Banks with lower owned-equity record better results, says study

Our Banking Bureau

Kolkata, Sept 17: Public sector commercial banks with low owned-equity have shown better financial results during the last decade compared with those with higher owned-equity, according to a study by the Institute of Cost & Works Accountants of India. Owned equity denotes capital plus reserves.

Working on a sample ranging from giant State Bank of India to Vijaya Bank, the ICWAI study concludes that size is only one parameter — although it sometimes does help a bank post better results. A comparatively smaller bank can do better if other parameters like management, policy, good work culture and sound risk management capability are favourable.

The study was conducted on a sample of six public sector commercial banks, two each from high, medium and low owned-equity groups. Two banks from the high owned-equity category were State Bank of India and Canara Bank. Punjab National Bank and Syndicate Bank were from medium owned-equity category and Vijaya Bank and Corporation Bank from the low owned-equity category. The key parameters were net profit and and net worth.

SBI, which has the highest owned-equity among the PSU banks, started with a positive growth in 1987 but subsequently recorded a negative growth in 1989-90. Thereafter, it recovered in the subsequent years but again recorded reduced growth in 1992-93. Again, after a temporary recovery, SBI suffered a setback in 1995-96 and then recovered in subsequent years. During 2000-01, the bank recorded a negative growth, mainly on account of huge payout on volutary retirement scheme.

During the last 19 financial years, SBI has recorded better results than the average results of the banking industry only four times. The study opines that the higher owned-equity could not help the bank throw up good results in difficult times.

Canara Bank, which has the second largest owned-equity after SBI, showed a negative growth in 1989-92. Though it recovered temporarily in the subsequent years, it recorded negative growth again in 1992-93.

The bank’s results were better than that of other PSU banks in six out of the last 10 years. PNB, which recorded a positive growth in 1991-92, recorded negative growth in 1992-92, 1995-96 and 2000-01. Syndicate Bank showed successive losses from 1987-88 to 1992-93, but four positive growth rates in the post-liberalisation era. It has recorded three beter results than total public sector out of 10 years.