“Social obligation vs.
Profitability”- System Paradox.
Banking industry has regulatory norms set by Basel
Committee on Banking Supervision (BCBS). Banking
institution sustainability is measured using CRAR
dimension. CRAR is indicative of whether bank’s
existing capital is sufficient to cover risk assets.
Competition among financial institutions has lead to
sustainability issues. Balancing between capital and
business expansion is key to survival. Portfolio
selection and profitability are inter-related. Survival
of the fittest means banks with better Capital
adequacy ratio will be able to withhold the risky
situations.
Executive Summary
Since independence public sector banks have played
major role through expansion of credit to various
sections of the society. PSB’s have been leading the
front with maximum allocation of resources to the
neglected sectors. Lending has been a key to success.
Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)
Institutions which have failed to adapt as per the
situations would be on the losing end. Data
analytics, artificial intelligence and qualitative
analysis are leading the credit assessment
platform. Banks in India have shifted the
traditional lending mechanism into automated
mechanism. Branch level disbursements have been
substituted by central approval authority. Branch
has been converted into counseling point rest all
decisions regarding the approval of loans are
allocated to respective controlling office.
Background of the case
Loaning is essential for generation of interest
income. Banks’ with higher net interest income are
positioned better as compared to others.
Competition across industry is forcing margins
S No Institutions (%)
towards zero. Health of a bank depends on their
1 State Bank of India 3.59
Asset quality and NIM.
2 Bank of India 3.45
3 Bank of Baroda 2.72
Net Interest Margin 4 Canara Bank 2.63
Core Business of banks is deposit mobilization and 5 Central Bank of India 2.62
loans disbursement. Hence earning from core 6 Indian Bank 2.6
segment is important for long term sustainability. 7 Punjab National Bank 2.59
Before liberalization era, rule was common for all 8 Union Bank of India 2.47
banks i.e. 3-6-3 which means banks will offer three
9 Bank of Maharashtra 2.41
percent on deposits, will charge six percent on loans
10 Punjab and Sind Bank 2.09
and it will lead to a margin of three percent. It was
11 Indian Overseas Bank 1.94
similar for all banks eliminating the scope of
12 UCO Bank 1.84
differentiation. After reforms suggested by
Source: Annual reports and Investor presentations
Narasimham Committee banks were given
for Q3 ending December, 2019.
autonomy to decide their interest rates for deposit
and loans leading to a competitive era. New regime
is termed to be best suited for efficient players and Loans are disbursed based on the credit policy set
automatic elimination of weaker entities. by banks. Aggressive policy with conducive market
conditions expedites the quantum of loans. Loan
Net interest margin is also known as ‘Spread’ and able funds are utilized to full capacity to ensure
‘Gap’. It is the excess of interest earned on loans over appropriate return on investments so as to avoid
interest expanded on deposits. A surplus of three any solvency issues. Portfolio of investment is set
percent and above is good whereas anything below as per the directions of RBI but client identification,
three will be moderate and the closer it goes to zero screening and short listing etc. all key dimensions
is indicating for potential organizational failure. are decided by individual bank specific criteria’s
S No Private Institutions (%)
Credit policy effectiveness is measured through
1 Axis Bank 4.76
multiple dimensions. The main parameter to
2 Kotak Mahindra Bank 4.69
determine the quality of lending is the proportion
3 Ratnakar Bank Ltd 4.57
of nonperforming assets in comparison to total
4 HDFC Bank 4.3
loan portfolio. Net NPA is the difference between
5 Indusind Bank 4.15 gross loan amount which has gone bad and the net
6 ICICI Bank 4.04 realizable value of security. In laymen language it is
7 Development Credit Bank 3.71 the actual amount of loss incurred by bank due to
8 J&K Bank 3.65 loaning. The lower is the ratio better it is for a
9 Karur Vysya Bank 3.33 bank.
10 Federal Bank 3
11 Karnataka Bank 2.83 PSB’s loan portfolio majorly comprising of priority
12 The South Indian bank 2.69 sector advances. In India, RBI has mandated that all
13 Catholic Syrian Bank 2.6 domestic commercial banks and Foreign banks with
14 Yes Bank 1.4 20 branches and above should have a minimum of 40
Source: Annual reports and Investor presentations per cent of Adjusted Net Bank Credit or Credit
for Q3 ending December, 2019. Equivalent Amount of Off-Balance Sheet Exposure,
whichever is higher. PSB’s are having a high exposure
Banks ranked low in NIM are in bad shape. They to agriculture, education, micro enterprises and
need restructuring in their existing system to avoid housing sector. Especially, MUDRA scheme launched
future miss happenings.
Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)
by Govt. of India is widely promoted by all public sector Nonperforming assets are asset which failed to
institutions due to social obligation of their owners. generate income (i.e. principal and interest) for a
Agriculture and education sector has been the biggest continuous period of 90 days. NPA has created a
contributor after corporate loans for non performing serious dent in Indian Banking with aggregate
assets. Asset quality of agriculture deteriorated to value of NPA exceeding ten lakh crores. NPA
10.1% in September 2019 as compared to 8% in March originating mainly because of defective credit
2019. In case of industrial sector, GNPA declined to policy, absence of collateral, intentional default,
3.79% diversion of funds, death of borrower, adverse
market condition, natural calamities, lethargic legal
system. Efforts have been made to recover the NPA.
Net NPA Various mechanism used are debt recovery
S No Private Institutions (%) tribunal or fast track court, one time settlement,
1 HDFC Bank 0.48 corporate debt restructuring, introduction of
officers accountability clause, stringent appraisal
2 Development Credit Bank 0.65
process, asset reconstruction fund, SARFEASI act
3 Kotak Mahindra Bank 0.89
etc.
4 Indusind Bank 1.23
5 ICICI Bank 1.49
Another dimension of having NPA is that bank’s
6 Federal Bank 1.63
should allocate appropriate amount of profits for
7 Catholic Syrian Bank 2 provisioning. Provisions are used for writing off
8 Ratnakar Bank Ltd 2.07 the bad assets from balance sheet. In prevailing
9 Axis Bank 2.09 market, most of the banks are into low profits
10 The South Indian bank 3.44 hence creation of provisioning is extremely
11 Karnataka Bank 3.75 difficult. Under BASEL guidelines, banks are
12 Karur Vysya Bank 4.13 supposed to allocate profit for counter cyclic
13 J&K Bank 4.9 buffer, capital conservation buffer. In case banks
14 Yes Bank 5.97 are unable to create these buffers they are not
Source: Annual reports and Investor presentations legally allowed to distribute dividend to
for Q3 ending December, 2019 shareholders. Hence the market valuation of most
of the PSB banks is not attractive.
Net NPA
Code Institutions (%) Provision Coverage Ratio (PCR)
1 State Bank of India 2.65
Code Institutions (%)
2 Bank of Baroda 3.33
1 Indian Overseas Bank 86.2
3 Indian Bank 3.8
2 UCO Bank 83.71
4 Canara Bank 5.05
3 Bank of Maharashtra 82.63
5 Bank of Maharashtra 5.46
4 State Bank of India 81.73
6 Indian Overseas Bank 5.81
5 Bank of Baroda 78.68
7 Bank of India 5.97
6 Bank of India 77.15
8 UCO Bank 6.34
7 Central Bank of India 76.85
9 Punjab National Bank 6.56
8 Punjab National Bank 74.5
10 Union Bank of India 6.99
9 Canara Bank 68.13
11 Punjab and Sind Bank 7.22
10 Union Bank of India 67.42
12 Central Bank of India 7.98
11 Punjab and Sind Bank 59.46
Source: Annual reports and Investor presentations
Source: Annual reports and Investor presentations
for Q3 ending December, 2019.
for Q3 ending December, 2019

Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)
