CHAPTER - VZ

PROFITABILITY AND PRODUCTIVITY

6.1 INTRODUCTION

Commercial banking in India, though more than a century old, has

witnessed significant development and rapid strides of 'progress only during

the last three decades. Against the spectacblar achievement in business and

branch expansion, the financial performance of the industry in general and of

the Public Sector Banks (PSBs) in particular has not been good. This is

reflected in rising costs, deterioration of quality of loan assets, the mounting

non-performing assets of banks and the consequent erosion in the profitability

except for marginal improvement in certain years.

Profit is the motive for any business. The most important function of

profit is establishment of viability of opemtions and continued stability of the

organisation. In the early post-nationalisation era, the profitability in Public

Sector Banks ceased to be an important parameter for measuring their

performance and instead, their developmental and social role got precedence

over profits and profitability. Fixation of targets for priority sector lending,

introduction of small loan schemes, Lead Bank Scheme, thrust on Small Scale

Industry (SSQ and agricultural lending, opening large number of branches in

nual, un-banked areas etc., were some of the indications which hinted at the

role, thc banks wcrc expectcd to play and the banh did exceedingly well in

these areas. However, what has been compromised in the process, is the

operational efficiency, generally reflected through profits and profitability. It

has to be appreciated that the banks are commercial orpisations and they

cannot compromise profitability while fblfilling social obligations and playing

a developmental role. In fact, profit is an index of their operational efficiency

167

and theref- it becomes necessary to prepare a budget to achieve profit both

at the micro (branch) as well as macro (corporate) levels.

Since the banking sector reforms have been set in motion, there had

been a shift of emphasis h m development or social banking to cornmcrcially

viable banking. Profitability became the buzz word and the prime mover of

the financial strength and performance of banks. In contrast with the past

practices all banking operations are now being measured in terms of their

ability to generate profits.

The deregulation and liberalisation approach adopted by RBI and Govt.

of India in the early 1990's, had thrown open many challenges before the

banking system and one such challenge is to maintain commercial viability

by generating profits to meet, among others, the capital adequacy norms and

take care of the additional provision against Non-Performing Assets W A S ) .

The Committee on Indian Financial System observed that poor working

results of Banks could be attributed largely to Five 'D's-Directed investment,

Directed credit, Deteriorating quality of loan, Dearth of capital / reserves /

provision to meet losses and Delinquent house keeping.' Nevertheless, under

the title directed credit, priority sector lending has been often indicated to be

the main reason for low profitability of banks.

The banking industry no longer enjoys the sellers' market and it has to

anticipate the customers' needs and preferences with regard to both acquisition

and deployment of funds. The Indian public sector banks are facing stil'f

168

competition from the private and foreign banks in attracting customers. There

has already been a great rise in the cost of staff and the demand for further

hike in the wages is on the anvil. There has been however, restriction on the

recruitment of staff in public sector banks. There has also been pressure on

the PSBs to update their work technology through computerisation which is

expensive for them. All these challenges are likely to exert pressure on the

profitability of PSBs and the situation attracted serious attention of one and

all concerned (the Government, RBI, and managements of banks) to contain

the mounting costs and NPAs to improve profitability.

6.2 NEED FOR PROFITS

Every bank has to be made to generate sufficient surplus to recover the

associated costs and at the same time retain a part of it either fully or partly

in the form of retained reserves. This type of reserve accumulation

strengthens the financial base of the banks and enhances their trustworthiness.

The reserves further act as a cushion to absorb any unforeseen risks and 1 or

comrnitmcnts in the futurc. It is therefore, time to shift the emphasis from the

quantitative expansion to qualitative consolidation of the gains achieved so

far. It is in this context that banks are now directed to improve profitability

and productivity.

The Bwks need profit for a number of reasons as mentioned below :

8 They are basically commercial organisations and in order to ensure that

the customers, particularly, the depositors have faith and confidence in

them, they must not incur losses, since it is their h&, which the banks

are managing.

In order to sustain themselves i.e, to meet their own ever increasing

expenses and for f M e r growth, they must earn profits.

9b RBI desires them to maintain a certain level of capital h d in relation to

their risk weighted assets, so as to mcet global standards, which would be

possible if they earn profits on a regular basis besides improving the

capital fund through other measures.

@ To meet the increased provisioning requirements i.e. cost of undesirable

loans, banks have to earn higher profits.

