Public bank vs private bank

Public bank vs private bank

?Can Public Sector Banks Compete with Foreign / Private Banks? A Statistical Analysis Dr. K. S. SRINIVASA RAO Prof. CHOWDARI PRASAD Associate Professor (QM Area) Associate Professor (Finance Area) Official e-mail: [email protected] tapmi. org [email protected] tapmi. org Personal e-mail: [email protected] com [email protected] co. in T. A. PAI Management Institute (TAPMI), MANIPAL – 576 104 Udupi District, Karnataka, India, Ph. (Office): 0820 – 257 1358 / 257 3162 / 257 3163

Key Words: Banking Survey, Efficiency, Financial Strength, Globalization, Profitability, Public Sector, Private and Foreign Banks, Size and Scale, Statistical Techniques, Transition Analysis Topic Area: Banking Abstract The economic reforms in India started in early nineties, but their outcome is visible now. Major changes took place in the functioning of Banks in India only after liberalization. Due to reforms in the 1990s, the depth and width of financial system in India has improved.

Though role of banks as financial intermediaries has reduced gradually, market share of banks continues to remain the largest in the financial market (CRIS INFAC Banking Annual Review: August, 2002). Increased competition, new information technologies and thereby declining processing costs, the erosion of product and geographic boundaries, and less restrictive governmental regulations have all played a major role for Public Sector

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Banks in India to forcefully compete with Private and Foreign Banks. For the last five years, several agencies in India tarted comparing the working of Industries, B-Schools, Banks, etc. on their performance over the past, through surveys. This, some times gives a feel that pushing a person into waters who has not learnt about swimming and asking him to compete with other professional racers. Keeping this point in mind, the authors have taken the survey results on banks over a period of time and compared Indian Public Sector Banks among themselves as a closed model and later with other banks as an open model using various Statistical Techniques like Cluster Analysis.

This article deals with clustering the banks during the period of study and then finding out the common features of these clusters. The research also focuses on the factors that made the banks moving from one cluster to another. * Paper submitted to the International Conference on « Business & Finance » to be held during 15-16, December 2003 at ICF AI Business School, Hyderabad. 1. Introduction

Banking in India was defined under Section 5(A) as « any company which transacts banking, business » and the purpose of banking business defined under Section 5(B), »accepting deposits of money from public for the purpose of lending or investing, repayable on demand through cheque/draft or otherwise ». In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949). During Britishers’ time, three Presidency Banks were opened in

Bengal (1809), Bombay (1840) and Madras (1843) with powers to issue Notes. In the year 1921, due to banking crisis during First World War, the three Presidency Banks merged to form Imperial Bank of India. In the year 1955, after Independence, Imperial Bank of India was nationalized and renamed as State Bank of India (SBI) with a primary mandate to go to rural areas by opening at least 400 branches immediately. In the year 1957, the seven banks that were earlier catering to the rulers of different areas or States viz. Patiala, Bikaner, Jaipur, Indore, Saurashtra, Hyderabad, Mysore, Travancore, became subsidiaries of SBI. In 1969 and 1980, Government of India nationalized 14 and 6 major banks respectively. After the merger of New Bank of India with Punjab National Bank during the era of Financial Sector Reforms, the number of PSBs became 27, which are under present study. The type and nature of businesses handled by the Public Sector Banks have not been merely confined to primary functions.

Class Banking was replaced with mass banking primarily by the Public Sector Banks by opening branches in remote parts of the country even without basic amenities of life. Profit was not the motive for these bank branches for about 3 decades. Their personnel undertook barefoot banking in godforsaken areas and implemented various poverty alleviation schemes as directed by Reserve Bank of India (RBI) or Government of India and Sate Governments concerned. The authorities were confident of delivering credit to the needy masses through the channel of

Public Sector Banking in the name of « Priority Sector Advances » combining the subsidy or margin money supported schemes. All these were aimed at generating income or employment to large number of rural masses comprising weaker sections of society, artisans, agriculturists and self-employed persons including educated unemployed youth (Chowdari Prasad, 2002). In India, till the eighties, the banks operated in a protected environment characterized by administered interest rates, high levels of pre-emption in the form of reserve requirements and directed credit.

