in 2000 to 31 in 2005 and from 33 in 2000 to 29 in 2005, respectively. This fall in the number of banks is reflective of the consolidation process and, in particular, the mergers and acquisitions that are the order of the banking system at present (Table 1).

Section II

Deposits and Credit

II.1 Credit Deposit Ratio

The credit-deposit ratio (C-D ratio) provides an indication of the extent of credit deployment for every unit of resource raised in the form of deposits. The C-D ratios of all scheduled commercial banks decreased gradually from 63.3 per cent in 1980 to 49.3 per cent in 2000. This declining trend has been reversed in the recent years, with the ratio increasing to 62.7 per cent in 2005. The foreign bank group recorded the highest C-D ratio (87.1 per cent) and State Bank Group the lowest (56.3 per cent) in 2005. The C-D ratios of all the bank groups had fallen drastically in 2000, except for foreign banks. With respect to domestic private sector banks group, this ratio

was high at 70.5 per cent in 2005. With respect to State Bank Group and nationalised bank group, the C-D ratios were lower at 56.3 per cent and 61.3 per cent, respectively, which were less than the C-D ratio of all scheduled commercial banks at 62.7 per cent in 2005. There has been a significant increase in the C-D ratios in 2005 across all the bank groups. (Table 2 and Chart 1).

II.2 Per Office Deposits and Credit

The overall business of foreign banks per office is higher than the per office business of other bank groups. Across the board, the

per office deposits are more than the per office credit as expected. With respect to all scheduled commercial banks, deposits per office increased from Rs.1.4 crore in 1980 to Rs. 33 crore in 2005 and credit per office also increased from Rs. 0.9 crore  to Rs. 20.7 crore during the same period (Table 3).

II.3  Type-wise Deposits

Over the years, there has been a shift in the composition of deposits. While the savings bank deposits of all scheduled commercial banks remained more or less constant at around one fourth of the total deposits, term deposits increased from 55.1   per cent in 1980 to 63.0 per cent in 2005. On the other hand, demand deposits fell from 19.7 per cent in 1980 to 12.8 per cent in 2005. More or less similar trend is observed for both State Bank Group and also for the nationalised bank group.  In the case of foreign banks and domestic private sector bank groups, the pattern in the composition of deposits differs from that of the public sector banks. In the case of foreign banks, demand deposits, which formed 25.7 per cent in 1980, increased to 30.1 per cent in 2005. The share of savings bank deposits in total deposits of foreign banks, decreased from 21.5 per cent in 1980 to 9.9 per cent in 2000. This share was 17.9 per cent in 2005. The analysis shows that more funds of short-term nature are parked with the foreign banks group. This may be an indication that the business class is attracted towards better

service offered by foreign banks. In the case of domestic private sector bank group, while the composition of demand deposits did not vary much over the 25-year period, the share of savings deposits fell from 26.8 per cent in 1980 to 16.0 percent in 2005, whereas term deposits increased from 56.7 per cent to 69.5 per cent over the same period.  Even though bank deposit rates are low, people prefer to park major portion of their funds in the form of term deposits because of the risk free returns and assured returns it provides. We can infer that the interest rate structure has definitely influenced the maturity structure of bank deposits. For example, since the year 2000, the share of term deposits to total deposits declined across bank groups except for State Bank group. The deposit rates of 1 to 3 yrs maturity show that there is a clear fall in the rates since 2000. This could be the major reason for decline in term deposits after 2000 (Table 4 and Chart 2).

II.4 Bank Group-wise Share in Deposits

76.4 percent in 2005. For all the bank groups, with the exception of foreign bank group, advances secured by tangible assets were more than 70 per cent for the period 1992 to 2005.  In the case of foreign banks, such secured loans increased from 54 per cent in 1992 to 57.9 per cent in 2005. Advances covered by government / bank guarantees with respect to all scheduled commercial banks decreased from 15.1 per cent to 5.9 per cent during the same period. Such type of advances declined for each of the bank groups. It is interesting to note here that unsecured loans granted by foreign banks group was more than a third of the total advances for all the years from 1992 to 2005. For all other bank groups, unsecured loans were less than 21 per cent. It is also noteworthy that unsecured advances granted by State Bank of India and its Associates increased sharply from 15.4 per cent in 2004 to 20.9 percent in 2005 (Table 6 and Chart 3).

