Private Sector Banks in India - A SWOT Analysis Prof. CHOWDARI PRASAD Dr. K.S.SRINIVASA RAO Associate Professor (Finance Area) Associate Professor (QM Area) Official e-mail: [email protected] [email protected] Personal e-mail: [email protected] [email protected] T.A. Pai Management Institute (TAPMI) MANIPAL – 576 104 Udupi District, Karnataka, India. Tel. (Office): 0820 – 257 1358 / 257 3162 Topic Area: Banking Introduction: Private Sector Banks existed for over a century in India. Formation of State Bank Group in 1955 / 1957 and two nationalizations in 1969 and 1980 lead to dominant Public Sector Banks. Economic reforms in 1991 and Banking Sector Reforms again in 1997-98 have changed the banking scene totally. People generally rely on nationalized banks backed by Government. Change in mindset of the customers forced RBI to allow new private banks a decade back. World Trade Organisation (WTO) and globalization initiated more foreign banks to add competition and a proper level playing field. It is pertinent and appropriate to mention that Imperial Bank of India was also a large private sector bank but handling all the commercial banking business as well as treasury related work of Government until Reserve Bank of India (RBI) was formed in the year 1934, once again as a private bank! It was in the post independent era in the year 1948 that RBI itself was converted into a fully state-owned bank followed by formation of State Bank of India in 1955. The debate about whether RBI is fully autonomous is inconclusive even today as it operates as the country’s central bank and also advises the Government on monetary and fiscal matters but implements the 1 welfare oriented policies as far as regulating the commercial banks are concerned, irrespective whether these banks are in public, private, cooperative or foreign sector. Prior to the first major nationalization of 14 banks in July 1969, private capital called the shots in commercial banking. The Tatas owned Central Bank of India, the Birlas – the United Commercial Bank (UCO Bank now) and so on. The policy of Social Control of banks in India in 1969 brought in a different turn but in retrospect, it is evident that political motives dominated the decision about the two nationalizations. Large scale branch expansion, mass recruitment of staff to take banking to grass root levels, directed investments and credit programmes, administered interest rate regime, credit dispensation towards poverty alleviation programmes through loan melas, etc ruled the roost in the Indian banking scene for over two decades. The Thirty Private Sector Banks today: During the mid-eighties, the scenario changed both at political front and the banking system in India. Productivity, Profitability, Professionalism, Introduction to Technology, Competition from private sector, innovation of new products and services, etc have set in and necessitated dramatic changes beginning with Financial Sector Reforms in 1991. Public Sector Banks started declaring losses and experiencing the need for total change in their working and preparing to face stiff competition from new generation banks permitted to start in mid-nineties after introducing Prudential Norms for the banking system in 1993. PSBs and Old Private Sector Banks realized their new role but also welcomed the new generation banks like Bank of Punjab, HDFC Bank, IDBI Bank, ICICI Bank, Centurion Bank, UTI Bank, IndusInd Bank, Times Bank, etc. These new banks had the advantage of starting with a clean slate, adequate capital resources, well trained and professional man-power, absence of Non Performing Loans in their books, 2 computerization, lean organizational system, handful of branches in chosen centres, a new variety of products and services, etc. Formation of WTO in January 1995 and India’s commitment to open up financial services to Global players had also brought in many Foreign Banks to open their Offices and expand branches, offering new range of products and services, through ATMs and Electronic services, Credit Cards and Portfolio Management for High Networth Individuals and Corporate customers. An entirely new level playing field was created to accept perfect competition among all types of banks in the country, particularly in Metro and Urban centres. Amidst the transition from traditional and controlled banking system, the old Private Sector Banks which were carrying on their business within limited area of operation also started feeling the heat both from the re- charged PSBs and new Private