Financial Performance of Retail Banking in India - Literature review Example

? Financial Performance of Retail Banking in India Introduction Global economy is going through a bad patch in recent times, mainly because of the financial crisis such as debt crisis, Eurozone crisis and bankruptcy of financial institutions in American and European regions. It should be noted that American and European continents were the richest regions in this world until a couple of decades before. However, global wealth is currently shifting from these regions to Asian region at present. The rapid economic growth of Asian countries such as India and China, despite of population growth problems, clearly indicates that. Amidst all unfavourable global financial climates, India’s Banking Industry, especially the retail banking industry was able to maintain steady growth. “Retail Banking is a banking service that is geared primarily towards individual consumers. Retail banking is usually made available by commercial banks, as well as smaller community banks. Unlike wholesale banking, retail banking focuses strictly on consumer markets”(Dr. Revathy, 2012, p.132). In fact the pace at which the Indian banking industry has grown in recent times has surprised many economists and neutral observers. The growth in Indian banking industry “is evident from the higher pace of credit expansion, expanding profitability and productivity similar to banks in developed markets, lower incidence of non- performing assets and focus on financial inclusion”(Dr. Goyal & Joshi, 2012, p.18). It should be noted that majority of the banking institutions including commercial banks and co-operative banks in India are functioning under the strong control of Reserve Bank of India (RBI). However, a small number of unscheduled cooperative banks are present in India which is functioning almost independently though RBI has some control on such banks. Even strong control of RBI is there, Indian retail banking industry is developing rapidly. This paper analyses the literature available to know more about the financial performances of Indian retail, banking industry in recent times. Literature Review The Indian banks witnessed a mixed trend in their profitability in FY12. While the average pre-tax profit of the banks increased by 16.46 percent, the banks in the private sector significantly outperformed their public sector counterparts (28.38 percent v/s 9.85 percent), the interest income for the banks under study increased by 33.85 percent in FY12(Indian banks: Performance benchmarking report, 2012, p.3). Banking interest rate in India is fixed by RBI. RBI increases or decreases Ripo, reverses ripo and CRR. Repo is the short form of repurchase agreement. “Repo rate or repurchase rate is the rate at which banks borrow money from the central bank (read RBI for India) for short period by selling their securities (financial assets) to the central bank with an agreement to repurchase it at a future date at predetermined price” (Ansul, 2010). It is just like borrowing money from a lender by selling him something. Reverse ripo is the opposite of repo. In the case of reverse ripo, a dealer buys government securities from an investor and then sells them back at a later date for a higher price (Investopedia, 2013). In short, ripo is the rate at which RBI sell its funds to other financial institutions whereas reverse ripo represents the interest at which RBI borrows funds from other banks. Banking interest rates depends on the ripo and reverse ripo rates. In other words, banks will be forced to increase the interest rates or money lending and borrowing when the ripo and reverse ripo rates increases and vice versa. In short, banking interest rates are directly proportional to the ripo and reverse ripo rates. Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI (What is CRR, repo and reverse repo rate?, 2012) RBI cuts Repo Rate from 7.50% to 7.25%; Reverse Repo Rate, Bank Rate and MSF Rates too adjusted to 6.25%, 8.25% and 8.25% respectively in this month (Goyal, 2013). CRR, Ripo and reverse ripo rates play an important role in the performances of retail banking industry in India. “If the central bank decides to increase the CRR, the available amount with the banks comes down” (What is CRR, repo and reverse repo rate?, 2012). Under such circumstances, banks may face lack of funds for doing business. It should be noted that when the ripo and reverse ripo rates decrease, interest rates will also be decreased. When interest rate decreases, people approach banks for loans or mortgages of different types. In short, RBI can effectively control not only the retail banking industry activities, but also all the economic activities in India. As part of economic reformation, government of India is keen in enhancing economic activities across India. That is why RBI is maintaining a low ripo and reverse ripo in recent times to pump more funds into the economic or business circles. In short, the rapid growth of retail banking industry in India is indebted to favorable governmental policies. The Net Interest Margin (NIM) for most of the banks declined with the exception of two large banks — SBI and ICICI Bank — on account of higher cost of bulk deposits and a slowdown in the credit growth. The economic slowdown and global developments have affected the banking sectors’ performance in India in FY12 resulting in moderate business growth (Indian banks: Performance benchmarking report, 2012, p.3). ICICI is the largest private sector bank in India whereas SBI is the largest nationalized or public sector bank in India. These two banks reported phenomenal growth rates though other retails banks faced a slight decline in their performances in recent times. Unlike the central banks in other countries, RBI is not ready to liberalize its control on retail banking industry. For example, one of the major reasons cited for recent