$3 Earlier banks used to credit interest on accnral basis (whether recoverable

or not), but with the modification of guidelines regarding income

recognition, only thc realistd interest can be taken as income. This loss of

income forces the banks to keep assets performing by adopting various

measures and earn higher income / profits,

t$ In the present competitive environment, the banks are required to make

huge investments of capital for mechanisation and computerisation on a

continuous basis, which involves n lot of capital and rcvcnuc expenditure

including depreciation. Not only this, the banks will also have to incur a

lot of expenditure on training, in-house Rcscarch & Development (R & D)

and on innovations in the face of global competition,

Periodical wage revisions became a great burden on the banks. All these

require a lot of additional revenue?

170

63 CAUSES FOR DECLINING PROFITABILITY IN PUBLIC SECTOR

BANKS

Profitability in Indian public sector banks has been under strain in

recent years. There are a number of causes for the decline in the profitability.

Some of them are :

r;J. Large percentage of directed investments (SLR), directed liquidity

(CRR) and directed credit (priority sector targets) and low rate of

return on such directed deployments is causing erosion of profits of

PSBs.

* Rapid branch expansion, particularly in the unbanked 1 underbanked

rural areas. Branchus, especially in the rural areas opened in

accordance with the government policy which take a long time to

register profit.

Increasing incidence of industrial sickness.

The mounting provisions for NPAs is a cause of drain in profitability

of PSBs.

The spread between lending and borrowing interest rates, which is low

restricts bank's interest income.

Erosion of profitability of banks has also emanated because of a lot of

expenditure as a result of massive expansion of branches, absorption

of technology, increased overheads and staff costs etc.

Implementation of new and international accounting practices

regarding asset classification, income recognition is the main cause for

reporting losses in PSBs.

171

98 Unfavourable change in the deposit-mix of banks.

Lower manpower productivity as revealed by low deposits and

advances per employee.

Competition from private and foreign banks with well developed

technology.

B Political interference in loan disbursement and loan recovery.

Govt. policies like self employment schemes such as DWACRA, PM

Rojgar Yojanq CMEY, etce3

6.4 CRITICAL AREAS FOR PROFIT PLANNING

Profit is an absolute difference between Total Revenue (TR) and Total

Cost (TC) during a specific period normally denoted by an accounting year.

If TR is more than TC, it results in Profit (P) and if TC is more than TR it

obviously results in Loss (L). The TR consists of two parts - one relating to

the revenue earned by way of interest on loans and advances and discount on

bills together termed as Gross Interest Revenue (GIR) and the other relating

to the revenue by way of exchange, commission on both inland and foreign

non-fund business like remittances, letters of credit, guarantees, government

business, rent on safe deposit lockers, etc., together termed as Non-lnterest

Revenue (NIR). Similarly, the bank's TC consists of two types - one relating

to the cost paid by way of interest on deposits, borrowings and refinance,

together termed as Gross Interest Cost (GIC) and the other relating to Staff

Cost (SC) representing establishment expenses, and Facilities Costs (FC)

representing the premises and equipment maintenance costs and other

operational costs together termed as Non-Interest Cost (NIc).~

172

The rise or MI in the revenue and the cost is affected by internal and

external factors. The external factors are the interest rate structure, credit

allocation, branch expansion, Statutory Liquidity Ratio, and Cash Reserve

Ratio etc. Due to reforms banks have very little control over some of the

factors and no control on majority of these factors. On the other hand, the

internal factors are generation and utilisation of resources comprising funds,

staff and facilities.

Profit is an absolute measure, while profitability is a relative measure.

The important components of profit planning are SPREAD i.e, the difference

between interest earned on advances and interest paid on deposits and the

BURDEN i.e .the difference between non-interest income and non-interest

expenditure. Thus, the profit equation would be: PROFIT = SPREAD - BURDEN. Spread = Burden is break even position, If the spread is more than

Burden there will be profit and vice-versa. Thus, Spread and Burden arc

crucial factors in generating profit.

6.5 ANALYSIS OF INCOME AND EXPENDITURE OF SBI

The banks must try to increase productivity through better development

of men, material and resources. In order to improve profitability it is

advisable for every bank to diversity its operations and concentrate on

innovative products, such as merchant banking, leasing, factoring, insurance,

credit cards etc. Profit planning is a systematic and forrndised exercise in this

direction. The basic idea underlying the profit planning exercise is to maintain

173

a proper spread between income and expenditure, The profit planning

techniques concentrate on maximising revenue and at the same time

minimising costs, there by correcting the imbalance that exists at present.

