The Zimbabwean Banking Sector: Solutions to The Common Challenges
An Overview of the Zimbabwean Banking Sector
At independence (1980) Zimbabwe had a sophisticated banking and financial market, with commercial banks mostly foreign owned, Makoni (2010). A central bank had been inherited from the Central Bank of Rhodesia and Nyasaland at the winding up of the Federation. For years the government did not interfere with the banking industry and there was neither nationalisation of foreign banks nor restrictive legislative interference on which sectors to fund or the interest rates to charge, despite the socialistic national ideology. However, the government later purchased some shareholding in two banks. It acquired Nedbank’s 62% of Rhobank at a fair price when the bank withdrew from the country, now known as Zimbank. The decision may have been motivated by the desire to stabilise the banking system. The State in 1981 also partnered with Bank of Credit and Commerce International (BCCI) as a 49% shareholder in a new commercial bank, Bank of Credit and Commerce Zimbabwe (BCCZ). This was taken over and converted to Commercial Bank of Zimbabwe (CBZ) when BCCI collapsed in 1991 over allegations of unethical business practices. In the first decade, no indigenous bank was licensed and there is no evidence that the government had any financial reform plan, Makoni (2010). Later on as part of financial reforms aided by ESAP the Registrar of Banks in the Ministry of Finance, in liaison with the RBZ, started issuing licences to new players as the financial sector opened up.
To date the Zimbabwean banking sector comprises of the Reserve Bank of Zimbabwe (RBZ), various Commercial Banks, Merchant Banks and the Post Office Savings Bank. The RBZ is the Central Bank for the nation and is the Supervisor of all other banks, it guides and maintain discipline through its monitoring and policy set ups. Zimbabwe has 15 commercial banks, five merchant banks, four building societies and one savings bank. There are 16 asset management companies and 95 micro-finance institutions.
Extent of Challenges currently faced by Banks
Banking institutions are still struggling after the economy restoration. 10 out of 25 financial institutions have recorded losses in the first quarter of 2010 ending 31 March. The recorded losses were mainly caused partly by high non-interest expenses in the form of salaries, employment benefits and general administration expenses against that there is low income generation capacity. Despite banks like CBZ, CABS and Standard Chartered recording profits in excess of US million during the first quarter, they also continue to face challenges, in actual fact they should be earning more than this if challenges are not as tough as they are.
According to Zimbabwe Banks and Allied Workers Union, as at 15 July 2010, banks that retrenched staff in the past year (2009) include Metropolitan (120 employees), People’s Own Savings Bank (160), Standard Chartered (98, through voluntary retrenchment) Barclays and FBC (200 on voluntary retrenchment), Renaissance (5) and Tetrad (16). NMB also axed 75 non- managerial staff while CFX retrenched 61 non- managerial and 39 managerial staff. CBZ and Premier have also retrenched employees.
Challenges Zimbabwean Banks are Commonly Facing
Financial Challenges
The Zimbabwean banks are currently failing to get enough finance to enable them to run its business operations at the full capacity. The banks are struggling to meet the minimum capital requirement set by the RBZ, even under a phased plan given by the central bank. The plan was to pay half by September 30 last year and by March 31 to meet the fully prescribed capital levels. 15 out of 25 banking institutions had complied by end May. Paid-up capital requirements were set as US,5 million for commercial banks and US million for merchant banks and building societies and more than 10 banks failed to pay up according to the phased plan. Low level of capitalization has also been identified by Brownbridge (1998), as a common challenge that is always faced by banks in developing nation especially locally owned banks.
.
Liquidity challenges
To expand operations banks need adequate cash, and this can be found through many ways and it is these ways that are currently unavailable. Getting loans from other banks, foreign companies, the Central bank and deposits from individuals and institutions are possible ways to raise finance. Foreign currency is very scarce in the economy due to poor export performance and lack of international capital flows. Even solvent banks may not survive a run on deposits as they are also struggling to mobilise “less liquid assets to meet liquidity needs”.
Volatility of deposits
The deposits to banks are very volatile and hence low profits out of them. This is mainly caused by a very high marginal propensity to consume of various economic agents who are earning low salaries and hence unable to save, this causes people not having money staying in their bank accounts except minimum balances. This has left banks having no money to invest and earn a profit. Major deposits are done by companies as salaries and wages of their employees who will then withdraw almost all of their salaries. The majority of workers are earning far less than the Poverty Datum Line especially those in the Public Service, making it difficult for them to save.
High Overhead Costs
Due to the low-income generation ability of the banking institutions, their earnings cannot match the overhead costs they are facing, especially salaries and wages given that they are not operating at full capacity. The cost of paying workers salaries that are in line with the cost of living is too heavy for the banks as they are not operating at full capacity and level of profitability is low. Even if they opt for retrenchment, the packages to be given to the retrenched workforce will be a challenge.
