INTERBANK COMPARISON

ABSTRACT
Banks are the backbone of the Indian Economy. The health of the economy depends upon the profitability, performance and efficiency of the banks. After the 2008 crisis, BASEL introduced BASEL-3 norms which focused on stringent rules for Capital Adequacy Ratio (CAR), Liquidity management. BASEL-3 introduced the new buffers capital conservation buffer and countercyclical buffer to prevent the banking sector during any crisis and the new minimum CAR requirements set includes these margins. The key factors according to author that influence the banks profitability and performance are Profit per Employee (PPE), Cost of Funds (CoF), Return on Advances, Wages as a percentage of total expenses, Return on Assets (ROA), Capital Adequacy Ratio (CAR), and the Net NPA ratio. The author has divided the total banks in India under 5 different heads namely: SBI and its Associates, Nationalised Banks, Public Sector Banks, Private Sector Banks, Foreign Banks. Five year data has been considered for the analysis. The growth percentage for the various banks has been studied for the past 5 years. A statistical tool, ANOVA has been used to compare the means of all the factors of the various banking heads considered. The result s of this test show a significant difference in the means of all the factors considered except CAR which does not show much of the variance for all the banks. The author has also used step-wise Multiple Regression model to determine the factors affecting the Return on Assets (ROA) for each of the banking head. This test shows that each banking head has different set of equation affecting their performance. For some banks it is the CoF, for some other it is the PPE which does not affect the ROA of the bank.

Some important keywords:

Interbank Profitability Analysis, Statistical Model affecting Return on Assets (ROA), Growth of various Banks in India, Factors affecting the performance of the Banks.

Performance Analysis of various Banks

The various banks have been divided into various sectors for the study. The sectors that have been considered for the comparison are:1. SBI and its associates 2. Nationalised Banks 3. Public sector banks 4. Private sector banks 5. Foreign Banks

These are main sectors under which the Indian Banks can be divided. The percentage business for these sectors in the India are as follows:-

These sectors have showed a varied amount of growth over the past 5 years. The growth of these banking sectors have been depicted as follows:-

Comparison of Means
The plot of various means for all the important factors of a bank are as follows:-

Profit Per Employee:-

This shows that the Foreign Banks have the highest Profit per employee and the least is of SBI and its Associates.

Cost Of Funds

This graph shows that the Cost of funds of the foreign banks is the least compared to the other banks which have almost similar value of cost of funds.

Return On Advances

This graph shows that the foreign banks have the highest Return on Advances, followed by the private banks and the rest have similar value.

Wages as a Percentage of total Expenses

The graph shows the varied results for all the banks for the wages as a percentage of total expenses.

Return on Assets

The return of assets for the foreign banks was the highest among all the banks and the rest of the banks have almost the similar returns.

Capital Adequacy Ratio

The capital Adequacy was the highest for the private sector banks followed by the foreign banks and rest of the banks have similar value.

Net NPA Ratio

The net NPA ratio was the highest for the SBI and associates, it was also significantly high for the foreign banks and was the least for the nationalized banks and was almost similar for rest of the banks.

Anova Test

ANOVA Sum of Squares PPE Between Groups Within Groups Total CoF Between Groups Within Groups Total Return_on_Advances Between Groups Within Groups Total Wages_totalincome Between Groups Within Groups Total ROA Between Groups Within Groups Total CAR Between Groups Within Groups Total Net_NPA_Ratio Between Groups Within Groups Total 952.897 82.733 1035.630 8.957 7.691 16.648 33.490 4.105 37.595 219.849 85.828 305.676 3.316 .747 4.063 20.361 36.034 56.395 1.116 1.526 2.642 df 4 20 24 4 20 24 4 20 24 4 20 24 4 20 24 4 20 24 4 20 24 .279 .076 3.656 .022 5.090 1.802 2.825 .052 .829 .037 22.199 .000 54.962 4.291 12.808 .000 8.372 .205 40.793 .000 2.239 .385 5.823 .003 Mean Square 238.224 4.137 F 57.589 Sig. .000

In the Annova table we see the F values and the significance values for all the factors of a bank. The null hypothesis is:Ho : - means of the variable are equal for all banks H1 : - means are not equal. In this table we see if the F value is greater than 4 and the significance value is less than 0.05 then we reject the null hypothesis of equal means and if F value is less than 4 and the significance value is more than 0.05 the the null hypothesis is accepted. From the table we see that for the factors like Profit Per Employee(PPE), Cost of Funds(CoF), Returns on Advances(ROA), wages as a percent of total income, Return on Assets(ROA), and Net NPA Ratio have different mens that is these variables have significantly different values for all the banks. Whereas we see that the Capital Adequacy Ratio(CAR) shows similar values. This is true because a minimum capital adequacy ratio has been set by Basel.

