Dissertation Report

On

An investigative study on the impact of the financial crisis on the Indian banking
industry

Submitted in partial fulfilment of the requirement for the Post Graduation Diploma in
Management

Submitted by:
Ashish Kumar
Roll Number: GM18059

PGDM 2018-2020

GL BAJAJ INSTITUTE OF MANAGEMENT AND RESEARCH

Plot No. 2, Knowledge Park-III, Greater Noida

Ashish Kumar | List of Tables 1

 ACKNOWLEDGEMENT

I owe my gratitude to many people who helped and supported me during the entire
Dissertation Report.

My sincere thanks to Dr. Harsh Pratap Singh, the Faculty Guide of the project, for initiating
and guiding the project with attention and care. He has always been available for me to put
me on track from time to time to bring the project at its present form.

This report would not been made possible without the constant guidance and support some of
my colleagues who helped me a lot during the completion of this project. I extend my
gratitude to the entire GLBIMR family, with their constant support and learning environment.

I also thank all faculty members without whom this project would have been a distant reality.

And lastly, I’m thankful to all those who contributed both directly and indirectly in making
this report.

Ashish Kumar

Greator Noida

Ashish Kumar | List of Tables 2

 ABSTRACT

This paper provides an outlook for the Indian banking system in the light of the extraordinary global
financial crisis, that started in the US, Europe and Asia in the last few decades but which has now
transformed the banking architecture as well as their way of working. The Indian public sector banks
have shown the symptoms of the impact of these financial crisis’s and how they combat the external
shocks. The analysis undertaken for this paper shows that the global crisis is likely to impact the
Indian public banks. This will pose a big challenge requiring urgent and sustained policy attention to
prevent this downturn from becoming unnecessarily prolonged. There is real downside risk that the
Indian PSBs could plummet to the pre-1980s levels if appropriate countercyclical measures are not
taken immediately and are not urgently followed by necessary structural reforms. We present three
scenarios in the paper assuming differentiated impact of the external crisis. Finally the paper suggests
a set of policy measures to get the Indian economy back on the path of sustained rapid and inclusive
growth.

Ashish Kumar | List of Tables 3

Contents
List of Tables ..................................................................................................................................... 5
List of Figures .................................................................................................................................... 5
INTRODUCTION ................................................................................................................................. 6
Global Financial Crisis .................................................................................................................... 7
Major financial crisis in India........................................................................................................ 10
The Asian Crisis of 1997 ........................................................................................................... 10
The Financial Crisis 2007-08 ..................................................................................................... 11
The European Crisis 2010 ......................................................................................................... 13
Literature Review ............................................................................................................................ 15
Objectives ....................................................................................................................................... 19
Research Methodology .................................................................................................................... 20
Asian Financial Crisis 1997 ........................................................................................................... 21
Impact on Indian Banking System ............................................................................................ 21
The Global Financial Crisis 2008 ................................................................................................... 22
Financial Soundness................................................................................................................. 23
Financial Soundness in Indian Banking ..................................................................................... 24
The European Crisis 2010............................................................................................................. 26
Implications for Indian Banking Sector ..................................................................................... 26
Conclusion & Way Forward ............................................................................................................. 34
Bibliography ................................................................................................................................... 35

Ashish Kumar | List of Tables 4

 List of Tables
Table No. Page No. Description
1 8 Some notable financial crises
2 9 Frequency of Financial Crisis
3 20 Core Financial Soundness Indicators of Select Countries
4 27 Net Profit/Total Assets (in %) of Public Sector Banks
5 28 Return on Assets and CRAR
6 29 Profit after tax and profit per employee
7

List of Figures
Figure No. Page No. Description
1 22 Core Banking Sector Indicators for India
2 23 Interest rates in India
3 23 Capital to Risk Weighted Assets Ration

Ashish Kumar | List of Tables 5

INTRODUCTION
Banks play the backbone in development of any economy. Post liberalization, the Indian
banking industry underwent a huge rise. Since the financial reforms of 1991, there has been a
drastic upgradation in the Indian banking sector. The deregulations of deposit interest rates
and lending rates, lower CRR and SLR, increased competition etc. have boost the Indian
banking sector. This has enabled banks to control the cost of deposits, to provide loans at a
competitive pricing, to make available more fund for lending, to lower down their generation
rate of Non Performing Assets, etc. RBI permitted new banks to be started in the private
sector as per the recommendation of Narashiman committee. Foreign banks also were
permitted to enter Indian banking industry. Because of the deregulation regarding entry, more
and more banks from within and outside India are emerging, which created huge competition
among banking entities. Due to this cut throat competition among banks in the Indian
banking sector, the banks are diversifying its risk to different sectors. During the period of
recession the global exposure of Indian banks is relatively very small, with international
assets about 6 per cent of the total assets. In the year 2009 the banking system had Rs. 36
lakh crore of deposits and Rs. 26 lakh crore of advances (Vidyakala and Madhuvanthi,
2009).The Indian banking sector has shown high economic growth and performance in the
past, low default ratio, absence of complex financial products, time to time intervention by
RBI, proactive steps for maintaining the liquidity in the market have favored the performance
of Indian Banking in recent global financial turmoil. Barring the few incidents of decline in
the business performance indicators , the huge Indian financial sector having 82 lakh crores
assets and 60 lakh crores deposit base has grown at around 12 to 15 per cent per annum and
has displayed stability for the last several years, even when other markets in the entire world
and in Asian region were facing a crisis.The bank expects that the loss due to the subprime
crisis would take away nearly 9% of the yearly turnover. The present study analyses the
impact of financial turmoil on the Indian banking sector.

Banks are financial institutions that mediate payments, provide loans and take deposits from
clients. The main macroeconomic objectives of central banks are mostly maintaining price
stability, promoting full employment and promoting economic growth. Set goals are achieved
by applying the tools of monetary policy - setting interest rates, open market transactions,
intervening in currency markets or adjusting the supply of money in an economy through the
transmission mechanisms of different transmissive channels. The aim of this paper is to
measure and evaluate the impact of financial crisis on the Indian banking industry. A

Ashish Kumar | INTRODUCTION 6

comparison of the selected banking sector is made on the basis of descriptive and measurable
indicators. The selected banking sectors are compared in terms of their pre financial crisis
performance and post financial crisis performance and how the central bank changed the
monetary policy to combat the crisis. The analysis is made on selected financial indicators
monitored in the banking sectors in the years 2003-2018, focusing on the evaluation of their
mutual influence. A correlation analysis method is used to investigate the relationship
between selected financial indicators. Key methods of scientific inquiry methods include
classification analysis, and comparison and abstraction in developing a theoretical and
methodological framework for solving the problem. This study will target at determining the
impact that the financial crisis has on the banking industry. This study will be important in
determining some of the sources of the financial crisis. Also, the strategies that the banking
sector could employ to save the situation will be discussed.

Sanyal and Shankar (2011) have examined the productivity levels of the Indian banking
industry by applying the Levinsohn–Petrin production function technique. They showed that
Indian private banks had higher productivity levels than both public and foreign banks. Under
the effect of competition they provided evidence that the new Indian private banks and
foreign banks have decreased their productivity levels, whereas the productivity levels of
public banks remained unaffected. Finally, they suggested that only the old private banks
have reacted positively to the increased competition by increasing their productivity levels.

For the period of 1996–2005, Das and Kumbhakar (2012) proposed a hedonic aggregator
function within input distance function framework analyzing the efficiency and total factor
productivity (TFP) of the Indian banking industry for the period 1996–2005. Their results
indicated that during that period banks have improved their efficiency levels, with the state
owned banks to perform much better compared to private banks.

