2.32 The financial performance of SCBs during 2000-01 has been characterised by a marked decline in net profits on account of higher provisions, despite an improvement in the operating profits of SCBs [Table II.1 and Appendix Table II.5 (A)].

2.33 The operating profits of SCBs in 2000-01 increased by 7.9 per cent to Rs.19,747 crore as on March 31, 2001. Operating profits of PSBs increased by 5.8 per cent to Rs.13,793 crore driven by 11.8 per cent increase in the operating profits of nationalised banks to Rs.8,053 crore, while those of the State Bank group declined by 1.7 per cent to Rs.5,740 crore in 2000-01. The profits of old private banks increased by 11.0 per cent to Rs.1,480 crore and that of new private banks by 10.1 per cent to Rs.1,369 crore in 2000-01. Foreign banks registered a 15.6 per cent increase in operating profits to Rs.3,105 crore in 2000-01 [Appendix Tables II.5 (A) to (G)].

2.34 Over the year, the ratio of operating profit to total assets, however, recorded a decline for all bank groups. In case of SCBs, the ratio declined from 1.66 per cent in 1999-2000 to 1.52 per cent in 2000-01. The State Bank group recorded a decline from 1.74 per cent to 1.42 per cent in 2000-01and new private sector banks from 2.11 per cent to 1.74 per cent (Table II.13).

2.35 The net profits of SCBs declined by 11.3 per cent to Rs.6,424 crore in 2000-01. Among the bank groups, only new private sector banks recorded an increase of 12.3 per cent in net profits. Net profit of public sector banks and foreign banks declined by 15.6 per cent and 2.4 per cent, respectively [Appendix Tables II.5 (A) to (G)].

2.36 The ratio of net profit to total assets of SCBs declined from 0.66 per cent in 1999-2000 to 0.50 per cent in 2000-01. In the case of PSBs, the ratio declined from 0.57 per cent to 0.42 per cent and within that for the State Bank group from 0.80 per cent to 0.55 per cent. The ratio for individual PSBs excluding two loss making banks are furnished in Chart II.3. In the case of private banks, for new banks, the ratio declined from 0.97 per cent to 0.81 per cent and for the old banks from 0.81 per cent to 0.62 per cent. In respect of foreign banks, the ratio declined from 1.17 per cent to 0.93 per cent (Table II.13 and Chart II.4).

2.37 In order to shore up the profitability amidst increasing competition, particularly private sector banks have resorted among others to mergers and acquisitions in the recent past in consonance with the trends witnessed in developed as well as emerging market economies (Box II.1).

2.38 The income of SCBs recorded an increase of 14.9 per cent to Rs.1,32,078 crore in 2000-01. PSBs recorded an increase of 13.9 per cent in their income to Rs.1,03,499 crore. The State Bank group and nationalised banks recorded a 15.8 per cent and 12.7 per cent increases in income, respectively. New and old private sector banks, respectively, recorded 38.8 per cent and 9.8 per cent increase in income and foreign banks income rose by 16.0 per cent [Appendix Tables II.5(A) to (G)].

2.39 With the higher increase in total assets (17.1 per cent) than in income (14.9 per cent) the ratio of income to total assets of SCBs declined from 10.40 per cent in 1999-2000 to 10.20 per cent in 2000-01. There was a general decline in this ratio among bank groups during 2000-01 excepting in case of the new private sector banks where the ratio increased from 9.18 per cent in 1999-2000 to 9.53 per cent in 2000-01 (Table II.13).

2.40 The interest income of SCBs increased by 15.9 per cent to Rs.1,14,951 crore in 2000-01. Among the individual bank groups, new private sector banks recorded the highest increase of 43.9 per cent followed by the State Bank group (16.6 per cent), foreign banks (15.1 per cent), old private sector banks (14.0 per cent) and nationalised banks (13.4 per cent) [Appendix Tables II.5(A) to (G)]. Among individual bank groups, foreign banks had the highest proportion of interest earned on advances/bills in interest income, whereas the proportion of interest income from investments was highest in the case of new private sector banks.

2.41 The ratio of interest income to total assets of SCBs declined from 8.97 per cent in 1999-2000 to 8.88 per cent in 2000-01. The ratio declined in respect of PSBs from 8.92 per cent to 8.84 per cent, the State Bank group from 8.67 per cent to 8.44 per cent, old private banks from 9.66 per cent to 9.52 per cent and foreign banks from 9.93 per cent to 9.30 per cent (Table II.13). The ratio increased for nationalised banks from 9.06 per cent to 9.09 per cent and for new private banks from 7.60 per cent to 8.18 per cent (Chart II.5).