Financial and Banking sector reforms were initiated in India in 1991 against the backdrop of challenges faced by the Indian banks from within and outside the banking system in the country as well as forces of globalization operating worldwide. The accent of the reform process was to improve productivity and efficiency of the financial system and to provide a highly competitive environment. In the present scenario of banking industry, competition among the banks is very severe.

The banks have been trying to find new avenues not only to retain the present customer strength but also attracting new customers by offering hassle-free services. In the process, strategies of certain banks, specially Public Sector Banks, are aiming to divide customers into different segments on the basis of the type of service they would like to render and also trying to segregate their servicing counters in their respective branches to enable customer to have easy access to a particular ransaction (Srinivasa Rao,K. S. and Rama Rao,U. , 1998). On the other side, Foreign Banks and old and new Private Sector Banks in India, have progressed well in the areas of technology up-gradation in operations, extending the business hours, introduction of new products and services like « Any Where Banking », « Any Time Money », « Electronic Fund Transfer », « Electronic Clearing », « Tele-Banking », etc.. These new tools enabled them to improve the quality of service and introduce Value Added Products (Saraf, W. S. , 1997).

The Indian economy under Liberalization, Privatization and Globalization (LPG) throws mind­-boggling process for existence and growth of the sector. WTO was established in 1995 and signing of WTO Agreement by Indian Government meant greater competition from foreign and domestic bankers in terms of speed, sophistication and professionalism. The banks are now expected to maintain transparency in their operational and financial statements. However, in the deregulated virtual market, small banks with high Return On Equity (ROE) will have an edge over the large banks.

In fact, modern commercial banks have to be much more agile in order to stay in the competitive market. Adoption of Information Technology is vital for survival and growth of the sector and will fix the future of commercial banks in the LPG economy (S. K. Bose, 2001). 2. Literature Review Industry experts and researchers all over the world studied the changes taking place in various countries, economies, etc.. Legal reforms, economic reforms, technological changes, etc. were experienced in recent decades.

The authors summarized similar analogies in Indian environment specifically in case of Public Sector Banks during the reforms era. The New Instititutional Economics carried out a short review of bank failures, etc. according to analytical framework. However, emphasis was laid on discussion of different techniques of bank restructuring used in different countries designed to assist the policy makers and financial sector professionals under different circumstances (Andrew Sheng, 1991). The financial services industry is transforming unpredictably.

NationsBank Corporation has broadened its product line considerably; State Street Bank & Trust Company narrowed its focus preliminarily to servicing financial assets as an investment manager. Increased competition from non-traditional institutions, new information technologies and declining processing costs, erosion of product and geographic boundaries, and less restrictive governmental regulations etc – all played a role (Dwight B. Crane and Zvi Bodie, 1996). Hasan, Iftekhar and Marton, Katherin (2003) analyzed the experiences and developments of Hungarian banking transitional process from a centralized economy to a market-oriented system.

They identified that early reorganization initiatives, flexible approaches to privatization, and liberal policies towards foreign banks’ helped to build a relatively stable and increasingly efficient banking system. Went, Peter (2003) analyzed a merger between two Scandinavian Universal Banks to determine arguments for the same. It was a response to changes in legislative and competitive environment, as well as a quest for broader functional competency by integrating a smaller, more successful bank into a state-owned bank.. The most important predicted effects were improvements in the profitability and market position.

Kippers et al (2003) in their paper, presented a study, based on two rather unique data sets. They used descriptive statistics and a sophisticated model, designed for this specific purpose, to see whether two basic premises of the theories on optimal ranges are valid. In contrast to the widely accepted assumptions, they found that individuals appear not to pay efficiently and that are also not indifferent to use of coins and notes. Following entry into European Community in 1986, Portugal transformed its repressed banking system with deregulation and privatization.

In such competitive banking system, one would expect a priori an increase in operational efficiency. Canhoto et al (2003) quantified the magnitude of efficiency gains over the years 1990-1995. The case of Portugal provides unique information on the joint effect of deregulation and the granting of new banking licenses on the change in operational efficiency of the banking system. Rime et al (2003) examined the performance of Swiss banks from 1996 to 1999, using a broad definition of bank output, evidence of large relative cost and profit inefficiencies.

A more narrow definition focuses on only traditional activities leading to efficiency estimates that are even lower. Finally, evidence on scope economies is weak for the largest banks. These results suggest few obvious benefits from the trend towards larger, universal banks in Switzerland. With the phenomenal growth of B2C e-commerce, most industries including banking and financial services sector have been influenced, in one way or another. Customers have not adopted B2C e-commerce in the same degree primarily because of risk concerns.