Global Financial Crisis

The recent global financial crisis, also termed as ‗the great recession‘ which resulted into a
grave banking panic and threw most of the economies of the world into severe recession, is
mostly attributed to several factors such as; Increasing global imbalances, build- up of
excessive leverage, mismatches in financial intermediaries, regulatory and supervisory
system loopholes, complex financial products carved out of mindless financial innovations.
The crisis set off unprecedented panic and uncertainty about the extent of risk in the system
thereby causing sudden and massive break down of trust across the entire global financial

Ashish Kumar | INTRODUCTION 7

system. While banks tended to hoard liquidity, the credit, bond and equity markets witnessed
huge setback resulting in massive deleveraging that hammered down asset prices, setting off
a vicious cycle. While a few of the monolithic global financial giants collapsed, quite a few
of such venerable financial institutions came to the brink of collapse. Although the epicentre
of the crisis was in the advanced economies particularly originating from the US, it soon
proliferated from the financial sector to the real sector in advanced economies, concomitantly
stretched geographically to the emerging market economies, and rapidly engulfed the global
economy. In view of the above occurrences, Post-crisis, financial stability has turned out to
be the central objective for regulators across the globe. Moreover, researchers and policy
makers should also review and draw lessons from the varied episodes of financial turmoil for
further strengthening financial stability in their economies (Table-1).

Table-1: Some notable financial crises due to systemic risk

Year Episode Main feature
1974 Herstatt (Germany) Bank failure following trading losses

1979-89 US Savings & Loan crisis Bank failure following loan losses

1987 Stock market crash Price volatility after shift in expectations

1990-91 Norwegian banking crisis Bank failure following loan losses

Finnish and Swedish

1991-92 Bank failure following loan losses
banking crises

1992-96 Japanese banking crisis Bank failure following loan losses

Exchange Rate Mechanism

1992-93 Price volatility after shift in expectations
crises

1995 Mexican crisis Price volatility after shift in expectations

Price volatility after shift in expectations and

1997-98 Asian crises
bank failure following loan losses

Russian default and Long

1998 Term Capital Management Collapse of market liquidity and issuance

2000 Argentine banking crisis Bank runs following collapse of currency board

2000-01 Turkish banking crisis Bank failure following loan losses

Ashish Kumar | INTRODUCTION 8

 Speculations concerning internet companies
2001 Bursting of dot-com bubble
crashed

Bank failure due to funding and liquidity

2007 Northern Rock crisis in UK
problems

2008-10 Global Financial Crisis Collapse of global financial institutions

Failure of PIIGS (Portugal, Ireland,

European sovereign debt Italy,

2010 crisis Greece, Spain) countries in managing sovereign

debts and fiscal prudence

Source: Compiled from various sources

The frequency of incidence of financial crisis has been the highest over the past three decades
or so (table-2). Financial crises have impacted both advanced as well as emerging market
economies adversely in varying degrees.

Table-2: Frequency of Financial Crisis: 1973-2007

Banking Currency Sovereign Twin Triple Total No. of
Period
Crisis Crisis Debt Crisis Crisis Crisis Crises

1970s 4 26 7 – – 37

1980s 40 74 42 11 4 171

1990s 73 92 7 27 3 202

2000s 7 19 8 4 3 41

Total 124 211 64 42 10 451

Source: Laeven and Valencia, (2008)

An assessment of the incidence of financial crises over the past one and a half century reveals
that although crisis occurs without warning, the incidence can essentially be explained in
terms of the prevailing macroeconomic conditions, the financial regulatory regime, currency
regime, fiscal discipline and global capital and trade flows.

Ashish Kumar | INTRODUCTION 9

Major financial crisis in India

The Asian Crisis of 1997

THE EAST ASIAN countries post the crisis of 1997 were for years admired as some of the
most emerging market economies in the world, owing to their rapid growth and the progress
in their populations' living standards. With their generally excellent fiscal policies and high
rates of private saving, these countries were widely seen as models for many other countries.
No one could have ever foreseen that these countries could suddenly become entangled in
one of the worst financial crises of the post World War II.

Their very success led foreign investors to underestimate their underlying economic
weaknesses. Partly because of the large-scale financial inflows that their economic success
encouraged, there were also increased demands on policies and institutions, especially those
safeguarding the financial sector; and policies and institutions failed to keep pace with these
demands (see table). Only as the crisis deepened were the fundamental policy shortcomings
and their ramifications fully revealed. Also, past successes may have led policymakers to
deny the need for action when problems first appeared.

Several factors—both domestic and external—probably contributed to the dramatic

deterioration in sentiment by foreign and domestic investors:

 a buildup of overheating pressures, evident in large external deficits and inflated

property and stock market values;
 the prolonged maintenance of pegged exchange rates, in some cases at unsustainable
levels, which complicated the response of monetary policies to overheating pressures
and which came to be seen as implicit guarantees of exchange value, encouraging
external borrowing and leading to excessive exposure to foreign exchange risk in both
the financial and corporate sectors;
 a lack of enforcement of prudential rules and inadequate supervision of financial
systems, coupled with government-directed lending practices that led to a sharp
deterioration in the quality of banks' loan portfolios;
 problems resulting from the limited availability of data and a lack of transparency,
both of which hindered market participants from taking a realistic view of economic
fundamentals; and

Ashish Kumar | INTRODUCTION 10

  problems of governance and political uncertainties, which worsened the crisis of
confidence, fueled the reluctance of foreign creditors to roll over short-term loans, and
led to downward pressures on currencies and stock markets.

External factors also played a role, and many foreign investors suffered substantial losses:

 international investors had underestimated the risks as they searched for higher yields
at a time when investment opportunities appeared less profitable in Europe and Japan,
owing to their sluggish economic growth and low interest rates;
 since several exchange rates in East Asia were pegged to the U.S. dollar, wide swings
in the dollar/yen exchange rate contributed to the buildup in the crisis through shifts in
international competitiveness that proved to be unsustainable (in particular, the
appreciation of the U.S. dollar from mid-1995, especially against the yen, and the
associated losses of competitiveness in countries with dollar-pegged currencies,
contributed to their export slowdowns in 1996–97 and wider external imbalances)
(see chart);
 international investors—mainly commercial and investment banks—may, in some
cases, have contributed, along with domestic investors and residents seeking to hedge
their foreign currency exposures, to the downward pressure on currencies.

To contain the economic damage caused by the crisis, the affected countries introduced
corrective measures. In the latter part of 1997 and early 1998, the IMF provided $36 billion to
support reform programs in the three worst-hit countries—Indonesia, Korea, and Thailand.
The IMF gave this financial support as part of international support packages totaling almost
$100 billion. In these three countries, unfortunately, the authorities' initial hesitation in
introducing reforms and in taking other measures to restore confidence led to a worsening of
the crisis by causing declines in currency and stock markets that were greater than a
reasonable assessment of economic fundamentals might have justified. This overshooting in
financial markets worsened the panic and added to difficulties in both the corporate and
financial sectors. In particular, the domestic currency value of foreign debt rose sharply.
While uncertainties persisted longer in Indonesia, strengthened commitments were made
elsewhere to carry out adjustment reforms.