The banking system in many emerging economies is fragmented in terms of the number and size of institutions, ownership, profitability and competitiveness of banks, use of modern technology and other related structural features. Very often, three or four large commercial banks co-exist with a large number of smaller urban and rural banks, or under the influence of the public sector. In general, few commercial banks, even larger ones, are listed on the stock exchange. Profitability varies widely, with some banks earning high returns but operating very inefficiently, and other banks competing fiercely for a narrow segment of the market. Likewise, while some commercial banks in the emerging economies are at the cutting edge of technology and financial innovation, many are still struggling with the basic operations such as credit risk assessment and liquidity management. Finally, recent banking crises have weakened banking systems in a number of countries, and banks in some countries remain on the brink of insolvency.

In this context, bank mergers have been considered as a possible avenue for improving the structure and efficiency of the banking industry. It is possible to categorise the motivations for bank mergers into four viz., cost benefits (economies of scale, organisational efficiency, funding costs and risk diversification), revenue benefits (economies of scope, enhancing monopoly rents), economic conditions (mergers after crises or after the upswing of the business cycle); and other motives (private managerial benefits, defence against takeovers, etc.).

Cross-country experience of bank mergers is suggestive of significant cost and revenue benefits from bank consolidation. Market-driven consolidation is a relatively new phenomenon and has been mainly observed in Central European economies. In Hungary, for instance, some 40 institutions are presently competing in the retail and corporate markets. At the same time, Belgium’s KBC and ABN Amro merged their Hungarian operations to exploit market synergies. After the large number of bankruptcies of private banks, in Poland and Czech Republic the number of commercial banks declined significantly, with no dominant bank in the corporate sector.

In other economies and especially in Asia, government-led consolidation has gained credence, motivated by the need to strengthen capital adequacy and the financial viability of many smaller banks affected by the 1997-98 crisis. The clearest example of this approach is Malaysia’s Danamodal, a special purpose institution established with the twin objectives of recapitalising the banks and facilitating consolidation and rationalisation of the banking system. In Philippines, a range of incentives is being offered to the merging banks, including better access to rediscount facilities and temporary relief from certain prudential requirements. In Indonesia, four of the seven state banks existing before the crisis were consolidated into a new state bank (Bank Mandiri). In addition, eight private banks that had been taken over by the Indonesian Bank Restructuring Agency (IBRA) were merged during 2000 into a new institution.

In Latin America, bank mergers arose as a response to inefficient banking structures. In Argentina, bank consolidation has been driven largely by the domestic and external financial liberalisation launched in the early 1990s, and the progressive tightening of prudential regulations. Bank consolidation in Mexico, on the other hand, took place in response to the lack of capital after the 1995 banking crisis.

In view of the global phenomenon of consolidation and convergence, the Report of the Committee on Banking Sector Reforms (Chairman: Shri. M.Narasimham) had suggested mergers among strong banks, both in the public and private sectors and even with financial institutions and NBFCs. The phenomenon of mergers in the banking sector is a relatively recent one in India. There was one merger in the early nineties, i.e., New Bank of India with Punjab National Bank. There has been a spate of mergers in the recent past, viz., 20^th Century Finance with Centurion Bank, HDFC Bank with Times Bank and ICICI Bank with Bank of Madura. The table below presents the number of mergers in the banking sector in India over the last three years.

What is important is that the systems for internal controls and risk management are put in place in order to take speedy decisions for offering a wide range of products through multiple delivery channels. In the ultimate analysis, therefore, the success of consolidation efforts will depend on how effectively the banking industry is able to put in place firewalls against financial crises, while blending risks with returns.

Hawkins, J. and P.Turner (1999), ‘Bank Restructuring in Practice: An Overview’, in Bank Restructuring in Practice, Bank for International Settlements, Switzerland.

Reserve Bank of India, Annual Report 1999-2000, Mumbai.

2.42 Other income of SCBs registered an increase of 8.8 per cent to Rs.17,127 crore in 2000-01. Among the bank groups, foreign banks recorded the highest increase of 19.5 per cent followed by new private sector banks (14.1 per cent), the State Bank group (10.8 per cent) and nationalised banks (7.5 per cent). On the other hand, old private sector banks recorded a decline of 14.6 per cent to Rs.1,039 crore in other income in 2000-01[Appendix Tables II.5(A) to (G)].

2.43 Commission, exchange and brokerage constituted around 52.0 per cent of the other income of SCBs, with the proportion being highest in case of PSBs at 52.5 per cent. There was a decline in the ratio of other income to total assets among all bank groups during 2000-01. The ratio of other income to total assets of SCBs declined from 1.42 per cent in 1999-2000 to 1.32 per cent in 2000-01. In the case of PSBs, the ratio declined from 1.29 per cent to 1.22 per cent, the State Bank group from 1.44 per cent to 1.33 per cent, nationalised banks from 1.20 per cent to 1.14 per cent, old private sector banks from 1.66 per cent to 1.23 per cent, new private banks from 1.58 per cent to 1.35 per cent and for foreign banks from 2.54 per cent to 2.47 per cent (Table II.13).

