The impact of new private sector banks on old private sector banks in India.

Malik, Garima ; Prakash, Ajay

Introduction

Banks are basically service-rendering institutions. The existence and success of banks depend on their ability to meet the various needs and wants of the customers. The new millennium has brought with it challenges as well as opportunities in various fields of economic activities including banking. The banking sector in India has undergone several changes in the areas of prudential, regulatory, disclosure and supervisory norms. The financial reforms launched during the early 1990s have dramatically changed the banking scenario in the country. New prudential norms, capital adequacy prescriptions, identification of bad debts, provision requirements etc. were enforced and interest rates were deregulated. As a result of these reforms, new private sector banks were allowed entry into the market.

Many of these new private sector banks have brought them state-of-the-art technology and lean structures. These new private sector banks have built a wide network of branches, set superior standards in productivity, they introduced global best practices and more importantly they have built durable competencies by attracting the best manpower, and creating strong brand image in the financial market within a short span of time. This forced the old private sector banks to respond to the new challenges with aggressive restructuring measures. On the other hand, some of the old private banks have not introduced innovative services, not set the superior standards in productivity and even not shown their competencies so all of that they given indirect benefit to new private sector banks. This research mainly focuses on the impact of the entry of these new private sector banks on the old private sector banks in Indian banking sector.

The Indian Banking Sector: A Snapshot

India is the largest country in South Asia with a huge financial systems characterized by variety of institutions and instruments. The Indian financial sector was well developed even before political independence of the country in 1947. The first bank in India, though conservative was established in 1786 (General Bank of India was the first joint stock bank). In the first half of the 19th century, the East India Company, established three bank: the Bank of Bengal in 1809, the Bank of Bombay in 1804 and Bank of Madras in 1843. These three banks were amalgamated in 1920 and the Imperial Bank of India was established on Jan 27, 1921. With the passing of the SBI Act in 1955, the Imperial Bank of India was taken over by the newly constituted SBI. The Reserve Bank, which is the Central Bank, was created in 1935 by passing the Reserve Bank of India act 1934.

In the wake of the Swadeshi Movement, two successive nationalization of banks taken on July 19, 1969, 14 major banks of the country were nationalized and on April 15, 1980, 6 more commercial private sector banks were also taken over by the government. The present commercial banking system in India may be distinguished into public sector banks, private sector banks, and foreign banks. Some figures about the Indian Banking sector has been present in Table 1, and the organization of scheduled banks has been shown in Figure 1.

[FIGURE 1 OMITTED]

Most of the studies by Vyas and Dhade (2006), Raman and Srinviasan (2005), Ganesan P. (2001), Rayapati Vijaya Sree (2003), Gupta V. and Jain P. K. (2003) compared the performance of public, private and foreign banks by using measures of profitability, productivity and financial management. They found that public sector banks fared poorly on all measures when compared with the private and foreign banks. Better performance from commercial banks is possible only if it incorporates profit making as one of the responsibilities. Kantawala Amita S. (2004), Ketkar W Kusum et al., (2004) analyze the performance of banks from a profitability point of view by using various financial parameters. These studies mainly reveal the authors' concern about the declining trends of public sector banks and increasing prominence of new private sector banks and foreign banks.

Sathye (2003) measured the productive efficiency of banks in India. It was done using Data Envelopment Analysis. This study compared the mean efficiency score of Indians Banks with the mean efficiency score of world and also stated that the efficiency of private sector commercial banks, as a group is paradoxically lower than that of public sector banks and foreign banks in India.

Private Banks in India

Private banking in India was practiced since the beginning of banking system in India. All the banks in India were earlier private banks. They were started in the pre-independence era to cater to the banking needs of the people. But after nationalization of banks in 1969 public sector banks came occupied dominant role in the banking structure. PSBs and old private sector banks realized their new role and also welcomed the new generation banks in 1994 when Reserves Bank of India encouraged setting up of private banks as part of its policy of liberalization of the Indian banking industry. HDFC was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in private sector.

Among the 29 private sector banks in India today, we have 21 old and 8 new banks, which are able to sustain the competition. These new private banks have the advantage of starting with a clean state, adequate capital resources, well-trained and professional manpower, and absence of non-performing loans in their books, computerization, and lean organizational system. Handful of branches in chosen centers, a new variety of products and services etc. The financial performance of private sector banks have been given in Table 2.

Objective of the Study

The objectives of this study are:

* To find-out the impact of new private sector banks on the Functioning and performance of old private sector banks in India.

* To study the growth and development of Indian banking sector.