 Code Private Institutions (%) 2 Bank of India 14.2
1 Catholic Syrian Bank 80.3 3 Canara Bank 13.86
2 Axis Bank 78 4 State Bank of India 13.73
3 ICICI Bank 76.3 5 Bank of Baroda 13.42
4 Yes Bank 72.7 6 Indian Bank 13.2
5 Development Credit Bank 71.98 7 Bank of Maharashtra 11.21
6 Federal Bank 66.38 8 Punjab and Sind Bank 10.93
7 J&K Bank 66 9 UCO Bank 10.27
8 Karur Vysya Bank 65.43 10 Punjab National Bank 9.73
9 Kotak Mahindra Bank 64.4 11 Central Bank of India 9.58
10 Ratnakar Bank Ltd 58.1 12 Indian Overseas Bank 5.53
11 Indusind Bank 53 Source: Annual reports and Investor presentations
12 The South Indian bank 48 for Q3 ending December, 2019.
Source: Annual reports and Investor presentations
for Q3 ending December, 2019 Capital adequacy ratio is an indicator for
measuring adequacy of bank’s capital for covering
risky assets in bank’s portfolio. CRAR is defined
Provision Coverage Ratio of banks is the ratio that
under BASEL norms. In global scenario a minimum
gives an indication about the provisions made against
of 8% of CRAR is must for a financial institution
bad loans (gross NPA value). Higher PCR indicates
whereas India being a conservative country has
lower unexposed portion of bad loans. New kept it at 9% mark. Any institution failing to
generation private sector banks do keep a close watch maintain the specified regulatory ratio will be
on asset quality and with better profits are able to restricted to operate in Indian banking. CAR
manage PCR enhancement will require exposure to capital
market at domestic and international level. Bank’s
Capital Adequacy ratio (CRAR) have enhanced their tier1 and tier 2 capital in
Code Private Institutions (%) phased manner to keep CRAR under specified
1 Catholic Syrian Bank 23 limits set by regulatory bodies. It’s easy for banks
2 Axis Bank 18.72 with lesser exposure to increase their CRAR. CRAR
3 HDFC Bank 18.5 is influenced by the loan portfolio of a bank.
4 Kotak Mahindra Bank 18.2 Aggressive banks with loan portfolio comprising of
5 ICICI Bank 16.5 highly risky assets will have a negative impact on
6 Ratnakar Bank Ltd 16.08 CRAR whereas a conservative bank with low risk
7 Karur Vysya Bank 15.87 appetite will be able to easily manage it CRAR.
8 Development Credit Bank 15.8 Assets exposure classified to be low, moderate or
9 Indusind Bank 15.43 high risky depends on the risk weight assigned to
the particular class. Risk weight are set by
10 Federal Bank 13.5
regulatory bodies and reviewed periodically from
11 Karnataka Bank 12.4
market based data. India being an agrarian
12 The South Indian bank 12
economy has kept low risk weight to agriculture
13 J&K Bank 11.42
and education sector exposure. If risk weights
14 Yes Bank 4.1
would be higher set for agriculture exposure, banks
Source: Annual reports and Investor presentations
would be required to keep more amount for CRAR
for Q3 ending December, 2019
provisioning. CRAR ratio of 9% means bank is
having Rs. 9/- in reserves for every Rs.100 of risky
Code Institutions (%) exposure. Hence higher the CRAR, better it is.
1 Union Bank of India 14.71 Enhancement of CRAR for banks would be through

Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)
capital infusion by Govt in case of PSB’s, right issue capitalize on their access to resources by attracting
for existing shareholders, fresh issue in market or experienced talented professional to manage their
through private placement. treasury and key business operations. PSB’s are
burdened with ever growing human resource cost
hence not able to invest heavily in technology
enabled platforms. Attitude of employees also
Return on Assets plays a key role in determining the performance of
Code Private Institutions ROA (%) bank.
1 HDFC Bank 2.13
2 Indusind Bank 2.05
Business per employee (BPE)
3 Kotak Mahindra Bank 1.99
Code Private Institutions BPE (Cr.)
4 Ratnakar Bank Ltd 1.07
1 Kotak Mahindra Bank 10.33
5 Federal Bank 1.04
2 HDFC Bank 17.76
6 Development Credit Bank 1.03
3 ICICI Bank 14.28
7 ICICI Bank 0.93
4 Axis Bank 16.84
8 Catholic Syrian Bank 0.6
5 Indusind Bank 13.74
9 Karnataka Bank 0.6
6 Yes Bank 22.19
10 Axis Bank 0.5
7 Catholic Syrian Bank 8.57
11 The South Indian bank 0.35
8 Ratnakar Bank Ltd 19.28
12 Karur Vysya Bank 0.31
9 Development Credit Bank 8.47
13 J&K Bank 0.25
10 Federal Bank 20.05
14 Yes Bank -23.3
Source: Annual reports and Investor presentations 11 Karur Vysya Bank 13.9
for Q3 ending December, 2019 12 Karnataka Bank 15.32
13 The South Indian bank 17.9
14 J&K Bank 11.9
Code Institutions ROA (%) Source: Annual reports and Investor presentations
1 Union Bank of India 0.41 for Q3 ending December, 2019
2 Bank of Maharashtra 0.31
3 Indian Bank 0.1
Code Institutions BPE (Cr.)