2.44 The expenditure of SCBs registered an increase of 16.7 per cent to Rs.1,25,654 crore in 2000-01. Among the bank groups, new private sector banks recorded the highest increase (41.9 per cent) to Rs.6,865 crore, followed by the State Bank group (18.6 per cent) to Rs.37,151 crore, foreign banks (17.9 per cent) to Rs.11,039 crore, nationalised banks (13.9 per cent) to Rs.62,031 crore and old private sector banks (11.4 per cent) to Rs. 8,568 crore [Appendix Tables II.5(A) to (G)].

2.45 The ratio of expenditure to total assets of SCBs declined marginally from 9.74 per cent in 1999-2000 to 9.70 per cent in 2000-01. In the case of PSBs, the ratio remained unchanged at 9.63 per cent. For the State Bank group, the ratio fell from 9.32 per cent to 9.22 per cent, old private sector banks from 10.52 per cent to 10.13 per cent and for foreign banks from 11.31 per cent to 10.84 per cent. For the nationalised banks and new private banks, the ratio increased from 9.83 per cent to 9.90 per cent and from 8.21 per cent to 8.71 per cent, respectively (Table II.13).

2.46 The interest expended by SCBs increased by 13.2 per cent to Rs.78,152 crore in 2000-01. Among the bank groups, new private sector banks exhibited the highest increase of 43.1 per cent and nationalised banks recorded the lowest increase of 9.3 per cent [Appendix Tables II.5(A) to (G)]. The interest on deposits comprised a substantial portion of interest expended, touching a high of 94.6 per cent for both PSBs and old private banks in 2000-01 and a low of 63.4 per cent for foreign banks in 2000-01. The foreign bank group had a relatively high share of interest expended on borrowings from the Reserve Bank at 29.6 per cent in 2000-01 compared with 2.3 per cent for PSBs.

2.47 The ratio of interest expended to total assets of SCBs declined from 6.25 per cent in 1999-2000 to 6.04 per cent in 2000-01. The decline in this ratio was seen in all the bank groups during 1999-2000, except in the case of new private banks in whose case the ratio increased from 5.64 per cent in 1999-2000 to 6.04 per cent in 2000-01 (Table II.13).

2.48 The operating expenses of SCBs showed an increase of 23.9 per cent to Rs.34,179 crore in 2000-01. Among the bank groups, the new private sector banks registered the highest percentage increase (64.4 per cent), followed by the State Bank group (29.6 per cent), nationalised banks (21.6 per cent), foreign banks (16.7 per cent) and old private sector banks (5.9 per cent) [Appendix Tables II.5(A) to (G)].

2.49 The ratio of operating expenses to total assets of SCBs increased from 2.50 per cent in 1999-2000 to 2.64 per cent in 2000-01. The ratio increased from 2.53 per cent to 2.72 per cent in the case of PSBs, from 2.57 per cent to 2.76 per cent for nationalised banks, from 2.46 per cent to 2.66 per cent for the State Bank group and from 1.42 per cent to 1.75 per cent for new private sector banks. The ratio declined from 2.17 per cent in 1999-2000 to 1.98 per cent in respect of old private sector banks and from 3.22 per cent to 3.05 per cent for foreign banks (Table II.13 and Chart II.6).

2.50 The wage bill of SCBs increased by 25.8 per cent to Rs.23,206 crore in 2000-01. Among the bank groups, new private sector banks showed the highest increase (52.3 per cent) followed by the State Bank group (31.4 per cent), while old private banks recorded the lowest increase of 2.0 per cent [Appendix Tables II.5(A) to (G)].

2.51 The ratio of wage bill to total assets increased for all bank groups, excepting old private sector banks and foreign banks. The ratio of wage bill to total assets of SCBs increased from 1.67 per cent in 1999-2000 to 1.79 per cent in 2000-01. The ratio increased from 0.28 per cent to 0.32 per cent in the case of new private sector banks. In the case of foreign banks, the ratio decreased from 1.05 per cent to 0.97 per cent and in the case of old private banks from 1.39 per cent to 1.23 per cent (Table II.13).

2.52 The provisions and contingencies of SCBs increased by 20.5 per cent to Rs.13,323 crore in 2000-01. Among the bank groups, old private sector banks showed the highest increase (29.0 per cent), followed by foreign banks (25.7 per cent), nationalised banks (25.0 per cent), the State Bank group (11.3 per cent) and new private sector banks (8.2 per cent) [Appendix Tables II.5(A) to (G)].

