Financial Daily
from THE HINDU group of publications

Saturday, December 01, 2001



Opinion | Next

Interest expended and interest income -- Remarkable convergence in ratios

P. R. Brahmananda

TO HELP nationalised banks achieve the required capital adequacy and to rationalise their investments, the Government, which owns these banks, has written down portions of their investments and contributed, till the end of 2000-01, about Rs 20,446 crore in the form of special government securities to these banks' asset portfolios. These securities earn interest at about 10 per cent for the banks so assisted. (At the same time, the different banks have to allow for provisions and contingencies in their e xpenditures before reckoning profits.).

Hence in comparing the relative performances of banks, two measures of `profit ratios' are obtained depending on whether we include such interest income in their earnings or not.

However, by and large, nationalised banks were seen prior to 1990 as instruments of direct or indirect non-commercially-viable policies and programmes of government. Thus, such additions to the assets of banks and incomes thereof, may be treated as compe nsating for forced non-commercially-viable operations. In what follows, we examine over a period of ten years aspects of different public sector banks' operational ratios, abstracting from the effect of the Government's compensatory assistance.

Between 1991-92 and 2000-01, interest expended as a percentage of liabilities, in the case of public sector banks, fell from 7.06 per cent to 6.18 per cent. The measure of coefficient of variation was 0.13 in 1999-2000. But in 2000-2001, this dipped to 0 .073. The coefficient of variation had come down nearly 44 per cent over a period of 10 years, a remarkable case of increase in convergence of the ratio of interest to liabilities among nationalised banks.

The biggest drop in the ratio was in Indian Bank, where it dropped from 9.21 per cent to 6.05 per cent. In Vijaya Bank, the drop was from 9.32 per cent to 6.28 per cent. In both these banks, the drop was by as much as one-third. The State Bank of Saurash tra had an interest-to-liability ratio of 8.44 per cent in 1991-92. This fell to 6.02 per cent by 2000-01.

In 1991-92, the ratio of interest to liabilities was the lowest among the nationalised banks. In Corporation Bank it was 5.81 per cent, followed by State Bank of Patiala, with 5.59 per cent. In 2000-01, the ratio was 6.21 per cent in Corporation Bank and 5.16 per cent in State Bank of Patiala. State Bank of India had an interest-to-liabilities ratio of 6.4 per cent in 1991-92. In 2000-01 this had dipped slightly to 5.63 per cent. In the Oriental Bank of Commerce, the above ratio was 6.25 per cent in 199 1-92, but rose to 7.27 per cent in 2000-01.

It may be noted that Corporation Bank and Oriental Bank of Commerce are the most efficient among the public sector banks in terms of standard measures. Probably, these two banks must have been able to attract more fixed deposits than other banks. This hy pothesis is worth exploring. Medium-term deposits have a tendency to seek a mixture of good security and relatively high yields. In fact, in 2000-01, only two banks -- Oriental Bank of Commerce and Dena Bank -- had a ratio of interest to liabilities of m ore than 7 per cent.

In Dena Bank in 2000-01, the ratio of net non-performing assets to net advances was the highest among the public sector banks (18.37 per cent). The four other banks, which have more than 10 per cent ratio of net non-performing assets to net advances were Punjab and Sind Bank (12.27 per cent), Allahabad Bank (11.23 per cent), United Bank of India (10.50 per cent) and Indian Bank (10.06 per cent).

In terms of the ratio of net non-performing assets to net advances in 2000-01, the best record is of Corporation Bank (1.98 per cent) followed, surprisingly, by Andhra Bank (2.95 per cent) and then by Oriental Bank of Commerce (3.6 per cent). Canara Bank , creditably (in a double sense) for a large bank of its size, had a ratio of 4.84 per cent. State Bank of Patiala had a ratio of 4.92 per cent and Syndicate Bank of 4.05 per cent.

The troubled UCO Bank seems to be getting out of difficulties, with a ratio of 6.35 per cent. United Bank of India, still not out of woods, has a high ratio of 10.50 per cent. In Vijaya Bank, which seems to be getting out of difficulties, the ratio is 6. 23 per cent. Clearly, over the last few years, the ranking of banks, in terms of the net non-performing assets ratio, is changing. This means that the sustained policy of the Authorities in helping troubled banks to get out of difficulties is paying divi dends. If these processes continue, the majority of the public sector banks would again present a reasonably sound picture.

We have referred to the ratio of interest expended to liabilities. In terms of interest earned on assets, the public sector banks had a mean ratio of 10.42 per cent in 1991-92; in 2000-01 this had come down to 9.12 per cent -- about 1.3 percentage points , or just 12 per cent, over nine years. But interest paid on liabilities had come down 0.87 percentage point, also about 12 per cent.

In other words, the mean ratios of interest expended to liabilities and to interest income on assets, had both declined proportionately. This means that the public sector banks have been proportionately adjusting downwards both the ratios. When interest earned on loans and investments comes down, interest paid on deposits etc., also comes down, almost proportionately.

The common impression in the financial press that banks are slow or reluctant to cut deposit rates when lending rates are reduced is not borne out.

In the case of interest income as a percentage of assets in 1991-92, Vijaya Bank (12.51 per cent), Canara Bank (11.13 per cent), State Bank of Patiala (11.53 per cent), State Bank of Saurashtra (13.32 per cent) and State Bank of Indore (11.12 per cent) w ere the leaders. In 2000-01, Canara Bank's ratio had come down to 8.46 per cent, Vijaya Bank's to 9.51 per cent, State Bank of Patiala's to 9.38 per cent, State Bank of Saurashtra's to 8.95 per cent and State Bank of Indore's to 8.63 per cent

In 1991-92, about 14 public sector banks had interest income as ratio of assets of above 10 per cent. In 2000-01, only Oriental Bank of Commerce had a ratio of 10 per cent plus (10.19 per cent). Even Corporation Bank had a ratio of 9.16 per cent. The fol lowing banks had ratios of less than 9 per cent: Bank of India (8.93 per cent), Bank of Maharashtra (8.96 per cent), Canara Bank (8.46 per cent), Indian Bank (7.88 per cent), UCO Bank (8.32 per cent) and United Bank of India (8.99 per cent).

Even State Bank of India had a ratio of only 8.24 per cent, with State Bank of Indore 8.63 per cent and State Bank of Saurashtra 8.95 per cent. On recent government loans, the coupon rate of interest was clearly in the range of 10-11 per cent. The older banks probably had more of portfolio in older government securities with low coupon rates. Further, the burden on non-performing assets must also be weighing heavily with respect to some banks. The coefficient of variation in respect of interest income a s a ratio of assets in the public sector banks in 1991-92 was 0.092. In 2000-2001 it had come down to 0.055 -- nearly 40 per cent in 10 years. Again, a remarkable increase in convergence.

Note that the coefficient of variation had come down in respect of interest expended ratio by 44 per cent during the same period. Banks seem to be coming closer in respect of lending rates as well as deposit rates, and both rates are converging. If the m easures of coefficients of variation are falling, this could be due to competition as well as direct and indirect support and goading by the authorities.

It is immaterial whether the authorities have this goal in mind or not! If the goal of financial reforms is convergence of rates among different public sector banks, this has clearly been achieved in a remarkable measure and within a decade. Competition among public sector banks cannot be in terms of rates, but has to be in terms of quality of service to customers.

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