Financial Performance of Banks

A comparative study of Private and Public Banks

SUBMITTED BY:
Submitted By:
Prateek Dudeja 071018
Ashima Aggrawal 071150
Nitish Malhotra 071177
Shivani Bansal 071268
Aditya Shantanu 071330
Rajat Bhardwaj 071375
(Electronics and Electrical
Communication)
Submitted To:
Ms. Anju Singla
 Declaration

We hereby declare that the project work entitled “Financial Performance of Banks: A comparative study
of Private and Public Banks” is an authentic record of the research and analysis carried out by us as a
part of the academic curriculum for the subject “Managerial Finance” for the award of degree of B.E.
Electronics and Electrical Communication Engineering, PEC University of Technology, Chandigarh,
under the guidance of Ms. Anju Singla during January to April, 2011.

Prateek Dudeja (071018)

Ashima Aggarwal (071150)
Nitish Malhotra (071177)
Shivani Bansal (071268)
Aditya Shantanu (071330)
Rajat Bhardwaj (071375)

Date: April 18, 2011

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 Acknowledgement

We are greatly thankful to our professor, Ms. Anju Singla for helping us out immensely in this project.
This project would never have seen the light of the day had she not solved the problems we faced during
the making of this project.

With this project we have taken a new step into the world of Finance where not only theoretical
knowledge, but a great amount of analytical knowledge is required to succeed. We feel that this project
has done just the same for us.

Once again we would like to express our gratitude for giving us an opportunity to learn and we hope to
be presented with more opportunities that open us up to a whole new plethora of knowledge.

Prateek Dudeja

Ashima Aggarwal

Nitish Malhotra

Shivani Bansal

Aditya Shantanu

Rajat Bhardwaj

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 Table of Contents
Abstract……………………………………………………………………………………………...7

Chapter 1: Public and Private Sector Banks in India: A comparative Analysis 8

1.1 Introduction 9

1.1.1 Public Sector Banks 11

1.1.2 Private Sector Banks 11

1.1.3 Performance of Private Sector and Public Sector Banks 12

1.2 Performance Parameters 13

1.2.1 Liabilities and Assets of Banks 14

1.2.2 Share in Aggregate Deposits 15

1.2.3 Priority Sector Lending 16

1.2.4 Sensitive Sector Lending 17

1.2.5 Credit Deposit Ratio 18

1.2.6 Cost of Funds and Return on Funds 19

1.2.7 Operating and Net Profit 20

1.2.8 Net Profitability of Bank Groups 21

1.2.9 Gross and Net NPAs 22

1.2.10 Capital Adequacy Ratio 23

1.2.11 Number of ATMs 24

1.3 Challenges……………………………………………………………………………………….25

Chapter 2: Comparative Study of top 5 Indian Banks 28

2.1 Introduction 29

2.2 Bank Profiles 31

2.3 Data Analysis 40

2.4 Findings and Recommendations 48

Conclusion 51

Bibliography 52

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 List Of Tables

Chapter 1: Public and Private Sector Banks in India: A comparative Analysis

1.1 Growth in Balance Sheet of Scheduled Commercial Banks…………………………………....14

1.2 Priority Sector Lending by Public and Private Sector Banks…………………………………...16

1.3 Lending to Sensitive Sector- Bank Group-wise…………………………………………………17

1.4 Cost of Funds and Return on Funds: Bank Group-wise………………………………………...19

1.5 Operating Profit and Net Profit- Bank Group-wise……………………………………………..20

1.6 Gross and Net NPAs of Scheduled Coemmercial Banks………………………………………..22

1.7 Capital Adequacy Ratio- Bank Group-wise……………………………………………..………23

1.8 Number of ATMs of SCBs (as at end-March 2010)….…………………………………………24

Chapter 2: Comparative Study of top 5 Indian Banks

2.1 Capital Adequacy Ratio (CAR) 41

2.2 Earning Per Share (EPS) 42

2.3 Net Profit Margin (NPM) 43

2.4 Return on Assets (ROA) ……44

2.5 Credit Deposit Ratio (CDR)……………………………………………………………………..45

2.6 Gross Non Performing Assets (GNPAs)………………………………………………………...46

2.7 Net Non Performing Assets (NNPAs)…………………………………………………………...47

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 List of Figures

Chapter 1: Public and Private Sector Banks in India: A Comparative Analysis

1.1 Share in Aggregate Deposits- Bank Group-wise …………………………………...................15

1.2 Group-wise Credit-Deposit Ratio …………………………………...........................................18

1.3 Net Profitability of Bank Groups ………………………………………………………………21

Chapter 2: Comparative Study of top 5 Indian Banks

2.1 Percentage change in Net Sales and Net Profit for HDFC Bank………………………………..33

2.2 Percentage change in Net Sales and Net Profit for State Bank of India………………………...34

2.3 Percentage change in Net Sales and Net Profit for AXIS Bank………………………………...36

2.4 Percentage change in Net Sales and Net Profit for IDBI………………………………………..38

2.5 Percentage change in Net Sales and Net Profit for ICICI Bank…………………………….…..39

2.6 Capital Adequacy Ratio (CAR)………………………………………………………………….41

2.7 Earning Per Share (EPS)…………………………………………………………………………42

2.8 Net Profit Margin (NPM)………….……………………………………………………………..43

2.9 Return on Assets (ROA)………………….……………………………………………………...44

2.10 Credit Deposit Ratio (CDR)……………...…………………………………………………….45

2.11 Gross Non Performing Assets (GNPAs)……………………………………………………….46

2.12 Net Non Performing Assets (NNPAs)……………………………………………………….…47

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 Abstract

What are the trends observed in the performance of Public Sector and Private Sector Banks? How do
they perform when compared across the critical parameters of profitability, Non-performing Assets,
deposits and lending, and cost of funds? This report is a modest effort to compare public and private
sector banks on the basis of eleven such crucial parameters. The various challenges and opportunities
confronting the Public sector banks and Private sector banks have also been discussed. Further a
comparison study of top 5 banks in India namely ICICI, HDFC, IDBI, AXIS Bank, State Bank of India
has also been presented.