recession was the injudicious activities of American and European banks. These banks were ready to give mortgages to all people irrespective of their financial backgrounds, until recent times. The central banks in these regions were acted as a silent witness while financial institutions were competing each other in giving mortgages even to people without collateral. On the other hand in India, RBI is acting wisely and it does not allow the banks to do business in an injudicious or unethical manner. That is why Indian retail banks stood firm despite of the unfavourable economic climates in America and Europe. It should be noted that not even a single bank in India faced any trouble though plenty of major banks in America and Europe faced destruction as a result of the ongoing recession. According to Dev (2006), financial inclusion is significant from the point of view of living conditions of poor people, farmers, rural non-farm enterprises and other vulnerable groups. It refers to the access to credit from formal institutions to various social groups. Formal banking institutions should look at inclusion both as a business opportunity and social responsibility, the self-help group movement and microfinance institutions is important to improve financial inclusion (Dev (2006). Financial inclusion has become a necessity in today’s business environment. Whatever is produced by business houses, that has to be under the check from various perspectives like environmental concerns, corporate governance, social and ethical issues. Apart from it to bridge the gap between rich and poor, the poor people of the country should be given proper attention to improve their economic condition (Dr. Goyal & Joshi, 2012, p.24) Indian banks are functioning in an ethical manner. They give priority to rural development rather than urban development. People from rural areas are getting more helps from Indian banks than people from urban areas. Banks in India disperse plenty of loans such as educational loan, automobile loans, housing loan and business loans to the public based on their income. Being the second most heavily populated country in the world, it is impossible for the people in India to develop properly without assistance from financial institutions. In other words, banks in India are getting more business opportunities than banks in other countries and naturally their profits rates are much more than that of banks in other countries. One of the major differences between an Indian and American lies in their spending habits. An Indian tries to save as much as possible whereas the American tries to spend as much as possible. As a result of that Indian banks have plenty of funds in the form of depository accounts compared to the banks in other countries. As a result of that retail banks in India are not facing shortage of funds at any time for doing business. The growth of the Indian economy is estimated to have slowed down significantly from 8.39 percent in FY11 to 6.88 percent in FY12. This slowdown could be attributed to a number of factors: Continuing problems in Europe, economic slowdown in the United States, Policy paralysis in view of the government’s inertia on various policy issues and reforms, Fiscal indiscipline leading to fiscal deficit, High inflation leading to high interest rate and Rupee devaluation (Indian banks: Performance benchmarking report, 2012, p.5). Foreign direct investments in India have been reduced a lot in recent times because of the Eurozone crisis and economic problems in America. Moreover, outsourcing jobs from these regions to India also reduced a lot in recent times. As a result of that, India’s economic growth has been declined in the last year. Even though the ruling UPA government is keen in implementing strong policies to streamline the economic growth, the opposition parties, especially the left parties are not giving support to such policies. Inflation rates in India are extremely high at present and the exchange rates of rupee against dollar are very weak. All these factors are contributing in one way or another to the slow economic growth. However, UPA government is keen in getting the economic growth back in tract under the visionary leadership of renowned economist and Prime Minister Dr. Man Mohan Singh. It should be noted that Dr. Man Mohan Singh was once the governor of RBI. Therefore he knows what to do in the retail banking industry to rejuvenate Indian economy. RBI has kept a low ripo and reverse ripo rates in recent times, to pump more funds into the economic sectors. As a result of that majority of the retail banks in India have shown tremendous growth at present. Canara Bank was the only bank under study that witnessed a decline in its bottom line. Canara Bank’s operating profit, profit before tax and PAT declined by 2.43 percent, 18.77 percent and 18.46 percent, respectively, on the account of decline in its NII, subdued fee income and higher operating expenses. SBI witnessed an increase of 41.65 percent in its PAT largely on account of the low-base effect of the previous year. The bank’s NII increased by 33.10 percent and its operating profit increased by 24.62 percent. ICICI Bank witnessed a growth of 25.51 percent in PAT from INR52 billion in FY11 to INR65 billion in FY12. Although private sector banks like Axis Bank, HDFC Bank and KMB have witnessed decline in their NIMs, healthy asset quality with higher recoveries and upgrades led to lower provisioning expenses resulting in a healthy bottom line. PAT for these banks increased in the range of 24-40 percent (Indian banks: Performance benchmarking report, 2012, p.8). The introduction of internet based technologies such as mobile banking and internet banking helped retail banks in India to introduce many new products which are attractive to the customers. Retail banks in India were one step ahead in introducing new technologies in their value