The Hindu Business Line : ‘Size matters; efficiency is ownership-neutral’

Chennai, Sept. 7 The average business done in a branch of a public sector bank in 2006-07 was Rs 67 crore. Comparatively, other bank groups did much more. New private banks managed to do over 4 times higher business at Rs 294 crore for a branch. Foreign banks managed to do Rs 1,004 crore of business in every branch, or about 15 times the business that an average public sector bank branch does.

Do these figures suggest that foreign and private banks are more efficient than public sector banks? Firstly, as any indignant public sector banker to whom you pose these figures will tell you, the comparison is odious and unfair.

It is a fact that about 40 per cent of the branch network of public sector banks is in rural areas. Transaction sizes there are small and often un-remunerative.

And even in urban and metro areas, public sector banks serve every strata of society. In contrast, private and foreign banks have the advantage of cherry-picking their customers and going in for high net worth customers and high-value business.

So, does ownership of the bank make a difference? The answer, surprisingly, is No.

An analysis on the efficiency, productivity and soundness of the banking system by the Reserve Bank of India in its Report on Currency and Finance released last week points out that there is no definite relationship between the two.

According to its study, using both accounting measures (ratios) and economic measures (data envelopment analysis (DEA), the State Bank group in the public sector was the most efficient. They were followed by new private banks, nationalised banks, foreign banks and old private banks in that order.

The report goes on to add, “The DEA efficiency analysis suggests that most efficient banks are found both in the public and private sectors. In all, there are 17 most efficient banks, which belong to public, private as well as foreign bank groups. In fact, all the 28 least-efficient banks are in the private sector (old private or foreign). This would suggest that in the Indian context, the relationship between ownership and efficiency is not significant.”

The study also flags two other related issues pertaining to size and diversification. That is, whether larger and more diversified banks are more efficient than smaller and specialised banks?

Using statistical tools such as regression analysis, the study finds that there indeed is a high degree of positive association between size (as measured by assets) and efficiency. The rank correlation coefficient between the two measures was 0.74 in 1992, 0.55 in 1998 and 0.55 in 2007.

Diversification helps

Similarly, there is also a high degree of correlation between diversification (as measured by non-interest income) and efficiency. The correlation coefficient between these two measures was 0.57 in 1992, 0.55 in 1998 and 0.61 in 2007. It concludes that banks that have diversified more and earn more through fee income are more efficient.

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