Is Bank Branch Expansion Driven by Demand? – Some Evidence from Kerala

--Navas Jalaludeen

Branches are the principal interface between banks and public and as such play an important role in financial intermediation to support the economic activities. If banking markets were to become more concentrated through the process of branch expansion, small firms and marginalized people who live in unbanked and under-banked areas could suffer. This paper examines the level of concentration of branches of commercial banks in Kerala using Herfindahl Hershman Index (HHI) and the Four Firm Concentration Ratio (C4) and how it has changed over a period of time. Further, the paper studies whether the level of concentration of branches is justifiable in terms of banking requirements of districts and whether the branch expansion has taken those factors into account. The study reveals that more new branches are opened in districts where the existing branches have more business instead of exploring untapped business potential of districts that have relatively better economic activities but not able to transform those into banking business due to lack of sufficient number of branches. The results also reveal that financial inclusion initiatives have influenced branch expansion and they have marginally reduced disparity among districts in terms of reach and availability of banking service.

© 2014 IUP. All Rights Reserved.

Credit Risk Management Index Score for Indian Banking Sector: An In-Depth Analysis

--Anju Arora and Muneesh Kumar

Over the last decade, the role of credit risk management practices in the overall risk management in the commercial banks was well accepted and banks have established a set of these practices, collectively known as Credit Risk Management (CRM) framework. The present paper evaluates the strength of CRM framework in the Indian banking industry, and makes a quantitative assessment of the overall CRM framework and each of its three major elements, namely, CRM organization, CRM policy and strategy, and CRM operations and systems. The CRM operations and systems are closely studied at transaction and portfolio levels. The paper statistically arrives at two potential areas of improvement that bank management should focus on in the near future, namely, credit risk monitoring at transaction level and credit portfolio risk analysis. The study provides new insights into CRM process and CRM framework in commercial banks.

© 2014 IUP. All Rights Reserved.

Technology Adoption and Banking Efficiency: A Study of Iranian Banks

--Tayebeh Farahani and Mysam Khansoz

This paper shows how useful the e-payment instruments are for modeling and estimating banking efficiency. The study examines the efficiency of Iran banking sector using the data of top 24 government and private banks. To estimate the banking efficiency, DEA model is employed using three inputs (number of ATMs and POS, bank size, and index of market concentration) and three outputs (return on assets, return on equity, and mean value of e-payment transactions). The findings reveal that five biggest banks (Melli, Mellat, Saderat, Tejarat, and Sepah) are more efficient in VRS model compared to CRS model because of better operating conditions. The empirical results show that the average level of overall technical efficiency is 78% in VRS model and 31% in CRS model, suggesting that Iranian banks could have increased their outputs by 22% with the existing level of inputs. These results also indicate that specialized state banks are more efficient than large banks.

© 2014 IUP. All Rights Reserved.

The Effect of Intellectual Capital on the Profitability Ratios in the Banking Industry: Evidence from Iran

--Mahdi Salehi, Abdollah Habibi Moheb Seraj
and Reza Mohammadi

As the world economy is moving from being an industrial economy to a knowledgebased one, identification, valuation and management of intellectual capital has become an important issue for many companies. The present paper studies the relationship between intellectual capital and its components (structural, physical and human) and the bank profitability ratios (return on assets, return on shareholders’ equity, profit margin and net profit growth rate) in the Iranian banking industry by using two control variables, i.e., bank size and financial leverage. The results indicate that intellectual capital has a strong impact on banks’ performance.

© 2014 IUP. All Rights Reserved.

Does Bank Capitalization Lead to High Liquidity Creation? – Evidence from Nigerian Banking Sector Using Panel Least Square Method

--Taiwo Adewale Muritala and Abayomi Samuel Taiwo

The study critically examines the impact of capitalization on bank liquidity creation in selected banks of Nigeria using the annual data of 10 banks for the period 2006 to 2010. The results of Levin, Lin and Chu unit root test show that all the variables are nonstationary at level. The results of Panel Least Square (PLS) regression reveal that bank size and capital asset ratio are positively related to bank capital but only bank size is significantly related to bank capital. In addition, the results show that bank liquidity and non-performing/assets ratio have a non-significant negative effect on bank capital. The implication is that better capitalized banks tend to create less liquidity, which supports the ‘financial fragility-crowding out’ hypothesis. This finding has important policy implications for emerging countries like Nigeria as it suggests that bank capital requirements, that is, recapitalization policy, implemented to support financial stability, may harm liquidity creation. The financial regulatory body needs to provide appropriate effective measures to adequately enhance transparent accountability. Measures such as relaxation or elimination of restrictions on profits and capital remittances, opening of formerly ‘priority’ sectors to investors, and provision of adequate security, among others, should be put in place.

© 2014 IUP. All Rights Reserved.