II.6 Bank Group-wise Share in Advances

The bank group-wise share of advances of scheduled commercial banks depicts that  nationalised bank  group contributed about 50 per cent of the total credit advanced by all scheduled commercial banks followed by State Bank Group with a share of about 25 per cent, domestic private sector  banks with a share of 19 per cent and foreign banks about 7 per cent in the year 2005. This indicates that banks in the public sector even after the implementation of reforms since 1991, contribute about 75 per cent of the total credit advanced by all scheduled commercial banks.

This trend may not continue in future as the data reveals that the share of the public sector banks declined from  92.1 per cent in 1980 to 74.3 per cent in 2005. On the other hand, the advances made by foreign banks increased from 3.3 per cent in 1980 to 6.5 per cent in 2005 and that made by private banks in the domestic sector increased from 4.5 per cent in 1980 to 19.2 per cent in 2005. Data supports that in the post reform period, public sector banks

are facing increasing competition from the private sector banks-both foreign and domestic (Table 7).

II.7  Priority Sector Advances

Priority sector advances of scheduled commercial banks showed some marginal decline from 35 per cent in 1992 to 34 per cent in 2005. This declining trend is observed in the case of all bank groups except for foreign banks. In the case of foreign banks, priority sector advances increased over the years since the banking sector reforms started. Of the total advances, nationalised banks advanced loans to priority sectors to the extent of 37.4 per cent and State Bank group to the extent of 35.3 per cent in 2005.  Such loans were low

with respect to domestic private sector banks group at 26.5 per cent and foreign banks at 25.8 per cent. A target of 40 per cent of net bank credit has been stipulated for lending to the priority sector by domestic scheduled commercial banks both in the public and private sectors and a target of 32 per cent has been stipulated for lending to the priority sector by foreign bank groups at present. However, the data presented in this section are percentages of priority sector lending to gross bank credit (Table 8).

Section III Investments

Bank group-wise investments show that all scheduled commercial banks invested 92.6 per cent of their total investments in government and other approved securities in the year 1980, which declined to 82.4 per cent in 2005; whereas other investments increased from 7.4 per cent to 17.6 per cent during the same period. This could be due to the reduction in SLR requirements. Even though the SLR requirements have been reduced from a high of 38.5 per cent in 1992 to the statutory minimum of 25 per cent, banks still prefer to invest large portion of their investments in approved securities, because of the risk-free and assured returns they get through such investments. In the case of public sector banks and foreign banks, there was a reduction in investment in government securities and a preference for other investments like shares, bonds and debentures, which are not counted for SLR requirements. However, in 2005, a major reduction was noticed with respect to investments in other securities and a clear preference for government and other approved securities. As against this, in the case of domestic private sector banks, there is a clear preference for investments in other securities after the year 1995 and a reduction of investments in government and other approved securities. Since the year 2000, with the entry of more private sector banks, this group invested more than one third of their total investments in non-SLR securities, which indicates that the private banks of late are currently venturing into more riskier, nonetheless challenging business (Table 9 and Chart 4).

Section IV

Capital To Risk-weighted Assets Ratio (CRAR)

The capital to risk weighted assets ratio (CRAR) is an indicator for assessing soundness and solvency of banks. Out of 92 scheduled commercial banks, 75 banks could maintain the CRAR of more than 8 per cent during the year 1995-96, when the prescribed CRAR was 8 per cent. During 1999-2000, 96 banks maintained CRAR of 9 to 10 per cent and above when the prescribed rate was 9 per cent. In 2004-05, out of 88 scheduled commercial banks, 78 banks could maintain CRAR of above 10 per cent and 8 banks between 9 and 10 per cent. All banks in the State Bank group maintained capital to risk weighted assets ratio of more than 10 per cent in 2004-05. In the nationalised bank group, 17 banks reached more than 10 per cent CRAR level except two banks whose CRAR during 2004-05 was between 9-10 per cent. During 2004-05, there were 2 banks in the old private sector categorywhose CRAR was less than 9 per cent (Table 10).