Thus, the two focal aspects of profit planning are expenditure control and

revenue augmentation.

Income and expenditure items can be broadly classified into interest

and non-interest items.

t Interest expenditure

Expenditure Opcriting expenses

Provisiom & Contingencies

Income and expenditure are recognised on realisation basis since the

accounting year 1992-93. In the case of foreign officcs income is recognised

as per the local laws of the count~y.~

I. INCOME OF SBI

i) Interest Income

It is a major component of the income of the Bank, consisting of

interest earned on advances / bills, income on investments and interest on

balances with RBI and other inter-bank finds, etc. The volume of Interest

1 74

Income depends on the Bank Rate, the rate fixed for interest on the surpius

of CRR required to be maintained, the rate of return on the Government

securities, the interest rates of priority sector lending, the volume of

Differential Rate of lnterest (DRI) lending, the rate of return fixed for food

credit and expon sector and other measures adopted by the Government. This

income also depends on the internal fund management and the quality of loan

assets, the proper recycling of b d s in the form of recovery, timely and

proper application of interest, follow-up of advances etc. Healthy credit

portfolio administration, a well planned deployment of h d s in the high-

yielding areas, getting refinance for concessional lending and check on the

leakage of interest revenue will increase the interest income.

ii) Non-interest Income

The Non-interest &come is earned by the Bank through rendering

ancillary services like issue of drafts, mail transfers, telegraphic transfers for

remittance of funds, realisation of cheques, providing safe deposit lockers etc.

This income includes commission, exchange and brokerage, profit on sale of

investments, profit on revaluation of investments, profit on sale of land,

buildings and other assets, profit on exchange transaction, lease income and

other miscellaneous incomes. To improve the profitability position of a

commercial bank, it has to concentrate an non-interest items.

175

6.5 (A) ANALYSIS OF INCOME OF SBI

The analysis of income of SBI is h i s h e d in Table 6.1. The table

explains that the total income showed an increasing trend in aggregate tenns

except in the year 1994.

TABLE 6.1

ANALYSIS OF INCOME OF SB1

Note : Figures in parenthesis are percentage to total income. Source : Compiled from the Annual Reports of SBI.

(Rs. in crore)

Year

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Interest earned

7273.13 (90.6)

9535.40 (87.2)

9697,39 (86.9)

91 79.78 (85.4)

10652.14 (84.0)

12958.57 (82.5)

14905.66 (85.0)

15878.89 (84.9)

191 07.54 (85.3)

22200.93 (86.1)

(By

Other income

749.25 (9.4)

1395.82 (12.8)

1459.34 (13.1)

1566.66 (14.6)

2022.62 (16.0)

2757.02 (17.5)

2643.07 (15.0)

2820.17 (15.1)

3284.69 (14.7)

3569.32 (13.9)

the end of March 3 In)

Totul income

8022.38

1093 1.22

1 1 156.73

1 0746.44

12674.76

15715.59

17593.73

18699.06

22392.23

25770.25

176

From Table 6.1, it is observed that the SBI improved its other income

during the period, which is less controlled by RBI and Government of India.

In terms of percentage the interest earned gradually decreased upto 1996 and

again improved slightly. It was always more than 80 per cent during the

period. But the other income varied between 9.4 to 17.5 per cent. Due to the

inlmduction of financial sector r e f m in the banking industry since 1992-93,

the income recognition norms were redefined, as discussed earlier and its

impact was clearly visible in the total income in the years 1993 and 1994. 111

the year 1993 growth was limited and in the year 1994 there had been a

decrease in the total income of the Bank. It was the transition period in

adjusting with the new accounting policies and procedures. From the year

1995 onwards the Bank again gained its previous position and had been

continuously improving its total income.

11 EXPENDITURE OF SBI

i) Interest Expenditure

Banks pay interest on deposits and borrowings. Since more than

seventy per cent of the working funds are raised by mobilising deposits,

interest on deposits is the major expenditure. But, Banks do not have control

on this item as the maximum rate of interest on deposits is prescribed by the

RBI. The role of banks is confined to mobilising various types of deposits.

After the implementation of reforms in the banking industry, interest

deregulation became a buzzword. But, the Indian banks are functioning still

in regulated interest rates. The Prime Lending Rates (PLR) and interest rates

on some types of deposits are partially deregulated. Still the commercial

banks, particularly public sector banks did not go for drastic changes in the

interest rate structure due to heavy competition h m private and foreign

banks.

