Profitability of Commercial Banks Shows Downward Trend

THE commercial banking sector in India is fast assuming the role of a catalyst in the nation-building process, having well shifted its focus from "class banking" and "mass banking" to "social banking" and "innovative banking". In effect, this involves helping provide social Justice by actively participating in programmes meant for ameliorating the lot of the masses and providing succour to the poor. Over the past few years, commercial banks have branched out of urban areas and penetrated deep into rural and tribal pockets. The objective of creating a "structural transformation of the sectorial distribution of bank credit" has immensely benefited small and marginal farmers, artisans, self-employed professionals and small scale entrepreneurs. Clearly, the objective of maximizing profitability has had to be compromised to a certain extent. But then, it must not be forgotten that these banks are primarily commercial institutions and, as such, must necessarily maintain their financial viability. This is also crucial in the interests of instilling confidence among innumerable depositors. In the post nationalization period, these commercial banks have consistently demonstrated a downward trend in their profitability. The ratio of net profit to total working funds of the banks was 0.4 per cent in 1969, which declined to 0.14 per cent in 1985. This is in sharp contrast to the performance of foreign banks in India whose profitability has all along been on the rise. To worsen matters, there are eight nationalized banks which have recently been declared "sick" by the Reserve Bank of India. They are the Bank of India, Syndicate Bank, United Bank of India, Bank of Maharashtra, Punjab and Sind Bank, Vijaya Bank, United Commercial Bank and New Bank of India. Significantly, these banks have not been able to utilise a major part of the deposits attracted by them for generating profits. Moreover, they have, on the whole, demonstrated a strange over-enthusiasm towards priority sector lending. At the end of June 1990, the total priority sector advances by these banks touched Rs 38,474 crore, constituting 42.3 per cent of the net band credit as against the prescribed target of 40 per cent only. This is primarily norms for Capital Adequacy, as adopted by the Central Bank Governors of the group of ten countries, assume relevance. According to the Basle Committee, banks should maintain a minimum capital base of eight per cent of risk-weighted assets. In the case of Indian banks, it is nowhere near the norm. Even if we come down to four per cent, the additional capital required for the nationalized banks will be about Rs 2,000 crore. Along with the low capital-asset ratio, another problem is that a fairly high percentage of assets is in the category of non-performing assets. No solution has yet been found for this.  Chakravorty Committee set up a few years back. After all, too many regulations adversely affect the performance of commercial institutions.

In the post-nationalisation period, commercial banks have consistently demonstrated a downward trend in their profitability .... This is in sharp contrast to the performance of foreign banks in India whose profitability has all along been on the rise.

There is also a need for restructuring the entire banking system in the country. The enthusiasm banks have dis-played in opening more and more branches in far flung areas of the country is well known. Even the 1985-90 Branch Licensing Policy laid down a target of 5,360 new branches for the banking sec-tor as a whole. In addition, when the Service Area Approach scheme was launched in 1989, these banks were prescribed a fresh target uneconomic branches. But in the absence of takers, the move could not succeed. However, of late, the Reserve Bank of India has granted permission to banks to swap their branches in far-flung areas with those of other banks for the purpose of geographical rationalization. They have also been permitted to close down their uneconomic branches in urban and metropolitan areas, so long as the Reserve Bank is informed about it. Merging of uneconomic branches with healthy ones would also help in this regard. Recently, some healthy banks have been willing to take over loss-making, uneconomic.

because banks are becoming more "target conscious" than ever before. Indian commercial banks are also operating with a lower capital base. The capital asset ratio of these banks ranges between 1.2 and 2.5 per cent, while their capital-weight risk assets ratio ranges between 1.1 and 4.7 per cent in the case of nationalized banks. In this context, the Basle Committee Commercial banks are subject to strict regulations by the Government and the Reserve Bank of India. In view of the fact that the money and capital markets are gaining maturity, it is time these banks are granted more financial liberalization so that they improve their efficiency and profitability. This idea has been strongly favoured by the noted economic L. K. Jha and the of 1,854 new branches to be opened, 5,624 were allotted to nationalized banks. If all these targets are to be fulfilled, adequate attention cannot be paid to the commercial viability of the branches opened. This has necessitated a consolidation of the operations of banks. The former Governor of the Reserve Bank of India, Mr R. N. Malhotra had himself launched a drive towards "consolidation of banks" by merging problematic branches with a view to extend their network and improve their branch strength. A major hurdle in this regard is that while a branch can be swapped, its personnel cannot be easily swapped. There is also the problem of mounting bad debts and over-dues, eroding the profits of banks substantially. The loan-waiver schemes have further aggravated the situation. What is needed now is the strong will on the part of politicians to shun populist moves and save the banks from deteriorating financial health. Ironically enough, in nursing various industrial sick units, these banks themselves are becoming sick. Hence the need to closely monitor lendings to sick units. In the ultimate analysis,- it is crucial that bank managements put their house in order.

Productivity and profitability can be improved by means of developing new systems for monitoring and control. Due emphasis must also be given to proper manpower planning, human resources development and effective training programmes to improve the quality of banking personnel. — PTI Feature

The author, Dr. Prakash, is Director of the Institute of Public Enterprises Research, Allahabad