In the following study, using the most current data existing, three ownership groups of banks operating in India; viz. publically owned domestic banks (PUODs), privately owned domestic banks (PRODs) and foreign-owned banks (FOBs) are assessed for their profitability. Applying key profitability ratios to assess the comparative profitability of these three ownership groups of banks, the study aims at finding the better financial performer among the three ownership groups.
INTRODUCTION
Financial Sector is backbone of economy of any country. It is a facilitator to achieve sustained economic growth. A strong financial system encourages investment by financing productive business opportunities, efficient allocation of resources and makes easy the trade of goods and services.
Banking has become an important feature, which provides services in financial matters and its scale of action is spreading day by day. There has been a tremendous change in the ownership structure of the banking industry in developing countries during the last decade. This change has been observed due to the privatization of public banks and entrance of foreign banks.
Commercial banks in India
Currently, India has 88 scheduled commercial banks (SCBs) - 27 publically owned domestic banks, 31 private owned domestic banks and 38 foreign banks.
Public Sector banks
The Central Government entered the banking services with the nationalization of the Imperial Bank of India in 1955. The shares of these banks are listed on stock exchanges. There are a total of 27 PSBs in India viz. Allahabad Bank, Andhra Bank, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank etc.
Private Sector Banks
Domestic private banks came into operation since late 1990s in India. There are a total of 31 privately owned domestic banks in India viz. City Union Bank Ltd., ING Vysya Bank Ltd., Tamilnad, Mercantile Bank Ltd., Axis Bank Ltd., Development Credit Bank Ltd. etc.
Foreign Owned banks
There are a total of 38 foreign banks operating in India viz. Bank of America NA, Bank of Bahrain and Kuwait B.S.C., Bank of Ceylon, Barclays Bank PLC, BNP Paribas, Chinatrust Commercial Bank, Citibank N.A., DBS Bank Ltd., Deutsche Bank AG etc
LITERATURE REVIEW
The trend of commercial banking is changing rapidly. Competition is getting stiffer and, therefore, banks need to enhance their competitiveness and efficiency by improving performance.
There have been several efforts in the past to examine the proï¬tability of banks in general and also to associate the performances of different bank groups. These studies tried to find out the performance of banks during the post-liberalization period. During the pre-liberalization period, the Indian banking sector was characterized by state ownership and administered interest rates. Thus, the performance of banks through this period was reliant on to a great amount on policies undertaken in the banking sector.
Verghese (1983) found that variations in the interest rate were the supreme factor determining proï¬tability of banks during the post-nationalization but pre-deregulation period. This trend has altered after the acceptance of the liberalization policies. Banks have gained substantial commercial freedom in the broad regulatory framework.
Ram Mohan (2002) discovered that the performance of PSBs improved during the post-liberalization period. The study examined the performance of PSBs by taking a various indicators, viz., net interest margin, net proï¬ts, intermediation cost and non-performing assets. Another study from Chaudhuri (2002) pointed out that during the period from 1997-98 to 2000-01, the PSBs witnessed a deterioration in their proï¬tability, mainly owing to the diminishing down of net interest margin.
Similarly, with regard to the performance of Foreign Banks in contrast with other bank groups, some of the studies have come to the inference that there is convergence in the performances of various bank groups in India. Some other studies inferred that public and private sector banks continue to be more efï¬cient than foreign banks. To illustrate this, Mittal and Aruna (2007) compared the proï¬tability of numerous bank groups by means of ratio analysis. Their study concluded that Foreign Banks were the most proï¬table bank group in India followed by Private Sector Banks and Public Sector Banks. Through this study they also found that the proï¬tability of the Public Sector Banks have observed improvement over the last ï¬ve years.
Das (1999) also opined that there is convergence in the performances of different bank groups in India. Public Sector Banks have a heritage of labor-intensive work procedures and more penetration in rural areas, which also resulted in reasonably low business per employee (RBI, 2009).
Sensarma (2006), opined that foreign banks are less cost efï¬cient in contrast to other bank groups in India. The above mentioned study compared the performances of different bank groups for the period from 1986 to 2000.
According to Avkiran (1995) the financial performance of commercial banks and other financial institutions has been measured using a combination of financial ratios analysis, benchmarking and measuring performance against budget or a mix of these techniques.
Gopinathan (2009) has offered that the financial ratios analysis can advert better investment decisions for investors as the ratio analysis measures several aspects of the performance and asses fundamentals of a company or an institution.
Ho and Zhu (2004) have presented that the evaluation of a company's performance has been aiming the operational effectiveness and efficiency, which might impact the company's survival directly.
Bakar and Tahir (2009) used multiple linear regression technique and simulated neural network techniques in their paper for predicting bank's performance. They used ROA as dependent variable of bank's performance and seven variables including credit risk, cost to income ratio, liquidity, size and concentration ratio were used an independent variables.
Their conclusion includes that neural network method outclasses the multiple regression method but however it needs explanation on the factor used and they noted that multiple regression can be used as a simple tool to study the linear relationship between the dependent and the independent variables.
Indian Banking cost studies used either various statistical methods or financial ratio analysis to analyze cost performance of publically-owned and foreign banks. Ataullah and Le (2002) used ratio analysis and non-parametric cost efficiency methods to analyze profitability of the three groups of bank ownership. They found that although these groups of banks improved their cost efficiency in the post-deregulation period, the efficiency of privately owned and foreign banks are more noticeable than that of the publically owned banks.
These results were confirmed by Rezvanian et al. (2005a, 2005b) who determined that foreign banks not only are significantly more efficient than privately and publically owned banks, but also the increase in overall technical efficiency, improvement in technological delivery of bank services, and growth in productivity of foreign banks is significantly more than those of public and private banks.
On the other hand, the studies by Mohan and Ray (2003) and Bhattacharyya et al. (1997a) do not confirm the findings of the above mentioned studies. Ataullah and Le's study, though, concluded that high cost efficiency banks appears to have higher profitability as measured by the return on assets ratio. Similar inferences have been touched by Kumbhakar and Sarkar (2003) and Saha and Ravisankar (2000) using Indian banking data
Sathye (2003) in comparing the efficiency of the three ownership groups of banks in India, found that public banks are the most efficient banks. Sarkar, Sarkar and Bhaumik (1998) also found variances in the performance of public sector banks and private sector banks in India.
Kumbhakar and Sarkar (2003) also examined the outcome of deregulation and liberalization on the total factor productivity (TFP) growth in the banking industry in India. Their study resolved that a substantial increase in TFP growth has not materialized in the Indian banking system succeeding deregulation. They also found the existence of a weak ownership effect in the Indian banking atmosphere and no indication of performance differentials due to competition following deregulation. Also a study by Shanmugam and Das (2004) concluded that the state-owned banks and foreign-owned banks performed better than the privately owned domestic banks.
Baral (2005) suggested that quality of assets held by a bank depends on trends in non-performing loans, exposure to specific risks and the health and profitability of bank borrowers. Olweny and Shipo (2011) also suggested that low levels of liquidity and poor asset quality are two main reasons of the failure of banks. The latter reason led to many bank failures in early 1980s.