The Financial Crisis 2007-08

The crisis that began as the U.S. “subprime” crisis in the summer of 2007 spread to a number
of other advanced economies through a combination of direct exposures to subprime assets,
Ashish Kumar | INTRODUCTION 11
the gradual loss of confidence in a number of asset classes and the drying-up of wholesale
financial markets. In this process it came to expose “home-grown” financial imbalances in a
number of advanced economies, typically characterized by an overreliance on wholesale
funding sources by the banking system and asset bubbles in residential property markets.

Three years after the onset of the crisis, there is still no full agreement among policymakers
and researchers on what caused the build-up of financial imbalances globally. While most
commentators concede that supervision and regulation were lacking with hindsight and
efforts to strengthen regulation are well underway, strong disagreement persists on whether it
was overly accommodative monetary policy from 2001 that fuelled the build-up (Taylor,
2007, White, 2009) or whether the widening global imbalances and associated capital flows
were the root cause of the build-up of financial imbalances across advanced economies (e.g.,
Bernanke, 2009, King, 2010, Portes, 2009). As argued by some (e.g., Acharya and
Richardson, 2009, Obstfeld and Rogoff, 2009), it may have been a combination of
accommodative monetary policy and growing global imbalances that caused the build-up.
But even if this were to be so, an empirical determination of these factors’ relative
contribution remains an important and unfinished task.

Taylor (2007) argued that in the United States, the demand for housing is sensitive to
moneymarket interest rates and that accommodative policy on the part of the Federal Reserve
from 2001 was likely therefore to have contributed to the build-up in housing demand and
asset prices. Similarly, White (2009) conjectured that when the stock market boom of the late
1990s collapsed and rates were sharply reduced in response “the seeds of the housing market
boom and bust were sown.”

Against this, Del Negro and Otrok (2007) found that the impact of accommodative monetary
policy on house prices had been small relative to the overall housing price increase in the
United States. Greenspan (2010) pointed out that U.S. house prices are more closely related
to longterm rates, whereas the relationship between short and long rates had been weak over
the period. Indeed, some economists argue that as a matter of principle, monetary policy has
little control over long-term rates and instead point to increasing global imbalances as the
main cause of low nominal and real rates over the period in the United States as well as
elsewhere. Looking across countries, IMF (2009a) found that while in many economies,
policy rates had been low by historical standards, there was virtually no association between

Ashish Kumar | INTRODUCTION 12

measures of the monetary policy stance and house price increases across advanced
economies.

On the other hand, existing cross-country evidence points to a robust relationship between
capital inflows and house price appreciations. Aizenman and Jinjarak (2009) found for a
sample of 43 countries that a one standard deviation (4 per cent) increase in the (lagged)
current account deficit is associated with a 10 per cent increase in real estate prices,
controlling for a range of other macro factors. Obstfeld and Rogoff (2009) found a significant
negative relationship between the change in the ratio of the current account to GDP and the
cumulative appreciation in real house prices over 2000-2006. And Reinhart and Reinhart
(2008) found that surges in capital inflows are associated with increases in both real equity
prices and house prices across advanced economies over much longer sample periods.

The European Crisis 2010

The European Union is a group of countries with outstanding natural resources, human
resources, and infrastructure. It is also a region of territorial and national diversity, with 550
million people in 28 member states sharing 4.4 million square kilometers. Its economic
strengths range from technology and complex manufacturing to agriculture and
worldrenowned tourism. This diversity in economic strengths is arguably Europe’s greatest
asset yet is also its greatest challenge. Europe’s management of this diversity, and the tension
between unity, collaboration, and difference, has driven the current financial crisis.

The impacts and threats of the crisis are great. Five of the member states face intense
sovereign debt and have been ensconced in cycles of bailouts and austerity since 2009. This
has led to intense discord in the region, causing some to question the sustainability of the EU
and to suggest the secession of individual member states from the Union.ii Faulty
investments and real estate and banking bubbles have cost some citizens their life savings,
particularly in hard-hit countries such as Spain.iii Unemployment figures are now at 5% in
Germany at the lower end.iv But in Greece and Spain, however, the figures reach 27%.v For
youth, the situation is even more dire, with Europeans aged 15-24 unemployed at a rate of
over 22%.vi Although all of Europe is well aware that there is a problem, there is
disagreement as to the causes and solutions. There has been discussion of the possibility of
member states going bankrupt, and leaving either the Eurozone or the Union.

In order to look for new insights into the crisis, we have attempted to understand key
dynamics and issues within a broader context.vii European unity has included political,

Ashish Kumar | INTRODUCTION 13

economic, and monetary changes for the region. The structure and dynamics of the European
Union reflects Europe’s strong national identities. Politically, the European Council, the most
empowered entity in the EU government, represents the member states and significantly
influences the agendas of the Parliament and European Commission.

Meanwhile, the burden of economic change has fallen mostly on the Southern nations. In the
past decade, the free market has opened up unprecedented economic opportunities. At the
same time, the common currency has shifted the 17 formerly autonomous nations into a
united monetary policy under the European Central Bank (ECB). This monetary policy,
whose Keynesian focus on low inflation most closely aligns with the historical monetary
policies of the German Bundesbankviii, has created fiscal issues for southern nations who
historically have used inflation as a way to increase the competitiveness of exports and to
finance public spending.ix With the loss of monetary autonomy, Southern nations have
struggled with the loss of manufacturing jobs to Asia for decades, as well as with increasing
pressure to offer the same social protections and benefits as wealthier Northern nations. The
imposition of this monetary policy without adequate gains in economic competitiveness has
left Southern nations to rely on tourism, other service industries, and bailouts to finance
national debt. National debt has also increased vulnerability to outside speculative
investment.

Consequently, the common European monetary policy that has aligned with growth in the
northern Figure 2: European sovereign debt vs. GDP Source: Thomson Reuters countries—
while removing the historical releasevalve in the southern nations used for massive debt
bubbles which were financed by the north—created a new cycle of indebtedness in the
south.x (Figure 2 represents relative sovereign debt in Europe compared to GDP in 2012).xi
Slow overall growth and market panic has further distressed the European market for
southern goods—leading consumers to purchase cheaper, lower-quality imports over
European products, and depressing tourism— further driving down southern revenues even as
austerity measures are imposed by the north. The north blames the south for overspending,
and the south balks at crippling austerity measures and never-ending debt. Financial distress
has taken its toll on EU citizens through persistent and massive unemployment, and feelings
of powerlessness and disunity

Ashish Kumar | INTRODUCTION 14

Literature Review

Financial crisis are the undesirable and inevitable part of the financial sector development. The gap
between risk bearing capacity and search for higher returns is the common feature of almost all crises
(Das et al. 2012). Crisis that is devoted to developed market not only affects the country in which it is
originated but also spill over its effects on the entire global economy (Goudarzi and
Ramanaryanan, 2011). Schwert (1989) affirmed that the financial crisis had increased the volatility
of stock market. The nature of volatility transmission can vary from one financial market to the other
market in terms of its magnitude and severity of shocks arising from the financial crisis (Caporale et
al., 2006).

Ellis and Lewis (2001) asserted that financial market volatility in Australia and New Zealand was
more manifested in the late 1998 than mid 1997 when the main event of Asian financial crisis
occurred. The causes of Asian crisis were rooted from the serious problems of moral hazard,
overinvestment and over evaluation of assets in Asia by domestic financial intermediation (Krugman,
1998). The fragile and incompetent banking system created more bubbles through granting excessive
credit which led to 107 this adversity. Polasek and Ren (2001) analyzed the volatility transmission
during Asian crisis on daily data of US, Germany and Japan stock market for 1996 to 1998 and
identified that different volatility patterns occurred among these stock markets before and after the
crisis.