The interest rates on deposits and borrowings are fixed by the

monetary authority i.e. RBI and the only option that the banks have to ensure

that the minimum possible interest is paid. With the growing awareness of the

public, the deposits under the high interest paying category are on w

increase, while banks strive hard to mobilise low interest paying deposits to

reduce the incidence of cost of interest. It is advisable to go in for currerlt

account deposits,

SBI enjoys certain special privileges among Indian public sector banks

because some times it acted as a central bank of our country and even now

it had been prfoming some of the central bank's functions on behalf of the

central bank where there was no branch for the central bank in the country.

It was the only bank permitted to do the business of exchanging foreign

c w n c y till a few yeas back, It is the only bank which is authorised to deal

with the Government transactions till now. If its branches or even its

subsidiary (Associate) bank branches are not available, then only the other

PSBs are permitted to deal with Government transactions. Majority of the

public sector undertakings (either state or central) maintain their accounts in

State Bank of India only because of the convenience, a large number of

branches in India and it is very convenient for thein to transact with others

elsewhere. Hence, the cost of finds in SBI are low when compared with the

other PSBs.

178

ii) Non-Interest Expenditure

Non-interest expenditure of SBI is analysed under two headings i.e.

a) operating expenses b) provisions & contingencies.

a) Operating expenses

Payments to and provisions for employees is the major expenditure

under this head. Banking is a manpower oriented industry and a large work

force is employed to run and maintain the banks. The employees in banks are

of three categories - officers, clerks and subordinate staK The clerical and

subordinate staff are also called award staff because their salaries and wages

are settled by Awards. Managements of banks have very little control over

salaries as the employees' unions have their say in deciding the salary

structure as they are highly organised and have better bargaining power.

Under the reforming process, the Government of India is not in a

position to recapitalise the weak banks and w m them to reduce the strength

of staff and stagnate the wage revisions. At the same time the Government

of India suggest that the Indian PSBs should strengthen themselves by

entering the capital markets and improve the profit earning capacity in the

competitive market. Now, the PSBs in India are facing the threat of

privatisation or even closure if they are not in a position to earn profits and

to stand on their own earnings.

The Banking Service Recruitment Boards (BSRBs) are totally idle and

there was no recruitment of staff for the past 4 to 5 years in banks (BSREls

were abolished in February 2001) and the existing staff is also found excess

due to computerisation in banks. To adjust the excess manpower in banks, a

179

few banks like SBI are asking the Government of India to permit them to

enter into other businesses like insurance etc. Already SBI entered into

merchant banking, leasing, factoring, credit cards, housing finance and to

insllrancc business very soon. Recently the growth in stnngth of staff in SBI

is vay low and the banKs management is very particular of reducing the cost

of staff in future. In this connection it offered an attractive Voluntary

Retirement Scheme (VRS) package in December 2000 and completed the

process by the end of 31st March 2001. Out of the 35,000 employees who

opted for VRS in SBI, around 20,000 employees' options were accepted and

their services were terminated under this schemem6

Rents, stationary, depreciation, postage, telephones etc. are some of

the items of expenditure under operating expenses. In addition to these, the

computerisation of branches is one of the major expenditure for the bank in

the present scenario. The SBI is spending a huge mount on HRD, As on

31st March 2000, Bank has 50 Staff Training Centres (SI'Cs) and 2 Staff

Training Colleges and 2 Specialised Institutions like SBI Institute of Rural

Development and SBI Institute of Information and Communication

Management to enhance the knowledge, develop skills and reorient attitude

of the employees to keep pace with the changing environment.

b) Provisions and Contingencies

Under the veil of secrecy, banks used to deduct provisions from

interest income rather than showing it as a separate item. From the year

180

1990-91 onwards, they started showing provisions and contingencies as a

separate item of expendim for a greater transparency of financial statements.

Provisions arc to be madc towards income tax, other taxes, towards NPAs,

prudential provision against total standard assets in India over and above the

RBI guidelines, provision for salary revision, depreciation on investments, and

other depreciations etc.

6.5 (B) ANALYSIS OF EXPENDITURE OF SBI

The analysis of expenditure of SBI is presented in Table 6.2. Interest

expenditure is the major segment of total expenditure. It varied between 55

to 65 per cent. The interest expenditure increased to 9 per cent between 1996

and 2000. It was mainly because in the Deposit Mix of SBI the high interest

payable term deposits increased to a greater extent in the above period, which

was discussed in the third chapter. The operating expenses are around 30 per

cent throughou) the period. They are a little bit stable during the study

period, Though the wages I salaries were revised, the operating costs were

under control due to reduction in staff strength. The provisions and

contingencies are shown in the Profit & Loss Account of the Bank from the

accounting year 1991-92. Prior to that Bank used to deduct provisions from

interest income rather than showing it as a separate item, under the veil of

secrecy. This expenditure had been increasing absolutely where as in terms

of percentage it drastically decreased during the period, i.e. from 22.5 per

cent in 1992 to 9,l per cent by the end of March 2000.

