Effectiveness of Internal Rating Systems in Public Sector Banks of India

-- Monoshree Mahanta and Munindra Kakati

The challenge before the Indian banks is the implementation of the new Basel framework, more popularly known as Basel II, as laid down by the Basel Committee on Banking Supervision (BCBS). This has severe implications for credit risk practices in Indian banking, the way banks appraise credit proposals, price loans, manage credit risk at the individual and portfolio level, and also manage their NPAs. Indian banks have been preparing and implementing various measures for effective management of credit risk. One such measure is the development of internal rating models mostly in collaboration with the external agencies and banks have been using them for rating their loan accounts. This paper examines the internal credit rating models of public sector banks and tests their effectiveness using multiple criteria. All the models have exhibited poor performance (weaknesses) in at least one criterion. However, the level of weakness varied widely across the models. The findings tentatively support our hypothesis that the presence of weaknesses in the existing credit appraisal is a major cause of accounts turning into bad loans.

© 2011 IUP. All Rights Reserved.

The Impact of Portfolio Risk on Performance of Scheduled Commercial Banks in India

-- Manmeet Singh and R K Vyas

Banks in their role as financial intermediaries take considerable financial risks. But the global financial meltdown has changed the banking scenario. Banks are taking utmost care in lending and investment in securities to maintain liquidity and manage the risk in assets portfolio. This paper investigates the impact of portfolio risk and other bank-level factors on the performance of scheduled commercial banks in India through a panel data study during the period 1997-2009. The results suggest that there is a significant impact of portfolio risk on the performance of banks. It means banks which are having more risk in their assets portfolio are enjoying high Return on Assets (ROA). Similarly, Capital to Risk-Weighted Assets Ratio (CRAR), Non-Interest Income (NII), and Net Interest Margin (NIM) make a significant contribution in improving the profitability of banks.

© 2011 IUP. All Rights Reserved.

A DEA and Malmquist Index Approach to Measuring Productivity and Efficiency of Banks in India

-- Vidya Sekhri

In this paper, a comparison has been made between the public sector banks and their private and foreign counterparts based on the measures of efficiency and productivity that use quantities of outputs and inputs. Efficiency measures a bank’s performance relative to a benchmark at a given point of time and productivity measures a bank’s performance over a period of time. Both measures are relevant in attempting a comparison between these banks. Data Envelopment Analysis (DEA) and Malmquist Index have been used for comparison. The comparisons have been made over the period 2004-09. The empirical findings confirm that the foreign sector banks have been able to score a high Total Factor Productivity (TFP) followed by private banks mainly because of their high technical efficiency change or the use of advanced technology by them. The public sector banks have performed better than the private and foreign banks in pure efficiency change index, which shows that they are more efficient in their operations and need to invest in technology to compete with the private and foreign banks.

© 2011 IUP. All Rights Reserved.

Investor View of Stock Performance of Indian Banks: Evidence Using the CANSLIM Approach

-- Pratima Jain, Peeyush Bangur and Kapil Sharma

Low risk and high return is the only basic aim of any investor. Through CANSLIM approach, this goal can be achieved easily. CANSLIM approach was first discussed by O’Neil in the US for investment purpose and also for investor protection. It is a growth stock investment strategy which involves implementation of both technical analysis and fundamental analysis. It is also an approach which helps the investor to select the best stocks among others to book profits. The present study focuses on how to examine and understand the financial position and better investment strategy in any bank through the CANSLIM approach. The paper also makes an attempt to determine whether there is some correlation between the financial performance of the bank and its stakeholders’ relationship with investment. For this purpose, an analysis of 10 banks—four from private sector, four from public sector and two from SBI group—which are listed on the stock exchanges of India and have a good reputation among investors, was done. A performance ranking model was applied to identify the best performing bank among the 10 banks on the basis of CANSLIM approach and its parameters. For this purpose, the data pertaining to the quarter ended March 2007 to the quarter ended March 2008 was used.

© 2011 IUP. All Rights Reserved.

Intertemporal Behavior of Technical Efficiency: A Study of Indian Commercial Banks

-- Ram Pratap Sinha

Application of static Data Envelopment Analysis (DEA) on the time series data relating to a set of decision-making units fails to capture important interactions from period to period. Window analysis is a model structure which provides a more robust treatment to the movement in efficiency over time. The present study thus makes use of the window analysis for comparing the intertemporal efficiency behavior of 28 public sector banks and 12 private sector banks for the period 2001-02 to 2005-06. The results suggest that the mean efficiency scores of the in-sample public and private sector commercial banks for the period 2001-02 to 2005-06 exhibit a secular declining trend.

© 2011 IUP. All Rights Reserved.

Modeling the Adoption of Basic E-Banking Services in Urban and Semi-Urban Regions in India

-- Surekha Invalli, Raghurama A and Chandramma M

Banking sector has witnessed a rapid shift in terms of distribution of services by employing automated, self-service modes built on ATM, card, Internet and mobile phone based platforms. The goal of banks in India is to promote and build up these alternate modes of delivery through new off-site ATM installations, sharing of networks, free access, offers and discounts and bundling of services. While a time-conscious, convenienceoriented city customer looks forward to these services, the urban and semi-urban customer is exposed to only a few of the above marketed benefits. This study was conducted to develop an understanding of adoption of e-banking services among the consumers in urban and semi-urban regions. The analyses revealed the influence of demographic variables, experience with computer technologies and medium of information as predictors of channel adoption. Depending upon banking behavior, four segments of consumers were identified with the help of factor analysis. Logistic regression was used to analyze the significance of different levels of socio-techno-demographic variables and behavioral factors on the propensity to adopt ATM and Internet banking at an individual level.

© 2011 IUP. All Rights Reserved.