Section V

Non-performing Assets (NPAs)

The measure of non-performing assets helps us to assess the efficiency in allocation of resources made by banks to productive

sectors. The problem of NPAs arise either due to bad management by banks or due to external factors like unanticipated shocks, business cycle and natural calamities (Caprio and Klingebiel, 1996). Several studies have underscored the role of banks’ lending policy and terms of credit, which include cost, maturity and collateral in influencing the movement of non-performing assets of banks (Reddy, 2004, Mohan 2003, 2004).

The ratio of gross non-performing assets (NPAs) to gross advances of all scheduled commercial banks decreased from 14.4 per cent in 1998 to 5.1 per cent in 2005. Bank group-wise analysis shows that across the bank groups there has been a significant reduction in the gross non-performing assets. With respect to public sector banks (State Bank group and nationalised bank group together), NPAs have decreased from 16.0 per cent in 1998 to 5.4 per cent in 2005.  In the case of foreign banks group, gross NPAs as a percentage to gross advances, which was the lowest among all the groups at 6.4 per cent in 1998, decreased to 2.9 per cent in 2005.  With regard to domestic private sector banks group, gross NPAs decreased from 8.7 per cent to 3.9 per cent during the same period. The ratio of net NPAs to net advances of different bank groups also exhibited similar declining trends during the period from 1998 to 2005. The net NPAs of all scheduled commercial banks declined from 7.3 per cent in 1998 to 2.0 per cent in 2005 (Table 11).  The decline in NPAs is more evidenced across bank groups especially since 2003. This reflects on the positive impact of the measures taken by the Reserve Bank towards NPA reduction and specifically due to the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, ensuring speedier recovery without intervention of courts or tribunal.

The composition of NPAs of public sector banks brings to light certain interesting aspects. It is observed that in 1995 for State Bank group, the share of NPAs was 52.5 per cent for the priority sector, 41.4 per cent for the non-priority sector, and 6.1 per cent for the public sector. These percentages were 47.4 per cent, 51.5 per cent and 1.1 per cent, respectively in 2005. Similarly in the case of nationalised banks also, the NPA composition for non-priority sector

Section VI

Income Composition

Section VIII

Return on Assets

Return on assets (ROA) is an important performance indicator of banks. Return on assets has been worked out by taking the ratio of net profit or loss to average advances and investments. For all scheduled commercial banks, the ROA increased from 0.1 per cent in 1980 to 1.1 per cent in 2005. Amongst the bank groups, the ROA of foreign banks group is the highest at 1.8 per cent in 2005. All other bank groups recorded a return on assets of 1.1 per cent showing that all banks are making profits and their performances are good. Foreign banks group is on a higher plane with respect to its performance in comparison with other bank groups.  Compared to the pre-reform period, the ROA of public sector banks improved significantly after the initiation of reforms. In the case of foreign banks and domestic private sector banks, data are available only from 1995 (Table 14).
The distribution of scheduled commercial banks by ROA reveals that in 1995, with respect to State Bank group, all 8 banks were in the ROA range of up to 1 per cent. This position improved slightly as one bank was in the ROA category of more than 1.5 per cent in 2000 and 2005. This goes to indicate that State Bank group has much potential to enhance their performance. Similarly, majority of the banks in the nationalised group were in the ROA range of less than 1 per cent in

Section IX

Some Select Ratios

The data reveals that the ratio of interest on advances to average advances of all scheduled commercial banks, which is reflective of the lending rates, decreased from 14.0 per cent in 1992 to 7.1 percent in 2005.  The prime lending rate was 19.0 per cent in 1992 and in the range of 10.25 to 10.75 per cent in 2005. From this, it is evidenced that banks are lending at the sub prime lending rates. The gap between the PLR and lending rates of all scheduled commercial banks was very less for the years 2000 to 2002. However, this gap widened since 2003. This is true for all the bank groups, which is indicative of the fact that during the recent years, banks are lending at sub PLR rates with wider gaps between PLR and lending rates.
The ratio of interest on investments to average investments, which is reflective of the return on investments, shows that for all scheduled commercial banks, the rates have declined from 10.1 per cent in 1992 to 7.6 percent in 2005. In comparison, the interest rates on central government dated securities (weighted average) declined from 11.8 per cent in 1992 to 6.1 per cent in 2005. Overall trends indicate that the return on investments made by the public sector banks is higher than that of all scheduled commercial banks. An interesting point to note here is that even though private sector banks invested more of their funds in non-SLR securities, still their interest on investments as a percentage to average investments is lower than that obtained by the public sector banks. Between State Bank group and nationalised bank group, the former was successful in getting higher yields on their investments than the latter group.
The ratio of interest on deposits to average deposits of scheduled commercial banks, which is reflective of the deposit rate, declined from 7.5 per cent in 1992 to 4.2 per cent in 2005. These rates are lower than the rates of deposits with 1 to 3 year maturity for all the bank groups. This indicates that banks are able to mobilise deposits at a lower rate than that of the rates for deposits of 1 to 3 years maturity (Table 15 and  Chart 7).