In Chapter 1 we have compared public and private sector banks on the basis of eleven crucial parameters.
The various challenges and opportunities confronting the Public sector banks and Private sector banks
have also been discussed.

In Chapter 2, performance of 5 banks is compared based on certain criteria. The data analysis of the
information got from the balance sheets of the 5 banks was done and ratios were used. Graph and charts
were used to illustrate trends. The Sampling Plane of our analysis had the following 5 banks as a sample:
HDFC, State Bank of India, AXIS Bank, IDBI and ICICI Bank.

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 CHAPTER 1
Public Sector and Private Sector Banks in
India
A Comparative Analysis

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The Indian financial system comprises of four segments or components. These are financial institutions,
financial markets, financial instruments and financial services. Banks come under the financial
institutions segment. Financial institutions are intermediaries that mobilize savings and facilitate
allocation of funds in an efficient manner. The Indian financial system was quite well developed even
prior to India’s political independence in August 1947. Both foreign and domestic banks were present
and so was a well-developed stock market. Until the 1990s, the Indian financial system was tightly
regulated. Following the balance of payments crisis in 1991-92, a stabilization program was initiated
with the help of International Monetary Fund, which specifically included a reform of the financial
system. The foundation for the financial sector reforms was laid by recommendations of the Committee
on Financial System 1991 (Narasimham Committee). The Committee again reviewed the financial
system in 1998 and made further recommendations. The objectives of the financial sector reforms were
to bring about greater efficiency and competitiveness in all the spheres of the economic activity.

Banking in India has its origin in Vedic times, i.e. 2000 to 1400 BC. Indigenous bankers and
moneylenders have played a vital role for centuries. Modern banking in India emerged between the 18th
and beginning of 19th centuries. In 1683, the officers of East India Company set up the first bank in
Madras. Between 1770 and 1850 banks such as Bank of Hindustan, Commercial Bank, Calcutta Bank,
Bank of Calcutta and Bank of Bombay. Later, Commercial Bank and Calcutta Bank merged to form
Union Bank. Three Presidency Banks i.e. Bank of Bombay, Bank of Madras and Bank of Bengal which
were set up between 1809 and 1843 were amalgamated to form the Imperial Bank of India in 1921.The
Imperial Bank of India later became the State Bank of India.

The sudden boom of investment in the 1900’s led to the emergence of leading joint stock banks such as
the Punjab National (1895), Bank of India (1906), Indian Bank (1907), Bank of Baroda (1909), Central
bank of India (1911) and Union Bank of India (1919). The major functions of these banks were to
finance foreign trade while domestic trade was largely handled by the Multani Shroffs and
moneylenders. Between 1941 and 1945, the number of banks increased from 473 to 737 but these banks
suffered from certain limitations such as inadequate capital structure and unsound methods of operations
and management. Thus, the government in consultation with Reserve Bank of India enacted the Banking
Companies Act in 1949. Between 1947 and 1969 banks were under private ownership of maharaja’s, or
king s of the princely states of India and these banks served the rich families and industrial houses which
narrowed the industrial growth of the banking system.

The Reserve Bank of India thus made it compulsory for reconstruction and / or merger of the weak units
with the sound one’s as per the Banking Companies Act of 1960 and the number of banks declined from
548 in 1947 to 89 in 1969. Fourteen private banks were nationalized on July 19, 1969 and another six in
1980. One of the objectives of nationalization was to extend the reach of organized banking to rural areas
and neglected sections of the society.

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Between 1969 and 1992, there was rapid expansion of bank network. The number of bank branches
increased from 8262 to 60570. The banking system spread to rural areas. Small Scale, tiny and cottage
industries benefited from the spread of banking system. The share priority sector in total banking grew
up from14 percentage in 1969 to 43% in 1990 and banking density improved from 64000 people per
branch in 1969 to 14000 people per branch in 1991.

1.1.1 Public Sector Banks

Public sector banks are the ones in which the government has a major holding. They are divided into two
groups i.e. Nationalized Banks and State Bank of India and its associates. Among them, there are 19
nationalized banks and 8 State Bank of India associates. Public Sector Banks dominate 75% of deposits
and 71% of advances in the banking industry (Indian financial system, by Bharti Pathak, 2003).

1.1.2 Private Sector Banks

Private sector banks came into existence to supplement the performance of Public sector banks and serve
the needs of the economy better. As the public sector banks were merely in the hands of the government,
banks had no incentive to make profits and improve the financial health. Nationalized killed competition
and stifled competition in banking. Banks operated in regulatory environment with administered rate of
interest structure; quantitative restrictions on credit flows, high reserve requirements and significant
proportion of lend able resources going to the priority and government sectors. This resulted in low
levels of investment and growth, decline in productivity and erosion of profitability of banking sector.
Thus, Narasimham Committee I (1991) which recommended the free entry of new banks in the financial
market provided they confirm the minimum start up capital and other requirements by the permission of
Reserve Bank of India. Currently there are 31 Private Sector Banks, which includes 23 old, and 8 new
banks. (Indian financial system, by Bharti Pathak, 2003)

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1.1.3 Performance of Public and Private Sector Banks: A Comparison
The performance and the roles of private and public sector banks are undergoing changes. The banks,
both private as well as public have to now operate in an increasingly competitive environment. The
competition for public sector banks is coming from the private sector banks. Despite having the
advantage of a substantial presence and penetration in the rural areas, the public sector banks are under
tremendous pressure to maintain their margins and to survive the competition. The customer-centric
approach of private sector banks have thrown open many more challenges for the public sector banks
especially in retaining customers and expanding customer base.