This paper extends an area of information systems research into a marketing of financial services context by looking into the elements of e­-banking. A conceptual model was proposed with two main antecedents that influence customer’s trust: perceived security and perceived privacy. Trust is being defined as a function of the degree of risk involved in the e-banking transaction, and the outcome of trust is proposed to be reduced perceived risk, leading to positive intentions towards adoption of e-banking (Yousafzai, Shumaila Y. ; Pallister, John G. and Foxall, Gordon R. (2003).

A focus on branch banking is a necessity despite rising usage of online banking. Comments from Raj Dhinsa, a senior analyst at market-watcher Jupiter Research, regarding Bank of America’s approach to online banking; number of individuals performing online banking functions by the end of 2003, indicating that it is much less (Brooks, Rick and Forelle, Charles, 2003). Efforts of banks in the 1990s to push the account holders to Automated Teller Machines; View of the author that the announced merger of Bank of America with FleetBoston Financial Corporation could bring benefits to the customer; (Hallinan, Joseph T. 2003) Comments on a banking rule that prohibited linking loans and services in the United States debate over the « tied lending » rule is supposed to ensure that no one bank has dominance over bank credit, according to bank regulator John D. Hawke Jr. (2003), Comptroller of the Currency. The idea was that cross-selling and cross-marketing are ordinary business dealings as prompted by Representative John D. Dingell (D-Mich). In India, the RBI constituted several committees from time to time with different objectives, headed by experts in different fields or Academicians, some of them during eighties and nineties.

Public Sector Banks have started experiencing the ill effects of traditional methods adopted till then. Change in policy at the apex level, advent of technology, threat of competition from foreign and private sector banks was felt during the late eighties. Host of recommendations by all such Expert Committees resulted in remarkable changes in products and policies of the banks in India. A list of the Committees during last two decades is given hereunder: – Year Name of Committee Objective and headed by 1982 Sukhmoy Chakraborthy Improving monetary system in India 1987 Narayanan Vaghul Development of Money Market 1990 M N Goiporia

Improving Customer Service in Banks 1991 S Narasimham Financial Sector Reforms 1992 S Janakiraman Investigating irregularities of fund management in Banks and Financial Institutions (Harshad Mehta’s Securities Scam) 1991-92 Ghosh Committee Examine and advise on greater or full disclosure in the published accounts of banks in India 1992 Rashid Jilani To draw standard specifications for security equipments like Vaults, Strong Room Doors, Cash Safes: etc. 1994 Saraf Committee To suggest ways and means to improve payment system with the help of technology 1995 Rashid Jilani To examine efficacy and adequacy of internal control ystems in banks and to suggest improvements in them 1996 Shere Committee To propose legislation on electronic funds transfer etc 1996 Padmanabhan To recommend on On-site Supervision of Banks 1997 SHKhan Harmonizing the roles of DFIs and Banks 1997 S Narasimham Banking Sector Reforms 1998 Y V Reddy Analytical aspects of monetary survey in the light of changing dimensions and depth of financial sector 1999 M S Verma To suggest measures for revival of Weak P S Banks 1999 Vasudevan Upgrading the existing technology in Commercial Banks 1999 Y V Reddy International Financial Standards and Codes 1999 N K Puri

Introduction of a comprehensive Return to efficiently monitor the international claims and liabilities, etc 2000 S R Mittal Different aspects of Internet Banking for regulation etc 2001 A S Ganguly Consultative Group of Directors in Banks and F I s 2002 G Ramachandran Review of working of Local Area Banks (Source: Indian Banking Year Book, Indian Banks Association, Mumbai, 2002) Having noted the global changes and keeping in view several recommendations and policy changes due to reforms in banking sector, the authors have also surveyed some papers on Indian Banking scenario which are summarized in the following paragraphs:

Bhattacharyya, et al (1997) examined the productive efficiency of 70 Indian commercial banks during early stages (1986-1991) prior to liberalization. They used Data Envelopment Analysis to calculate radial technical efficiency scores and Stochastic Frontier Analysis to attribute variation in the calculated efficiency scores to three sources: a temporal component, an ownership component, and a random noise component. They found that publicly owned Indian banks to have been the most efficient, followed by foreign-owned banks and privately owned Indian banks.