Cash-based Transactions Prevailing
Due to the foreign currency shortages in the economy, and the unavailability of alternative payments to business transactions, a lot of cash is in the hands of economic agents and they are not willing to have it banked. Every trade taking place is on cash basis and generally no credit transactions are preferable currently. Alternative methods for business transactions include credit transfers, cheques, direct debits and payment cards (debit, credit, prepaid, ATMs and POS networks).
Lack of lines of Credit
As banks like any other companies are willing to borrow elsewhere so that they expand business, the lines of credit are not available. The few that are there are of short term nature and hence very costly. The supply then cannot meet the demand. Small banks are the most affected as they cant meet the requirements for getting credit even in the foreign market.
Central Banker not Performing all its roles- Lender of last resort
Due to the fact that Zimbabwe has no currency of its own, it has adopted the multicurrency use and mainly South African rands and the United States dollars are used for transactions, the Central bank can nolonger perform all its roles especially being a lender of last resort. This gives banks a hard time to find sources of finance. RBZ’s problems also meant that banks would not be able to obtain a refund of their statutory reserves for which they are entitled in case of a possible decline in their deposits because these reserves are not backed by international reserves. In normal environment, if liquidity tightens banks approach the RBZ for accommodation, then RBZ reserves the right to grant assistance on its own terms.
No active Interbank Market
Currently there is no active interbank market, implying that those banks with no collateral to the required conditions find it difficult to borrow so that they cover liquidity gaps. Lack of finances remains a big challenge to the banking sector, as they are not able to expand their business in line with current economic conditions and public demand for their services to be appreciable and internationally competitive.
Insider lending
Insider lending also has contributed to bank failures and still remains a challenge to the Zimbabwean banking sector and this often lead to bad debts. As an example most of the larger local bank failures in Kenya, such as the Continental Bank, Trade Bank and Pan African Bank, involved extensive insider lending, often to politicians, Brownbridge (1998). This is the same scenario with Zimbabwean banks which have no choice but to perform insider lending. Nigeria and Uganda also experienced the same.
Lending to high-risk borrowers through Adverse selection and Compliance to National Policies
Due to lack of investment opportunities, banks are now lending to high-risk borrowers through adverse selection and compliance to national policies. Various government bodies have negotiated with the banks to offer loans as part of Empowerment programmes to the youth and woman who have no collateral securities. Many of such groups have failed to return the loans as prescribed and hence are having losses. As the economy is from the depression, it is now difficult to distinguish and identify credibility of clients for loan purposes.
Entrepreneurship Skills (Excessive Human Capital Flight)
Due to the crisis there have been excessive human capital flight and hence those with great expertise have migrated to greener pastures. A lot of staff is lacking a lot of experience and hence challenges remains pinning the sector. Even some crucial staff have been lost through retrenchment as a way to avoid too much overhead costs.
Adoption and Use of Internet Banking by the Customers
Since the banking sector has adopted this kind of technology it is very worrying that its customers are not heavily using it. It needs strong awareness programs to the public so that they will maximize this kind of technology to their benefit. This challenge has been observed also by Chitura et al (2009), as bank technology advancement is not receiving appreciation by its customers.
Proposed Solutions To Banking Sector Challenges
Banks plays very crucial roles in the economy and therefore their success means also the better for the overall economy. As supported by Chen et al (2010), “Banking efficiency is essential for a well-functioning economy.” Researches suggest that banks exert a first-order impact on economic growth and development (e.g. Beck, Levine and Loayza, 2000). When banks operate efficiently by directing society‘s savings toward those enterprises with highest expected social returns and monitoring them carefully after lending, society‘s scarce resources are allocated more efficiently. Therefore the banks challenges needs to be addressed both at corporate and national level for the benefit of the economy and financial sector. Bank failures have to be avoided as through the inter linkages of various sectors of the economy will transfer to inefficiency of other sectors.
The remedies vary from those to be implemented by the individuals banks themselves, collectively or in partnership, long term and short term remedies and national solutions to protect the banks.
Cost-Cutting Measures
As the banks are striving to map their way to recovery, and as far as the rate of profitability creation remains sticky at low levels, the only way to manage survival is through managing its costs. They should engage in minimizing their costs. Some banks have already started cost cutting measures through retrenchment of non-crucial staff and also offering voluntary retrenchment. This helps in reducing overhead costs so that they match the income generation capacity to current expenditure. Rationalization of branches is also one of the cost cutting measures which banks may take. According to the Shutdown Rule, any organization should shutdown if it can no longer cover its variable costs, hence the banks should make sure that they minimize the variable costs so that they can continue operating accordingly whilst they find ways of raising their revenue. They should also identify niche markets for their services to raise revenue.