We have compared Public and Private sector banks based on 11 parameters, which are critical while
evaluating their performance. These criteria are as follows:

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 1.2.1 Liabilities and Assets of Banks

On the back of robust economic growth and industrial recovery, loans and advances witnessed strong
growth, investments, in a rising interest rate scenario. Deposits showed a lackluster performance in the
wake of increased competition from other saving instruments. Borrowings and net-owned funds (capital
and reserves and surplus), however, increased sharply underscoring the growing importance of non-
deposit resources of SCBs. Bank group-wise, assets of new private sector banks grew at the highest rate,
followed by public sector banks and old private sector banks. As you can see below the percentage of
total assets and liabilities of New Private sector banks is higher than the Public sector Banks.

Source: RBI Table 1.1 Growth in Balance Sheet of Scheduled Commercial Banks

NOTE: Scheduled commercial banks (SCBs) consist of 28 public sector banks (State Bank of India and its
seven associates, nationalized banks and other public sector bank (one)),9 new private sector banks, 20 old
Private sector banks and 31 foreign banks.

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 1.2.2 Share in Aggregate Deposits

It can be seen below that Deposits of SCBs grew at a lower rate during 2009-10 as compared in the
previous year because of slowdown in demand deposits and savings deposits. Deceleration in demand
deposits was due mainly to the base effect, as demand deposits had witnessed an unusually high growth
last year. The growth in demand deposits, however, was in line with the long-term average. Savings
deposits, which reflect the strength of the retail liability franchise and are at the core of the banks’
customer acquisition efforts, grew at a healthy rate, although the growth was somewhat lower than the
high growth of last year. The higher growth of term deposits was mainly because of NRI deposits and
certificates of deposit (CDs). Excluding these deposits, the growth rate of term deposits showed a
deceleration, which was on account of a possible substitution in favor of postal deposits and other
investment products, which continued to grow at a high rate benefiting from tax incentives and their
attractive rate of return in comparison with time deposits.

Across bank groups, the rate of expansion of deposits was highest in respect of new private sector banks
(21.1 per cent), followed by PSBs (15.6 per cent), old private sector banks (10.8 per cent) and foreign
banks (7.9 per cent). The share of new private sector banks in total deposits has gradually increased over
the years. They are the ones, which took the initiative in hiking the deposit rates.

Source: RBI Figure 1.1 Share in Aggregate Deposits- Bank Group-wise

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 1.2.3 Priority Sector Lending

The performance of private sector banks in the area of priority sector lending remained less
satisfactory with 12 out of 30 private sector banks failing to achieve the overall priority sector targets.
Only one private sector bank could achieve the sub-targets within the priority sector. Advances to
weaker sections by the private sector banks of net bank credit were much lower than the stipulated target
for the sector.

Public sector banks are enforced by government to undertake lending mostly in the priority sector (40%)
at subsidized rates to encourage and support the rural sectors. Private sector banks aims at profitability
and marginal returns, so they concentrate more on the sensitive sector. Agricultural sector gets less
importance in priority sector as compared to other sectors because private sector banks concentrate less
on this sector as compared to PSB’s.

Source: RBI Table 1.2 Priority Sector Lending by Public and Private Sector Banks

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 1.2.4 Sensitive Sector lending

Sensitive Sector comprises of Capital Market, Real Estate Market, Commodities, and Venture Capital.
Among bank groups, old private sector banks had the highest exposure to the sensitive (measured as
percentage to total loans and advances of banks), followed by new private sector banks, foreign banks
and public sector banks.

Private sector banks focuses more on sensitive sectors as these markets are highly volatile involving high
returns and higher risk. Since Public sector banks require high expertise and high risk is, involved they
refrain from lending to sensitive sector.

Source: RBI Table 1.3 Lending to Sensitive Sector- Bank Group-wise

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 1.2.5 Credit Deposit Ratio

Among bank-groups, the new private sector banks had the highest C-D ratio, followed by foreign
banks, old private sector and public sector banks. The C-D ratio, which implies greater credit orientation
of banks, is used as a credit efficiency indicator for analyzing the role of banks in promoting productive
sectors and contributing to economic growth. In a bank-based financial system, the C-D ratio is
regarded as an aggregative measure for gauging the effectiveness of credit delivery system. Although
the deployment of credit and the time path of C-D ratio, in general, are influenced by the structural
transformation of the economy, the role of credit culture and banks’ lending policy have an inherent
impact on the size of the ratio. This ratio is indicative of percentage of funds lend by the bank out of
total amount raised through deposits. Higher ratio reflects ability of bank to make optimal use of
available resources.
Private sector Banks are deploying their deposits in the way of loans at higher Interest rates thereby
making profit hence the credit-deposit ratio is higher compared to public sector banks where the
deposits are being deployed in the form of government securities and subsidies where the returns is low
or nil. Higher ratio generally helps in increasing the income of the banks. PSB’s cost of deposits is
higher as compared to private banks as private banks concentrate more on Currents accounts.

Source: RBI Figure 1.2 Bank Group-wise Credit-Deposit Ratio

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 1.2.6 Cost of Funds and Return on Funds

Cost of deposits declined significantly during 2009-10, reflecting largely the impact of significant
decline in deposit rates in the last year. Significantly, the cost of borrowings was much lower than the
cost of deposits across all bank groups, barring foreign banks. The decline in cost of funds was
accompanied by a larger decline in return on advances, reflecting mainly the increased lending at sub-
PLR rates because of competitive pressures. As a result, interest spread came under pressure, suggesting
that the benefits of low interest rates have begun to percolate to banks’ borrowers.

If the cost of funds is going up then obviously, banks have to increase the return on their advances also.
What is happening is that deposit rates are being increased without a parallel need for the increase of the
worth. As it is, the RBI's liquidity report suggests that there is an excess of liquidity. However, banks are
taking the deposits at much higher rate of interest than the real rate at which they should take it, they feel
that the interest on the advances should be increased.