It was an attempt to explain these patterns in terms of the government’s evolving regulatory policies. Banking performance is the mirror reflection of an economy. So long as banks do their primary function of banking by lending to the constituents of economy, they stand a chance of nudging ahead. (Rohit Rao, 2000). By 2001, the Indian financial sector entered its 10th year of reforms, which have touched upon almost every segment. Nevertheless, it experienced major reforms and has come far away from the days of nationalization.

The Narasimham Committee laid the foundation for reforms in the Indian banking sector and paved way for enhancing its efficiency and viability. With India becoming a member of WTO, it had to be opened up for international players and to prepare the Indian banking industry for a vibrant global competition. As the international standards became prevalent, banks had to unlearn their traditional operational methods of directed credit, directed investments and administered interest rates.

Moreover, increase in the number of banks, transparency of banks’ balance sheets through prudential norms and increase in the role of the market forces due to deregulated interest rates have all significantly affected the operational environment of the sector. Further, commitments made by India in the WTO Financial Services Agreement in December 1997 had a significant impact on the banking industry (M. Thenmozhi and R. Kishore Kumar, 2001). Technology and competition have brought about notable changes in the Indian banking today.

From Internet Banking to Cash Management Services, technology has changed both in retail and wholesale banking. Banks have been slow to adapt to the changing times finding themselves behind technology-savvy competitors. It applies particularly, to some of the state owned banks opposed to introduction of new technology. Moreover, with lines of demarcation between banks and financial institutions blurring, the focus has shifted to offering all assets (e. g. loans) and liabilities (e. g. deposits) products under one roof heading towards Universal Banking (A.

K. Trivedi, 2002). The impact of reforms on banking sector varies from changing their constitution, cost of operations, reporting norms and ultimately their profitability. The predominance analysis of banks was undertaken. The reforms associate themselves with vision, vigour and vitality and a mission to strengthen the Indian economy (AV. Aruna Kumari, 2002). Globalization can lead to suspicion, protectionism, and policies that are ultimately self-destructive. Such fears cannot be allowed to frustrate the great potential of a world.

The author believes that countries can face the challenges of globalization positively (M. Lakshmi Narasaiah, 2002). Banking in the new millennium will be marked by high expectations of customers who are well informed and possess technical knowledge. Computers are rapidly taking over the functions and personalized service will continue to have relevance. The sum and substance of banking activity in future will boil down to one simple prescription: Customer Delight (K. Sivaloganathan, 2002). Sathye (2003) measured the productive efficiency of banks in India.

It was done using Data Envelopment Analysis. The study shows that the mean efficiency score of Indian banks compares well with the world mean efficiency score and the efficiency of private sector commercial banks, as a group is paradoxically lower than that of public sector banks and foreign banks in India. The existing policy of reducing Non-Performing Assets and rationalization of staff and branches may be continued to obtain efficiency of Indian banks internationally competitive. To sum up, Indian Public Sector Banks as well as others have transformed from mere collectors of deposits and urveyors of credit as per directions of the Government or RBI to highly competitive financial outfits in course of the past 12 years ever since Financial Sector Reforms were introduced. Various measures taken by the regulator were (1) Prudential Norms and transparency of Balance Sheets (2) Capital Adequacy requirements and 4-way classification of Assets (Loans and Investments) (3) Gradual reduction of SLR and CRR stipulations (4) Provisioning Norms (5) Deregulation of Interest Rates (6) Creation of Debt Recovery Tribunals, BIFR, etc. (7) Enactment of new laws or amendments to Negotiable Instruments Act, and others by Government (8) implementation of Asset Liability Management measures (9) introduction of Risk Management in Banks (10) Recovery measures like Compromise Settlements, Corporate Debt Restructuring, Rehabilitation facilities to sick units (11) Computerization of branches (12) Closure or shifting or combining of loss making branches (13) Voluntary Retirement Scheme for employees (14) Investment in Hardware, Software and training of staff (15) permission for Online Banking, Internet Banking, ATMs, etc.

All these measures have definitely aided in reduction of costs, improving productivity and profitability of banks, strengthening of capital and funds base of banks, reduction of multi-tier decision making levels, speedier collection and transfer of funds, investor education and information dissemination through use of Internet, offering innovative products and services, spread of banking habits among all sections of society, competition with foreign and new generation private sector banks, etc.