Sector Banks besides Foreign Banks. The latest new private banks to enter the scene are Kotak Mahindra Bank in March 2003 and YES Bank in September 2004. Table No. 1 Performance Data of all Private Sector Banks in India as on March 31, 2004 (Rs. in Crores) S No Financial Indicator 21 Old 9 New Total 30 Private Banks Private Banks Private Banks 01 Deposits 1,09,805.46 1,58,743.80 2,68,549.26 02 Investments 49,545.70 85,255.33 1,34,801.03 03 Advances (Credit) 58,232.66 1,12,666.5 1,70,899.19 3 04 Total Assets 1,26,093.19 2,41,183.13 3,67,276.32 05 Gross NPAs 4,609.63 5,771.17 10,380.80 06 Net NPAs 2,142.07 2,664.40 4,806.47 07 Interest Income 9,472.84 16,068.95 25,541.79 08 Other Income 2,519.31 5,092.23 7,611.54 09 Total Income 11,992.15 21,161.18 33,153.33 10 Interest Expended 6,238.68 11,291.32 17,530.00 11 Operating Expenses 2,503.52 4,911.07 7,414.59 12 Total Expenditure 8,742.20 16,202.39 24,944.59 13 Operating Profit 3,249.89 5,116.35 8,366.24 14 Provisions/Contingencies 1,786.06 2,941.14 4,727.20 3 15 Net Profit 1,463.83 2,017.63 3,481.46 (Source: IBA Bulletin, October 2004) Among the thirty (30) Private Sector Banks in India today, we have 21 old and 9 new banks which are able to sustain the competition. Stringent Capital Adequacy requirements, compliance to Prudential, Asset Liability and Risk Management norms, huge investment in technology to move towards total computerization, etc., have put tremendous pressure on all the banks including the old Private Banks. In the post reforms era too there have been several changes in banking system in India. Times Bank was merged with an efficient counter-part ie., HDFC Bank in 2000 for strategic reasons. ICICI Ltd (a private sector Development Financial Institution formed in 1955-56) was reverse merged with ICICI Bank. In the previous year, it also took over the south based Bank of Madura. Simultaneously, certain erring or inefficient old private banks like Benares State Bank Ltd., and Nedungadi Bank Ltd., were asked by RBI to be merged with Public Sector Banks in recent years. But, one question that arises is how much reliable some of the new private banks are inspite of their efficiency due to recent experience of Global Trust Bank failure. Better professional management techniques adopted by the ICICI Bank made it as number one, inspite of rumours two years back (Best Bank – Business India, 16-29, August, 2004). From the data available in the RBI Annual Report for 2003-04, it is observed that private sector banks have been discharging their responsibilities and obligations in extending priority sector lending more than satisfactorily. The following table evidences the status vis-à-vis Public Sector and Foreign Banks: 4 Table No. 2 : Priority Sector Advances by Banks in India (Rs in Crores) As on last reporting (27) Public Sector (30) Private (34) Foreign Banks Total Friday of Banks Sector Banks March 1999 1,04,094 (39.2) 13,947 (41.3) 8,268 (36.5) 1,26,309 March 2000 1,27,478 (40.3) 18,368 (38.0) 9,934 (35.2) 1,55,780 March 2001 1,49,116 (43.7) 21,567 (36.7) 11,572 (33.5) 1,82,255 March 2002 P 1,71,185 (43.1) 25,709 (40.9) 13,414 (34.0) 2,10,308 March 2003 P 2,03,095 (42.5) 36,705 (44.4) 14,848 (33.9) 2,54,648 March 2004 P 2,45,501 (43.9) 52,629 (47.3) 17,651 (34.2) 3,15,781 (Source: RBI Annual Report, 2003-04) Private Sector Banks as a group has extended priority sector loans at 47.3 per cent in the year 2004; over and above the stipulated 40% of the total advances. In absolute terms too, there has been nearly four fold increase in a six year period while their counter parts viz., Public and Foreign Banks have increased their exposure just about one and half times. Note: Figures for the three years 2002 to 2004 in the above table are provisional. Figures in parentheses are percentages to net bank credit in the respective group. The target for aggregate advances to the priority sector is 40 per cent of net bank credit for domestic banks and 32 per cent of net bank credit for foreign banks. Table No. 3: Outstanding Agricultural Advance (Rupees in crores) PUBLIC SECTOR PRIVATE SECTOR End March Amt O/s % of NBC Amt O/s % of NBC 1999 37,632 14.2 3,467 9.1 2000 45,296 14.3 4,023 8.3 2001 53,571 15.7 5,634 9.6 2002 P 63,082 15.9 8,022 8.5 2003 P 73,507 15.3 11,873 10.8 2004 P 86,127 15.4 17,594 12.3 (Source: RBI Annual Report 2003 – 04) From the above table, we observe that Public Sector Banks have always been at the command of the RBI and Government of India to disburse more and more to the much needy agricultural 5 sector.