The misery of US widely acknowledged the great depression of 1930s (Bajwa, 2012). It was started
in US with the collapse of sub-prime mortgage market in early 2007 which was followed by several
other financial catastrophes such as collapse of Wall-street Fannie Mae, Freddie Mac, AIG, Lehman
Brothers and Merrill Lynch (Celikkol et al., 2010 and Chaudhary, 2011). As a result of this, a
liquidity crisis turned into a full-fledged global credit crunch. Bordo (2008) pointed out that this stock
market crash overwhelmed many countries within a few months of its start in the US. Due to the
interconnectivity of Indian economy with the rest of the world, it was also affected through this global
financial crisis. Its effects could be seen on the performance of the financial market like, stock market,
real estate and the banking sector (Sinha, 2012).

News of the recession in US stock market and sudden withdrawal of FIIs from Indian stock market
brought a crash in 2008 (Joseph, 2009). Indian financial markets showed a near 60 percent decline in
the index and wiped off of about USD 1.3 trillion in market capitalization since January, 2008 when
the Sensex was peaked at about 21000 (Kumar, 2009). Indian stock market was also affected by the
earlier crisis occurred in the world economy but majority of these crisis were not as serious as the
recent one. The impact of recent global financial crisis on Indian commercial banks is analyzed
through bankex index. How the news of recession in US had affected the Indian banks stock prices, is
evaluated in this chapter.
Ashish Kumar | Literature Review 15
From the experience of different episodes of financial crisis in recent decades and particularly from
the global financial crisis of 2007–09, it has been well established that a sound and well-regulated
financial system, of which the banking system is a most crucial part, is a sine qua non for
macroeconomic stability and sustainable economic growth. In fact, the presence of a crisis in the
banking system in terms of its insolvency has the potential to push the economy into a slump, in what
is the most extreme form of credit-driven macroeconomic cycle (Caprio and Honohan, 2002). It has
been noted that the banking crises of the recent decades have been inextricably linked with
macroeconomic crises. Further, these crises are observed to be costly, either in direct cash costs to
bank creditors or to the governments who have bailed them out, or both, and indirectly in the
associated spillover effects on economic activity including that caused by reduced access to credit
(Caprio and Honohan, 2010).

According to the Report on Currency and Finance for the year 2010 by the Reserve Bank of India
(RBI) (India's central bank), the recent global financial crisis that has caused great turmoil in the
banking systems of developed economies has not affected the Indian banking system much. This is
because of the prudent regulatory and supervisory framework, strong macroeconomic fundamentals,
limited exposure of Indian banks to riskier assets and derivatives, and the relatively low presence of
foreign banks in India. On the other hand, Ghosh and Chandrasekhar (2009) noted that the liquidity
trap characteristics prevailed in the Indian banking industry during the crisis years. This was because
from demand side most credit-worthy potential borrowers were unwilling to borrow because of the
prevailing uncertainties and expectations of slowdown, and from supply side banks suddenly be- came
more risk-averse. Meanwhile, all other enterprises, including those which desperately required
working capital just to stay afloat, found it increasingly difficult to access bank credit even as they
faced more stringent demand conditions. Eichengreen and Gupta (2013) observed that from mid-
2008, there was a sharp increase in interbank bor- rowing rates and the flight of deposits from private
banks to public sector banks was predominantly towards the State Bank of India (SBI), India's largest
commercial bank. Reallocation of deposits towards the SBI due to the government's implicit
guarantee of its liabilities destabilised other banks and increased the inefficiency of financial sys- tem
since other banks were forced to hold more capital and maintain more liquidity to reassure depositors.

Since the rapid growth of Indian economy over the last decade we have observed an
additional increase in investment rates and savings (OECD, 2011). Herd, Koen, Patnaik,
and Shah (2011) emphasized that the implemented reforms of Indian economy4 have
increased saving rates during the 1980s and especially during the early 2000s to a comparable
levels with other East Asian economies. Bhattacharyya, Lovell, and Sahay (1997a),
Bhattacharyya, Bhattacharyya, and Kumbhakar (1997b) discussed that the banking
reforms started in 1955 with the setup of State Bank of India. This was later followed by the

Ashish Kumar | Literature Review 16

nationalization of 14 major commercial banks. This policy aimed to break the monopolistic
control, spread banking services, mobilize deposits and enhance credit planning as part of
national economic planning. In 1980 a second round of nationalization was implemented.
However, in the 1980s it was evident that nationalized banks could not compete with private
and foreign banks in terms of bank profitability and service quality.

Seemingly, bank liquidity can be seriously impacted by financial crisis. It may be understood
as the time when institutions or assets are rendered less than their nominal value, causing
losses (Choon et al., 2013). Vodová (2013), Vodova (2011), Bunda and Desquilbet (2008)
and Choon et al. (2013) found a negative correlation between financial crisis and bank
liquidity. Although financial crisis could be caused by poor bank liquidity, the opposite
relation may also hold true. This is how a financial crisis may cause poor bank liquidity:
First, the volatility of vital macroeconomic variables could lead to unfavorable business
environment for banks. Then, economic instability might worsen the business environment of
borrowers and affect their ability to make loan repayments, ultimately leading to a decline in
bank liquidity. However, found banks more liquid during the crisis period. Eichengreen and
Gupta (2013) observed the impact of transfer of deposits from private sector banks to public
sector banks in the Indian banking system during 2007–2009 time periods.

Shirai (2001) assessed that prior to the reforms 1991, high entry regulation of private and
foreign banks, the prevalence of reserve requirements, interest rate controls, allocation of
financial resources to priority sectors are the cause of financial repression in the country.
After 1991 reforms, the deregulations of deposit interest rates, deregulation of lending rates,
lower CRR and SLR, increased competition etc. have strengthened the Indian banking sector.
The privatization of banks at the right time has helped banks to show high performance and
profitability.

Roland (2004) also evaluate the reforms that have occurred in the Indian banking sector by
focusing on the changes in three policies namely interest rate controls, statutory pre-
emptions, and directed credit,

Kumar (2007) evaluates the financial performance of private sector banks in India from the
year 2004 to 2006. The study has evaluated the banks on the basis of seven financial
performance variables-Business per employee, return on assets, profit per employee, capital
adequacy, credit deposit ratio, operating profit and percentage of net Non performing asset to
net advance.
Ashish Kumar | Literature Review 17
Trehan and Soni (2003) appraise the efficiency of the banking industry and separate those
banks that performed well from those and performed poorly. The results of the study shows
that SBI and its associates are more efficient than nationalized banks and the difference
between the two groups are statistically significant.

Vidyakala and Madhuvanthi (2009) explains that the prudential norms adopted by the
Indian banking system and the better regulatory framework in the country have helped the
banking system remain stronger even during the global meltdown. The banking industry is
indirectly affected due to the decrease in exports and drying up of overseas financing. The
Indian banks do not have big exposures to subprime market, thus the impact recession on the
Indian Banking sector is very small.

Eichengreen and Gupta (2013) argued that bank inefficiency has increased due to the fact
that other banks hold more capital for the shake of liquidity and the reassure of their
depositors. In addition the belief that government protects the deposits for the largest public-
sector banks decreased efficiency of the other banks and encouraged risk taking.