4 Bank of Baroda 0.06
1 Union Bank of India 20.78
5 Canara Bank 0.06
2 State Bank of India 17.58
6 State Bank of India 0.02
3 Indian Overseas Bank 13.47
7 Punjab and Sind Bank -0.47
4 UCO Bank 13.16
8 Bank of India -0.88
5 Punjab National Bank 16.1
9 Punjab National Bank -1.29
6 Bank of Maharashtra 17.29
10 Indian Overseas Bank -1.49
7 Bank of Baroda 18.88
11 UCO Bank -1.52
8 Central Bank of India 13.11
12 Central Bank of India -1.7
Source: Annual reports and Investor presentations 9 Bank of India 17.65
for Q3 ending December, 2019. 10 Indian Bank 21.74
11 Canara Bank 17.59
Return on assets plays a key role in influencing 12 Punjab and Sind Bank 18.87
investors. Private Banks being more autonomous in Source: Annual reports and Investor presentations
decision making with performance driven salary for Q3 ending December, 2019.
structures, result oriented approach have
outperformed the PSB’s in terms of return. New Business work culture across banks has impacted
generation private sector banks are able to the profitability. New generation private sector
Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)
banks strategy of “Hire and fire” versus PSB and old 12 Punjab and Sind Bank 103.0
generation banks having “Old is gold” strategy. Source: Annual reports and Investor presentations
Target driven mind set versus permanent job for Q3 ending December, 2019.
oriented mind set. It’s difficult to operate with staff
having secured mindset. New generation bank staff M Cap ratio is the relationship between market
are dynamic and target driven covering all value of all outstanding shares to total value of net
dimensions of financial products (i.e. CASA, term demand and time liability. Lower the ratio is
deposit, loans, insurance products: life and general considered to be better. In other words, this ratio
insurance, treasury products, demat and broking signifies risk involved in keeping deposit with
business etc.) Employees are supposed to cross sell banks having low or no market capitalization. This
products of strategic partners generating is considered to be non essential criteria to judge a
commission and brokerage. Noninterest income is a bank’s performance. The key to improve this ratio
supplement over interest income. Private banks are is to issue fresh capital through private placement
strong in their treasury operations too. or follow up public issue. Brand establishment is
also highlighted, as brands perceived to be highly
valued will command better market price leading
M Cap Ratio (Deposit / M Cap)
to strong market capitalization.
Code Private Institutions Ratio
1 Kotak Mahindra Bank 1.0
2 HDFC Bank 1.9 Situational Challenge
3 ICICI Bank 3.1 Banking sector is in turmoil due to nonperforming
4 Axis Bank 4.7 assets, failing margins, online financial frauds,
5 Indusind Bank 6.6 increased investment obligations towards
6 Yes Bank 7.4 automation etc. Banking sector has to balance
between technology and human resources hence
7 Catholic Syrian Bank 7.9
emerging scenario can be best suited for entities
8 Ratnakar Bank Ltd 9.5
that will be able to invest in automation and
9 Development Credit Bank 10.6
upgrade the skill set of their existing employees.
10 Federal Bank 16.4
Data analytics, artificial intelligence, online
11 Karur Vysya Bank 28.0
platforms will be the future, hence drastic
12 Karnataka Bank 49.9 transformation is required to shift from tradition
13 The South Indian bank 75.3 brick and mortar model to branchless banking
14 J&K Bank 92.9 models driven by mobile apps, virtual banking
Source: Annual reports and Investor presentations variants. Data analytics will enable appropriate
for Q3 ending December, 2019 credit history check before grant of loans; CIBIL
database is linked to credit software to eliminate
Code Institutions Ratio high risky cases. Block chain and cloud computing
1 Union Bank of India 17.8 will reduce the cost of data management. Initial
2 State Bank of India 17.9 investment may be high but gradually the cost per
3 Indian Overseas Bank 19.0 transaction will be reduced, elimination of human
4 UCO Bank 21.4 intervention will reduce operational risk and cost
5 Punjab National Bank 23.0 both. The benefits of transformation can be shared
6 Bank of Maharashtra 26.5 between banks and their valued customers.
7 Bank of Baroda 28.2
8 Central Bank of India 41.5 Terminal Questions
9 Bank of India 46.2
10 Indian Bank 46.6 1. How banks have eliminate the risk associated with
11 Canara Bank 47.6 ATM skimming?
Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)
2. As a depositor, which bank should be preferred to
park Rs.10 lakhs with 100% surety that entire principal
of Rs.10 lakhs is secured in case of banking institutions
failure
3. What strategies should be adopted by banks with
low NIM to stay in the game of survival?
4. How “moratorium period” is intended for
customer’s safety.

Mr. Anoop Mohanty, Assistant Professor, Mittal School of Business, LPU (anoop.mohanty@lpu.co.in)
Mr. Tanuj Mohanty, Head Cashier, Bank of India, Sector 31, Chandigarh.(tanuj.mohanty@bankofindia.co.in)