Customer is now seriously considered as king and all efforts are being made to suit his needs and meet the demands by tailoring various products and services. Cocheo, Steve (1982) focused on the adaptability of bankers to economic conditions in the Northeastern States, basis of state boundaries in the ranking of banks; Need for projecting a percentage return on average foreign and domestic assets to perform at high levels, etc.

In 1994, information on performance rankings among banks and banking corporations in the United States for 1993, total assets; Tier one capital ratio; credit quality ratios, profitability revenue mix, total revenues, ‘U. S. Bankers’ composite score were discussed in U. S. Banker. Thomas, Tony (1995) highlighted the results of KPMG’s 1995 ratings of Australian banks’ strength and efficiency; overall ranking of banks; Ratio of write-offs to loans; Capital adequacy ratio; Return on net assets; Levels of derivatives; Interest margins and spreads. Ozanian, Michel K. and Bradford, Stacey, L. 1996) focused on the stock performance of top banks in the United States as of July 8, 1996. Total asset value of bank takeovers; Trend towards increasing the percentage of non-interest income versus interest income; List of top performing banks in the United States; Measures used in ranking the banks. In 1996, World of Banking dealt with ranks of the 20 biggest banks in Russia in respect of share of gross assets and net assets ratio; Consequences of the country’s banking crisis; Outflow of deposits from commercial banks and trust companies; Public’s wariness towards pyramid scams; Ownership of banks, etc.

Hanley et al (1997) presented information on performance ranking of banks in United States; what performance ranking of banks provides; Selection of the criteria used to identify banks; and Selection of insights in 1997 top performers. In 1998, American Banker presented statistical information on the rankings of banks, thrift institutions, insurance companies, credit card companies, brokerage companies and investment advisory companies, compiled by First Call. Eisenbeis et al (1999) examined the properties of the X-inefficiencies in bank holding companies in the Unites States derived from both stochastic and linear programming frontiers.

Comparison of the robustness of results across methods; Correlation of the ranking of banks’ efficiencies under the two methods; Relationship of the stochastic frontier scores to risk-taking behaviors. Altunbas et al (2001) examined efficiency ranking of banks through Translog cost function in Europe. Demonstration of the goodness-of-fit criterion; Estimation of single-equation stochastic Translog cost function; Comparison of Fourier and Translog method; Implications of efficiencies and scale economies for the financial sector regulation

It also presents several charts depicting the rankings of banks based on financial performance for the top 1000 banks listed (Banker, 2003). 3. Ranking of Banks Numbers count. But they never tell the full story. Traditionally, it was the norm to rank companies and banks on the basis of their sales or assets with an assumption – the biggest is the best. Today in the era of mega-mergers, there are still some who swear by this old-fashioned thinking. Others have graduated a bit.

Their idea of ranking is to involve a large number of ratios and indicators, juggle with weightages and finally come up with relative scores. There is something to be said for this approach. It is objective and eliminates biases. But even if it still works for the manufacturing sector, it fails in any service industry. Today, banking is no longer about mysterious gnomes juggling millions of dollars. It is all about service. Convenience, Comprehensive Service and a Smiling Face are things you cannot put numbers to. Besides, any number-crunching exercise always throws up some absurdities.

There could be banks that score very high on, for instance, Asset Quality. But their lack of Non Performing Assets (NPA) is not necessarily because they are canny lenders, it is more because they do not lend at all. Can they be termed banks at all if they are not involved in what should be one of their primary functions? (Ashok H. Advani, Editorial, Business India, Feb. 2000). One side, State Bank of Patiala has recorded a net profit of Rs. 161. 10 crores for 2000-01 and ranked number 13 and SBI that has posted a net profit of Rs. 1604. 5 crores for the year ended March 31, 2001, got a rank of 27 (Bank Indices, 2001, Banking & Finance, 2002). CAMELS stands for Capital Adequacy, Asset Quality, Management, Efficiency, Liquidity and Systems with reference to reforms in Banking Sector. Business magazines, with the help of private agencies, have been taking up ratings of banks for the last seven to eight years. One agency’s survey is totally different from the others and peculiarly the same agency is changing their parameters next year, making the public more confused about the ranks.