Bank group/year Cost of Cost of Cost of Return on Return on Return on Spread

Deposits Borrowings Funds Advances Investments
Funds
1 2 3 4 5 6 7 8= (7-4)
1 Public sector banks
2008-09 6.26 3.04 6.04 10.08 6.95 9.11 3.07
2009-10 5.68 1.37 5.34 9.10 6.72 8.36 3.02
1.1 Nationalised banks*
2008-09 6.31 2.76 6.09 10.17 7.05 9.22 3.14
2009-10 5.64 1.42 5.35 9.18 6.88 8.48 3.13
1.2 SBI Group
2008-09 6.17 3.47 5.94 9.89 6.77 8.90 2.95
2009-10 5.75 1.28 5.32 8.92 6.41 8.13 2.81
2 Private sector banks
2008-09 6.60 3.56 6.18 11.41 6.93 9.85 3.67
2009-10 5.36 1.95 4.83 9.89 6.25 8.60 3.77
2.1 Old private sector banks
2008-09 6.73 4.44 6.67 11.82 6.57 10.01 3.34
2009-10 6.27 1.94 6.13 10.95 6.18 9.25 3.12
2.2 New private sector banks
2008-09 6.56 3.52 6.04 11.29 7.03 9.80 3.77
2009-10 5.01 1.96 4.42 9.56 6.28 8.40 3.99
3 Foreign banks
2008-09 4.58 4.07 4.46 12.61 7.63 10.55 6.10
2009-10 3.20 1.58 2.82 9.99 6.39 8.30 5.49
All SCBs
2008-09 6.24 3.37 5.96 10.50 7.01 9.36 3.40
2009-10 5.49 1.57 5.09 9.29 6.59 8.41 3.31

Note: 1) Cost of Deposits = Interest Paid on Deposits/Average of current and previous year’s deposits.
2) Cost o f Borrowings = Interest Paid on Borrowings/Average of current and previous year’s borrowings.
3) Cost of Funds = (Interest Paid on Deposits + Interest Paid on Borrowings)/(Average of current and previous year’s deposits
plus borrowings).
4) Return on Advances = Interest Earned on Advances /Average of current and previous year’s advances.
5) Return on Investments = Interest Earned on Investments /Average of current and previous year’s investments.
6) Return on Funds = (Interest Earned on Advances + Interest Earned on Investments)/(Average of current and previous year’s
advances plus investments).
7) *- Includes IDBI Bank Ltd.
Source: Calculated from balance sheets of respective banks.

T Table 1.4 Cost of Funds and Return on Funds: Bank Group-wise

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 1.2.7 Operating and Net Profit

Net profits declined by 7.0 per cent (excluding the conversion impact i.e. conversion of non-banking
entity to banking entity) during 2009-10 as against an increase of 30.4 per cent in the last year. While net
profits of nationalized banks, old private sector banks and foreign banks declined, those of SBI group
and new private sector banks increased. Sharp increase in the net profits of new private sector banks was
because of a sharp decline in provision and contingencies (loans).

Banks operating profit is calculated after deducting administrative expenses, which mainly includes
salary cost and network expansion cost. Operating margins are profits earned by banks on its total
interest income. Net Profit is calculated after deducting various cost of funds, since the cost of funds i.e.
the borrowing costs are higher as compared to the lending rates offered, the PSB’s net profit is lesser
compared to the private banks.

Source: RBI Table 1.5 Operating Profit and Net Profit- Bank Group-wise

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 1.2.8 Net Profitability of Bank Groups

Return on assets reflects the efficiency with which banks deploy their assets. Net profits to assets ratio of
SCBs declined marginally in 2009-10. However, except for the new private sector banks, the ratio
declined across bank groups, the decline being the highest in case of old private sector banks, followed
by foreign banks and public sector banks. In case of New Private Sector banks the duration of investment
is low, investment pattern differs, interest is high as a result the Net Profitability is high.

Source: RBI Figure 1.3 Net Profitability of Bank Groups

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 1.2.9 Gross and Net NPAs

With provisioning for NPAs being somewhat lower during 2004-05, the decline in the NPA ratio was
attributable to both increased recovery of NPAs and overall reduction in asset slippages. In absolute
terms, non- performing assets in ‘doubtful’ category increased, while those in sub-standard category
declined sharply, reflecting the change in asset classification norm from the year ended March 2005,
whereby an asset was treated as doubtful if it remained as NPA for 12 months as against the earlier norm
of 18 months. However, NPAs in doubtful category as percentage of net advances declined significantly.

PSB's NPA ratio is satisfactory compared to private banks. Higher NPAs ratio shows that bank is unable
to maintain the quality of its loans however; the ratio has been decreased compared to previous year.
Private banks NPA ratio is higher as they are offering loans without having required deposits to lend
them. PSB's have a better management and monitoring over their deposits and the defaulters, which may
turn its lent amounts into a debt that could be returned by its defaulters comfortably as compared to the
Private banks.

Source: RBI Table 1.6 Gross and Net NPAs of Scheduled Commercial Banks

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 1.2.10 Capital Adequacy Ratio

Among bank groups, the CRAR of new private sector banks improved significantly, which brought them
closer to other bank groups. Within the public sector banks, the CRAR of nationalized banks registered a
marginal improvement during the year. The CRAR of the State Bank group, old private sector banks and
foreign banks declined. A banks CAR is ratio of qualifying capital to risk adjusted assets. The RBI has
set the minimum CAR at 10%, a rate below the minimum indicates that the bank is not adequately
capitalized to expand its operations. However banks CAR can be a little higher than the minimum.

Overall, Public Sector Banks have shown satisfactory performance as compared to Private sector banks
as they are more cautious while lending. In case of PSB’s CAR has decreased as compared to previous
year. Decreasing ratio could affect the business expansion and result in low level of income. Higher
CAR shows that bank can expand its business more and is less vulnerable to external shocks.

Source: RBI Table 1.7 Capital Adequacy Ratio- Bank Group-wise

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 1.2.11 Number of ATMs

Total number of ATMs installed in the country was 60,153 at end-March 2010. The SBI group of banks
constituted the largest share of ATMs, followed by nationalized banks, new private sector banks, old
private sector banks and foreign banks. While nationalized banks, old private sector banks and SBI group
had more on-site ATMs than offsite ATMs, SBI new private sector banks and foreign banks had more
off-site ATMs than on-site ATMs.