Organizing shifts rather than Retrenchment of staff
As retrenchment may mean losing employees permanently, it may also mean future problems when right skills are in need. To conserve skills, the banking sector can liase with employees to be place in shifts, for example working two weeks per month, at a reduced salary and benefits. This ensures long term survival. The Barclays bank, apart from retrenchment, organized for such operations for certain staff grades.
Proposed Mergers
Certain banks who have strived to meet the minimum capital requirement, even after the scheme by the RBZ loosen the requirements, and have no hope to do so in the near future, should try to merge together rather than closure. Merging helps as you bring assets together and ensures survival, and in future you may also de-merge to retain your original brand. However this measure has its own disadvantages as it leads to further retrenchment of staff as there is duplication of work and various ranks in the organization.
IMF Solution
The IMF has proposed that banks that are not performing up to the required levels should close down and only efficient banks should remain in operation. According to my assessment it may be to early to announce bank closures rather all other alternatives should be given a trial. Bank closures will have many disadvantages to the economy ranging from raising unemployment rates and many other social costs involved. The inefficiency of the banks is not a result of their inability to operate but its following a national crisis emanating elsewhere. Bank failures mostly arised due to a liquidity crisis triggered by the economic meltdown, hyperinflation and mismanagement, hence it’s a result of many factors.
Expanding sources of finance to International organizations
This is rather a task of the responsible authorities to negotiate on behalf of banks for international loans. This helps to relieve the scarce sources of finance in the economy and allow banks to cover liquidity gaps.
Developing alternative means of payments
The economy in general should find other ways to make business transactions other than direct cash only as this affect investment path. Business should resort to accepting credit transaction, use of cheques among other methods.
Conclusion
As far as the banking sector is worth to play a crucial role in the overall economy they are worth to be supported. The idea of closing inefficient banks may not be the right decision rather they have to be supported. The banking and financial sector links various economic sectors and hence have a strong link to the level of economic development. The government of Zimbabwe should promote and loosen the rules governing their closure so that no elimination is done to the sector rather it should be aided to expand its services. Banking and financial sectors are also technologically linked and hence moves the economy ahead. The solutions to the bank challenges rest in the hands of both the institutions and the government.
References
Brownbridge Martin (1998), “The Causes of Financial Distress in Local Banks in Africa And Implications For Prudential Policy,” UNCTAD/OSG/DP/132,Geneva.
Chen Lin, Yue Ma and Frank Song (2010), “Bank Competition, Credit Information Sharing and Banking Efficiency,” Department of Economics and Finance City University of Hong Kong Hong Kong, China.
Chitura Tofara, Dube Thulani and Runyowa Langton (2009), “Adoption and Use of Internet Banking in Zimbabwe: An Exploratory Study,” Journal of Internet Banking and Commerce, April 2009, vol. 14, no.1
Corbell Tery (2010), “Bank Challenges Are Faced by Many Companies,” The Biz Coach.
Kiyota Hiroyuku (2009), “Confronting the Global Financial Crisis: Bank Efficiency, Profitability and Banking System in Africa,” Institute for International Cooperation Studies, Takushoku University, Tokyo, Japan.
Leornard Makombe (2010), “Zimbabwe: Struggling Banks Axe More Than 1,000 Workers. Zimbabwe Independent, 15 July 2010.
Makoni Tafadzwa Dr. (2010), “Overview of Zimbabwean Banking Sector (Part One),” Ezine Articles.
VOA (2010), “Reserve Bank of Zimbabwe to Restore Licenses to Three Forcibly Merged Banks,” UTC Friday 13 August 2010.
Comparative study of non interest income of the Indian Banking Sector, a study of non interest income
Overview Of Banking Project
Title: Comparative study of non interest income of the Indian Banking Sector
Submitted by:
Gaurav Sharma
BBA(Finance, Gold Medal),MBA(Finance)
gksindia1@gmail.com
Index
Introduction 1
Methodology 3
SBI& Associates 5
Nationalized banks(Public sector banks) 10
Private sector banks 15
Foreign banks 20
Findings 25
Conclusion 26
Literature review 26
References 26
Introduction
There are two broad sources of bank revenues:
Interest income Non-interest income.
Interest income is generated from what is known as “the spread.” The spread is the difference between the interest a bank earns on loans extended to customers, corporate etc and the interest paid to depositors for the use of their money. It is also earned from any securities that the banks own, such as treasury bills or bonds.
Non-interest income is earned by providing a variety of services, such as trading of securities, assisting companies to issue new equity financing, securities commissions and wealth management, sale of land, building, profit and loss on revaluation of assets etc.
As compared to the developed world, the Indian banking sector, apart from the relying on traditional sources of revenue like loan making are also focusing on the activities that generate fee income, service charges, trading revenue, and other types of noninterest income. While noninterest income plays an important role in banking revenues in the developed world, its contribution to the total income of the Indian banking was 25% as on 31st March 2008.