According to Horváth et al. (2014), unemployment had a significantly negative impact on

liquidity. Greater unemployment reduced capital and hampered liquidity creation. This
finding is in accordance with the fact that banks suffer from a reduction in solvency and
create lower liquidity in troubled economic times. Contrary to this, study by Munteanu
(2012) suggested that increased unemployment rate of the economy results increased bank
liquidity.

Ashish Kumar | 18
Objectives

 To empirically examine the impact of recession on the Indian banking sector.

 To analyze the liquidity position of the banks during the financial crisis period.
 To assess whether the management of the banks is successful in maintaining the
performance of banks during financial crisis.

Ashish Kumar | Objectives 19

Research Methodology
The paper is based on secondary data analysis of the banks. Analysis is made at group level-
Public Sector banks, Private banks and Foreign banks are analyzed for the time period 2003-
2018. This period has been chosen taking into consideration the following factors:

 The recession in the US starts from the year 2006.

 India felt heat of recession in the year 2007-08
 Devaluation of rupees
 Implementation of demonetization

Indian Banking sector, the period 2003-018 is taken. The financial performance of Indian
banking sector is analyzed by using the four financial indicators

Profitability: It will be examined by using net interest margin, loan-to-assets ratio and return-
on-assets ration.

 Net interest margin is an important indicator in evaluating banks because it reveals a

bank’s net profit on interest-earning assets, such as loans or investment securities.
 Banks with a higher loan-to-assets ratio derive more of their income from loans and
investments.
 Banks with lower levels of loan-to-asset ratios derive a relatively larger portion of
their total incomes from more-diversified, non-interest-earning sources, such as asset
management or trading.
 The return-on-assets ratio is an important profitability ratio, indicating the per-dollar
profit a company earns on its assets

Capital adequacy: The Basel III norms stipulated a capital to risk weighted assets of 8%.
However, as per RBI norms, Indian scheduled commercial banks are required to maintain a
CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12%. It is
decided by central banks to prevent commercial banks from taking excess leverage.

Management performance: It is measured through the ratios-profit per employee, business per
employee, credit deposit ratio, investment deposit ratio.

Liquidity: The liquidity of banks is indicated by cash deposit ratio. Along with this the
analysis of a firm's current ratio, quick ratio, and net working capital are the key components
of a basic liquidity analysis for Indian banking sector..
Ashish Kumar | Research Methodology 20
To evaluate the impact of financial crisis on Indian banking sector and to analyse that
whether the different group of banks differ in their performance, MS Excel and SPSS will be
used to perform different analysis.

Asian Financial Crisis 1997

Asian crisis that started in Thailand in 1997, a crisis that within a very short period plunged stock
markets and currencies across seven East Asian countries. Hundreds of banks, builders, and
manufacturers went bankrupt. The Thai baht, Indonesian rupiah, Malaysian ringgit, Philippine peso
and the South Korean won depreciated by between 40 percent to 80 percent.

All this happened despite the fact that Asia’s fundamentals looked good: inflation was low; fiscal
deficits remained largely within limits; the existence of independent and well-run central banks;
relatively high domestic savings (albeit dropping); a large and growing middle class; an educated
workforce (paid relatively low wages); a vibrant entrepreneurial class and a stable political
environment. But these fundamentals painted a false picture. Underneath the seeming calm, investors
were getting concerned about serious structural deficiencies and policy inconsistencies.

Impact on Indian Banking System

However, this financial crisis has less or negligible impact on Indian banking system. One of the
reasons was the financial reforms that have been introduced in 1991 which brought boom in the
Indian economy and Indian banking system as well. Another reason that impeded the impact of Asian
crisis on India was the magnitude of trade from these nations. The trade between Indian and the seven
countries that have impacted badly through this crisis was very low.

Table-1: Commercial Banks Deposit and Lending Rates from 1990-99

Commercial Bank Rates
Deposit Rates Lending Rates
Minimum
Over 3 Rate
years & Celling Minimum Selective
1 to 3 Upto 5 Above 5 Rate Rate Credit
Year Years Years Years General General control
1990-91 9.00-10.00 11.00 11.00 - 16.00 16
1991-92 12.00 13.00 13.00 - 19.00 19
1992-93 11.00 11.00 11.00 - 17.00 17
1993-94 10.00 10.00 10.00 - 14.00 15
1994-95 11.00 11.00 11.00 - 15.00 Free
1995-96 12.00 13.00 13.00 - 16.50 Free
1996-97 11.00-12.00 12.00-13.00 12.50-13.00 - 14.50-15.00 Free
1997-98 10.50-11.00 11.50-12.00 11.50-12.00 - 14.00 Free
1998-99 9.00-11.00 10.50-11.50 10.50-11.50 - 12.00-13.00 Free
1999-00 8.50-9.50 10.00-10.50 10.00-10.50 - 12.00-12.50 Free

Ashish Kumar | Research Methodology 21

 2000-01 8.50-9.50 9.50-10.00 9.50-10.00 - 11.00-12.00 Free
Source: RBI historical data

The Global Financial Crisis 2008

Global financial crisis and its impact on Indian scheduled commercial banks The sub-prime
crisis that emerged in the US housing market in the year 2007 resulted into a global financial
crisis, leading to global financial recession. The financial landscape has significantly changed
after the collapse of Lehman Brothers in September 2008. The impact of the crisis can be
gauged from the sharp upward estimates of possible write-downs by banks and financial
institutions from US$500 billion in March 2008 to about US$3.5 billion in October 2009. The
crisis indicated that irrespective to the degree of globalisation of a country and soundness of
its domestic policies, a financial sector could affect every economy. The crisis has impacted
different economies differently. Every country has been affected by the crisis, although
through different channels and to different degrees. The USA and Europe were at the
epicenter of the crisis. In advanced economies, the crisis spread from financial sector to the
real sector. In emerging economy, the transmission of external shocks to domestic
vulnerability has typically been from the real sector to the financial sector. India has been
affected by the crisis through the interplay between external shocks and domestic
vulnerabilities by way of the financial, real and confidence channels. The Indian economy
exhibited significant resilience in the backdrop of an intense global financial crisis. It
witnessed moderation in GDP growth in 2008–2009 in comparison with the robust growth
performance in the preceding five years. In the period during 2003–2008, the average GDP
growth was not only the highest ever recoded in the India’s past independence economic
history, but also one of the highest in the world in the recent period. Nonetheless, the balance
sheet of scheduled commercial banks and their financial performance decelerated in the year
2008–2009. Although the growth of both the credit and deposits decelerated during 2008–
2009 as compared to 2007–2008, they remained significantly positive. Deceleration in bank
credit was observed in an intense manner in specific sectors. The scheduled commercial
banks in India showed considerable resilience against the backdrop of global financial crisis
and its affects on Indian economy.