Research Design

The present study adopts analytical and descriptive research design. Which is intended to produce accurate description of variables relevant to the decision being faced. In this study, five large Indian banks from the Old private sector have been selected (Jammu & Kashmir Bank, Federal Bank, Ing Vysya Bank, Bank of Karnataka, and Bank of Rajasthan) on the basis of highest deposits and investment and assets. Hence, it can be safely concluded that the banks covered by this study are fairly representative of the private banks in India. For this study relevant data of the sample banks have been collected from the annual reports published by these banks and Reserve Bank of India various statistical periodicals reports have been used for the study purpose.

Hypothesis of the Study

The performance of the old private sector banks has changed after the entry of new private sector banks. For this purpose, some generally conceived hypothesis has been formulated can be specified as under:

Ho: There is no significant difference of the performance of old private sector banks after entry of new private sector banks.

H1: There is a difference on the performance of old private sector banks after entry of new private sector banks.

The study confines the analysis to the traditional financial ratios to measure performance and efficiency mainly because of the ready availability of relevant data.

Period of the Study

The results are based on the time period 1998-2006. The study is divided into pre & post arrival of new private sector banks in India. Though the liberalization process started in 1992, its full benefits were realized only in late years most of the new private sector banks started their business in the year of 1995-96 & after 1998 so study covered basically two periods 1998-2002 (4 years) and 2002-2006 and next (4 years).

Limitations of the Study

The study may have the following limitations:

(i) The study is based on secondary information. The limitations of the secondary data are unavoidable.

(ii) The findings are based on banking components like deposits, advances and investments and financial ratios of the selected banks and other variables were considered as constant, thought the performance of old private sector banks was influenced by a number of factors, during this periods, it was out of scope of the study to evaluate the influence of each and every variables.

(iii) The financial data of new private sector banks were not available since beginning so the study had to rely on the data after 1997 of the new private banks.

Empirical Analysis & Interpretation

This section of the study divided into two parts. The First Part analyzes the basic banking components in absolute figures. Here Deposits, Income, Advances are analyzed in detail. The influence of the new private sector banks has been assessed by applying the t-test to find the significant differences in the performance of old private sector banks in the pre-post entry periods.

The second Part of the study examines the performance of old private sector banks in terms of financial ratios, which were selected as the parameters of ascertaining the changes in the business if old private banks after the entry of new private banks. The ratios were selected from different areas of banking business, which covered the following parameters (i) Soundness, (ii) Growth, (iii) Profitability, (iv) Efficiency/Productivity, (v) Credit Quality. With each parameter containing identical ratios. CAR (Soundness), Net NPA to Net Advances (Credit quality), Business per Employee (Productivity), Return on Assets (Profitability), Net profit / loss as percentage of total Assets (Growth), Net Interest Income (spread)% of total Assets (Efficiency).

The data in the Table 3 reveal that significant changes took place in the absolute financial data of the bank for selected time periods (Details provided in the Appendix I). The statistical test shows that the deposits, income and advances trend changed after entry of new private sector banks and pattern of growth also influenced by market because after entry of new private banks the customers base is divided as the new private banks brought adequate facilities and attractive schemes for satisfy the needs of the variety of customers.

Inference: Since the value of sig (2 tailed)<0.05 (at 5% significant level), the null hypothesis is rejected and hence it is concluded that deposits and advances, investments of old private sector banks differ significantly after entry of new private banks.

Part--II

Financial analysis is largely based on ratio as a tool for making fair comparisons. Therefore, the study selected a set of ratios comprising a suitable framework or a model, which could be used for various types of parametric analysis of the bank.

The data in Table 4 reveals that the ratios representing the different parameters of the banks. We might observe from this table that almost each ratio indicates that there is no significant difference after entry of new private sector banks but in some cases like in the case of Jammu & Kashmir Bank the ratio Net NPA to Net Advances (Credit quality), Business per Employee(Efficiency) significant differ between two periods so H0 is rejected and same follows in the case of Federal Bank but in the case of Bank of Rajasthna only Business per employee ratio(Efficiency) indicate that there is significant difference so H0 is rejected and same trend shown in the case Ing Vysya Bank Ltd but all five parameters in the case of Bank of Karnataka does not differ significantly hence the null hypothesis is accepted. All financial ratios have been given in the Appendix 2.

Suggestions

The following are the suggestions offered by the researcher for the purpose of improving the business of old private sector banks.

* The extension of services to rural parts will enhance the customer base and volume of transactions of the bank. It will facilities the bank to reap the benefits of large scale operations.

* In order to speed up the banking transactions of the customers, necessary steps have to be initiated by the banks for creating awareness among the customers and to educate them regarding the utilization of various e-banking services and facilities. The first suggestion is to the old private sector banks must possess a professional attitude, which was lacking in these banks.

* The bank officials should maintain a good rapport with the customers; this will develop a social banking environment.