2.53 The ratio of provisions and contingencies to total assets of SCBs increased nominally from 1.00 per cent in 1999-2000 to 1.03 per cent in 2000-01. For the nationalised banks the ratio increased from 0.86 per cent to 0.95 per cent and for old private sector banks from 1.01 per cent to 1.13 per cent, from 2.08 per cent to 2.12 per cent for foreign banks. The ratio declined from 0.94 per cent to 0.87 per cent in the case of State Bank group and from 1.14 per cent to 0.93 per cent for new private sector banks (Table II.13 and Chart II.7).

2.54 There was an increase in the spread (net interest income) among most bank groups during the year 2000-01. The ratio of spread to total assets of SCBs increased from 2.73 per cent in 1999-2000 to 2.84 per cent in 2000-01. In the case of nationalised banks, the ratio increased from 2.66 per cent to 2.90 per cent and for new private sector banks from 1.95 per cent to 2.14 per cent (Table II.13 and Chart II.8). Foreign banks showed a decline in spread from 3.92 per cent to 3.64 per cent. In the case of State Bank group the ratio remained unchanged at 2.76 per cent. The bank-wise details of the select financial parameters of public sector banks, private sector banks and foreign banks are furnished in Appendix Tables II.6(A) to (I), II.7(A) to (H) and II.8(A) to (H), respectively.

2.55 Off-balance sheet activities of SCBs comprising forward exchange contracts, guarantees, acceptances and endorsements, etc., increased by 28.9 per cent over the 1999-2000 levels to Rs.7,52,976 crore. As a result, the ratio of contingent liabilities to total liabilities of SCBs increased by 5.3 percentage points to 58.2 per cent in 2000-01. Forward exchange contracts which account for the highest share of contingent liabilities increased by 30.5 per cent to Rs.5,53,597 crore in 2000-01. The share of forward exchange contracts in total liabilities increased by 4.4 percentage points over the previous year to 42.8 per cent. Acceptances, endorsements, etc., increased by 37.6 per cent to Rs.1,27,930 crore in 2000-01, taking its share in total liabilities up to 9.9 per cent (Table II.14). Among bank groups, nationalised banks recorded the highest proportional increase in contingent liabilities (42.2 per cent), followed by foreign banks (31.2 per cent). Foreign banks continued to maintain the highest contingent liabilities both in absolute terms (Rs.3,71,807 crore) and as a percentage of total liabilities (365.2 per cent) (Chart II.9).

2.56 The gross non-performing assets (NPAs) of the SCBs increased to Rs.63,883 crore at end-March 2001, from Rs.60,408 crore a year ago. Net NPAs as at end-March 2001 amounted to Rs.32,468 crore compared with Rs. 30,073 crore, as at end-March 2000 (Table II.15). Bank group-wise also, gross NPAs increased for PSBs, private sector banks and foreign banks to Rs.54,773 crore, Rs. 6,039 crore and Rs.3,071 crore, respectively, as at end-March 2001 over the levels of Rs.53,033 crore, Rs.4,761 crore and Rs.2,614 crore, respectively, at end-March 2000.

2.57 The ratios of gross and net NPAs to total assets as well as gross and net advances, however, declined for all bank groups other than private sector banks. The ratio of gross NPAs to total assets of SCBs declined from 5.5 per cent in 1999-2000 to 4.9 per cent in 2000-01 while the ratio of net NPAs declined from 2.7 per cent to 2.5 per cent. The ratio of gross NPAs to gross advances declined from 12.7 per cent in 1999-2000 to 11.4 per cent in 2000-01. The ratio of net NPAs to net advances declined from 6.8 per cent to 6.2 per cent over the year (Chart II.10). Bank-wise details of NPA ratios of PSBs and private sector banks are given in Appendix Tables II.9(A) to (D). Sector-wise NPAs of individual public and private sector banks are presented in Appendix Table II.10 (A) and (B).

2.58 The gross NPAs of PSBs as at end-March 2001 at Rs.54,773 crore showed an increase of 3.3 per cent over the year. The share of PSBs in total NPAs of SCBs declined from 87.8 per cent as at end-March 2000 to 85.7 per cent as at end-March 2001. The ratio of gross NPAs to total assets of PSBs declined from 6.0 per cent to 5.3 per cent during 2001 and that of net NPAs to total assets from 2.9 per cent to 2.7 per cent. The ratio of gross NPAs to gross advances decreased from 14.0 per cent to 12.4 per cent and that of net NPAs to net advances from 7.4 per cent to 6.7 per cent over the year. The decline in the NPAs ratios of PSBs was facilitated by the rise in assets in standard category from 86.0 per cent in 1999-2000 to 87.6 per cent in 2000-01 (Table II.16). As at end-March 2001, 22 out of the 27 PSBs had net NPAs up to 10 per cent of net advances, while five banks had net NPAs in excess of 10 per cent (Table II.17).