Provisions to NPA s
2005 17.6 … 54 154.8 176.9 24.8 60.3 179.7 59.4
2006 17.6 … 54.6 134.8 170.8 34.3 58.9 179.9 54.5
2007 18.3 … … 91.7 144 39.2 56.1 181.9 44.9
2008 21.9 70 38.1 74.4 118.4 116.4 52.6 189 31.4
Ashish Kumar | Research Methodology 22
2009 22.6 63.2 41.1 57.7 95.8 155 52.1 156.7 29.6
2010 22 62.3 35.4 64.2 103.7 218.3 51.5 171.1 32.6
Return on Assets [ROA]
2005 1.8 0.6 0.8 1.8 3.2 0.6 0.9 3 1.2
2006 1.7 0.6 0.5 1.8 3.3 0.9 0.9 2.7 1.4
2007 1.6 0.4 0.4 1.2 3 0.9 0.9 2.9 1.4
2008 0.9 0 -0.4 -0.1 1.8 1 1 1.4 2.1
2009 1 0.4 0.1 -0.1 0.7 0.9 1.1 1.9 0.9
2010 1.2 0.6 0.2 0.9 1.9 1 1.1 2.1 1
Return on Equity [ROE]
2005 25.6 11.8 11.8 17.8 24.2 15.1 13.3 29.8 15.2
2006 27.8 14 8.9 17.2 26.3 14.9 12.7 27.6 18.3
2007 30.2 9.8 6.2 11.2 22.7 16.7 13.2 28.9 18.1
2008 18.9 -1 -10.3 -1.6 13.3 17.1 12.5 14.9 28.7
2009 17.4 8.2 2.6 -0.6 4.9 16.2 13.1 20.4 15.8
2010 20.5 13.3 3.9 8.2 12.5 17.5 12.5 21.7 14.7
Data Source: IMF – All Countries FSI Data

Financial Soundness
One of the important sources of vulnerability that can affect financial stability and lead to a
financial crisis can be the weakness (such as a high level of short-term debt) in the financial
structure of the economy i.e., the composition and the size of the assets and liabilities on the
balance sheet. A financial crisis follows when the demand for financial assets of one or more
sectors plummets and consequently the banking system fails to meet the outflows or may be
unable to attract new financing or roll over existing short-term liabilities. In this direction,
financial soundness (Table-2) matters much during the financial crisis because it gives some
indication of how likely it is that financial problems would be transmitted into the real
economy (by, for example) a reduction in the supply of loans.

Table-3: Core Financial Soundness Indicators of Select Countries (In percent)

South
Australia France UK USA Russia China India Brazil
Africa
Capital Adequacy Ratio [CAR]
2005 10.2 11.3 12.8 12.9 16.0 2.5 12.8 17.9 12.3

2006 10.3 10.9 12.9 13.0 14.9 4.9 12.3 18.9 12.3

2007 10.1 10.2 12.6 12.8 15.5 8.4 12.3 18.7 12.8

Ashish Kumar | Research Methodology 23

2008 11.3 10.5 12.9 12.8 16.8 12.0 13.0 18.2 13.0

2009 11.9 12.4 14.8 14.3 20.9 11.4 13.2 18.8 14.1

2010 11.4 12.3 15.9 15.3 18.1 12.2 13.6 17.8 14.9

Non-Performing Assets [NPA]

2005 0.6 3.5 1.0 0.7 2.6 8.6 5.2 3.5 1.8

2006 0.6 3.0 0.9 0.8 2.4 7.1 3.3 3.5 1.1

2007 0.6 2.7 0.9 1.4 2.5 6.2 2.5 3.0 1.4

2008 1.3 2.8 1.6 3.0 3.8 2.4 2.3 3.1 3.9

2009 2.0 3.6 3.5 5.4 9.5 1.6 2.3 4.2 5.9

2010 2.2 4.2 4.0 4.9 8.2 1.1 2.4 3.1 5.8

Data Source: IMF – All Countries FSI Data

Financial Soundness in Indian Banking

Banking sector is by far the most central part of the financial system in most of the emerging
economies and is, therefore, also the main source of risk for financial stability. Undoubtedly,
financial soundness of banks has a significant sway on the stability of the financial system as
a whole as the banking system constitutes more than 75% of the financial markets in India.
The Indian banking system endured the onslaught of the global financial crisis and a factor
that bolstered the normal functioning of the banking system even in the face of one of the
largest global financial crisis was its robust capital adequacy. Further, the core banking sector
indicators for India like; Capital Adequacy Ratio (CAR), Capital Adequacy Ratio–Tier-1,
Gross Non-Performing Assets (GNPAs) to total loans, Net Non- Performing Assets (NNPAs)
to total loans and Return on Equity (ROE) have experienced downward pressure during the
recent recession period (Figure-8). On the contrary, liquid assets to total assets ratio has
moved upwards indicating the tendency of the banks to hold cash during the times of

Ashish Kumar | Research Methodology 24

Figure-1: Core Banking Sector Indicators for India

Data Source: International Financial Statistics (IFS) of IMF

Interest Rates (Benchmark prime lending rate), Money market rate and the discount rates)
which have significant impact on the lending activity showed downward movement in the
Indian banking scenario (Figure-2).

Figure-2: Interest Rates in India

Data Source: International Financial Statistics (IFS) of IMF

Ashish Kumar | Research Methodology 25

Under Basel II, Capital to Risk-weighted Assets Ratio (CRAR) of Indian banks as at end-
March 2009 was at 14.0 per cent, far above the stipulated level of 9 percent (Figure-3). This
suggests that Indian banks have successfully managed to meet the increased capital
requirement under the amended framework.

Figure-3: Capital to Risk Weighted Assets Ratio–Bank Group-wise (As at end-March)

Note: *: Includes IDBI Bank Ltd Source: Report on Trend and Progress of Banking in India
2009-10 of RB
Furthermore, between March 2009 and 2010, there was a surge by about 0.5 percentage point
in the CRAR reflecting further strengthening of their capital adequacy under the new
framework.

The European Crisis 2010

Implications for Indian Banking Sector

Though trade channel is the dominant channel of transmission of the euro crisis contagion to
India, but there will be negative spillovers on India’s financial sector as well. Aizenman et al.
(2012) assessing the likelihood of financial contagion from the eurozone to Asian financial
markets using event study have traced the impact of distinct eurozone news on the dynamics
of equity and bond prices in developing countries.

In general, eurozone has been a vital source of foreign bank loans for developing Asia. The
conflux of funding strains and sovereign risks led to fears of a precipitous deleveraging
process that could hurt financial markets and the wider economy via asset sales and
contractions in credit. Many European banks have announced medium term business plans

Ashish Kumar | Research Methodology 26

for reducing assets. The impact is likely to differ significantly across regions, with larger
effects expected in emerging Europe than in Asia or Latin America. In the Indian context, the
claims of European banks, amounting to US$ 146 billion, formed 53 per cent of total
consolidated foreign claims. Of this, 56 per cent pertained to claims of banks in United
Kingdom. According to data from the Bank for International Settlements, in September 2011
India’s borrowings from eurozone banks amounted to around $ 57 billion. While share of
borrowings from eurozone in total foreign bank borrowings was to the extent of 17.9 percent,
borrowings from Eurozone banks as share of domestic credit was at 4.4 percent.

Indian banking system has not been notably impacted by the euro debt crisis as neither does
it have any significant presence in countries impacted by the current crisis nor Indian banks
have any significant exposures to bonds issued by them. Though there is no first-order impact
of the sovereign debt crisis, there could however, be second-order impact through various
channels including trade. There could be funding constraints for Indian bank branches
operating overseas if European banks deleverage. The cost of borrowing for banks and
corporates, as a result, may go up leading to concerns over refinancing foreign currency
liabilities. Due to the slump in the overseas demand and the associated downturn in
investment activity, there has already been some sluggishness in the credit as well as asset
growth of Indian banking sector during 2011-12.

The direct impact of the Eurozone crisis on Indian banks is expected to be limited as the
Indian banking sector is largely dominated by domestic banks with foreign banks accounting
for only 8 per cent of total banking sector assets and 5 per cent of banking sector credit.
However, there could be indirect impact on Indian banks due to their exposures to other
countries, especially in the Eurozone. Further, though the direct impact of deleveraging is not
expected to be significant on domestic credit availability, there definitely would be an impact
on specialized types of financing like structured long-term finance, project finance and trade
finance could be impacted.

