Profitability of Banks in India
The RBI's annual report on trade and progress of Banking in India gives the profitability of the different types of commercial banks in the country. In case of the SBI group and other public sector banks (Nationalised banks) profitability has been quite low. The profitability of Indian private sector banks has been much better than the nationalised banks, whereas in case of foreign banks it has always been excellent.
The low profitability and poor financial condition of public sector banks can be justified by referring to their deep commitment to social obligations imposed by the government. These obligatory causes for low profitability of public sector banks include
- Opening branches in rural areas
- Setting up and subsidising regional rural banks
- Financing IRDP and other poverty alleviation programmes at concessional rates of interest
- Priority sector lending to the extent of 40 % of the credit etc.,
These causes hold good to a large extent but truth is that private banks are making more profit than the public sector banks.
Causes for Low Profitability of Public Sector Banks:
According to the Narasimhan Committee the causes are:
( I ) Declining Interest Income of Banks:
It is the result of high proportion of the total deposits being impounded in CRR and SLR and earning relatively low rate of interest. Further, a high proportion of bank deposits has to be given to priority sectors under social banking with quite low rates of interest. At least 1% of the total deposits are to be made available to weaker sections of the society at a mere 4% of interest rate. Also large proportion of the loans are disbursed to agricultural and industry and recovery rates of these loans is far from satisfactory.
( II ) Rising Costs of Operations:
Since the revenue has not been rising and the banks face the problem of rising costs of operations, uneconomic branch expansion, heavy recruitment of employees, trade union activity, low productivity, heavy salary bill, etc.
Basic Weaknesses of Public Sector ( Nationalised ) Banks:
- The nationalised banks are over regulated and to some extend are ungoverned.
- They have failed to sustain desired credit pattern and fill in the credit gaps in the different sectors of the Indian economy.
- They have age old and outmoded procedures and practices which fall to meet the demands of modern fast paced banking system.
- Bureaucratisation has made deep inroads into the banking system.
- There is undue and unwarranted political interference at the highest echelons of the banking structure.
- Large amount of overdue's, a significant portion of which is with agricultural sector.
- Banks did not have any machinery to see that finances from public institutions are in fact going into productive use and not in speculative business as exposed by the securities scams of 1992-93.
- Lower quality of customer service. In a nutshell, there is a yawning gap between promise made and performance given to the customers.
Banking Reforms
Narasimhan Committee Recommendations:
The main recommendations of Narasimhan Committee (1991)On the Financial (Banking) System are:
( i ) Statutory Liquidity Ratio (SLR) be brought down in a phased manner to 25 percent (the minimum prescribed under the law) over a period of about five year to give banks more funds to carry business and to curtail easy and captive-finance.
( ii ) The RBI should reduce Cash Reserve Ratio (CRR) from its present high level.
( iii ) Directed Credit Programme i.e., credit allocation under government direction, not by commercial judgement of banks under a free market competitive system, should be phased out. The priority sector should be scaled down from present high level of 40 percent of aggregate credit to 10 percent. Also the priority sector should be redefined.
( iv ) Interest rates to be deregulated to reflect emerging market conditions.
( v ) Banks whose operations have been profitable is given permission to raise fresh capital from the public through the capital market.
( vi ) Balance sheets of banks and financial institutions are made more transparent.
( vii ) Set up special tribunals to help banks recover their debt speedily.
(viii) Changes be introduced in the bank structure 3-4 large banks with international character, 8- 10 national banks with branches throughout the country, local banks confined to specific region of the country, rural banks confined to rural areas.
( ix ) Greater emphasis is laid on internal audit and internal inspection in the banks.
( x ) Government should indicate that there would be no further nationalisation of banks, the new banks in the private sector should be welcome subject to normal requirements of the RBI, branch licensing should be abolished and policy towards foreign banks should be more liberal.
( xi ) Quality of control over the banking system by the RBI and the Banking Division or the Ministry of Finance should be ended and the RBI should be made primary agency for regulation of banking system.
( xii ) A new financial institution called the Assets Reconstruction Fund (ARF). Should be established which would take over from banks and financial institutions a portion of their bad and doubtful debts at a discount (based on realisable value of assets), and subsequently follow up on the recovery of the dues owed to them from the primary borrowers.
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