TABLE 6.2

ANALYSIS OF EXPENDITURE OF SBI

(Rs. in cmrc) (By the end of March 3 1")

Note : Figures in parenthesis are percentage to total exps~lditure . Source : I . Compiled from the Annual Reports of SBI.

2. Performance highlights of Public Sector Banks, IBA. Mumbai, March 1999.

Year

lggl

lgg2

Igg3

1994

995

1996

lgg7

lgg8

Igg9

*Oo0

Interest expended

4633.69 (58.5)

6088.64 (56.6)

6727.18 (61.5)

6264.13 (59.8)

6687.87 (55.9)

8225.92 (55.3)

9591 -43 (59.0)

10473.2 1 (62.2)

13044.44 (61.1)

15272.58 (61.4)

Operating expenses

2015.59 (25.5)

2253.98 (20.9)

2575.97 (23.5)

2949.47 (28.2)

3610.72 (30.2)

4459.54 (29.9)

4604.67 (28.4)

4720.89 (28.0)

5896.63 (27.6)

6295.17 (26.5)

Provisionr & Contingencies

1266.10 (1 6.0)

2413.55 (22.5)

1641.54 (1 5.0)

1257.80 (1 2.0)

1660.67 (1 3.9)

2198.53 (14.8)

2048.38 (12.6)

1643.76 (9.8)

2423.35 (1 1.3)

2150.95 (9.1)

Total Expenditure

7915.38

10756.17

10944.69

10471.40

1 1959.26

14883.99

16244.48

16837.86

2 1364.42

2371 8.70

6.6 PROFITABILITY OF SBI

Table 6.3 shows the Net Profit of SBI during the study period. The

percentage of change is calculated based on the previous year results as

shown in the table.

TABLE 6.3 PROFITABILITY OF SBI 1991-2000

(Rs, in crore)

Note : The % of change is crlculated basing on the previous year results. Source: Compiled from the Annual Reports of SBI.

From Wble 6.3 it is observed that, the net profit recorded the

highest growth rate of 160.1 per cent by the year ending 1995. The transition

period of financial sector reforms was over wd so the Bank got some relief'

from provisions and contingencies. Another important observation is that,

during the year 1999 the Bank recorded a negative growth of 44.8 per cent

in Net Profit. During the study period this was the only year where Bank's

Net Profit declined and also in a high percentage. 'The rcasons for this are

considered excess provision for depreciation on investments, huge expenses

for the issue of the Resurgent India Bonds, wage hike as per the industry

level settlement and more provisions for NPAs. It is clear from Table 6,3

that in the year 1999 the percentage of change in total income is 19.7 per

cent whereas the percentage of change is 26.9 per cent in total expenditure, which is higher than the change in total income.

FIG. 6.1 PROFITABIUTY OF SBI

(h in #on)

Year

The trend in Net Profits of SBI is graphically presented in Figure 6.1,

The figure reveals that there is a deep decline in net profit of SBI

during the year 1999 and reasons for that are explained above. The Net

Profit shows an increasing trend which is explained by the model

Y = 91.415e0*33'8X

Where R~ = 0.9062. The compound growth rate is 39.35 per cent which is

significant at 1 per cent level. So the formulated hypothesis that there is a

growth in profitability of SBI in the post refom era, since 1992-93 is

accepted. If the same trend continues the Net Profit may increase further.

PROFITABILITY ANALYSIS OF SBI The profit of a bank can be measured as the difference between

interest spread and burden. The inter-relationship among spread, burden and

profit is known by the Spread - Burden - Profit Analysis where ;

Spread = Interest earned - Interest expended Burden = Non-interest expenditure - Non-interest income Profit = Spread - Burden

(A) Analysis of Spread

Spread is a function of cost of resources and yield on funds deployed.

Interest earned includes interest 1 discount on advances and bills, income on

investments, interest on balances with RBI and other inter-bank funds and

others. '

Xble 6.4 gives the details of analysis of spread in SBI. In the

year 1993 and 1994 there has been a decrease in the spread of the Bank.