Such surveys every year on banks make Public Sector Banks to compete with Private Sector Banks and Foreign Banks. This, some times, gives a feeling that asking a physically challenged person to compete in a race along with a group of perfectly fit persons. This made the authors to think in the direction of comparing Public Sector Banks among themselves first in Closed Model and then comparing them with the Private Sector Banks and Foreign Banks in Open Model. 4. Closed Model

The authors have taken the cross-sectional data from the past survey results on banks (Banking & Finance, 2002) and compared the 27 Public Sector Banks among themselves as a closed model (Annexure-1). The four factors, based on the financial and business indicators, have been considered are – Efficiency, Financial Strength, Profitability and Size & Scale for these Public Sector Banks (Annexure-2). Each of the factors is given an equal weightage of 25%. Each parameter within a Factor is ranked by giving equal weightage across all the 27 Public Sector Banks. Efficiency is a composite of (1) Cost of Funds (CF**), (2)

Ratio of intermediation costs to total assets (Total Expenses / Assets) (TE / A**), (3) Burden – total non-interest expenses minus total non-interest income divided by total assets (B**), (4) Business per Branch (BPB), and (5) Operating Profit per Employee (OPPE). The parameters marked as ** are ranked in ascending order while other parameters are in descending order. Financial Strength is a composite of (1) Capital Adequacy Ratio (CAR) – Tier I + Tier II, (2) NPA level (net NPAs to net advances) (NPA to NA**), and (3) Leverage (total debt / net worth) (L**).

The parameters marked as ** are ranked in ascending order while other parameters are in descending order. Profitability is a composite of (1) Net Interest Spread (IS), (2) Operating Profit to Average Working Funds (OP to AWF), (3) Return on Assets (RNP / AWF and (4) Return on Equity (RE). The parameters marked as ** are ranked in ascending order while other parameters are in descending order. Size & Scale is a composite of (1) Aggregate Deposits (AD), (2) Average Working Funds (AWF), (3) Operating Profits (OP), Net Profits (NP), and Credit + Investment Deposit Ratio (C+IDR). The parameters have been ranked in descending order.

The authors have then carried out Cluster Analysis for these 27 Public Sector Banks. They came out as 5 clusters based on each of the four factors (Annexure-3). The authors also have done the overall ranking on four factors – Efficiency, Financial Strength, Size & Scale and Profitability combined as Total and have done Cluster Analysis for these 27 banks and it came out as 5 clusters based on Total. 5. Open Model The authors have taken the cross-sectional data from the past survey results on banks (Banking & Finance, 2002) and compared the Public Sector Banks with Private Sector Banks and Foreign Banks as an open model (Annexure-4).

Data was available for all 98 commercial banks in India for the first two years only. Subsequently, due to closures, mergers & acquisitions, etc. , data was available only for 87 banks. These were compared under this open model. The four factors, based on the financial and business indicators, have been considered are – Efficiency, Financial Strength, Profitability and Size & Scale for all these Banks (Annexure-5). Each of the factors is given an equal weightage of 25%. Each parameter within a Factor is ranked by giving equal weightage across all the banks.

Similar to earlier Closed Model exercise, Efficiency is a composite of (1) Cost of Funds (CF**), (2) Ratio of intermediation costs to total assets (Total Expenses / Assets) (TE / A**), (3) Burden – total non-interest expenses minus total non-interest income divided by total assets (B**), (4) Business per Branch (BPB), and (5) Operating Profit per Employee (OPPE). The parameters marked as ** are ranked in ascending order while other parameters are in descending order. Financial Strength is a composite of (1) CAR – Tier I + Tier II, (2) NPA level (net NPAs to net advances) (NPA to NA**), and (3) Leverage (total debt / net worth) (L**).

The parameters marked as ** are ranked in ascending order while other parameters are in descending order. Profitability is a composite of (1) Net Interest Spread (IS), (2) Operating Profit to Average Working Funds (OP to AWF), (3) Return on Assets (RNP/AWF) and (4) Return on Equity (ROE). The parameters marked as ** are ranked in ascending order while other parameters are in descending order. Size & Scale is a composite of (1) Aggregate Deposits (AD), Average Working Funds (AWF), (3) Operating Funds (OP), (4) Net Profits (NP), and (5) Credit + Investment Deposit Ratio (C+IDR). The parameters are in descending order.