Source: RBI Table 1.8 Number of ATMs of SCBs

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Public Sector Banks
The public sector banks are turning the spotlight on the customer and offering quicker, better service.
That includes everything from ATM machines and computerized branches to never before seen
marketing initiatives. Clearly, public sector banks have woken up to competition. Post-liberalization,
several new generation private sector banks changed the face of the industry. Customers no longer had
to stand in long queues or make 10 trips for loans to be sanctioned. These changes are taking place at a
particularly fast pace in few of the banks including the State Bank of India, Corporation Bank, Indian
Bank, Bank of Baroda and the Union Bank of India.

Private sector banks brought in concepts like customer relations officers focused marketing teams and
single window banking. Moreover, with new technology, private sector banks like ICICI and HDFC
Bank could offer customer services like ATMs, phone banking, internet banking, automatic money
transfer, mobile banking, Core banking solutions and computerized monthly statements.Recently a new
technology of cheque truncation is being introduced. As against physical travel of instruments, under
cheque truncation only the image of the instrument would travel. This would totally alter the face of
clearing systems facilitating faster realization of instruments. It is currently being implemented on a
pilot basis in India.

Public sector banks’ focus had earlier remained on industrial credit, which was slowing down. Lending
to corporates meant higher margins for banks. As interest rates came down corporates began to consider
alternate sources of funds. Banks then began to explore possibilities like retail lending.
The two important challenges for public sector banks are:

 To maintain profitability inspite of government norms and regulations, as to maintain their PLR.
 Put in place appropriate technology of excellent standards that will make them be seen more as
virtual banks rather than brick and mortar.

This will lead to consolidation of their respective network. They must be given autonomy -- operational
and administrative -- and be completely board driven, including in the selection of the chief executive
officer. Finally, they must be taken out of the purview of the Central Vigilance Commission, even if it
entails bringing them under the Companies Act. They need to improve in the services like ATMs, Credit
and Debit cards. They lack behind in providing facilities like loans and other accounts. These branches
are not interlinked with each other and customers visiting hours are less.

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Private Sector Banks

There are two types of private sector banks, the old and the new. As far as the old (mostly regional
banks) are concerned, inadequacy of capital will lead to their mergers sooner rather than later. Private
sector banks have good technology for handling transactions and also offer attractive products, but it
cannot be said that corporate governance and risk management are far superior to that of the Public
Sector Banks. Some of the most important challenges for private sector banks are:

 Priority sector credit: Generally, private sector banks lend money to individuals and corporate
sector whereas sectors like agriculture, small-scale industries and retail trade small business is
neglected.
 Consolidation and Convergence: The recent merger that happened was of Lord Krishna Bank
with Centurion Bank. RBI may be inclined to approve the merger. The regulator, which has been
insisting on promoters of smaller banks to lower their holdings, would possibly prefer such
mergers. Centurion Bank of Punjab needs the additional business to compensate for its relatively
higher cost structures. It can cross-sell its banking products through the LKB network, including
traditional banking products and fee-based services like wealth management products, to affluent
NRI customers.

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 CHAPTER 2
Comparative Study of Top 5 Indian Banks
HDFC
State Bank of India
AXIS Bank
IDBI
ICICI

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In the recent years the financial system especially the banks have undergone numerous changes in the
form of reforms, regulations & norms. It is important to evaluate the banks on certain criteria. The study
is conducted to analyze 5 banks to get the desired results by comparing the following parameters:

The data analysis of the information got from the balance sheets of the 5 banks was done and ratios were
used. Graph and charts were used to illustrate trends.

The Sampling Plane of our analysis had the following 5 banks as a sample.

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HDFC
State Bank of India
AXIS Bank
IDBI
ICICI

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HDFC Bank Ltd. is a major Indian financial services company based in Mumbai, incorporated in August
1994, after the Reserve Bank of India allowed establishing private sector banks. The Bank was promoted
by the Housing Development Finance Corporation, a premier housing finance company (set up in 1977)
of India. HDFC Bank has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all branches
of the bank are linked on an online real-time basis. As of September 30, 2008 the bank had total assets of
INR 1006.82 billion. For the fiscal year 2008-09, the bank has reported net profit of Rs.2,244.9 crore, up
41%s from the previous fiscal. Total annual earnings of the bank increased by 58% reaching at
Rs.19,622.8 crore in 2008-09. HDFC Bank is one of the Big Four Banks of India, along with State Bank
of India, ICICI Bank and Axis Bank — its main competitors.

History
HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Corporation
Limited (HDFC), India's premier housing finance company. It was among the first companies to receive
an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector.The
Bank commenced its operations as a Scheduled Commercial Bank in January 1995 with the help of
RBI's liberalization policies. In a milestone transaction in the Indian banking industry, Times Bank
Limited (promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in
2000. This was the first merger of two private banks in India. As per the scheme of amalgamation
approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank
received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more than 1,000.
The amalgamated bank emerged with a strong deposit base of around Rs. 1,22,000 crore and net
advances of around Rs. 89,000 crore. The balance sheet size of the combined entity is over Rs. 1,63,000
crore. The amalgamation added significant value to HDFC Bank in terms of increased branch network,
geographic reach, and customer base, and a bigger pool of skilled manpower.

34
Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a Corporate Governance and
Value Creation (GVC) rating by the rating agency, The Credit Rating Information Services of India
Limited (CRISIL). The rating provides an independent assessment of an entity's current performance and
an expectation on its "balanced value creation and corporate governance practices" in future. The bank
has been assigned a 'CRISIL GVC Level 1' rating which indicates that the bank's capability with respect
to wealth creation for all its stakeholders while adopting sound corporate governance practices is the
highest. 

Figure 2.1 HDFC Bank

35
State Bank of India is the largest banking and financial services company in India, by almost every
parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British
India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the
oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial
Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank
of India. In 2008, the Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and overseas,
including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest
banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a
regional banking behemoth. It has a market share among Indian commercial banks of about 20% in
deposits and advances, and SBI accounts for almost one-fifth of the nation's loans.