Components of non interest income
The major components of non interest income in our banking sector are as follows:
Commission/ exchange and brokerage Profit or loss on Sale of investments Profit or loss Sale of land& buildings Profit/loss on revaluation of investments Profit or loss on Exchange transaction etc. Miscellaneous income source which includes advisory, trading etc.
Share of various sources of non interest income
The share of various sources of non interest income to the total income of banking sector as on 31st march 2008 is shown in the pie chart below:
In the above figure we find that the highest contribution to the non interest income has been of the commission followed by sale of investments, miscellaneous income and exchange transactions.
Movements of interest and non interest income of the Indian banking sector (1994-2004)
Methodology
Under this I have done a comparative study of non interest income of the Indian banking sector by classifying banks into four categories:
SBI and associates which includes State bank of India, State bank of Bikaner and Jaipur, State bank of Hyderabad, State bank of Mysore, State bank of Patiala, State bank of Saurashtra and State bank of Travancore. Nationalized banks: (Public sector banks) which includes Allahabad bank, Andhra bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara bank, Central Bank of India, Corporation bank, Dena bank, Indian bank, Indian Overseas bank, New bank of India, Oriental bank of Commerce, Punjab &Sind bank, Punjab National Bank, Syndicate bank, UCO bank, Union bank of India, United bank of India, Vijaya bank.( Total 19) Other scheduled banks: (Private sector banks) which includes Development credit bank, Times bank, Axis bank, Indus land Bank, ICICI bank, Bank of Rajasthan, Catholic Syrian bank, Lakshmi Vilas bank, HDFC bank, Centurion bank, Bank of Punjab, Tamilnad Mercantile Bank, Federal bank, Punjab Cooperative bank, Lord Krishna bank, ING Vyasya bank, IDBI bank, Dhanlakshmi bank.(total 18 banks) Foreign banks: which includes Barclays bank, ING bank, ABN Amro bank, Bank of America, BNP Paribas, Standard Chartered bank, DBS bank ,Citibank, HSBC, Deutsche bank, Mashreq bank, Bank of Nova Scotia, Bank of Bahrain & Kuwait, American Express bank (total 14 banks)
The banks used under private sector and foreign sector category are reflective of major portion of their respective market/category. Moreover data was not available for other banks within that category.
The period of study taken was 11 years i.e. 1994-2004. The period of study was taken as 11 years because, for the above mentioned period the data was available for all the bank and to ensure uniformity.
Objectives of the study:
To analyze the growth of non interest income as a source of revenue for the Indian banking sector over a period of 11 years (1994-2004). To analyze the contribution of major components of the non interest income over a period of 11 years (1994-2004). To find out statistically that how much of the profits of the banking sector over a period of 11 years is determined by non interest income and interest income. To find out statistically the contribution of various components of Non interest income towards the profits of the bank over a period of 11 years. To find out the contribution of interest and non interest income towards the total income in each of the 11 years (1994-04). To find out the correlation between the non interest income and the total income of the banking sector over a period of 11 years. To find out the reasons for the increase in the non interest income and what are the challenges involved to generate non interest income.
Tool used:
Data regarding the interest income, non interest income, profits, various components of non interest income, total income of the banking sector has been collected from the RBI website.
To find out the influence of interest and non interest income on the profits of the banking sector, I have made use of multiple regression tool in E-views software.
The interest and non interest income were independent variable and the profits of the bank was the dependent variable
Two Multiple Regression equation was used for the study:
Equation 1
Profits=a+b1*interest income+b2*noninterest income
Where b1 and b2 were coefficient and a is the intercept term which shows the profits of the bank had been c if interest and non interest income had been 0
Equation 2
Profits: a+b1*commission+b2*profit/loss on sale of land+ profit/loss on sale of investment+ profit/loss on revaluation of investment +profit/loss on exchange transactions+ Miscellaneous income
Where profits was the dependent variable and various components of non interest income were independent variable and a is the constant term
The equation 2 was used to find out the influence of various components of non interest income on the profits of the bank.
SBI and Associates
(Rs‘000)
In the above table we see the following:
Column1: Average
Column 2: Year
Column 3: Other income or the non interest income of the bank
Column 4: Commission, exchange and brokerage
Column 5: Net profit/loss on sale of investment
Column6: Net profit/loss on revaluation of investment
Column7: Net profit/loss on sale of land, building and other assets
Column 8: Net profit/ loss on exchange transactions
Column 9: Miscellaneous income
Column 10: Total income of the bank
Column 11: Profit/loss of the bank
Column 12: Interest income of the bank
Column 13: Noninterest income as a percentage of total income
Column 14: Interest income as a percentage of total income
Influence of interest and non interest income on profits of SBI& Associates
The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the SBI and its associates are determined by interest and non interest income.
