The banking industry in India is witnessing a slowdown on account of the mounting Non- Performing Assets (NPAs) resulting in banks’ adopting a defensive approach in growth strategies. Banks’ performance has been dented due to the economic slowdown coupled with the impact of the regulatory changes. Public Sector Banks (PSBs) in India have, of late, been critically evaluated because of the soaring stressed assets, including NPAs. Deteriorating asset quality, reduced loan growth, and higher operating expenses have led to a deceleration in the operating profit of PSBs. There is a need to critically review the performance of PSBs and the factors that are responsible for such high stressed assets, especially when the taxpayers have to provide resources for recapitalization. As private banks are profit-oriented and urban-oriented, and PSBs are socially-oriented, the benchmarks need to be carefully designed.

In this issue, the first paper, “Benchmarking with a Dynamic DEA Model: Evidence from Indian Banking Sector”, by Ram Pratap Sinha, focuses on benchmarking the performance of the public sector, the private sector and foreign banks operating in India. The author employs a ‘Dynamic Slacks-Based DEA Model’ and also computes factor efficiency indicator for the output and link variables to study a cross-section of commercial banks including 62 commercial banks for a five-year period from 2006-07 to 2010-11. The merit of the dynamic approach used in this paper is the presence of a link variable which connects the activity of a Decision Making Unit (DMU) spread over different time periods. The study reveals that in terms of efficiency, the foreign banks performed better, followed by public and private sector banks during the period. Further, comparing the mean factor efficiency indices corresponding to the output/link variables (net interest income, other income, and business), the author suggests that there is adequate elbow room for increasing the efficiency of the banks by augmenting fee-based activities.

Diversification as a business strategy drives an entity to enter a new field of business with diversified products and services in order to reduce risk and improve returns. The Indian banking sector has been undergoing geographical and revenue diversification, as they benefit the banks and make them resilient to adverse effects on income and bank earnings shocks. The second paper, “Geographic Diversification in Indian Banking: Assessing the Impact on Risk and Returns”, by Joyeeta Deb and Gautam Sen, dwells on the issue of geographic diversification in Indian banking and assesses the impact of risk and returns. The study examines the manner and the extent to which banks are geographically diversified in the case of both public and private sector banks besides analyzing the impact on the performance. The study period covers 20 years from 1994 to 2014 for a sample of 40 commercial banks involving 25 public sector banks and 15 private sector banks operating in India. Using the Herfindahl-Hirschman Index, the authors measure the degree/extent of geographical diversification of the banks. The study reports a stable trend in the diversification index for all public sector banks indicating that with the increase in the number of branches, the proportion of the increase in the number of branches of banks in all the regions has also expanded. However, a mixed trend in diversification index is observed for the private sector banks. The study reveals that there exists a significant difference in terms of geographical diversification between public and private sector banks and the public sector banks are observed to be more diversified than private sector banks.

Directed credit program involving loans on preferential terms and conditions to priority sectors has been a major tool of development policy in both developed and developing countries. The rationale behind directed credit is mainly to viaduct the gap between private and social benefits, whilst high investment risk of the projects and problems of information asymmetry discourage lending to small and medium-sized firms. Priority sector lending over a period of years in Indian banking has had a positive impact on inclusive growth. The third paper, “The Performance of Regional Rural Banks and Non-Banking Institutions in Priority Sector Lending: A Study on West Bengal”, by Mahua Bhattacharya and Paromita Dutta, provides useful insights on the performance of Regional Rural Banks (RRBs) and non-banking institutions in priority sector lending in the state of West Bengal. In this paper, the authors address two questions, viz., (i) Are the RRBs and non-banking institutions of West Bengal performing well in the remotest part of rural areas? and (ii) If so, how pervasive are they in priority sector lending? The study employs a sample of 125 respondents from different remote areas of West Bengal drawn from five different priority sectors, viz., agriculture, micro and small-scale enterprises, education, housing and others (includes Self-Help Groups (SHGs), joint liability groups, other backward classes, women, etc.). Employing a two-step empirical procedure involving exploratory factor analysis and Structural Equation Modeling (SEM), the study shows that apart from ‘others’ sector, none of the remaining priority sectors gives a positive indication of the effect of the performance of RRBs and non-banking institutions in priority sector lending.

Research has shown that mergers and acquisitions improved the performance of the banks and also improved the price effectiveness due to which profits increased rapidly. Bancassurance is found to be reliable and responsive as the customers have a favorable experience from bancassurance channel. The bancassurance model is widely used as a strategy by banks and insurance companies to improve their performance. The life insurers who adopt bancassurance are found to achieve better economies of scale than those who do not adopt the bancassurance model. In the light of this view, the fourth paper, “The Impact of Acquisition of an Insurance Company on Bank’s Financial Performance: A Study on the Acquisition of Metlife India Insurance Co. Ltd. by Punjab National Bank”, by N M Leepsa and Ranjit Singh, studies the impact of the acquisition of an insurance company on bank’s financial performance. The authors study the impact in the context of the acquisition of Metlife India Insurance Co. Ltd. by Punjab National Bank in India. Essentially, they find out the difference between the pre- and post-M&A financial performance of PNB after going for the deal with Metlife India Insurance Co. Ltd., using the three-year averages of the pre- and post-M&A financial ratios. Employing various financial ratios based on the different parameters of CAMEL model, the study reveals that there is inconsistency in the long-term impact of bancassurance on the bank performance.

-- Vighneswara Swamy
Consulting Editor