Economic Value Addition by Indian Banks

Topics: Banks of India, Weighted average cost of capital, Government-owned banks in India Pages: 15 (5820 words) Published: July 25, 2009
Economic value addition by Indian Banks: A study

This research paper studies Indian bank’s profile to demonstrate a direct correlation between the investment in stakeholder relationships and corporate performance. Many Indian banking seems to have destroyed shareholder’s wealth over a period of time and only a few have positively contributed to their wealth. With the help of EVA (Economic Value Added) and MVA (Market Value Added) which tell what the institution is doing with investor’s hard earned money, the paper examines an appropriate way of evaluating bank’s performance and also finds out which Indian banks have been able to create (or destroy) shareholders wealth since 1996-1997 to 2000-2001. The overriding message of this paper is that banks must always strive to maximize shareholders value without which their stocks can never be fancied by the market. This analysis helps us to dig below the surface numbers to tell us more about the underlying business and whether there is a prima facie case for using EVA as one of the range of performance measurement tools.

Economic value addition by Indian Banks: A study
Introduction Indian Banking has seen many changes in the last decade like imposition of prudential standards, greater competition among banks, entry of new private banks, etc. This paradigm shift in the Indian banking sector can be seen in terms of two dimensions: One relates to operational aspect especially performance and risk-management system and the second dimension relates to structural and external environment or exogenous aspects. Is evaluating Indian bank’s performance a rather straight forward issue? The answer is no. One might say that like a corporate, even banks can be judged from the behavior of their stock prices. However, as bank stocks have not been very active on exchanges, barring few on few occasions, should we conclude that Indian banks have by and large failed to add values to their shareholders’ wealth. The answer is once again no as one needs to evaluate private and public sector banks in a more dynamic manner than just looking at their stock prices, non-performing assets (NPAs), C/D ratios and others. Some may also argue that the general slow down in lending by banks and their eternal problem of recovery of non –performing assets (NPAs) has led to the sufferings of Indian banks. The net NPA figure of scheduled commercial banks of over Rs. 32,468 crore represents 6.2 percent of advances aggregating Rs. 5,58,766 crores in 2001 and 2.5% of the total assets. Over Rs. 30,000 crore of NPAs are locked up in suit filed accounts. There will be very little that an ARF/ARC can do in recovering from suit filed accounts due to deficiencies in the legal system. Major corporate clients who are willful defaulters take shelter under protection of BIFR. Banks are fairly successful in recovering the overdue from non-corporate clients. The phenomenon of growing NPAs is not confined to public sector banks alone. The net NPA of old private sector banks stood at 7.3% of their advances, for new private sector banks it was 3.1% and for foreign banks operating in India it accounted for 1.9% in the year 2001 of their advances. Many Indian banks are discovering that the key to their long-term growth does not lie in products and services alone but in assets that can never be replicated, that is, their unique relationship with customers, employees, suppliers and distributors, investors and the communities they serve. One of the most fateful errors bankers usually commit relates to their belef that merely reducing NPAs and i thereby maximizing profit would solve “the problem of banking industry”. Not only is this belief still held by most of the bankers in India - and therefore professionally unacquainted by the changing profile of their shareholders and the capital market- it is held by virtually large number of myopic captains of the industry. That things are not going as well as they ought to be going...
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