FE-E&Y India’s Best Banks: The fine print

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1. Banks were categorised into public sector banks (‘PSB’), old private sector banks (‘OPSB’), new private sector banks (‘NPSB’), and foreign banks (‘FB’). With the objective of making the comparison more meaningful, banks with five branches or less, either as on March 31, 2006 or March 31, 2007; banks with total assets less than Rs 4,000 crore (approximately $1 billion), and banks that ceased to exist in India during 2006-2007; were not considered for the rankings.

2. Financial information for the year ending March 31, 2006 and March 31, 2007, relating to each of the banks falling into the aforesaid categories was collected from the data available from the Reserve Bank of India. To ensure consistency, only the published information was used.

3. Five different major criteria were identified against which Indian banks were to be ranked. These criteria are: (i) Strength and Soundness, (ii) Credit Quality (iii) Growth, (iv) Efficiency, and (v) Profitability. Considering the current banking, industrial and over-all economic scenario, pertinent weights were assigned to each of the major criteria. The rationale for selecting each of the criteria and assignment of their respective weights has been discussed.

4. Six sub-criteria were selected within each of the aforesaid major criteria, which would cover various aspects within the aforesaid criteria. Considering the current banking, industrial, and over-all economic scenario, pertinent weights were assigned to each of the sub-criterion. These sub-criteria and their respective weights (in brackets) are:

(i) Strength and Soundness (0.10)

(a) Core Capital (0.10)

(b) Capital Adequacy (0.15)

(c) Credit/(Deposit+Borrowing) Ratio (0.15)

(d) Borrowings/Deposit Ratio (0.20)

(e) Total Assets (0.20)

(f) Net worth (0.20)

(ii) Credit Quality (0.15)

(a) Increase in Gross Non-Performing Assets (‘GNPA’) (0.10)

(b) Net Non-Performing Assets (‘NNPA’)/Total Assets (0.15)

(c) NNPA/Net worth (0.15)

(d) GNPA/Gross Advances (0.20)

(e) Increase in GNPA/Increase in Gross Advances (0.20)

(f) Increase in NNPA/Increase in Net Advances (0.20)

(iii) Growth (0.20)

(a) Increase in Net worth (0.10)

(b) Net Interest Income (‘NII’) Growth (0.10)

(c) Total Assets Growth (0.15)

(d) Advances Growth (0.20)

(e) Net Profits Growth (0.20)

(f) Deposits Growth (0.25)

(iv) Efficiency (0.25)

(a) Profit per Branch (0.10)

(b) Non-Interest Income/Total Assets (in %) (0.10)

(c) Spread/Total Assets (in %) (0.20)

(d) Profit per Employee (0.20)

(e) Business per Employee (0.20)

(f) Operating Expenses/Total Assets (in %) (0.20)

(v) Profitability (0.30)

(a) Return on Investments (0.10)

(b) Yield on Advances (0.10)

(c) Return on Assets (0.20)

(d) Return on Net worth (0.20)

(e) Cost/Income Ratio (0.20)

(f) Cost of Deposits (0.20)

The rationale for selecting each of the sub-criteria and assignment of their respective weights is has been discussed.

5. Banks were ranked, category-wise, within each of the aforesaid sub-criteria. These sub-criteria ranks were multiplied with sub-criteria weights and the weighted sub-criteria ranks were carried over to each of the major criteria. The sub-criteria ranks were then multiplied by the major-criteria weights. The resultant weighted major-criteria ranks were aggregated to determine the best bank in each of the four categories and each of the five criteria.

6. As discussed in the abovementioned article, since all the banks, irrespective of their ownership (category), compete in the same market place, vie for the same customers, and are faced with the same situation, it was deemed appropriate to determine a best bank within each of the major-criteria selected by us. Here, the same aforesaid process was followed, but the banks were not spilt into their respective categories.

7. While ranking banks of the aforesaid 30 parameters, it is found that banks with very few (less than five) branches and total assets of less than Rs 4,000 crore may compare favourably against larger banks. These are primarily foreign and smaller old-private sector banks that operate in India in a very limited manner. Including these banks often distort the results and thereby, render the ranking less meaningful. Accordingly, banks with five or less branches either during 2005-06 or 2006-07 or total assets less than Rs 4,000 crore have been excluded.

8. Also, excluded are banks that merged their operations with other banks during 2005-2006 or 2006-07, for example, pursuant to the merger of Bharat Overseas Bank with Indian Overseas Bank, the parameters of the merged entity are taken for 2007, whereas the parameters of erstwhile Bharat Overseas Bank have been dis-regarded for 2006 and the financial numbers of erstwhile Bharat Overseas Bank are not aggregated with Indian Overseas bank for 2006. Sangli Bank and Lord Krishna Bank reported their financial statements as separate legal entities (the banks were formally merged with ICICI Bank and Centurion Bank of Punjab subsequently), therefore, these banks have been considered in the survey.