This is because the interest income should be recognised on the basis of

realisation but not on accrual basis from the accounting year ending by

March 1993.

TABLE 6.4 ANALYSIS OF SPREAD

(Rs, in crore)

Source: 1 . Compiled from the Annual Reports of SBI. 2. Performance highlights of Public Sector Banks, IBA, Mumbai, March 1999.

185

(B) Analysis of Burden

The analysis of "Burden" of the Bank is explained in Table 6.5 Burden

is a hct ion of non-intmst expenditure and non-interest income. Non-interest

expenditure includes operating expenses and provisions & contingencies

whereas non-interest income is the other income of the bank except interest

earned. The factors of Burden are under the control of individual Banks. SB1

has taken many steps to reduce its operating expenses and improve its other

sources of income. From -7able 6.5, it is evident that the Burden varied

from year to year and it is not increasing or decreasing constantly.

TABLE 6.5

ANALYSIS OF BURDEN

(Rs, in crore) (By the end of March 3 I")

Source: I . Compiled from the Annual Reports of SBI. 2. Performance highlights of Public Sector Banks, IBA, Mumbai, March 1999.

186

(C) Spread - Burden - Profit Analysis

Table 6.6 reflects the details of Spread-Burden-Profit analysis of

SBI. The profit of the bank is recorded more when ever the spread increases

more and simultaneously the burden decreases or otherwise the percentage of

increase in spread is more than the percentage of increase in burden. From

the table it is evident that in the year 1998 and 2000 the burden is under

control and spread is more. Automatically the bank recorded a good amount

of net profit i.e., Rs. 1861.20 and Rs. 2051.55 crore respectively.

TABLE 6.6

SPREAD - BURDEN - PROFIT ANALYSIS OF SBI

(Rs. in crore) (By the end of March 3 1

Sourco : I . Compiled from the Annual Reports of SBI. 2. Performarrcc highlights of Public Sector Banks, IBA, Mumbai, Mnrch 1999.

6.7 PROFIT PER BRANCH AND PROFIT PER EMPLOYEE

Table 6.7 reveals the details of profit per branch and profit per

employee of SBI in lacs. The table explains that the Profit Per Branch (PPB)

had been showing an increasing trend except in the yew 1999. In the year

1999 the net profit of the bank fell down due to many reasons explained

earlier. From the year 1995 the growth in PPB is very high and it reached

Rs. 22.67 lacks by the year ending March 2000. It shows that the

performance of SBI in terms of profitability is a renlarkable one. The Profit

Per Employee (PPE) varied from Rs. 5 thousand to Rs. 87 thousand during

the period. It is also a very good achievement in a period of 10 years.

TABLE 6.7 PROFIT PER BRANCH AND PROFIT PER EMPLOYEE OF SBI

(RI. in lacs) (By the end of March 3 I")

Source : 1. Compiled from the Annual Reports of SBI. 2. Business Standard, Banking Annual, December 2000.

188

6.8 RETURN ON EQUITY OF SBI

The particulars of Return On Equity (ROE) of SBI is given in

Table 6.8. This ROE ratio signifies the earning capacity of the shareholders

of the Bank. It is also used to examine the operational and managerial

efficiency of the Bank. Equity which comprises capital plus reserves increased

constantly throughout the study period. No other public sector bank in India

procured such a huge amount of equity. In the recent years the bank's equity

recorded a high growth, reached a maximum level of Rs. 12,147 crore by the

end of March 2000 fiom Rs. 1291 crore in the year 1991.

TABLE 6.8 RETURN ON EQUITY (ROE) OF SBI 19913000

(Rs. in crore)

Note : Equity = Paid up capital + Reserves & Surplus Net Profit

ROE = ..- X 100 Equity

(By the end of March 3 1 ")

Source : Compiled from the Annual R e p o m of SBI.

Year Net profit (Ra.) Equity (Rs.) ROE (%)

189 6.9 RETURN ON TOTAL ASSETS (ROA) OF SBI

The Retum on Total Assets ratio signifies the bank's profitability position. This ratio is also an indicator of operational emciency of a bank. The higher the ratio, the better is the operational efficiency of the concern. The formula used to calculate the ratio is

Net profit (after tax) + Interest paid on borrowed capital ROA = X 100

Total Assets

The inclusion of interest paid on borrowed capital to the net profit is conceptually sound because total assets have been financed from the pool of funds supplied by the creditors and the owners, The Return on Total Assets of SBI is presented in Table 6.9. The ratio of ROA is the highest in the year 1992 i.e. 1.92 per cent and the least in the year 1999 i.e. 0,84 per cent. During the year 1999 the SBI's net profit declined due to heavy expenditure relating to issue of Resurgent India Bonds, wage hike as per the. industry level settlement etc., Hence thc ratio of ROA is low for this year. The ratio is more than one per cent throughout the study period except in the years 1994 and 1999.

