Subsequent to nationalization of banks, the commercial banks in India had social banking as the theme and never focused much on increasing their bottom line.
IMPACT OF NON INTEREST INCOME ON THE PROFITABILITY OF BANKS (India) – A STUDY Introduction : Subsequent to nationalization of banks, the commercial banks in India had social banking as the theme and never focused much on increasing their bottom line. Increasing profits became secondary to increasing their turnover. Thus, while the top line witnessed very high growth, the profits were not keeping pace with the business turnover of the banks. The trend has now undergone breathtaking changes due to reforms in the financial sector including introduction of IRAC (Income Recognition and Asset Classification) norms, BASEL norms as well as competition from the new generation banks. The stake holders of these banks expect the banks to improve their net profits on a continuous and consistent basis. The necessity to provide for corresponding capital charge for increase in Loans & Advances and increasingly stringent IRAC norms have forced banks to look at other ways of increasing their net profits. Banks today are exploring options to increase their income from commission , fee and brokerage which are insulated from the cyclical turns of the economy. This study makes an attempt
to explain how non-interest income would ensure regular and consistent
profitability for the banks. The study also analyses how increase in turnover does not necessarily translate in to increased profits and also highlights how the new generation banks have exploited this route to record huge profits and score over the public sector banks. For the purpose of the study, under non interest income, I have taken only Commission , fee income and Brokerage type of income earned by the bank. Income in the nature of profits on sale of assets or profits on sale of investments have not been included as these are not consistent. The table 1 below shows how the profits of the public sector banks have fluctuated with most of the public sector banks having reported a fall in profits in 2013-14 . On the contrary, the three private sector banks viz. ICICI, HDFC Bank and Yes Bank have consistently shown an increase in profits even when the public sector banks were showing a decline in profits.
TABLE 1- Net Profits made by banks from 2009-10 to 2013-14 (Rs in crore) Net profit 2009-10
STATE BANK OF INDIA PUNJAB NATIONAL BANK BANK OF BARODA UNION BANK OF INDIA INDIAN BANK CANARA BANK ICICI HDFC YES BANK FEDERAL BANK
Net profit 2010-11
% increase
Net profit 2011-12
9166.00 8265.00
-9.83
11707.29 14104.98 20.48
10891.17 -22.78
3905.35 4433.49 3058.33 4241.67
13.52 38.69
4884.20 5006.96
4747.67 4480.72
-2.80 -10.51
3342.57 4541.08
-29.60 1.35
2074.92 1555.00 3021.43 6834.63 2948.7 477.70 464.54
0.34 10.23 33.24 26.06 33.16 52.21 26.38
1787.13 1746.97 3282.71 6465.26 5167.09 976.99 776.80
2157.93 1581.14 2872.10 8325.47 6726.28 1300.68 838.17
20.75 -9.49 -12.51 28.77 30.18 33.13 7.90
1696.20 1358.17 2438.19 9810.48 8478.37 1617.78 838.89
-21.40 -14.10 -15.11 17.84 26.05 24.38 0.09
2081.95 1714.10 4025.89 8615.75 3926.4 727.10 587.08
Net profit 2012-13
% increase
Net profit 2013-14
% increase
Profits of a bank would be affected by an increase or decrease in income or expenses. This study focuses on the income side of the banks. As we are aware, income of a bank primarily depends on (i)
Interest income on Loans and Advances
(ii)
Other income (non interest income)
In this study , as stated earlier, the focus is only on income in the nature of commission and brokerage and fee . Many banks have reported high level income due to profits on sale of assets or profits on sale of investments or foreign exchange business. These have been deliberately excluded as they are not consistent every year. For the purpose of study, we have taken 10 banks, of which 4 are in private sector and the rest are public sector. Nature of Interest income Most of the banks have the following sources as interest income: (i)
Interest on loans and advances
(ii)
Interest on credit card business
(iii)
Discount earned on bill discounting
(iv)
Exchange earned on cheque/bill purchase transactions
The bulk of the interest income, therefore, depends on the loans and advances portfolio of the bank which often declines during a business downturn. With stringent IRAC norms, interest income is no longer a reliable source of income although it may constitute the single largest source of income.
Table2. Gross Non Performing Assets (NPAs) of banks 2009-10 STATE BANK OF INDIA PUNJAB NATIONAL BANK BANK OF BARODA UNION BANK OF INDIA INDIAN BANK CANARA BANK ICICI HDFC YES BANK FEDERAL BANK
(Rs in crore)
2010-11 2011-12 2012-13 2013-14 25326.00 39676.00 51189.00 61605.00 4379.39 8719.62 13465.79 18880.06 3152.5 4464.75 7982.58 11875.9 3622.82 5449.86 6313.83 9563.74 740.31 1850.78 3565.48 4562.2 3089.21 4031.75 6260.16 7570.21 10034.26 9475.33 9607.75 10505.84 1698.48 1999.39 2334.64 2989.28 110.01 83.86 94.32 174.93 1148.33 1300.83 1554.01 1087.41
3214.41 2400.69 2670.89 510.1 2590.31 9480.6 1821.89 198.28 820.97
The table above gives the gross NPAs of 10 banks from the period 2009 to end March 2014. As can seen from above, there has been an consistent increase in Gross NPA level of all banks with the exception of ICICI bank and Yes Bank, which may be due to write offs.