We find non -interest income to be a significant variable in explaining the profits of SBI as the prob value is less the .05 (.0095)and the value of t stat is more than 2(3.386)[ Rule: an independent variable is said to be significant is its prob value is less than .05 or the t-stat is more than 2). We find that in our regression model the percentage of variation in the profits of SBI and its associate that is explained by interest and non interest income is 92.81% ( Rule: for a regression model to be efficient the r-square shall be at least .6) From the above output we find that Noninterest income had a significant influence on the profits of SBI and its associates over a period of 11 years.
Influence of non interest components on profit of SBI& Associate
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
1
.990(a)
.981
.943
4040785.55743
a Predictors: (Constant), misc, plland, plexchange, pllinvest, plreav, comm
Coefficients(a)
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
-20565743.526
10099548.868
-2.036
.135
comm
2.109
.603
1.153
3.495
.040
pllinvest
.970
.255
.944
3.805
.032
plreav
27.569
76.257
.100
.362
.742
plland
76.158
97.743
.221
.779
.493
plexchange
-1.077
.815
-.135
-1.322
.278
misc
-4.728
2.151
-1.042
-2.198
.115
a Dependent Variable: profit
In the above regression output the independent variable used were various components of non interest income i.e. commission/exchange /brokerage, profit/loss on sale of investment, profit and loss on revaluation of investment, profit/loss on sale of land/building, profit/loss on exchange transaction and miscellaneous income. And the dependent variable used was the profits of the SBI& associates
The objective is to find out that which one of the non interest component had a major influence on the profit of SBI & associates over a period of 11 years.
We find the following:
The percentage of variation in the profits of the SBI& associates explained by the 6 independent variables is 98.1% which is significant(as R square shall be more than .6) We find that commission/exchange/brokerage and profit/loss on sale of investment had a major influence on the profits of the SBI and its associates over a period of 11 years. As they are having a prob values less than .05(level of significance) and is having a t-stat more than 2.
This means that SBI and its associates shall focus more on commission exchange and brokerage for its non interest income.
Contribution of various components of non-interest income of SBI& Associate(94-04)
The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that commission/exchange and brokerage had around 59% (highest) contribution to the non interest income followed by sale of investment (20%). Exchange transaction was having a contribution of 12% and miscellaneous income was having an influence of 9%. The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income.
Movements of interest and non interest income of SBI & Associates(94-04)
If we look at the movement of interest and non interest income of SBI and associates over a period of 11 years we will find that the non interest income has grown at a CAGR of 18.46% and the interest income has grown at a CAGR of 13.15%.The noninterest income over a period of 11 years has grown by 444.563% whereas interest income has increased by 244.14% which shows how aggressively the bank is working on its non interest income.
Contribution of interest and non interest income of SBI & Associate
From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 14% to 21% and share of interest income has decreased from 85% to 78%.
On an average over a period of 11 years the contribution of non interest income as been 15% and interest income has been 85% to the total income of the SBI and its associates.
Correlation between non interest income and total income
0.935642
There is a very positive correlation between non interest income and the total income of SBI and its associates which shows that higher the non interest income higher the total income of the SBI& associate.
Nationalized banks: Public sector banks
(Rs‘000)
In the above table we see the following:
Column1: Average
Column 2: Year
Column 3: Other income or the non interest income of the bank
Column 4: Commission, exchange and brokerage
Column 5: Net profit/loss on sale of investment
Column6: Net profit/loss on revaluation of investment
Column7: Net profit/loss on sale of land, building and other assets
Column 8: Net profit/ loss on exchange transactions
Column 9: Miscellaneous income
Column 10: Total income of the bank
Column 11: Profit/loss of the bank
Column 12: Interest income of the bank
Column 13: Noninterest income as a percentage of total income
Column 14: Interest income as a percentage of total income
Influence of interest and non interest income on profits of Public sector banks (94-04)
The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the public sector banks are determined by interest and non interest income.
Non interest and Interest income are independent variables and profit is the dependent variable
From the above output we find:
We find non -interest income to be a significant variable in explaining the profits of public sector banks as the prob value is less the .05 (.0268) and the value of t stat is more than 2(2.7056) [Rule: an independent variable is said to be significant if its prob value is less than .05(level of significance) or the t-stat is more than 2]. We find that in our regression model the percentage of variation in the profits of public sector banks that is explained by interest and non interest income is 88.86%( Rule for a regression model to be efficient the r-square shall be at least .6) From the above output we find that noninterest income had a significant influence on the profits of public sector banks over a period of 11 years.
Influence of non interest components on profit of Public sector banks(94-04)
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
1
.974(a)
.948
.870
14640946.95589
a Predictors: (Constant), misc, plland, plreav, pllinvest, plexchange, comm.