Source : Co~npiled from the Annual R e p o r t s of SBI.

TABLE 6.9 RETURN ON TOTAL ASSETS OF SB1 1991-2000

(Rs, in crore)

1996

1997

1998

I Y Y Y

2000

83 1.60

1349.25

1X6l.20

1027.111

205 1.55

- . .... . . . . ..

1620,50

1290.61

886.96

847,86

R75.94

2452.10

2639.86

2748.16

1875.67

2927.49

144469,83

156473,lB

179672.67

222509,OZ

261504 96

1.70

I .69

1.53

0,84

1.12

190

6.10 OPERATING PROFIT PER BRANCH OF SBI

Operating Profit Per Branch (OPPB) is the real indicator of the

profitability performance of a commercial bank. The OPPB of SBI is shown

in Table 6.10. The table exhibits that in the years 1993 and 1994 the

Operating Profit Per Branch is declined. It is mainly because of the

inlmduction of financial sector reforms in the banking industry in India, From

the year 1995 the Bank's OPPB showed an impressive increase and reached

Rs. 0.46 crore by the year ending March, 2000.

TABLE 6.10 OPERATING PROFIT PER BRANCH OF SBI 1991-2000

(Ks. in crore)

Note : Operating Profit = Net Profit + Pruvisions & Contingencies. Source : Compiled from the Annual Reports of SBI.

(By the end of March 3 1"')

Year

199 1

1992

1993

1994

1995

Operating Profit (Rs.)

1373.1 1

2588.59

1853.58

1532.84

2376.1 7

No. of Branches

8558

8627

8738

8812

8839

Operating Profit per branch (Rs.) (OPPB)

0.16

0.30

0.2 1

0.17

0.27

6.1 1 PRODUCTIVITY IN SBI

The productivity ratios indicate how best the manpower is utilised, how

effectively the branches are being managed and to what extent all the

resources are exploited. It is a relationship of an output of an activity and an

input of a resow. The productivity in SBI is explained in Table 6.1 1. One

aspect of productivity is the measurement of Business (deposits + advances)

Per Branch and the other aspect is Business level Per Employee.

TABLE 6.1 1

PRODUCTIVITY IN SBI 1991-2000

(Rs. in crore)

Note : Volume of Business = Deposits + Advances. Source : 1 . Compiled from the Annual Repom of SBI.

2. Business Standard, Banking Annual. Dtcen~ber 2000. 3. The Financial Express, 'India's Best Banks 1999', December 1999.

192

. Table 6.1 1 exposes the productivity in SBI both in terms of per

branch and per employee. The Business Per Branch and Per Employee had

been showing a continuously increasing trend during the study period. The

Business Per Branch (BPB) reached a maximum level of Rs. 32.59 crore by

the end of 31st March 2000. It indicates how well the Bank's branches were

being managed and also reflected on the degree of productivity of a branch.

The Business Per Employee (BPE) varied from Rs. 0.40 crore to Rs. 1.25

crore during the period. It also continuously increased over the period of

time. It indicates the degree of employee (labour) productivity of the Bank.

Fig. 6.2 PRODUCTIVITY IN SBI

16

10 10

1mi 1m 1m 931101 1- 1 P 1 1 7 1- 1999 BOP 1 I I 1- 1- IY I- 4 1 1 1 1 1 1 1 1 1 *U ".- hr

4- ---- ,. --

The BPB and BPE of SBI are graphically shown in Figure 6 2. In the

case of Business Per Branch there is a compound growth of 13.08 per cent

with R* = 0.9733 and F = 292.47, which is sipificant at 1% level. Regarding

Business Per Employee there is a compound growth of 12.76 per cent with

R* = 0.9670 and F = 234.66, which is also significant at 1 per cent level. So

the fmulated hypothesis that there is a growth in productivity of SBI in the

post reform era, since 1992-93 is accepted.

