The Hindu Business Line : Indian banks fare well against global peers

THE Indian banking sector compares well with the global benchmarks, thanks to prudential supervision and the measuresundertaken by the Reserve Bank of India and the Government.

In its report on Trends and Progresses of Banking in India 2004-05, the RBI has compared the Indian scheduled commercial banks (SCBs) to banks in other countries on various financial and soundness indicators.

These parameters include funding volatility ratio, return on assets, net interest margin, cost-income ratio, non - performing loans ratio and capital adequacy ratio.

The return on total assets (RoA) of banks, defined as ratio of net profit to total assets, was 0.9 per cent for SCBs in India in 2004-05, as compared to the global RoA of between -1.2 per cent and 6.2 per cent, said the RBI in its report.

The RoA was the highest for foreign banks at 1.3 per cent, followed by new private sector banks at 1.1 per cent. For public sector banks, it was 0.9 per cent. RoA is one of the most widely employed measures of profitability.

With regard to funding volatility ratio (FVR), which measures the extent to which banks rely on volatile liabilities to finance their assets, the ratio for various bank groups was in the range of -0.11 to -0.23 per cent.

This compares favourably with the global range, which was in the range of -0.71 and 0.11 per cent, the ratio being primarily negative for most countries.

Most countries in developed and even several emerging economies have net interest margin (NIM) of around 2 per cent of total assets. In India, the NIM for scheduled commercial banks was 2.9 per cent in 2004-05, with the new private banks having the lowest NIM in 2004-05, at 2.2 per cent.

The cost-income ratio (CIRfor Indian banks was 0.5 per cent, with the global range being 0.46 to 0.68 per cent.

The ratio of non-performing loans (NPL) to total assets vary from 0.3 per cent to 3 per cent in developed economies to over 10 per cent in several Latin America economies, said the report.

In the case of Indian banks, the NPL has declined to 5.2 per cent by end-March 2005.

Provisioning to NPLs ratio was 60.3 per cent for Indian banks, which was within the global range. Globally, the provisioning ratio varies from less than 10 per cent to over 200 per cent. Indian banks have improved their capital adequacy ratio (CAR) or the capital to risk weighted assets ratio.

The global range for CAR lies between 8.8 per cent and 37.1 per cent. For Indian banks, it is 12.8 per cent, which is higher than the regulatory requirement of 9 per cent.

Globally the capital to assets ratio varies between 2.7 per cent and 20.2 per cent. For Indian banks it is 6.3 per cent.

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