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that
led to a flight of its best and brightest managers. These managers took the retirement allowances and
then went on to become senior managers in new private sector banks.

Figure 2.2 State Bank of India

36
Axis Bank, formally UTI Bank, is a financial services firm that had begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted jointly by the
Administrator of the Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance
Corporation of India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The
New India Assurance Company, The Oriental Insurance Corporation and United India Insurance
Company UTI-I holds a special position in the Indian capital markets and has promoted many leading
financial institutions in the country. The bank changed its name to Axis Bank in April 2007 to avoid
confusion with other unrelated entities with similar name. After the Retirement of Mr. P. J. Nayak,
Shikha Sharma was named as the bank's managing director and CEO on 20 April 2009.

As on the year ended March 31, 2010, the Bank had a total income of Rs 13,745.04 crore (US$ 2.93
billion) and a net profit of Rs. 1,812.93 crore (US$ 386.15 million). On February 24, 2010, Axis Bank
announced the launch of 'AXIS CALL & PAY on atom', a unique mobile payments solution using Axis
Bank debit cards. Axis Bank is the first bank in the country to provide a secure debit card-based payment
service over IVR. Axis Bank is one of the Big Four Banks of India, along with ICICI Bank, State Bank
of India and HDFC Bank.

Branch Network

At the end of March 2010, the Bank has a very wide network of more than 835 branch offices and
Extension Counters. Total number of ATMs went up to 3595. The Bank has loans now (as of June 2007)
account for as much as 70 per cent of the bank’s total loan book of Rs 2,00,000 crore. In the case of Axis
Bank, retail loans have declined from 30 per cent of the total loan book of Rs 25,800 crore in June 2006
to around 23 per cent of loan book of Rs.41,280 crore (as of June 2007). Even over a longer period,
while the overall asset growth for Axis Bank has been quite high and has matched that of the other
banks, retail exposures grew at a slower pace. The bank, though, appears to have insulated such
pressures. Interest margins, while they have declined from the 3.15 per cent seen in 2003-04, are still
hovering close to the 3 per cent mark.

37
Bankers Fair Practice Code

This is a voluntary Code, which sets standards of fair banking practices for member banks of Indian
Banks' Association to follow when they are dealing with individual customers. It provides valuable
guidance to you for your day-to-day operations. The Code applies to:

 Current, savings and all other deposit accounts

 Pension, PPF accounts etc. operated as agents of RBI/Government
 Collection and remittance services offered by the banks
 Loans and overdrafts
 Foreign-exchange services
 Card products
 Third party products offered through our network.

As a voluntary Code, it promotes competition and encourages market forces to achieve higher
operating standards for the benefit of customers.

Figure 2.3 AXIS Bank

38
The Industrial Development Bank of India Limited commonly known by its acronym IDBI is one of
India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized IDBI as an
"other public sector bank". It was established in 1964 by an Act of Parliament to provide credit and other
facilities for the development of the fledgling Indian industry. It is currently 10th largest development
bank in the world in terms of reach with 1210 ATMs, 720 branches and 486 centers. Some of the
institutions built by IDBI are the National Stock Exchange of India (NSE), the National Securities
Depository Services Ltd (NSDL), the Stock Holding Corporation of India (SHCIL), the Credit Analysis
& Research Ltd, the Export-Import Bank of India (EXIM Bank), the Small Industries Development bank
of India(SIDBI), the Entrepreneurship Development Institute of India, and IDBI BANK, which today is
owned by the Indian Government, though for a brief period it was a private scheduled bank.

The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of
Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the
ownership of IDBI was transferred to the Government of India and it was made the principal financial
institution for coordinating the activities of institutions engaged in financing, promoting and developing
industry in the country. Although Government shareholding in the Bank came down below 100%
following IDBI’s public issue in July 1995, the former continues to be the major shareholder (current
shareholding: 52.3%).

During the four decades of its existence, IDBI has been instrumental not only in establishing a well-
developed, diversified and efficient industrial and institutional structure but also adding a qualitative
dimension to the process of industrial development in the country. IDBI has played a pioneering role in
fulfilling its mission of promoting industrial growth through financing of medium and long-term
projects, in consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of
products and services, covering almost the entire spectrum of industrial activities, including
manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for
green-field projects as also for expansion, modernization and diversification purposes. In the wake of
financial sector reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-
based services with a view to providing an integrated solution to meet the entire demand of financial and
corporate advisory requirements of its clients.

39
As on March 31, 2010, IDBI Bank has a balance sheet of Rs 2.34 lakh crore and business size (deposits
plus advances) of Rs.3.06 lakh crore. As an Universal Bank, IDBI Bank, besides its core Banking and
project finance domain, has an established presence in associated financial sector businesses like Capital
Market and Investment Banking, Home Finance, Primary Dealership area and more recently, the Life
Insurance Business. As a step towards taking the organization on a accelerated growth path, the Bank has
reorganized its businesses around nine verticals out of which six customer verticals, each focusing on
distinct customer segments and three business verticals. Going forward, IDBI Bank is strongly
committed to work towards emerging as the 'Bank of choice' and 'the most valued financial
conglomerate', besides generating wealth and value to all its stakeholders.

Figure 2.4 IDBI

40
ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is a major banking and
financial services’ organization in India. It is the 4th largest bank in India and the largest private sector
bank in India by market capitalization. The bank also has a network of 1,700+ branches (as on 31 March
2010) and about 4,721 ATMs in India and presence in 19 countries, as well as some 24 million
customers (at the end of July 2007). ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customers through a variety of delivery channels and specialization
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital
and asset management. (These data are dynamic.) ICICI Bank is also the largest issuer of credit cards in
India. ICICI Bank's shares are listed on the stock exchanges at Kolkata and Vadodara, Mumbai and the
National Stock Exchange of India Limited; its ADRs trade on the New York Stock Exchange (NYSE).