According to RBI data, at the end of September 2011, there are only 37 branches and 3
subsidiaries of Indian banks in the European Union, and none of them is in Portugal, Italy,
Greece and Spain. Out of the 37 branches, 30 branches are in the UK, 3 branches in Belgium
and 2 each in Germany and France. All of the three subsidiaries are in the UK. Their
combined share in the aggregate banking sector assets stood at 3 per cent as at end September

Ashish Kumar | Research Methodology 27

2011. Moreover, none of the Indian banks has any exposure to bonds issued by Portugal,
Greece and Spain while exposures to Italian bonds are insignificant.

One significant lesson from the euro debt crises for Indian financial system that is relatively
more open than that of Chinese. For example, wholesale debt funding has been the undoing
for banks in the euro zone. Though it is hard to argue that banks should only raise debt
resources through retail deposits, at the same time, the current episode shows that largescale
reliance on wholesale debt, specifically, from across borders can tilt the financial stability. Of
course, though the Indian banking system has conventionally relied on retail deposits, which
despite higher cost serve as a stable source of funding, any substantial shift towards
wholesale debt funding may not be a desired. The second important inference, we can draw
from the euro debt crisis is that India’s continuance of making the banks hold the public debt
(due to its high fiscal deficit) hitherto as a vestige of the era of financial repression may not
hold prudent all the time as the euro debt crisis raises the question of whether sovereign debt
of a country can be held largely outside a country in portfolios that keep getting churned and
subject to day to day re-pricing. While exhibit-3 presents the amount of investments in T-
Bills of the Government of India by the Indian banks, Exhibit-4 captures the investments of
Indian banks in the government securities.

Sovereign debt crises have far-reaching consequences and usually go hand in hand with (or
can be traced to) banking and – in many cases – currency crises. Hence, managing and
resolving sovereign debt crises pose unexpected challenges to policymakers. Crucial actions
and reforms have been taken over the past two years to tackle the current European debt
crisis. However, given their numerous transmission channels, these measures have been the
subject of intense debate among decision-makers, experts, the media, and the general public.
Though the euro zone sovereign debt crisis can impact Indian economy through five broad
channels such as; banking sector, commodity markets, currency markets, investments and
trade, this paper has focused exclusively on the implications for the banking sector, as the
banking sector in view of all pervasive nature interacts with all the other channels too.

The global financial crisis and the current euro zone crisis have severely impacted the
banking sectors in the advanced economies and the spillover is ricocheting on banks in
emerging economies including India. Indian banking sector has not been impacted by euro
zone debt crisis, as it does not have any substantial presence in euro zone countries nor Indian
banking sector has any significant exposures to bonds issued by them. Though there is no

Ashish Kumar | Research Methodology 28

first order impact of the euro zone debt crisis, there could, however, be second-order impact
through various channels including trade. There could be funding constraints for Indian bank
branches operating overseas if European banks deleverage. The cost of borrowing for Indian
banks and corporates has shoot up leading to concerns over refinancing foreign currency
liabilities. Owing to the drop in the overseas demand and the associated downturn in
investment activity, there has already been some sluggishness in the credit as well as asset
growth of Indian banking sector.

Consequent to the European banks suffering huge losses and liquidity constraints, the supply
of foreign credit to emerging markets has dried up which has added to the pressure on
investing spending in emerging markets which are already struggling to cope with rising
capital costs due to tight monetary policies. India is experiencing similar situation and the
Indian banks are forced to look inward and explore domestic sources of capital though
relatively to costlier to compensate for the shrinking global market. As European banks
suffered due to the sovereign debt crisis, capital has flown back, leading to a sharp
depreciation of the rupee, which was already weak. A falling rupee has hurt the industries and
their profit margins both within and outside the country. This has negatively affected the
profitability and credit deployment activity of the banking sector.

Table 2 represents the ratio of net profit to total assets of the public and private sector banks
respectively, for the last decade. There is an overall improvement in terms of profitability for
both the banks groups as indicated by their average values. However, the private sector banks
have experience a better improvement; 16 of the 20 private sector banks ended with a higher
net profit to assets ratio in 2012.

Table 4: Net Profit/Total Assets (in %) of Public Sector Banks

Banks 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Allahabad Bank 0.32 0.59 1.31 1.20 1.28 1.11 1.18 0.79 0.99 0.94 1.02

Andhra Bank 0.97 1.63 1.72 1.59 1.19 1.13 1.02 0.95 1.16 1.16 1.08

Bank of Baroda 0.77 1.01 1.14 0.71 0.73 0.72 0.80 0.98 1.10 1.18 1.12

Bank of India 0.72 1.12 1.19 0.36 0.62 0.79 1.12 1.33 0.63 0.71 0.70

Bank of Maharashtra 0.68 0.89 0.95 0.54 0.16 0.70 0.68 0.64 0.62 0.43 0.49

Canara Bank 1.03 1.24 1.34 1.01 1.01 0.86 0.87 0.94 1.14 1.20 0.88

Ashish Kumar | Research Methodology 29

Central Bank of India 0.31 0.54 0.98 0.52 0.34 0.54 0.44 0.39 0.58 0.60 0.23

Corporation Bank 1.31 1.58 1.73 1.19 1.10 1.02 1.1 1.03 1.05 0.98 0.92

Dena Bank 0.06 0.57 1.04 0.25 0.27 0.64 0.93 0.87 0.89 0.86 0.92

Indian Bank 0.11 0.53 1.04 0.93 1.06 1.35 1.43 1.48 1.53 1.41 1.24

Indian Overseas Bank 0.65 1.01 1.08 1.28 1.32 1.23 1.18 1.10 0.54 0.60 0.48

Oriental Bank 0.99 1.34 1.67 1.34 0.95 0.79 0.93 0.79 0.83 0.93 0.64

Punjab & Sind Bank 0.17 0.03 0.06 -0.45 0.57 0.99 1.24 1.04 0.90 0.77 0.62

Punjab National Bank 0.77 0.98 1.08 1.12 0.99 0.95 1.03 1.25 1.32 1.17 1.07

Syndicate Bank 0.79 1.00 0.92 0.77 0.88 0.80 0.79 0.70 0.58 0.67 0.72

UCO Bank 0.52 0.59 0.99 0.63 0.32 0.42 0.46 0.50 0.74 0.55 0.61

Union Bank of India 0.71 1.08 1.22 0.99 0.76 0.82 1.12 1.07 1.06 0.88 0.68

United Bank of India 0.52 1.26 1.22 1.03 0.62 0.63 0.59 0.30 0.42 0.58 0.62

Vijaya Bank 0.81 1.03 1.71 1.30 0.40 0.78 0.64 0.42 0.72 0.64 0.61

SBI & its associates 0.77 0.91 1.02 0.91 0.86 0.82 0.89 0.93 0.88 0.74 0.87

IDBI Bank ... ... ... 0.38 0.63 0.61 0.56 0.50 0.44 0.65 0.70

Average 0.65 0.94 1.17 0.84 0.76 0.84 0.90 0.86 0.86 0.84 0.82

Note: IDBI Bank was established in the year 2004

Source: Performance Highlight of Public Sector Banks, IBA (various issues).