Coefficients(a)
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
-84595095.339
58218744.505
-1.453
.220
comm
.151
5.866
.024
.026
.981
pllinvest
.017
.478
.014
.035
.974
plreav
-13.928
8.434
-.348
-1.651
.174
plland
48.353
63.394
.105
.763
.488
plexchange
5.954
8.910
.276
.668
.541
misc
3.451
7.536
.470
.458
.671
a Dependent Variable: profit
In the above regression output the independent variable used were various components of non interest income i.e. commission/exchange /brokerage, profit/loss on sale of investment, profit and loss on revaluation of investment, profit/loss on sale of land/building, profit/loss on exchange transaction and miscellaneous income. And the dependent variable used was the profits of the public sector banks
The objective is to find out which one of the non interest component had a major influence on the profit of public sector banks over a period of 11 years.
We find the following:
The percentage of variation in the profits of the public sector banks explained by the 6 independent variables is 94.8% which is significant(as r square shall be more than .6) We find that none of the non interest component was individually sufficient in explaining the profits of the public sector banks as we find that none of the non interest component is having a significance value of less than .5 or having a t-stat of more than 2.
Contribution of various components of non interest income of Public Sector banks (94-04)
The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that commission/exchange and brokerage had around 36% (highest) contribution to the non interest income followed by sale of investment (35%). Miscellaneous income was having a contribution of 16% followed by exchange transaction i.e. 12%. The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income.
Movements of interest and non interest income of Public sector banks(94-04)
If we look at the movement of interest and non interest income of public sector banks over a period of 11 years we will find that the non interest income has grown at a CAGR of 19.85% and the interest income has grown at a CAGR of 12.68%.The noninterest income over a period of 11 years has grown by 511.87% whereas interest income has increased by 230.03% which shows how aggressively the bank is working on its non interest income.
Contribution of interest and non interest income of the Public Sector banks(94-04)
From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 11% to 20% and share of interest income has decreased from 88% to 79%.
On an average over a period of 11 years the contribution of non interest income as been 13% and interest income has been 87% to the total income of the public sector banks.
Correlation between non interest income and total income of Public sector banks
0.940162
There is a very positive correlation between non interest income and the total income of public sector banks which shows that higher the non interest income higher the total income of the public sector banks.
Private sector banks
(Rs ‘000)
In the above table we see the following:
Column1: Average
Column 2: Year
Column 3: Other income or the non interest income of the bank
Column 4: Commission, exchange and brokerage
Column 5: Net profit/loss on sale of investment
Column6: Net profit/loss on revaluation of investment
Column7: Net profit/loss on sale of land, building and other assets
Column 8: Net profit/ loss on exchange transactions
Column 9: Miscellaneous income
Column 10: Total income of the bank
Column 11: Profit/loss of the bank
Column 12: Interest income of the bank
Column 13: Noninterest income as a percentage of total income
Column 14: Interest income as a percentage of total income
Influence of interest and non interest income on profits of Private sector banks(94-04)
The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the private sector banks are determined by interest and non interest income.
Non interest and Interest income are independent variables and profit is the dependent variable
From the above output we find:
We find non -interest income to be a significant variable in explaining the profits of private sector banks as the prob value is less the .05 (.0128) and the value of t stat is more than 2(3.188) [Rule: an independent variable is said to be significant if its prob value is less than .05(level of significance) or the t-stat is more than 2]. We find that in our regression model the percentage of variation in the profits of private sector banks that is explained by interest and non interest income is 95.95 %( Rule for a regression model to be efficient the R-square shall be at least .6) From the above output we find that noninterest income had a significant influence on the profits of private sector banks over a period of 11 years.
Influence of non interest components on profit of Private sector banks (94-04)
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
1
.964
.912
.881
309483.83835
a Predictors: (Constant), misc, plreav, plexchange, pllinvest, plland, comm
Coefficients(a)
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
-775200.943
177724.748
-4.362
.012
comm
.493
.252
.311
1.955
.122
pllinvest
.623
.147
.672
4.240
.013
plreav
4.129
2.209
.062
1.869
.135
plland
108.894
14.560
.923
7.479
.002
plexchange
-2.522
.513
-.268
-4.915
.008
misc
3.314
.310
1.114
10.680
.000
In the above regression output the independent variable used were various components of non interest income i.e. commission/exchange /brokerage, profit/loss on sale of investment, profit and loss on revaluation of investment, profit/loss on sale of land/building, profit/loss on exchange transaction and miscellaneous income. And the dependent variable used was the profits of the private sector banks
The objective to find out which one of the non interest component had a major influence on the profit of private sector banks over a period of 11 years.
We find the following:
The percentage of variation in the profits of the private sector banks explained by the 6 independent variables is 91.2% which is significant(as r square shall be more than .6) We find that sale of investment , land & building and miscellaneous income and exchange transactions have a major influence on the profits of private sector banks over a period of 11 years as these variable are having a significance level of less than .05 and a t-stat of more than 2. According to the above output miscellaneous income had a major influence o the profits of the as it’s is having the maximum t-stat i.e. 10.680 so bank shall focus on it for its non interest income.