The Bank is expanding in overseas markets and has the largest international balance sheet among Indian
banks. ICICI Bank now has wholly-owned subsidiaries, branches and representatives offices in 19
countries, including an offshore unit in Mumbai. This includes wholly owned subsidiaries in Canada,
Russia and the UK (the subsidiary through which the Hi SAVE savings brand is operated), offshore
banking units in Bahrain and Singapore, an advisory branch in Dubai, branches in Belgium, Hong Kong
and Sri Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia, South Africa,
Thailand, the United Arab Emirates and USA. ICICI reported a 1.15% rise in net profit to Rs. 1,014.21
crore on a 1.29% increase in total income to Rs. 9,712.31 crore in Q2 September 2008 over Q2
September 2007. The bank's CASA ratio increased to 30% in 2008 from 25% in 2007.

Figure 2.5 ICICI Bank

41
2
A
D
.3
ly
42
a
n
it
s
 2.3.1 Capital Adequacy Ratio

Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk weighted Assets Ratio
(CRAR) of 9 percent with regard to credit risk, market risk and operational risk on an ongoing basis, as
against 8 percent prescribed in Basel Documents. Capital adequacy ratio of the ICICI Bank was well
above the industry average of 13.97% t. CAR of HDFC bank is below the ratio of ICICI bank. HDFC
Bank’s total Capital Adequacy stood at 15.26% as of March 31, 2010.

HDFC CAR is gradually increased over the last 5 year and the capital adequacy ratio of Axis bank is the
increasing by every 2 year. SBI has maintained its CAR around in the range of 11 % to 14 %. But IDBI
should reconsider their business as its CAR is falling YOY. Higher the ratio the banks are in a
comfortable position to absorb losses. So ICICI and HDFC are the strong one to absorb their losses.

2005- 2006- 2007- 2008- 2009-

Particular

H
D 13.60 17.40
11.40% 13.10% 15.10%
F
C

S
13.47 13.39
B 11.88% 12.34% 14.25%
I

A
X 13.73 15.80
11.08% 11.57% 13.69%
I
S

I
D 11.95 11.31
14.80% 13.73% 11.57%
B
I

I 13.35% 11.69% 13.97 15.53% 19.41

43
C
I
C
I

Table 2.1 CAR

Figure 2.6 CAR

44
 2.3.2 Earning Per Share

To calculate earning per share ratio, simply divide the company’s net income by the number of shares
outstanding during the same period. If the number of shares out in the market has changed during that
period (ex. a share buyback), a weighted average of the quantity of shares is used.

Importance of EPS

The significance of EPS is obvious, as the viability of any business depends on the income it can
generate. A money losing business will eventually go bankrupt, so the only way for long term survival is
to make money. Earnings per share allow us to compare different companies’ power to make money.
The higher the earnings per share with all else equal, the higher each share should be worth. EPS is often
considered the single most important metric to determine a company’s profitability. It is also a major
component of another important metric, price per earnings ratio (P/E).

When we do our analysis, we should look for a positive trend of EPS in order to make sure that the
company is finding more ways to make more money. Otherwise, the company is not growing and thus
should be considered only if you are confident that it can at least sustain its income.

Particul 2005- 2006- 2007- 2008-

2009-10

27.90 36.30 46.20 52.90

HDFC

83.73 86.29 126.6 143.7

144.37%

17.45 23.50 32.15 50.61

10.06 11.85
7.76% 8.70%

32.49 34.84 39.39 33.76

ICICI

Table 2.2 EPS

45
Figure 2.7 EPS

46
 2.3.3 Net Profit Margin

Net Profit margin is a key method of measuring profitability. It can be interpreted as the amount of
money the company gets to keep for every dollar of revenue. That is,

Net Profit Margin = Net Income ÷ Net Sales.

Profit margins can be useful metrics, but typically require some specific circumstances to really have
significance. Suppose we have Company A from above (15% profit margins) and Company B (with 20%
profit margins). If A and B are in the same industry and, indeed, are competitors, then B may be a more
intelligent investment.

If, however, companies A and B are not in the same space, then the differences in profit margins may not
be so insightful. Suppose A is in an industry where profit margins are typically less than 10%, and B is in
an industry where margins are typically greater than 25%, then A is probably a higher quality candidate.

Particu 2005- 2006- 2007- 2008-

HDFC 19.46 16.57 15.72 13.75

12.31 13.75

AXIS 16.79 14.45 15.29 16.75

10.42

ICICI 18.43 13.53 12.09

Table 2.3 NPM

Figure 2.8 NPM

47
 2.3.4 Return on Assets
Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA for
short, tells an investor how much profit a company generated for each $1 in assets. The return on assets
figure is also a sure-fire way to gauge the asset intensity of a business. ROA measures a company’s
earnings in relation to all of the resources it had at its disposal (the shareholders’ capital plus short and
long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders. If a
company has no debt, the return on assets and return on equity figures will be the same. HDFC has
shown remarkable ROA over 5 years but AXIS bank will attract more eyes as its ROA increases for last
5 year. SBI’s ROA is slightly low as compared to HDFC; reason is the SBI has highest assets in Indian
bank industry that’s why its ROA is low as compared to AXIS bank and HDFC bank. IDBI is out
performed in ROA but ICICI’s ROA is quite enough to attract investors.

Particu 2005- 2006- 2007- 2008-

HDFC 1.39% 1.39% 1.42% 1.42%

0.92% 0.98% 1.01% 1.04%

AXIS 1.11% 1.07% 1.24% 1.44%

0.66% 0.66% 0.67% 0.62%

ICICI 1.21% 1.04% 1.12% 0.98%

Table 2.4 ROA

Figure 2.9 ROA

48
 2.3.5 Credit Deposit Ratio
It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the
higher the loan-assets created from deposits.

Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 60 per cent. That
means Bank X has used deposits worth Rs. 60 crores to create loan-assets. Only Rs. 40 crores is
available for other investments.

Now, the Indian government is the largest borrower in the domestic credit market. The government
borrows by issuing securities (G-secs) through auctions held by the RBI. Banks, thus, lend to the
government by investing in these Gsecs. And Bank X has only Rs. 40 crores to invest in G-secs. If more
banks like X have lesser money to invest in G-Secs, what will the government do? After all, it needs to
raise money to meet its expenditure.