193

6.12 SUGGESTED STRATEGIES FOR IMPROVEMENT OF

PROFITABILITY

The strategies suggested to Banks for maximisation of their profit while

marching towards the new century are :

* NPA Management : The success of bank in a new millennium largely

depends on its ability to manage the NPA portfolio. Recovery of NPA

brings the benefit of fi-eeing the locked up funds for fresh profitable

lending, and recognition of income and reversal of provisions, thereby

helping to improve margins. * Asset - Liability Management (ALM) : ALM is a tool for increased

profitability and managing interest rates. ALM envisages the matching

of the assets and liabilities of the bank in t e n s of maturity cost and

yield rates, and proper pricing of its various products, which are of'

prime importance in the process of' profit plt~nning of hanks. * Funds Management : Funds management, especially with regard to

CRR and SLR, becomes crucial in view of the heavy penalties

imposed on defaults in their maintenance. * Cash Management : Currency chests, arrangements with other banks/

branches wd use of remittance facilitius should bc actively used to

improve cash management, which is also a non-income generating

asset. * Risk Management : The profitability of a bank in the new millennium

largely depends on its ability to efficiently manage the various risks;,

to which they are exposed to, in the changed scenario. Credit risk,

interest rate risk, liquidity risk, capital risk, market risk, exchange rate

risk are the various risks faced by banks.

V r i c i n g of services : Cost of different services should be found out

and price of services should be fixed on cost plus basis.

* Cost effectiveness and control : One of the crucial factors in

maintaining profitability of a bank is its ability to control cost of

operations. The cost to income ratio should be kept at minimum

possible levels reducing overheads on an on-going basis but without

adversely affecting the quality of services. Each individual bank is

expected to have a well designed cost information system for assessing

the servicing costs of various functions performed by banking. * Man power planning : Absorption of technology will lead to

enhancement in personnel productivity, but the scope for reducing

strength of staff is remote. Hence profitability of banks largely depends

on its ability of reorient and redeploy the surplus manpower for

customer oriented tasks. * Diversification : Banks must be alert to the new opportunities for

increasing other non-fund income by diversifying their services into

areas such as capital markets. consultmcy services, leasing, factoring,

merchant banking, hire-purchase, credit cards, housing finance and

insurance services etc. Dedicated subsidiaries can be established for a

better focus. * Information Technology ('IT) : 11' has emerged as a strategic tool for

profit generation in bwks. Deriving a competitive advantage through

the most modern delivery channels and the resultant increase in

business, customer satisfkction and efficient marketing of products will

further strengthen the bottom line of banks. Information Technology

should help in a better Management Information System (MIS), better

corporate planning and better informed decisio~~ making while lending.

* Enhance Operational Efficiency : Enhancing the operational

efficiency of bank's branches by attracting rural deposits which are

comparatively cheaper, optimum capacity utilisation of IT equipment,

making the operations customer friendly, doing away with outdated

procedures, better house keeping etc., goes a long way in enhancing

operational efficiency and betterment of the bottom line of banks. * Other aspects : The emerging concept of universal banking can be

exploited by banks to their advantage for profitable lending operations

to infrastructure. Banks should concentrate on high yielding advances

like gold loans and try to maintain a uniform average advances

position throughout the year as their profit planning strategy. Banks

should adopt flexible banking hours and open specialised branches to

augment their business and resultant profits. Setting up of specialised

branches for sector specific lending can be a strategy that can be

adopted. Banks should take concerted efforts to reducelprevent

financial frauds, which are a strain in profitability. Bank should

revamp their revenue audit cells to prevent leakage of income.'

The banking industry is facing yet another period of change, perhaps

greater than the one experienced in the immediate past, and there is no doubt

that banks have to manage their functions successfLlly and skilfully during the

present era, replete with significant economic, competitive and technological

challenges in order to improve their profitability and productivity.

REFERENCES

1. S.C. Anand, "Is Priority Sector Lending still a drag on Projtability"? IBA Bulletin, April 1993, p.6.

2. N.S. Toor, "Non-Performing Advances in Banks - Concept, Practice and Management", Skylark Publications, New Delhi, 1994, p. 42.

3. S . Singh, "Projtabilip of Commercial Banks in India", IBA Bulletin, October 1989, p.9.

4. M . M . Thakar, "Profir Planning in Bank", IBA Bulletin, February 1997, p.2 1,

5 , 'SSl Annual Report", 1998-99 p. 5 1 .

6 . V. Dnyanesh Jathar "VRS in Banks - Oji'crr's Choice'', The Week, April la', 2001, p. 64.

7. P,P, Pathrose, "Profit Planning by Bunks", IBA Bulletin, December, 1998, pp. 28-32.