Banking sector is the mirror of the economy and banks are like the purse of the nation. Productivity, profitability and operational efficiency of the banking sector reflect the overall mood of the economy. The banking sector reforms emphasized the need to improve productivity of the banks through appropriate measures so as to reduce the operating cost and improve the profitability by increasing efficiency in terms of business level of banks in India. Efficiency relates to how well a bank employs its resources, and how a bank simultaneously minimizes cost and maximizes revenue based on an existing level of productivity.

As per the RBI Report on Trends and Progress of Banking in India, Indian banking sector, which withstood the turmoil of the global financial crisis during 2008-09, started showing some signs of stress during the subsequent period. The performance of the Indian banks during the post-crisis period was conditioned to a large extent by fragile recovery of the global financial markets as well as a challenging operational environment on the domestic front, with high inflation and muted growth performance. In addition, stressed financial condition of some sectors further added to the deterioration in the asset quality of banks.

The report further states, “Financial performance of banks came under pressure during 2011-12, mainly due to the increased cost of deposits in the backdrop of an elevated interest rate environment. However, on a positive note, the efficiency of banks improved. The two main indicators of profitability, i.e., RoE and RoA, declined marginally during 2011-12, reflecting deceleration in the net profit of banks.”

However, banking continues to be the lifeline of the economy in India and across the world. In this context, the first paper, “Productivity of Islamic and Conventional Banks of Malaysia: An Empirical Analysis”, by Farhana Ismail and Rossazana Ab. Rahim, investigates productivity change of Malaysian banks during the period 2006 to 2009 by employing Malmquist productivity index. This study departs from the practice of existing studies by assessing the productivity of Islamic and conventional banks. The results of this study reveal that throughout the study period, the productivity of Islamic banks (10.4%) was higher than the conventional banks (0.9%).The study suggests that Malaysia’s commercial banking industry can further increase its TFP through an improvement in the efficiency component.

The next paper, “Banking Sector Development and Economic Growth in OECD Countries: Panel VAR Evidence”, by Rudra P Pradhan, Prateek Dasgupta, Bele Samadhan and Sasikanta Tripathy, examines the causality relationships between Banking Sector Development (BSD) and economic growth (GDP) by using panel VAR model. Using selected 34 OECD countries, the study finds Granger causality between BSD and GDP. The paper suggests that banking sector indicators can be considered as the policy variable to accelerate economic growth in OECD countries. The policy implication of this study is that the economic policies should recognize the differences in the banking sector development-growth nexus in order to maintain sustainable economic growth in the region.

In the next paper, “Operational and Market-Based Efficiencies of Indian Commercial Banks: A Comparative Study”, by Sanjeev C Panandikar, a new method based on certain financial ratios is proposed. The bank-wise data for seven criteria of efficiency from financial year 2001-02 to 2009-10 is decomposed to obtain two different measures of efficiencies called operational efficiency and market-based efficiency, using factor analysis and multidimensional scaling. The banks include public sector, private sector and foreign banks as classified by the Reserve Bank of India. It is observed that for the study period, the banks differ significantly in terms of market-based efficiency but not in terms of operational efficiency. It is also seen that the foreign banks have the highest average market-based efficiency.

The next paper,“Growth, Profitability and Productivity in Public Sector Banks: An Assessment of Their Interrelationship”, by Dhananjay Bapat, examines the relationship among growth, profitability and productivity for Indian public sector banks. For measuring profitability, Return on Assets (ROA) was selected, and for assessing productivity, business per employee and profit per employee were used as measures.

All the banks in India offer similar kinds of services, but they could provide differences in terms of service quality, according to the next paper, “Analysis of Service Quality Gap in Indian Banking Industry”, by Sunayna Khurana. The paper analyzes the gap between customer expectation and customer perception in the retail banking industry. The paper suggests that improved service quality should be adopted to give maximum satisfaction to the customers.

The last paper, “International Trade Financing by Banks: Addressing the Risk”, by Smita Roy Trivedi, looks at the process of trade financing decisions taken by banks and the inherent risks associated with such decisions for both import and export financing. Using data on crystallized and/or overdue bills from two large public sector banks in India, the paper identifies key independent variables which could impact the event crystallization or otherwise of the export bill.

-- S C Bihari
Consulting Editor