IJARED 2(2) 116-158 © The Author(s) 2014 [email protected] www.emeacollege.ac.in ISSN:2348-3342 Performance Evaluation of Commercial Banks in Kerala Using Credit-Deposit Ratio: A Study of Scheduled Commercial Banks Abdurazaque. P. M. Department of Economics , EMEA College of Arts and Science, Kondotti, Kerala Abstract: Financial efficiency is the yardstick for the measurement of the performance of banks in the banking sector both in the present and future. A well developed banking system is a necessary pre-condition for economic development of a modern economy. Besides providing financial assistance to economic growth, banks can also influence the direction in which these resources are to be channelized. Banks are playing a major role in the mobilization capital in a county. In order to optimize credit flow and to ensure higher efficiency of credit creation, a monetary tool, called Credit-Deposit (C- D) Ratio was introduced by RBI. Commercial banks have achieved noteworthy prominence in the financial intermediation process in Kerala since the nationalization of banks.. This study attempts to examine the performance of commercial banks in the state by focusing on Credit-Deposit Ratio Keywords: Commercial Banks, Credit Deposit Ratio, Priority Sector Lending A well developed banking system is a necessary pre-condition for economic development of a modern economy. Besides providing financial assistance to economic growth, banks can also influence the direction in which these resources are to be channelized. Banks are playing a major role in the mobilization capital in a county. It plays a pivotal role in the development of the economy of any nation. Proper banking facilities are necessary for the development of a nation. It promotes development in all sectors like agriculture, industry, trade, commerce and transport etc. Banking institutions mobilize savings and use them for productive purposes. It is the life-blood of economic progress. International Journal for Advanced Research in Emerging Disciplines (IJARED) In a modern economy banks are to be considered not only as dealers in money but also as the leaders in development. They are not only the store houses of country’s wealth but also the reservoirs of resource necessary for economic development. it is the growth of commercial banks in 18th and 19th centuries that facilitated the occurrence of industrial revolution in Europe. Similarly, the economic development in modern developing economies like India largely depend on the growth of sound banking system Banks are backbone to economic development through the financial services provided by them. The efficient and effective performance of the banking industry over time is an index of financial stability. Banks play an important role in the mobilization and allocation of resources in an economy. The sound financial position of a bank is the guarantee not only to its depositors but equally important for the whole economy of the nation. Deposits and Credits are inflow and outflow, respectively, of funds of the banks. Bank credit (in the form of loans and advances) has a dynamic role to play in the regions and sectors, such as self- employed production units, small farmers and small-scale enterprises, as their growth and survival depends on external finance. The credit is deployed by commercial banks based on the deposits mobilized from the public after making allowances for statutory requirements prescribed by RBI from time to-time. Sustained efforts have been made by commercial banks to induce people to keep a part of their savings as bank deposits. Deposits mobilized by the banks are utilized for: (i) loans and advances, (ii) investments in government and other approved securities in fulfillment of the liquidity stipulations, and (iii) investment in commercial papers, shares, debentures, etc. up to a stipulated 119 International Journal for Advanced Research in Emerging Disciplines (IJARED) ceiling. Commercial Banks enjoys a special privilege of credit creation by multiple expansions of deposits. The banking system in India consists of two main sectors- the organized sector and the unorganized sector. The organized sector is composed of the Reserve Bank of India the commercial banks. The commercial banks are of two types namely, the scheduled banks and non-scheduled banks. Scheduled banks are those banks whose name appears in the second schedule of the Reserve Bank of India act 1934. Non-scheduled banks are those banks whose name is not included in the second schedule of the RBI Act 1934. The scheduled banks are of two types nationalized and non-nationalized. It also includes the new generation banks, foreign banks and the co-operative banks. The unorganized sector comprises of indigenous bankers and local money lenders. Besides these two sectors there are also some institutions in the Indian banding system such as post office savings bank , the industrial finance corporations, state finance