The authors have done Cluster Analysis for all the banks and it came out as 5 clusters based on each of the four factors (Annexure-6). The authors have also done the overall ranking of the four factors – Efficiency, Financial Strength, Size & Scale and Profitability combined as Total and have done a Cluster Analysis for these 87 banks and it came out as 5 clusters based on Total. 6. Transitional Analysis The authors have computed the mobility of the banks from one cluster to another over the period of study in closed model (Annexure-7) and open model (Annexure-8), keeping in mind the framework of Srinivasa Rao, K. S. nd Srinivasa Rao, K. (1994). After computing all the scores for the four parameters converted as total, the authors have graded the banks into four categories. These are best (score less than 4), better (with score 4 – 6), good (with score 7 – 9) and moderate banks (with scores 10 and above). In Closed Model, 8 out of 27 banks viz. , Bank of Baroda, Corporation Bank, Oriental Bank of Commerce, State Bank of India, Canara Bank, Punjab National Bank, State Bank of Hyderabad and State Bank of Patiala were graded as best banks. In the remaining 19 banks, 3 were graded as better, 7 as good and 9 were graded as moderate banks.

In Open Model, 12 out of 98 banks were not continued throughout the period of study. Out of 86 banks, 11 were graded as best banks viz. , Bank of America, Citibank N. A. , Deutsche Bank AG, Corporation Bank, HDFC Bank, ABN-Amro Bank N. V. , Global Trust Bank, HSBC, ICICI, Oriental Bank of Commerce, Standard Chartered Bank. In the remaining banks, 8 were graded as better, 39 as good and 26 were graded as moderate banks. 7. Conclusion Indian Public Sector Banks have been operating in different economic and political conditions for several decades – earlier as Private Sector Banks and now in Public Sector subsequent to their nationalization.

They have been functioning as commercial and profit oriented establishments for long period but due to the developmental policies of the Government of India, profit making was given a go-by. The transition in political and economic conditions in the country took place in later years of eighties and simultaneously technological and legal changes have also gained importance. Thanks to the Financial Sector Reforms initiated during early nineties, the focus has shifted to productivity, profitability, efficiency, transparency, etc in order to make them work on high standards competing with new

Private Sector and Foreign Banks. However, the story does not end here. Radical changes in accounting, deregulation of interest rates, close follow up of non performing assets, introduction of prudential norms, voluntary retirement of old generation staff, concern for total customer care, professional managements, have made the managements (including the GOI) to turn to generate surpluses and make these banks self-sufficient even by approaching the Capital Market. Corporate Governance in Banks is an accepted phenomenon today.

With these developments and by taking full advantage of Information Technology in the entire banking system, Public Sector Banks will gear up and reach to their pinnacle in performance and delivering the expected levels of service in about 4 –5 years from now. The authors suggest that the managements of these 27 banks will give a thorough look into all the aspects of study, diagnose the reasons for the outcomes, and assess their strengths and weaknesses so as to initiate corrective or remedial measures, wherever warranted. Acknowledgements

The authors highly acknowledge their gratitude to the Chairman, ICFAI International Conference Committee and to the reviewers who have given a positive feedback on their paper. The authors are very much thankful to Prof. D. Nagabrahmam, Director, TAPMI for the encouragement and support. 8. References [1] Altunbas, Y. and Chakravarthy, S. P. (2001), “Frontier Cost Functions and Bank Efficiency”, Economic Letters, Vol. 72, Issue 2, pp. 233-241 [2] Arun Shourie (2003), “Before the Whining Drowns it Out, Listen to the New India”, The Indian Express, ttp://www. indianexpress. com/full_story. php? content_id=29666, August 15 [3] Ashok H. 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Operating Profit per Employee (OPPE) 6. Capital Adequacy Ratio (CAR) – Tier I + Tier II 7. NPA level (net NPAs to net advances) (NPA to NA) 8. Leverage (total debt / net worth) (L) 9. Net Interest Spread (IS) 10. Operating Profit to Average Working Funds (OP to AWF) 11. Return on Assets (RNP / AWF) 12. Return on Equity (ROE) 13. Aggregate Deposits (AD) 14. Average Working Funds (AWF) 15. Operating Profits (OP) 16. Net Profits (NP) 17. Credit + Investment Deposit Ratio (C+IDR) 18. Liberalization, Privatization and Globalization (LPG)