Banking industry is growing rapidly. From a mere 8,269 branches at the time of
nationalization of banks in 1969, the total number of bank branches today has crossed one lakh and still continuing. However, the distribution of bank branches is not spread evenly across the country. There are pockets like in the North-Eastern states where there are fewer bank branches, while some pockets in the Western and Southern parts of the country are well banked, and even in some places over banked. But what is the basis of bank branch expansion? Is it driven by demand or by other considerations like politics? The time has come now to ponder over these issues and find answers for the future.

In this backdrop, the first paper, “Is Bank Branch Expansion Driven by Demand? – Some Evidence from Kerala”, by Navas Jalaludeen, 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. 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.

Banking industry today is plagued by growing concerns about asset quality caused by credit risk. This is the focus of the second paper, “Credit Risk Management Index Score for Indian Banking Sector: An In-Depth Analysis”, by Anju Arora and Muneesh Kumar. According to the authors, over the last decade, the role of credit risk management practices in the overall risk management in commercial banks was well accepted, and banks have established a set of these practices, collectively known as Credit Risk Management (CRM) framework. The 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.

The third paper, “Technology Adoption and Banking Efficiency: A Study of Iranian Banks”, by Tayebeh Farahani and Mysam Khansoz, 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.

The fourth paper, “The Effect of Intellectual Capital on the Profitability Ratios in the Banking Industry: Evidence from Iran”, by Mahdi Salehi, Abdollah Habibi Moheb Seraj and Reza Mohammadi, analyzes 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.

The last paper of the issue, “Does Bank Capitalization Lead to High Liquidity Creation? – Evidence from Nigerian Banking Sector Using Panel Least Square Method”, by Taiwo Adewale Muritala and Abayomi Samuel Taiwo, critically examines the impact of capitalization on bank liquidity creation in some selected banks of Nigeria using the annual data of 10 banks for the period 2006 to 2010.

-- S C Bihari
Consulting Editor