Contribution of various components of non interest income of Private Sector banks (94-04)
The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that sale of investment has around 41%(highest) contribution to the non interest income followed by commission/exchange /brokerage 34% followed by miscellaneous income(17%) and exchange transactions 8%. The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income.
Movements of interest and non interest income of Private Sector banks(94-04)
If we look at the movement of interest and non interest income of private sector banks over a period of 11 years we will find that the non interest income has grown at a CAGR of 43.50% and the interest income has grown at a CAGR of 33.95%. The non interest income over a period of 11 years has grown by 3604.74%% whereas interest income has increased by 1760.84% which shows how aggressively the private sector banks are working on its non interest income.
Contribution of interest and non interest income of Private sector banks (94-04)
From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 13% to 23% and share of interest income has decreased from 86% to 76%.
On an average over a period of 11 years the contribution of non interest income as been 17% and interest income has been 83% to the total income of the private sector banks.
Correlation between non interest income and total income of Private sector banks
0.987067
There is a very positive correlation between non interest income and the total income of private sector banks which shows that higher the non interest income higher the total income of the private sector banks.
Foreign banks
(Rs ‘000)
In the above table we see the following:
Column1: Average
Column 2: Year
Column 3: Other income or the non interest income of the bank
Column 4: Commission, exchange and brokerage
Column 5: Net profit/loss on sale of investment
Column6: Net profit/loss on revaluation of investment
Column7: Net profit/loss on sale of land, building and other assets
Column 8: Net profit/ loss on exchange transactions
Column 9: Miscellaneous income
Column 10: Total income of the bank
Column 11: Profit/loss of the bank
Column 12: Interest income of the bank
Column 13: Noninterest income as a percentage of total income
Column 14: Interest income as a percentage of total income
Influence of interest and non interest income on profits of Foreign banks (94-04)
The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the foreign banks are determined by interest and non interest income.
Non interest and Interest income are independent variables and profit is the dependent variable
From the above output we find:
We find non -interest income to be a significant variable in explaining the profits of foreign banks as the prob value is less the .05 (.0006) and the value of t stat is more than 2(5.459) [Rule: an independent variable is said to be significant if its prob value is less than .05(level of significance) or the t-stat is more than 2]. We find that in our regression model the percentage of variation in the profits of foreign banks that is explained by interest and non interest income is 94.64%( Rule for a regression model to be efficient the r-square shall be at least .6)
From the above output we find that noninterest income had a major and significant influence on the profits of foreign banks over a period of 11 years
Influence of non interest components on profit of Foreign banks (94-04)
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
1
.995(a)
.990
.975
891916.79648
a Predictors: (Constant), misc, plland, plreav, pllinvest, comm, plexchange
Coefficients(a)
Model
Unstandardized Coefficients
Standardized Coefficients
B
Std. Error
Beta
t
Sig.
1
(Constant)
2987693.345
1103189.297
2.708
.054
comm
-.182
.245
-.131
-.744
.498
pllinvest
.371
.298
.158
1.248
.280
plreav
-15.101
9.845
-.094
-1.534
.200
plland
-9.579
5.393
-.123
-1.776
.150
plexchange
.808
.384
.485
2.101
.103
misc
2.657
.952
.580
2.790
.049
a Dependent Variable: profit
In the above regression output the independent variable used were various components of non interest income i.e. commission/exchange /brokerage, profit/loss on sale of investment, profit and loss on revaluation of investment, profit/loss on sale of land/building, profit/loss on exchange transaction and miscellaneous income. And the dependent variable used as the profits of the foreign banks
The objective is to find out which one of the non interest component had a major influence on the profit of foreign banks over a period of 11 years.
We find the following:
The percentage of variation in the profits of the foreign banks explained by the 6 independent variables is 99.0% which is significant(as r square shall be more than .6) We find that only miscellaneous income have a major influence on the profits of foreign banks over a period of 11 years as it is having a significance level of less than .05(.049) and a t-stat of more than 2(2.790).
Contribution of various components of non interest income of Foreign banks (94-04)
The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that commission/exchange /brokerage was having around 48% (highest) contribution to the non interest income followed by exchange transactions 29%. The contribution of sale of investment was 17% followed by miscellaneous income 6% .The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income
Movements of interest and non interest income of foreign banks (94-04)
If we look at the movement of interest and non interest income of foreign banks over a period of 11 years we will find that the non interest income has grown at a CAGR of 19.57% and the interest income has grown at a CAGR of 13.49%. The non interest income over a period of 11 years has grown by 497.394%% whereas interest income has increased by 254.54% which shows how aggressively the bank is working on its non interest income
Contribution of interest and non interest income of foreign banks (94-04)
From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 21% to 31% and share of interest income has decreased from 78% to 68%.
