Profitability Analysis of Public Sector Banks in India
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The term 'profit' is an accounting concept which shows the excess of income
over expenditure viewed during a specified period of time. Profit is the main reason
for the continued existence of every commercial organisation. On the other hand, the
term profitability is a relative measure where profit is expressed as a ratio, generally
as a percentage. Profitability depicts the relationship of the absolute amount of profit
with various other factors. Profitability is the most important and reliable indicator as
it gives a broad indicator of the ability of a bank to raise its income level. Profitability
of banks is affected by a number of factors. Some of these are endogenous, some
are exogenous. Changes in policies made by RBI are exogenous to the system. These
include changes in monetary policy, changes in quantitative credit control like changes
in cash reserve ratio, statutory liquidity ratio, manipulation of bank rates, qualitative
credit controls like selective credit control measures, credit deposit ratio, region-wise
guidelines on lending to priority sector, changes in interest rates on deposits and
advances, levy of tax on interest income etc. Various other factors like careful control
of expenditure, timely recovery of loans are endogenous.
As Banking System plays a pivotal role in the economic development
of a nation, it has caught the eyes of many researchers, administrators,
departments and committees. S. K. Varghese (1983, pp.145-157) in his study,
"Profits and Profitability of Indian Commercial Banks in 1970's" analysed the
profits and profitability of Indian Commercial Banks from 1970 to 1979 by using
operating profits, operating margins, growth yield on assets and spread related
ratios. V. V. Angadi and V. Johan Devraj (1983, pp.59-170) measured financial
productivity in terms of the input-output relationship for 1970-1980. According
to them, the profitability of banks was governed by several factors, some of
them were endogenous and some of them exogenous to the system and yet
structural. Amandeep (1991, pp.43-53) in her paper on determinants of banks'
profitability considered eleven factors, which reflected different dimensions of
banks' operations and hence affected the banks' profitability. According to her,
the profitability of banks was determined and affected mainly by two factors
viz., spread and burden. Sanjay Kaushik (1995, pp.190-242) in his study on
social objectives and profitability of Indian banks, evaluated their productivity
and profitability pertaining to the period 1973 to 1991 in terms of nine indicators.
He concluded that the social obligation was not a major drag on profitability
of banks. Saveeta Bhatia and Satish Verma (1998, pp.433- 445) made an attempt
to determine empirically the factors influencing profitability of public sector
banks in India by making use of the technique of multiple regression analysis.
Table 1 deals with Credit Deposit Ratio which has shown an incremental
trend from (48.28%) in 2001 to (59.52%) in 2005. It shows growth of 23.28%
during the period of study. In the year 2001 Bank of India (62.26%) has the
maximum C.D.R. while in 2005 IDBI Ltd. tops the list with (300.70%). E.G.R. is
highest in Andhra Bank (10.17%) and lowest in Central Bank of India (-1.21 %).
C.D.R. in terms of dispersion is less consistent with Andhra Bank (13.96%) and
more consistent with PSB (0.97%). Concentration Index has moved from 0.03764
in 2001 to 0.05308 in 2005. In 2001, maximum share to the overall index is made
by Bank ofIndia (6.01%) and least by UTBI (1.50%). In 2005, lOBI Ltd. takes
the lead with (50.44%) and PSB is at bottom with (I.l1 %) share.