Table 5: Return on Assets calculated annualized and CRAR

Banks Return on Assets (%) Annualized CRAR (%)
Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Years 09 10 11 12 13 09 10 11 12 13

Allahabd Bank 0.90 1.16 1.11 1.02 0.64 13.11 13.62 12.96 12.83 11.03

Andhra Bank 1.09 1.39 1.36 1.19 0.99 13.22 13.93 14.38 13.18 11.76

Bank of Baroda 1.09 1.21 1.33 1.24 0.90 14.05 14.36 14.52 14.67 13.30

Bank of India 1.49 0.70 0.82 0.72 0.65 13.01 12.94 12.17 11.95 11.02
Bank of
Maharashtra 0.72 0.70 0.47 0.55 0.74 12.05 12.78 13.35 12.43 12.59

Canara Bank 1.06 1.30 1.42 0.95 0.77 14.10 13.43 15.38 13.76 12.40

Ashish Kumar | Research Methodology 30

 Central Bank of
India 0.45 0.66 0.70 0.26 0.44 13.12 12.24 11.64 12.40 11.49
Corporation
Bank 1.28 1.28 1.21 1.06 0.88 13.61 15.37 14.11 13.00 12.33

Dena Bank 1.02 1.01 1.00 1.08 0.86 12.07 12.77 13.41 11.51 11.03

IDBI Bank 0.62 0.53 0.73 0.81 0.69 11.57 11.31 13.64 14.58 13.13

Indian Bank 1.62 1.67 1.53 1.31 1.02 13.98 12.71 13.56 13.47 13.08
Indian Overseas
Bank 1.17 0.53 0.71 0.52 0.24 13.20 14.78 14.55 13.32 11.85
Oriental Bank of
Commerce 0.88 0.91 1.03 0.67 0.71 12.98 12.54 14.23 12.69 12.04
Punjab National
Bank 1.39 1.44 1.34 1.19 1.00 14.03 14.16 12.42 12.63 12.72
Punjab & Sind
Bank 1.26 1.05 0.90 0.65 0.44 14.35 13.10 12.94 13.26 12.91

Syndicate Bank 0.81 0.62 0.76 0.81 1.07 12.68 12.70 13.04 12.24 12.59

UCO Bank 0.59 0.87 0.66 0.69 0.33 11.93 13.21 13.71 12.35 14.22

Union Bank 1.27 1.25 1.05 0.79 0.79 13.46 12.51 12.95 11.85 11.45

United Bank 0.34 0.45 0.66 0.70 0.38 13.28 12.80 13.05 12.69 11.66

Vijaya Bank 0.59 0.76 0.72 0.66 0.59 13.15 12.50 13.88 13.06 11.32
State Bank of
India 1.04 0.88 0.71 0.88 0.91 12.64 13.39 11.98 13.86 12.92
State Bank of
Bikaner & Jaipur 0.92 0.93 0.96 0.99 0.96 14.52 13.30 11.68 13.76 12.16
State Bank of
Hyderabad 0.91 1.03 1.22 1.15 0.99 11.53 14.90 14.25 13.56 12.36
State Bank of
Indore 0.88 0.91 NA NA NA 13.46 13.53 NA NA NA
State Bank of
Mysore 0.91 1.06 1.03 0.67 0.66 12.99 12.42 13.76 12.55 11.79
State Bank of
Patiala 0.83 0.79 0.88 0.93 0.68 12.60 13.26 13.41 12.30 11.12
State Bank of
Travancore 1.30 1.26 1.12 0.65 0.66 14.03 13.74 12.54 13.55 11.70

Table 6: Profit after tax and profit per employee

Profit per employee (Rs.
Banks Profit after tax (Rs. Crore) Lakhs)
Years Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
Ashish Kumar | Research Methodology 31
 09 10 11 12 13 09 10 11 12 13

Allahabd Bank 769 1,206 1,423 1,867 1,185 3.76 5.76 6.70 8.36 5.25

Andhra Bank 653 1,046 1,267 1,345 1,289 4.58 7.32 8.99 8.91 7.80

Bank of Baroda 2,227 3,058 4,242 5,007 4,481 6.05 7.85 10.59 11.87 10.39

Bank of India 3,007 1,741 2,489 2,678 2,749 7.00 4.39 6.20 6.39 6.44
Bank of
Maharashtra 375 440 330 431 760 2.75 3.21 2.38 3.12 5.59

Canara Bank 2,072 3,021 4,026 3,283 2,872 4.97 7.35 9.76 8.21 6.96
Central Bank
of India 571 1,058 1,252 533 1,015 1.71 3.30 3.96 1.51 2.83
Corporation
Bank 893 1,170 1,413 1,506 1,435 7.64 9.52 10.92 10.90 9.68

Dena Bank 423 511 612 803 810 4.28 4.86 6.15 7.87 7.31

IDBI Bank 859 1,031 1,650 2,032 1,882 8.42 8.44 11.93 13.16 12.18

Indian Bank 1,245 1,555 1,714 1,747 1,581 6.23 7.92 8.88 9.30 8.38
Indian
Overseas Bank 1,326 707 1,073 1,050 567 5.20 2.63 4.16 3.84 1.99
Oriental Bank
of Commerce 890 1,135 1,503 1,142 1,328 6.18 7.39 9.04 6.21 7.03
Punjab
National Bank 3,091 3,905 4,433 4,884 4,748 5.64 7.31 8.35 8.42 8.06
Punjab & Sind
Bank 431 509 526 451 339 5.03 6.16 6.49 5.61 3.98

Syndicate Bank 913 813 1,048 1,313 2,004 3.64 3.18 3.99 5.29 8.11

UCO Bank 558 1,012 907 1,109 618 2.40 4.43 4.19 5.09 2.72

Union Bank 1,727 2,075 2,082 1,787 2,158 6.28 7.47 7.50 5.80 6.79

United Bank 185 322 524 633 392 1.22 2.11 3.48 4.08 2.53

Vijaya Bank 262 507 524 581 586 2.28 4.51 4.72 5.16 5.05
State Bank of
India 9,121 9,166 8,265 11,707 14,105 4.74 4.46 3.85 5.31 6.45
State Bank of
Bikaner &
Jaipur 403 455 551 652 730 3.55 3.96 4.84 5.42 5.91
State Bank of
Hyderabad 616 823 1,166 1,298 1,250 4.90 6.05 8.63 8.63 8.29
State Bank of NA NA NA 4.44 4.83 NA NA NA

Ashish Kumar | Research Methodology 32

 Indore 279 308
State Bank of
Mysore 337 446 501 369 416 3.48 4.41 5.04 3.60 3.86
State Bank of
Patiala 532 551 653 796 667 4.68 4.44 5.20 5.87 4.62
State Bank of
Travancore 608 684 728 510 615 5.58 5.80 6.20 4.20 5.06
Source: Performance Highlight of Public Sector Banks, IBA (various issues).

Ashish Kumar | 33
Conclusion & Way Forward
The lessons from history (and economic theory) are that at this stage there is a need to privatise the
PSBs, introduce social regulation, and liberalise by removing the barriers to entry and providing on-
tap licenses without delay. If there is discomfort with complete privatisation in one go, it may be done
in a phased manner. PSBs control about 32% of all banking assets in the 20 largest emerging market
economies (EMEs). The figure is 75% in India (Sharma 2016). The GoI may want to privatise
partially and bring the figure in India down to the level where it is in other big EMEs. The PSBs that
are not privatised may be given meaningful autonomy; this needs to go well beyond constituting the
BBB.

Ashish Kumar | Conclusion & Way Forward 34

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Ashish Kumar | Bibliography 36