If the money so released is large, ``too much money will chase too few goods'' in the economy resulting
in higher inflation levels. This would prompt investors to demand higher returns on debt instruments.

2005- 2006- 2007- 2008-

Particular

HDFC 65.79 66.08 65.28 66.64

62.11 73.44 77.51 74.97

AXIS 52.79 59.85 65.94 68.89

238.79 166.12 124.35 100.13

ICICI 87.59 83.83 84.99 91.44

Table 2.5 CDR

49
 Figure 2.10 CDR

2.3.6 Gross Non performing Assets

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on
Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non
standard assets like as substandard, doubtful, and loss assets.

SBI maintained its GNPA to 3% which is very good sign of performances as SBI is the largest lender in
INDIA. HDFC’s GNPA is quite good as it is low with compared to ICICI and SBI but in 2008-09 GNPA
rises. The reason may be economic crises. AXIS bank has lowest GNPA which shown its management
ability. ICICI has the highest GNPA in banking industry and rising YOY.

P
a
2 2 2
r
0 0 0
t
0 0 0
i
7 8 9
c
- - -
u
0 0 1
l
8 9 0
a
r

1 1 1
H
. . .
D
3 9 4
F
0 8 3
C
% % %

3 2 3
S . . .
B 0 8 0
I 4 4 5
% % %

50
 0 0 1
A
. . .
X
7 9 1
I
2 6 3
S
% % %

1 1 1
I
. . .
D
8 3 5
B
7 8 3
I
% % %

I 3 4 1
C . . .
I 3 3 1
C 0 2 3
I % % %

Table 2.6 GNPA

Figure 2.11: Gross NPA

51
 2.3.7 Net Non Performing Assets

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net
NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of
NPAs and the process of recovery and write off of loans is very time consuming, the provisions the
banks have to make against the NPAs according to the central bank guidelines, are quite significant. That
is why the difference between gross and net NPA is quite high.

It can be calculated by following:

Gross NPAs – Provisions

Net NPAs ¿
Gross Advances – Provisions

AXIS Bank has least Net NPA and ICICI has highest NNPA among group. HDFC shown its
management quality as it maintained its NNPA YOY. SBI has to keep NNPA below. IDBI has
successful to control NNPA YOY.

P
a
r
t
i
2007-08 2008-09 2009-10
c
u
l
a
r

H
D
0.50% 0.60% 0.50%
F
C

S
B 1.78% 1.76% 1.72%
I

A
X
0.36% 0.35% 0.36%
I
S

I
D
1.30% 0.92% 1.02%
B
I

52
I
C
I 1.12% 2.09% 2.12%
C
I

Table 2.7 Net NPA

Figure 2.12 Net NPA

53
2
R
&
a
d
i
F
4
.
m
c
e
s
n
o
ti
g 2.4.1 Findings

 Capital Adequacy: HDFC BANK has shown best performance in CAR as it’s gradually rising
YOY and IDBI’s decreasing YOY. IDBI should reconsider their business tactics.
 Return on Assets: HDFC tops the group and IDBI again at last but this tie IDBI shown consistent
performance as compared to ICICI having higher ROA.
 Earnings Per Share: SBI’s EPS is highest among group. IDBI has least EPS. Investors will choice
SBI over all banks and IDBI at last.
 Net Profit Margin: AXIS Bank has highest NPM in 2009-10 and rising YOY. IDBI’s NPM is
decreasing YOY.

54
 Credit Deposit Ratio: HDFC maintains its CDR and tops the group. IDBI again on worst side but
good thing is that it’s decreasing YOY.
 Gross NPA: AXIS bank has least GNPA and ICICI has highest among peers.
 Net NPA: AXIS Bank again performed better than others and ICICI has maintained its position.
SBI has rise in NNPA over the GNPA.

55
 2.4.2 Recommendations

 The banks should adapt themselves quickly to the changing norms.

 The system is getting internationally standardized with the coming of BASELL II accords so the
Indian banks should strengthen internal processes so as to cope with the standards.
 The banks should maintain a 0% NPA by always lending and investing or creating quality assets
which earn returns by way of interest and profits.
 The banks should find more avenues to hedge risks as the market is very sensitive to risk of any type.
 Have good appraisal skills, system, and proper follow up to ensure that banks are above the risk.

56
 Conclusion

In any banking system, no bank -- public or private -- can survive unless it continuously strives to
transform its organization into a self-governing, self-correcting and self-adjusting entity. For banks to
grapple with these problems and manage the future, structural and institutional rigidities need to be
eased in two critical areas: comprehensive legal support for recovery of bad debts and a fundamental
change in the pattern of governance for the PSBs.

While public sector banks are in the process of restructuring, private sector banks are busy
consolidating through mergers and acquisitions (the sector has been recently opened up for foreign
investments). PSB’s need to improve in services like ATMs, Credit and Debit cards. They lack
behind in providing facilities like loans and other accounts. These branches are not interlinked with
each other and working hours are less. In case of Private sector banks customers are not aware of the
facts and hidden costs in view, as there are various products and facilities provided by the banks. The
charges that are been taken are also too high. Challenges and Opportunities exist for both the public
sector as well as the private sector banks, their nature however differs.

From the 11 parameters, we have identified 3 areas of challenges separately for private and public
sector banks.

 The Credit Deposit Ratio of Private sector banks is better compared to PSB’s
 The Capital Adequacy Ratio of PSB’s is satisfactory compared to that of Private Banks
 The Net Profit of PSB’s is better than Private Sector

57
 Bibliography

 Publications; Trends and Progress in India- Operations and Performance of Commercial Banks:
www.rbi.org.in
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/04CPT081110.pdf
 Bharati V. Pathak, Indian Financial System, Pearson Education Pvt. Ltd.

 www.icicibank.com

 www.hdfcbank.com

 www.idbi.com

 www.axisbank.com

 www.statebankofindia.com

 www.scribd.com

 www.bseindia.com

 www.sify.business.com

58