corporation et. The reserve bank of India is the leader of the Indian banking system. Commercial Banks The term commercial bank refers to all those institutions, which accept deposits repayable on demand and lend money for short periods for genuine commercial and industrial purposes. They are the oldest banking institutions in the organized sector of the Indian money market and cater to needs of trade, commerce, industry, agriculture, small business and ever other sectors. With a wide network of branches throughout the country commercial banks command a major share in the total banking operations. Most of these banks were established as joint stock companies with share holding by private individuals, but in the second half of the 20th century all the big banks have been nationalized and 120 International Journal for Advanced Research in Emerging Disciplines (IJARED) presently 27 banks constitute the strong public sector in the commercial banking in India. Besides the public sector commercial banks a large number of private sector commercial banks including the new generation banks and a large number of foreign commercial banks are also operating in India. Banking Sector in Kerala Adequate and affordable capital is critical for development of an economy. Kerala boasts of a well-developed banking infrastructure. Commercial, Nationalized, Co-operative banks and a large number of Gramin banks have sprung up within the state. Although, Kerala has only 1per cent of the total land area, it has 4 per cent of bank branches. This indicates that people of the state are highly financially literate. Kerala has largest number of bank branches among the semi urban areas in the country. At the end of March, 2013 Kerala had total of 5207 bank branches which shows and increase of 424 branches compared to March 2012. Despite Kerala’s small size, this is on par with large states like Bihar, Punjab and Rajasthan, as on March ,2013 , banks in Kerala including commercial banks and co-operative banks disbursed Rs. 171712 Cr. as advances . Deposit mobilization is an inevitable activity of all banks for augmenting credit flow to the development and priority sectors of the state. Overall Bank deposits in Kerala increased by 16.77 per cent from Rs. 200572 crores in March, 2012 to to Rs.234217 Cr. in March,2013. Scheduled Commercial Banks in Kerala accounted for 3.32 per cent of deposits of the country. 121 International Journal for Advanced Research in Emerging Disciplines (IJARED) Non Resident Indian Deposits The large scale migration of Malayalees to Gulf region and the remittances send by them has played a significant role in the economic development of the state. Kerala is one of the states in India attracting largest amount of NRI remittance. As per State Level Banking Committee data the total NRI deposits in banks in Kerala as on March 2013 was Rs. 75882 Cr marked a growth of 36.6 percent on March 2013 over the same period of previous year. The private sector banks have mobilized major chunk of the NRI deposits followed by the State Bank of Travancore. Credit Deposit Ratio (CDR) In order to optimize credit flow and to ensure higher efficiency of credit creation, a monetary tool, called Credit-Deposit (C-D) ratio was introduced by RBI. The tool is also sometimes referred to as Loan-to-Deposit ratio, as it reflects total advances as a proportion of total deposits and thus measures the spread between outflow and inflow (thereby indicating efficiency of credit creation). Credit-Deposit ratio of Commercial Banks has many-folds significance. Primarily, it is a measure of the utilization of resources by the banking system. The ratio is an important tool of monetary management; magnitude of the ratio shows management’s aggressiveness to improve income by higher lending operations. In a way, performance of banking industry may be gauged through value of the ratio, since it reflects as to how the funds are utilized by the banks to generate their revenue and increase the market share. In fact, the actual or possible level of C-D ratio might be one of the significant factors which the Reserve Bank of India could take into account in formulating measures of general credit control. Credit-Deposit ratio is proportion of loan created by banks from deposits it receives, in 122 International Journal for Advanced Research in Emerging Disciplines (IJARED) other words its capacity of banks to lend. High ratio indicates banks are generating more credit from its deposits and vice-versa. The outcome of this ratio reflects the ability of the bank to make optimal use of the available resources. It is the ratio of how much a bank lends out of the deposits it has mobilized. Credit Deposit ratio is an important criterion to measure the performance of the working of a bank. It is the ratio of total deposits to total credit provided by the bank. In early 2000, Credit Deposit Ratio (CDR) of the Public Sector Banks in Kerala was very low.