Banking being a services sector is quite sensitive to economic fluctuations. A substantial part of the domestic savings is channeled through the banking sector in most of the developing countries. As a predominant source of credit for the economic activities, the health of the banking sector assumes greater significance and hence is often considered a heavily regulated sector in the economy. One of the obvious reasons for banking regulation is that banks are risky due to the fact that they are often highly leveraged, and there is scope for moral hazard, which induces the risk-taking behavior of the banks. In the backdrop of stringent regulations, bank performance assumes greater importance. More importantly, bank performance measures such as capital adequacy, leverage ratio, net non-performing assets, and profitability are keenly scrutinized by the analysts, investors, researchers, policy makers and the public at large. This calls for the banks to clearly understand which factors affect their performance and how they can keep track of such determinants in order to measure their performance.

The first paper, “Determinants of Commercial Banks’ Profitability in Botswana: An Empirical Analysis”, focuses on investigating the determinants of commercial banks’ profitability in Botswana. The authors, M Seemule, Narain Sinha and Tiroyamodimo Ndlovu, determine the factors that influence the commercial banks’ profitability. Theoretically, though there are several determinants of bank profitability, for the purpose of empirical investigation, they group them as the external and internal factors to the banking industry. The internal factors or the bank-specific determinants considered for the analysis are capital, expense management, size, liquidity and asset quality. The external factors or the industry-specific and macroeconomic determinants considered for the analysis are money supply, GDP growth and inflation. Employing a panel data estimation technique, the study covers the period from 2004 to 2013. The authors notice that the banks with higher equity ratio are likely to have a higher safety, leading to higher profitability and increased performance. Higher liquidity is causing decreased profitability, calling for the need to have optimum levels of bank liquidity, instead of maintaining high levels of liquidity. Large banks are found to have a positive relationship with profitability, suggesting that size matters in banking.

Competition is the common phenomenon in almost all the sectors of the economy. However, the banking sectors across the globe are experiencing increased competition due to the advent of technology, liberalization, increased customer awareness, etc. The quality of banking products and their prices are determined by the efficiency of the banks and the level of competition. Marketing of bank products to increase the market share and thereby boost the business volumes for achieving the targeted level of profitability calls for a clear understanding of the customer perceptions of the banking products.

The second paper, “The Level of Penetration of Banking Products and Services in the Rural Areas of Sivakasi: A Study of Customer Perception”, analyzes customers’ perception of the variables and the levels of their penetration, and identifies the customer satisfaction levels towards banking services and products. In their primary data-based study, the authors, M Selvakumar, R Mohammed Abubakkar Siddique and V Sathyalakshmi, bring field perspective to the analysis of the topic. Based on a sample of 200 respondent bank customers, they employ the principal factor analysis method with orthogonal varimax rotation to identify the significance of different variables of customer satisfaction. The findings indicate that the level of penetration of banking products is low in the study area. However, the customers are satisfied with the quality of service, though there is a deficiency in the availability of banking products and services. In view of the low level of penetration of banking services in the study area, the authors suggest an increase in the ATM services, payment and money transfer services coupled with mobile-based banking services.

Many developing countries continue to be homes to a large section of the poor who are in need of tailored financial services. These poor households find several barriers to access to organized financial services. Given this backdrop, in the third paper, “The Fragile SHG-Bank Lending Linkage: Some Empirical Evidence for Tamil Nadu”, the author, T K Venkatachalapathy, empirically investigates the features of progressive lending and Bank-Self-Help Group (SHG) linkage program for a sample of 204 women SHGs in the Tamil Nadu state of India. The author observes that the SHGs witnessed a progressive decline in their loan sizes over different loan cycles. The number of borrowers declined, though there was an increase in the loan size, suggesting that the groups lacked the required skills to undertake larger economic activities that required larger loans. It was also noticed that the factors such as the age of the SHG, per capita member credit, and the type of bank linkage are the main determinants of progressive lending in SHG-bank linkage program.

-- Vighneswara Swamy
Consulting Editor