* The banks have to focus more on CRM. It will enhance the customer satisfaction and maintain a sustained relationship with the customers in the long run and enhance the customer loyalty.

* Appropriate promotional strategies have to be initiated by the banks with a view to motivate the customers to make use of the variety of products offered by the banks.

At present the new private sector banks have made impact on the business of the old private banks. Therefore the old private banks must equip itself to face the rising competition from the new private sector banks in India.

Conclusion

The advent of Liberalization, globalization and privatization has paved the way for the entry of more number of private and global players in almost all the economic activities of the country and banking sector is not an exception to this. The study examined the areas of banking business of old private sector banks that may have been influenced by the new generation private sector banks. The study period chosen was 1998-2006. The impact of the arrival of new private sector banks on the performance of the old private sector banks based on parameters such as Growth, Credit Quality, Operational Efficiency, and Profitability etc. has been analyzed. These parameters further divided into financial ratios, which are further evaluated by statistical test applied on the banks data statistical Mean, S.D and t- test to ascertain the significant differences. All latest technologies, professionalism, innovative product and services etc. have set in dramatic changes. Old private sector banks started declaring losses and experiencing the need for total change in their working and preparing to face stiff competition from the new private players.

From the results of the T-test, it is concluded that the entry of new private players have been affected the performance of the old private sector banks.

References

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Garima Malik, Amity Business School, Noida, India, E-mail: garima261@rediffmail.com

Ajay Prakash, IILM Academy of Higher Learning, Lucknow, India

Table 1: Banking indicators as on march 31, 2007

Number of Scheduled Commercial Banks 79
Number of Branches 73836
Total deposits (Amount in Crore) 2608309
Total Credits (Amount in Crore) 1928913
Total Investments (Amount in Crore) 790431
Deposits of Scheduled Commercial bank per office (Rs.Lakh) 3675
Credit of Scheduled Commercial bank per office (Rs.Lakh) 2757

Source: Annual progress report of RBI (2006-07), Mumbai

Table 2: Financial performance of all private sector
Banks in India as on November 27, 2007 (Amount in Crore)

 21 Old Private Banks 8 New private Banks

Capital 1,062.89 (at the 3,080.84 (at the
 end of March 2007) end of March 2007)
Deposits 1,38,249.13 (at the 4,13,737.94 (at the
 end of March 2007) end of March 2007)
Income 13,088.29 49,176.94
Expenditure 11,966.42 43,833.54
Operating Profit 3,027.30 11,021.28
Net Profit 1,121.87 5,434.40
Net/Interest Income Margin 4,551.61 13,699.20
Total Assets 1,60,561.92 5,84,842.08

Source: RBI Profile of Banks 2006-07

Part--I
Table 3: Statistical test values

 Pre-Entry Post-Entry

 Mean Standard Mean
 Deviation

Jammu & Kashmir Deposits 9986.3 2757.806 19612
Bank Investment 4595.725 1271.455 8305.75
 Advances 4413.983 1538.94 10824

Federal Bank Deposits 7438.973 1081.29 14374
 Investment 2922.435 556.5358 5536
 Advances 4576.653 537.3705 8619.5

 Deposits 3430.06 418.3129 7487.25
Bank of Rajasthan Investment 1447.055 353.0747 3295.5
 Advances 1759.735 204.2444 2878.75

Ing Vysya Bank Deposits 7535.878 755.7736 11392.25
Ltd Investment 2870.203 500.3374 4073.5
 Advances 3863.545 749.9784 7965.5

Karnataka Bank Deposits 5658.195 1131.362 10444.75
Ltd Investment 2522.965 759.8344 4854.25
 Advances 2686.07 583.0573 5661.75

 Post-Entry

 Standard t-Value Sig.
 Deviation (2-tailed)

Jammu & Kashmir Deposits 3855.284 -17.1749 0.00043
Bank Investment 1078.756 -18.8275 0.000327
 Advances 2837.253 -4.29506 0.023211

Federal Bank Deposits 2915.746 -6.83429 0.00641
 Investment 725.5678 -10.2674 0.00197
 Advances 2335.582 -3.27446 0.04662

 Deposits 1547.294 -6.85966 0.006343
Bank of Rajasthan Investment 885.7635 -3.5175 0.038987
 Advances 844.1889 -3.27446 0.04662

Ing Vysya Bank Deposits 1902.454 -6.40349 0.007715
Ltd Investment 311.6071 -7.69325 0.004564
 Advances 2079.915 -5.70466 0.010683

Karnataka Bank Deposits 2136.611 -9.27768 0.00265
Ltd Investment 499.8982 -9.51628 0.002461
 Advances 1733.994 -5.13831 0.014281

Source: RBI Statistical Tables Relating
to Banks in India, 1998-2002 to 2002-06.