added and customized banking products such as “different types of deposit accounts, housing, consumer, auto and other types of loan accounts, demat facilities, insurance, mutual funds, credit and debit cards, ATMs and other technology-based services, stock-broking, payment of utility bills, reservation of railway tickets, etc” (Dr. Revathy, 2012, p.132). All these value added products are helping retail banks to increase their business and profits. For example, demat facilities offered by the new generation banks are used by the public for investing their money in share markets. Moreover, the introduction of credit cards and debits and the subsequent introduction of millions of ATM machines across India are helping retail banks immensely in building their profits. At present, public can take money from any ATM machines irrespective of the owner of that machines. In other words, SBI ATM machines can be used by the ICICI or HDFC bank customers and vice versa. Banking stocks have appreciated by over 35 per cent year-on-year from January 2000 to October 2007, outdoing overall stock-market growth in India as well as that of banks in the region. Further, Indian urban centres account for almost 60 per cent of total savings deposits (as of March 2006), despite only 27 per cent of the population residing in 4,000 urban locations. This reaffirms two widely held beliefs—the potential of customers in urban areas is high and more importantly, there is need to foster financial inclusion to tap the remaining 73 per cent of customers fragmented across 650,000 villages in India (Indian Banking: Towards Global Best Practices, 2007, p.16). Huge growth prospects are there for Indian retail banking industry. Only a small portion of the Indian population is currently banking customers. There are plenty of villages in India in which banking products are still unavailable. Villagers forced to travel huge distances to seek banking services. Since the government of India is doing everything possible to attract FDI at present, foreign banks competing each other to exploit the opportunities in Indian retail banking industry. GE Capital like foreign banks has $1.5 billion business at present and their target business is $ 10 billion in about four years (Riding The Retail Wave, N.d., p.62). Kotak Mahindra Bank (KMB) is another private bank which developed rapidly in recent times in India. KMB's net profit zoomed by 125 per cent during first quarter of the current fiscal (April-June 2006), way ahead of other competitors, including HDFC Bank (48.4per cent), UTI Bank (30.14 per cent) and ICICI Bank (17 per cent). Not surprisingly, the company's stocks have gained by 50 per cent since mid-June on the Bombay Stock Exchange, though analysts such as JP Morgan Stanley have cautioned that the current spike in prices is unjustified (Riding The Retail Wave, N.d., p.64). MSC (Maharashtra State Co-operative) Bank is another retail bank in India which has shown phenomenal growth since last 5 years. Its business increased from Rs.1442 crores to Rs. 1536 crores during the period from 2006 to 2010. The net profit of this bank has increased almost 42% during this period (Matkar, 2010, p.142). If state bank of India is the largest banking group in public sector, ICICI is the largest banking group in private sector in India. Both these banking groups marked attractive growth rates during the last few years. The ratio of net profits to total income of ICICI was varied from 11.81 per cent to 17.45 percent whereas in case of SBI it is not stable. It increased to 13.11 percent from 12.64 percent in 2008-09 then further decreased to 10.54 percent in 2009-10 and 8.55 percent in 2010-11 and finally increased to 9.73 percent in 2011-12 during the period of 5 years of study. However, the net profit margin was higher in ICICI (14.37%) as compared to SBI (10.91%) during the period of study. But it was continuously decreased from 2007-08 to 2011-12 in ICICI. Thus, the ICICI has shown comparatively lower operational efficiency than SBI. (Dr. Singh & Tandon, 2012, p.64) References Ansul. 2010. Meaning of Repo, Reverse Repo, CRR, SLR and Bank Rates. [Online] Available at: http://www.knowledgehub.co.in/2010/03/meaning-of-repo-reverse-repo-crr-slr.html [Accessed 13 May 2013] Dr. Goyal K.A. & Joshi V. 2012. Indian Banking Industry: Challenges And Opportunities. International Journal of Business Research and Management (IJBRM), Volume (3): Issue (1) : 2012 Dr. Revathy, B. 2012. Indian retail banking industry: drivers & dooms - an empirical study. EXCEL International Journal of Multidisciplinary Management Studies Vol.2 Issue 1, January 2012. Dr. Singh, A.B. & Tandon, P. 2012. A study of financial performance: a comparative Analysis of SBI and ICICI bank. International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 11, November 2012 Dev, S. M. 2006. Financial Inclusion: Issues and Challenges. Economic & Political Weekly, 41(41): 2006. Goyal, R. 2013. Latest Important Banking  Sector  Data – 2013. [Online] Available at: http://www.allbankingsolutions.com/DATA.htm[Accessed 13 May 2013] Indian banks: Performance benchmarking report, 2012. 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. kpmg.com/in Indian Banking: Towards Global Best Practices, 2007. McKinsey & Company. November 2007. Investopedia. 2013. Money Market: Repos. [Online] Available at: http://www.investopedia.com/university/moneymarket/moneymarket7.asp[Accessed 13 May 2013] Matkar, A. 2010. Glance in Financial Performance and Retail Banking Products of Maharashtra State Co-op. Bank. Abhinav National monthly refereed journal of research in Commerce & management VOLUME NO.1, ISSUE NO.3 Riding The Retail Wave, N.d.. A team India Now report. What is CRR, repo and reverse repo rate?. 2012. [Online] Available at: http://www.indiainfoline.com/Markets/News/What-is-CRR-repo-and-reverse-repo-rate/4891655230[Accessed 13 May 2013] Read More