On an average over a period of 11 years the contribution of non interest income as been 23% and interest income has been 77% to the total income of the foreign banks.
Correlation between non interest income and total income of foreign banks
0.972437
There is a very positive correlation between non interest income and the total income of private sector banks which shows that higher the non interest income higher the total income of the private sector banks.
Findings
We have seen that the contribution of non interest income of our banking sector has increased significantly over a period of 11 years. We have also seen that in each type of banks i.e. SBI, public sector banks, private sector banks and foreign banks the contribution of non interest income towards the total income has increased over a period of time and that of the interest income has decreased over a period of time. If we look at the total banking sector we will find that in our banking system the non interest income is having a significant influence on the profits of the banks. On an average the share of the non interest income towards the total income of the banking sector has increased from 12% in 1994 to 20% in 2004.If we look at the components of non interest income of our banking sector we will find that commission/exchange and brokerage earned by the banks had a major contribution i.e. 44% to the total noninterest income of the bank , after the commission the next big contribution to the non interest income had been of the sale of investments which was 28%, followed by exchange transactions having a share of 15%. Miscellaneous income was having the 13% contribution to the total noninterest income of the banking sector. The contribution of sale of land, revaluation of investments was having a negative or even a negligible influence on the noninterest income of the banking sector. On an average the non interest income of the banking sector has grown at a CAGR of 25% as compared to interest income which has grown at a CAGR of 18%. The percentage increase in the non interest income of the banking sector has increased by 1264.64% and interest income has increased by 622%. The private sector banks had seen a significant contribution in the increase of its non interest income over a period of 11 years as compared to other types of banks. Among the various non interest components that had an influence on the profits of the banking sector we find that commission, sale of investment, miscellaneous income had a significant influence on it. We also find that there was a positive correlation between the non interest income and the total income of the banking sector. We also find that in case of public sector banks none of the non interest component was found to be statistically significant enough to influence the profits over a period of 11 years.
Reasons for increase in the non interest income
Now if we look at the reason for the increase in the non interest income of the banking sector we will find that it has majorly increased due to following reasons:
With economy growing at an unprecedented rate of 9.4 per cent during 2006-07 and acceleration in the growth rate being attributable to the buoyancy in the industrial and service sector, the demand for fee-based services of banks has gone up and as a result of which the non interest income has also risen up. Noninterest income is an effective way used by banks to respond to its squeezing margins At the bank level, greater reliance on noninterest income, particularly trading revenue, is associated with lower risk-adjusted pro?ts attached to it.
Challenges involved
Not aggressive direct customer interaction of public sector banks. High cost and less expertise involved in launching of innovative products/services as per the customers’ expectations. Technology requirements.
Conclusion
After studying the non interest growth pattern of the Indian banking sector over a period of 11 years we can say that it is slowly and gradually becoming one of the important avenues for our Indian banks to generate revenue from. In this respect we see that not only private banks and foreign banks are ahead but also our public sector banks are gradually catching it. We can say that it to be an important source available with our banking sector to respond to the squeezing margins and meeting the shareholders expectations.
Literature review
1. Business Efficiency of Public Sector Commercial Banks: A Data Envelopment Approach :
Ram Pratap Sinha (2008)
The article says that following the nationalization of 20 major commercial banks in 1969 and 1980, the government followed policies of financial repression up to the 1980s. During this period the public sector commercial banks had rapid expansion of branches, especially in the rural and semi urban areas and had reasonable success in the matter of deposit mobilization and disbursement of loans. However, the operating efficiency of public sector commercial banks, declined during the period due to various reasons. In the 1990s, the banking environment was radically transformed by certain bold initiatives taken by RBI including the dismantling of entry barriers, rate deregulation, introduction of prudential accounting norm and the implementation of Basel I capital adequacy norms. The changed competition and accounting environment compelled the commercial banks to provide unprecedented attention to cost cutting and supplementing fund-based income by fee-based income.
Product mix and earnings volatility at commercial bank: evidence from a degree of leverage model: Robert De young & Karin P Roland(1999)
The article says that the commercial banks lending and deposit taking business has declined in recent years. Deregulation and new technology have eroded bank’s comparative advantages and made it easier for non bank competitors to enter these markets. In response, banks have shifted their sales mix towards noninterest income-by selling non bank fee based financial services such as mutual funds, by charging fees for services that used to be bundled together with deposit or loan products .It says that the conventional wisdom in the banking industry is that earnings from fee based products are more stable than loan based earnings and that fee based activities reduce bank risk via diversification.
References
RBI website Icfai Journal of Banking studies Sept 2008 issue pg 22-26 Ideas.repec.org
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