Performance Evaluation of Banks

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  • Topic: Banking, Bank, Capital requirement
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  • Published : April 7, 2011
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PERFORMANCE EVALUATION
OF
BANKS
– SOME ASPECTS

AROOP KUMAR MOHAPATRA

ASSISTANT VICE PRESIDENT
INDUSIND BANK
BHUBANESWAR

ABSTRACT

Doing a performance appraisal of banks, especially Indian ones, is not an easy task. What are the factors that need to be considered to differentiate the good, the bad and the ugly. If we just compare the major ratios for a financial analysis of banks, we may reach at conclusions, which will be quite far from reality. Because these ratios do give a picture, but not the complete one. This was very easily brought out in the global recession recently, where a lot of reputed banks went under. Global behemoths collapsed under the weight of their own inadequacies, which could not be properly reflected in their financial analysis. However, there has to be some mechanism and parameters on which banks could be compared and their performance measured. The traditional evaluation method used the NPA (Non Performing Assets) level, the CD (credit deposit) ratio, the CAR (Capital Adequacy Ratio) and other earnings ratios. In the new paradigm of banking, these figures do not reflect all the reality. The business of banking and the banking of business has undergone a sea change. This paper tries to put forth some other criteria on which banks can be evaluated and their relevance to the new economic reality.

KEY WORDS

CASA (Current Account Savings Account)
NIM (Net Interest Margin)
CAR (Capital Adequacy Ratio)

INTRODUCTION

The last few years have been a trying time for the global banking industry. India, and the Indian Banking Sector, weathered this storm much better than their counterparts in the more developed countries. This has also shaken up the banking industry, which now realizes that it has to align itself to a new market reality, where the strategy which made them big in the first place, will no longer be able to propel them further, and in fact may contribute a lot to their downturn. India is not immune to these changes. The “Open Sky” policy which was announced by RBI, and which was widely expected to be implemented by 2009, in which foreign banks would be given a free run over the Indian countryside. However, the global recession put paid to any such plans, and the MNCs’ were left deciding how many people to rightsize and which business units to shut down and discontinue. The Indian banking sector will see a lot of structural changes in the coming years. Public sector banks realize they have to restructure to survive, private banks are looking at newer avenues for growth and MNC banks are trying to grow post-recession. There is no doubt that this will increase the level of competition and efficiency across the industry spectrum. Before trying to do a financial analysis of a bank, one needs to keep in mind that this analysis will differ very much from the one for a company or firm. This is due to the structure and operation structure of banks. There is no tangible product or measurable service which they provide. For example, they do not bill by the hour or we cannot say that they have sold these many units of a product in this year. However, there are certain parameters, which will actually help in evaluating the true performance of a bank.

REVIEW OF LITERATURE

In the past, various studies with regard to the financial performance of banks have been conducted. Swami studied the comparative performance of different bank groups. Das has studied the correlation between the capital, non performing assets and the productivity. Qamar has studied the profitability and efficiency of resource use. Uppal has studied the efficiency, soundness and productivity. Mukherjee studied the benchmark performance and technical efficiency.

EVALUATION OF BANKING PERFORMANCE

Let us look at some key ratios that determine the performance of a bank:

1. CASA Ratio – (Current Account Deposits + Savings Account Deposits)/Total Deposits This is important because this is an indicator...
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