Table 4: Statistical Test Values of Financial Ratios

 Pre-Entry Post-Entry

 Mean Standard Mean
 Deviation

 CAR 19.05 3.8737 15.15

 Net interest 2.99 0.3467 2.75
Jammu & Kashmir income (spread)
Bank % of total Assets

 Net-NPA to Net 2.835 0.840 1.347
 Advance

 Business per 1.97 54.15 395.75
 employee

 Return on Assets 1.34 0.29 1.2675

 Net profit/loss 1.3425 0.297 1.2575
 as % of total
 assets

 CAR 10.64 0.48 11.9

 Net interest 2.21 0.7681 2.86
 income (spread)
Federal Bank % of total

 Assets
 Net-NPA to Net 8.69 1.049 2.75
 Advance

 Business per 179.75 31.31 350
 employee

 Return on Assets 0.5375 0.3473 0.895

 Net profit/loss 0.535 0.3465 0.8475
 as % of total
 assets

 CAR 7.3 5.091 11.45

 Net interest 2.445 0.5591 2.51
 income (spread)
 % of total
Bank of Rajasthan
 Assets
 Net-NPA to Net 7.30 2.830 3.32
 Advance

 Business per 117.44 15.84 221.78
 employee

 Return on Assets -0.005 1.2849 0.6275

 Net profit/loss 0.0075 1.254 0.6175
 as %as % of
 total assets

 CAR 11.62 0.71 10.62

 Net interest 8.195 4.5810 2.51
 income (spread)
 % of total

Ing Vysya Bank Assets
Ltd
 Net-NPA to Net 8.195 4.58 2.51
 Advance

 Business per 176.89 35.83 346.92
 employee

 Return on Assets 0.4775 0.1217 0.2475

 Net profit/loss 0.48 0.1188 0.2475
 as % of total
 assets

 CAR 11.55 0.96 13.1

 Net interest 2.115 0.2621 2.16
 income (spread)
 % of total

Karnataka Bank Assets
Ltd
 Net-NPA to Net 5.88 0.799 3.95
 Advance

 Business per 197.87 39.69 389.91
 employee

 Return on Assets 1.1015 0.2239 1.295

 Net profit/loss 0.9325 0.2082 1.2
 as % of total
 assets

 Post-Entry

 Standard t-Value Sig.
 Deviation (2-tailed)

 CAR 2.16 2.7830 0.068

 Net interest 1.6018 0.2075 0.2075
Jammu & Kashmir income (spread)
Bank % of total Assets

 Net-NPA to Net 0.29 4.994 0015
 Advance

 Business per 100.66 -8.45 0.003
 employee

 Return on Assets 0.81036 0.1384 0.89

 Net profit/loss 0.820 0.1606 0.88
 as % of total
 assets

 CAR 1.20 -2.1051 0.125

 Net interest 0.1007 -1.858 0.160
 income (spread)
Federal Bank % of total

 Assets
 Net-NPA to Net 1.672 4.85 0.016
 Advance

 Business per 70.128 -8.55 0.0033
 employee

 Return on Assets 0.3030 -1.752 0.1780

 Net profit/loss 0.2282 -1.5571 0.217
 as % of total
 assets

 CAR 0.91 -1.6405 0.199

 Net interest 0.310 -0.1528 0.88
 income (spread)
 % of total
Bank of Rajasthan
 Assets
 Net-NPA to Net 2.47 2.4341 0.092
 Advance

 Business per 53.78 -5.4611 0.0120
 employee

 Return on Assets 0.04212 -0.7585 0.5032

 Net profit/loss 0.4353 -0.739 0.5130
 as %as % of
 total assets

 CAR 0.88 2.8815 0.063

 Net interest 0.7738 2.97 0.058
 income (spread)
 % of total

Ing Vysya Bank Assets
Ltd
 Net-NPA to Net 0.77 2.97 0.058
 Advance

 Business per 81.62 -6.724 0.0067
 employee

 Return on Assets 0.4359 0.9967 0.392

 Net profit/loss 0.4359 1.001 0.390
 as % of total
 assets

 CAR 0.98 -1.687 0.19

 Net interest 0.4001 -0.18 0.865
 income (spread)
 % of total

Karnataka Bank Assets
Ltd
 Net-NPA to Net 2.77 1.132 0.33
 Advance

 Business per 65.42 -12.39 0.0011
 employee

 Return on Assets 0.03109 -2.6072 0.079

 Net profit/loss 0.408 -2.268 0.074
 as % of total
 assets

Source: RBI Statistical Tables Relating
to Banks in India, 1998-2002 to 2002-06.