The spread between the lending and deposit rates have reduced over the years from 1992 to 2005. The general fall in interest rates in the recent period is in consonance with the monetary policy stance of a soft and flexible interest rate regime.

Section X

Concluding Observations

There has been a spurt in the number of banks during the late 1990s, which decreased during the early period of the new millennium. This could be reflective of the consolidation process, and in particular, the mergers and acquisitions that are the order of the banking system at present. The number of bank offices increased significantly during the early 1980s. After a consolidation phase during the late 1980s and early 1990s, there has been a moderate increase in the number of offices mainly due to the entry of new generation private sector banks since late nineties.

The public sector banks continued to play a very prominent role in both deposit mobilisation and credit disbursal even after the implementation of reforms since 1991. They contribute about 75 per cent of the total deposits mobilised and total credit advanced by all scheduled commercial banks. The entry of domestic private sector banks has been altering this trend to some extent since the late nineties.

There has been a significant change in the composition of deposits, with a clear shift in favour of term deposits, whereas demand deposits witnessed a decline. The share of savings bank deposits remained more or less constant. It is observed that more funds of short-term nature in the form of demand deposits are parked with the foreign banks group. This may be an indication that the business class is attracted towards better service offered by foreign banks.

Even though the SLR requirements have been reduced to the statutory minimum of 25 per cent, banks still prefer to invest large portion of their investments in approved securities, due to the risk-free and assured returns they get through such investments. However, in the case of private sector banks in the domestic sector, there is a clear preference for investments in other securities and a reduction of investments in government and other approved securities. Since the year 2000, with the entry of more private sector banks, this group invested more than one third of their total investments in non-SLR securities, which indicates that the private banks, of late, are currently venturing into more riskier, nonetheless challenging business.

Across the bank groups, there has been a significant reduction in the non-performing assets (NPAs). The composition of NPAs of public sector banks interestingly reveals that NPAs connected to non-priority sector has increased, whereas, NPAs relating to priority sector advances exhibited a decline. This goes to explode the commonly held myth that the problem of NPAs is caused mainly due to the credit allocation made to priority sectors.

The share of non-interest income in the total income has been increasing across the different bank groups. This is a welcome trend as it may reduce the risks arising out of the sole dependency on interest as the source of income.

Wages as a percentage of operating expenses of public sector banks is more than 60 per cent.  This situation possibly calls for more apt and pragmatic human resource policies and proper manpower planning for the future of these banks. Banks in the private sector both foreign and domestic, however, have reduced their wage component in the operating expenses and are spending more for other business boosting measures like image building, software development etc.

Compared to the pre-reform period, the ROA of public sector banks improved significantly after the initiation of reforms, although it is still lower as compared to foreign banks.
The objective of the analysis was to study the trends in banking during a span of 25 years, covering both pre- and post- reforms period. The study has clearly brought out the positive effects of the reform measures on the banking industry in general.  A comparative analysis of various bank groups with respect to different variables has also identified certain specific problem areas of the respective groups. The pace of the reform process is sometimes a cause for concern and criticism. But, there seems to be a great wisdom in this gradualism.

The Indian approach to financial sector reforms is based on pancha sutra or five principles- cautious and proper sequencing; mutually re-inforcing measures, complementarity between reforms in the banking sector and changes in fiscal, external and monetary policies, developing financial infrastructure and developing financial markets (Reddy, 2000). The progress of the banking sector reforms this far, albeit slow, vindicates this stand.

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^* The authors are Director and Assistant Adviser, respectively, in the Department of Statistical Analysis and Computer Services. The views expressed in the paper are those of the authors’ and not of the institution to which they belong.