Step- Wise Multiple Regression

Variables Entered/Removedb Model 1 Variables Entered Net_NPA_Ratio, CoF, CAR, PPEa Variables Removed . Enter Method

a. Tolerance = .000 limits reached. b. Dependent Variable: ROA

1) SBI and its associates

Unstandardized Coefficients Model 1 (Constant) PPE CoF CAR Net_NPA_Ratio a. Dependent Variable: ROA B 1.580 .100 .120 .030 -1.451 Std. Error .000 .000 .000 .000 .000 .891 .736 .236 -1.135 Standardized Coefficients Beta

ROA(SBI and Associates)= 1.580+0.100(PPE)+0.120(CoF)+0.03(CAR)-1.451(Net_NPA_Ratio) This gives an equation for Return on Assets of SBI. This shows that Net NPA Ratio has an inverse relationship with the ROA and we see that Wages as a Percentage of Total Expenses has no impact on the ROA of the bank.

2)

Nationalised Banks

Unstandardized Coefficients Model 1 (Constant) PPE Wages_totalexpenses CAR Net_NPA_Ratio a. Dependent Variable: ROA B 1.430 .029 .001 -.030 -.243 Std. Error .000 .000 .000 .000 .000

Standardized Coefficients Beta

1.264 .069 -.474 -.748

ROA(Nationalised Banks)=1.430+0.029(PPE)+0.01(Wages)-0.30(CAR)-0.243(Net_NPA_Ratio) This gives an equation for Return on Assets of Nationalised Banks. This shows that Net NPA Ratio and CAR have an inverse relationship with the ROA and we see that Cost of funds(CoF) has no impact on the ROA of the bank.

3) Public Sector Banks

Unstandardized Coefficients Model 1 (Constant) PPE Wages_totalexpenses CAR Net_NPA_Ratio a. Dependent Variable: ROA B 1.674 .014 -.010 -.020 -.325 Std. Error .000 .000 .000 .000 .000 .463 -.594 -.245 -.580 Standardized Coefficients Beta

ROA(Public Sector Banks)=1.674+0.14(PPE)-0.10(Wages)-0.20(CAR)-0.325(Net_NPA_Ratio) This gives an equation for Return on Assets of Public Sector Banks. This shows that wages as a percentage of total expenses, Net NPA Ratio and CAR have an inverse relationship with the ROA and we see that Cost of funds(CoF) has no impact on the ROA of the bank.

4) Private sector banks

Unstandardized Coefficients Model 1 (Constant) CoF Wages_totalexpenses CAR Net_NPA_Ratio a. Dependent Variable: ROA B .006 .071 .038 .043 -.302 Std. Error .000 .000 .000 .000 .000

Standardized Coefficients Beta

.333 .419 .566 -.508

ROA(Private Sector Banks)=0.006+0.071(CoF)+0.038(Wages)+0.043(CAR)-0.302(Net_NPA_Ratio) This gives an equation for Return on Assets of Private Sector Banks. This shows that Net NPA Ratio has an inverse relationship with the ROA and we see that Profit Per Employee(PPE) has no impact on the ROA of the bank.

5) Foreign Banks
Unstandardized Coefficients Model 1 (Constant) PPE CoF Wages_totalexpenses Net_NPA_Ratio a. Dependent Variable: ROA B 21.029 .030 -1.368 -.669 -.376 Std. Error .000 .000 .000 .000 .000 .289 -2.292 -2.799 -.520 Standardized Coefficients Beta

ROA(Foreign Banks)=21.029+0.30(PPE)-1.368(CoF)-0.669(Wages)-0.376(Net_NPA_Ratio) This gives an equation for Return on Assets of Foreign Banks. This shows that wages as a percentage of total expenses, Net NPA Ratio and Cost of funds have an inverse relationship with the ROA and we see that Capital adequacy ratio(CAR) has no impact on the ROA of the bank.

Conclusion:The study conducted is a fact finding research. In the course of study some factors influencing profitability, growth, and efficiency of the various banks have been examined. The public sector banks hold the maximum percentage of business in India. It has been seen that the private sector banks have shown maximum growth in 2010-11 and the nationalized banks have shown a constant growth over the past 5 years.

From the Anova test we concluded that the variance in the means of all the factors have a significant difference except for the capital adequacy ratio which has almost similar values. The step-wise multiple regression analysis of the profitability parameter i.e. return on Assets(ROA) discloses the relationship among the various factors considered on the ROA of the banks. This relationship will help in determining the strengths and the weaknesses of the various banks and the steps they can take to improve the profitability.

References :

A Profile Of the Banks 2010-11, summary by RBI, Mumbai. A study of profitability and efficiency of Banks in India, by Dr. V. S. Pai Profitability of the Indian scheduled commercial banks: A case analysis, by A. Ramachandran. Management Of Banking, 6th ed., by Mac Donald and W. Koch.