Do Nonperforming Assets Alone Determine Bank Performance?

Do Nonperforming Assets Alone Determine Bank Performance?

Rituparna Das (Faculty of Policy Science, National Law University, India)
Copyright: © 2015 |Pages: 19
DOI: 10.4018/978-1-4666-6551-4.ch024

Abstract

The post-crisis period in India witnessed economic slowdown consequent upon economy wide loan default in the infrastructure, real estate, and construction sectors. The asset quality problem of the Indian commercial banks became so acute that many of the weak banks were to be merged with strong banks in the interest of the depositors in order to arrest any contagion effect. The old generation private sector banks in India do not have government patronage or continuing support of the founder communities. This chapter analyzes the key financial ratios of these banks and tries to find out whether nonperforming assets are the sole determinants of the performances of these banks.
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Introduction

On March 5, 2014 Asian News International reported that the Finance Minister of India warned the public sector banks about their growing problem of non performing assets. The problem of non performing assets is found to have been aggravating for public sector banks during the last quarter of 2013-14 relative to the private sector banks. A study reported by PTI in the beginning of 2014 on non performing assets conducted by the Associated Chambers of Commerce and Industry of India. The study mentioned (i) political interference at local levels and waiver of loans by government, (ii) lack of professionalism in the workforce, (iii) mis-utilisation of loans by borrower, (iv) faulty credit management, (v) unscientific repayment schedule, (vi) lack of timely legal settlement of cases, and above all (vii) slippage of restructured accounts to non-performing assets to be the factors contributing to aforesaid growth of non performing assets. Against this background this chapter plans to investigate into the determinants of profitability of the following old generation private sector banks in India.

  • 1.

    Catholic Syrian Bank,

  • 2.

    City Union Bank,

  • 3.

    Dhanlaxmi Bank,

  • 4.

    Federal Bank,

  • 5.

    ING Vysya Bank,

  • 6.

    Jammu and Kashmir Bank,

  • 7.

    Karnataka Bank,

  • 8.

    Karur Vysya Bank,

  • 9.

    Lakshmi Vilas Bank,

  • 10.

    Nainital Bank,

  • 11.

    Ratnakar Bank,

  • 12.

    South Indian Bank,

  • 13.

    Tamilnad Mercantile Bank.

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Background

Choudhury (2012) succinctly described the background of the old generation private sector banks in India. These were in his opinion those banks existing at the time of nationalization, but not considered to be important in matter of nationalization in 1969. The banks were developed out of patronage from some specific community. He described them as those entities which on the one hand do not have state patronage unlike the nationalized banks and on the other hand do not have the loyalty any more of the founder community, from which they used to get major business. He is also of the view that these by and large localized banks have presence across the country, which are ornamental and not contributing to the development of these banks. He described that some of these banks like Centurion Bank of Punjab and Bank of Rajasthan were acquired by new generation private sector banks like HDFC Bank (Housing Development Finance Bank) and ICICI Bank (Industrial Credit and Investment Corporation of India Bank) respectively. He reported the struggle for surviving competition by some like DCBL (Development Credit Bank Limited) and ING Vysya Bank. Devrajappa (2012) subscribed to the academically accepted view that merger of two weaker banks or merger of one strong Bank with one weak bank can be treated as a faster and less costly way to improve profitability and spurring internal growth. As per Rangan (2013) the merger between HDFC Bank and Centurion Bank of Punjab (CBOP) was billed as one of the biggest mergers in the banking history of India in 2008 and the merger aimed, inter alia, at leveraging the strengths of HDFC bank and CBOP in terms of branches, serving different segments of the market and the general synergy brought about by mergers. Kuriakose, Raju and Kumar (2012) analyzed the merger between ICICI Bank and Bank of Rajasthan based on strategic similarities and relatedness. They reported that the management of the acquiring entity the ICICI Bank had to focus on the intrinsic issue of differences in key parameters between the banks in the post-merger period to boost the performance of the merged entity.

Key Terms in this Chapter

Principal Component Analysis (PCA): A qualitative econometric method whereby the relatively more important one are selected out of many determinants of bank performance.

Net Interest Margin: it is the spread between earning from loans and investments and costs of funds.

Eigenvalue: If the product of a non-zero real number and a square matrix equals the product of the above number and a non-zero vector, the above number is called the eigenvalue.

Capital to Risk Weighted Asset Ratio: It is also called Capital Adequacy Ratio is the ratio. It reflects a bank's ability to face and survive various financial risks and protect its stakeholders like depositors.

Generalized Method of Moments (GMM): An econometric method for estimating parameters in statistical models where the maximum likelihood estimation is not applicable.

Credit Concentration Risk: The risk that loans will not perform during slowdown of some particular sector of the economy or some business group to which a bank has large exposure, if any.

Cost of Funds: For banks, cost of funds means cost of deposit, cost of call money, cost of certificate of deposits and cost of repo.

Eigenvector: In the above definition of ‘Eigenvalue’ the non-zero vector is called the eigenvector.

Quality of Assets: Punctuality in repaying loans. Bad quality indicates a non-performing asset.

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