TABLE 3
Incremental provision for NPAs from 2009-10 TO 2013-14 (Rupees in Crore)
STATE BANK OF INDIA PUNJAB NATIONAL BANK BANK OF BARODA UNION BANK OF INDIA INDIAN BANK CANARA BANK ICICI HDFC YES BANK FEDERAL BANK
2009-10 5148 722.06 648.96 698.92 303.24 1426.17 4318.14 2655.32 121.64 413.11
2010-11 8792.00 904.11 1178.86 1187.69 705.00 1001.17 2778.26 1448.15 49.19 488.85
2011-12 11546 2576.11 1836.42 1510.73 972.75 1294.06 2087.25 1398.43 51.43 221.77
2012-13 11368 2961.11 2989.52 1625.53 962.4 1860.99 2251.34 2197.14 160.19 189.28
2013-14 14224.00 5365.62 2938.04 2205.67 1188.00 2238.03 2637.93 2963.14 158.80 228.22
The table 3 above also shows the incremental provision for NPAs for the 10 banks above during the years 200910 to 2013-14.
TABLE 4
ADVANCES FROM 2009-10 TO 2013-14 (Rupees in Crore) 2009-10
2010-11
increase over 200910
201112
increase over 201011
2012-13
increase over 201112
increase over 201213
2013-14
STATE BANK OF INDIA
631914.2
756719
124805.30
867579
110859.44
1045617
178037.66
1209829
164212.45
PUNJAB NATIONAL BANK
186601.2
242107
55505.47
293775
51668.09
308725
14950.45
349269
40543.91
175035.3
228676
53641.10
287377
58700.91
328186
40808.47
397006
68820.05
UNION BANK OF INDIA
119315.3
150986
31671.00
177882
26895.78
208102
30220.11
229104
21002.24
INDIAN BANK
62164.7
75262.2
13097.49
90324
15061.40
105643
15318.96
122212
16569.92
CANARA BANK
169334.6
212467
43132.54
232490
20022.72
242177
9686.73
301067
58890.85
ICICI
181205.6
216366
35160.30
253728
37361.76
290249
36521.77
338703
48453.22
HDFC
125830.6
159983
34152.08
195420
35437.35
239721
44300.62
303000
63279.63
22193.1
34363.6
12170.51
37989
3625.03
46999.6
9010.93
55633
8633.39
26950.11
31953.2
5003.12
37756
5802.76
44096.7
6340.71
43436.1
-660.60
BANK OF BARODA
YES BANK FEDERAL BANK
TABLE 5
INCREASE IN ADVANCES FROM 2009-10 TO 2013-14 AND PROVISION MADE (Rupees in Crore)
Increase in advances during 2010-11
Increase in provisions during 2010-11
%
Increase in advances during 2011-12 110859.4 4
Increase in Provisions during 2011-12 11546
10.41
%
STATE BANK OF INDIA
124805.3
8792.00
7.04
PUNJAB NATIONAL BANK
55505.47
904.11
1.63
51668.09
2576.11
4.99
BANK OF BARODA
53641.1
1178.86
2.20
58700.91
1836.42
UNION BANK OF INDIA
Increase in advances during 2012-13 178037.6 6
Increas e in Provisio ns during 2012-13
%
Increase in advances during 2013-14 164212.4 5
Increase in provisio ns during 2013-14 14224.0 0
%
11368
6.39
8.66
14950.45
2961.11
19.81
40543.91
5365.62
13.23
3.13
40808.47
2989.52
7.33
68820.05
2938.04
4.27
31671
1187.69
3.75
26895.78
1510.73
5.62
30220.11
1625.53
5.38
21002.24
2205.67
10.50
INDIAN BANK
13097.49
705.00
5.38
15061.40
972.75
6.46
15318.96
962.4
6.28
16569.92
1188.00
7.17
CANARA BANK
43132.54
1001.17
2.32
20022.72
1294.06
6.46
9686.73
1860.99
19.21
58890.85
2238.03
3.80
ICICI
35160.3
2778.26
7.90
37361.76
2087.25
5.59
36521.77
2251.34
6.16
48453.22
2637.93
5.44
HDFC
34152.08
1448.15
4.24
35437.35
1398.43
3.95
44300.62
2197.14
4.96
63279.63
2963.14
4.68
YES BANK
12170.51
49.19
0.40
3625.03
51.43
1.42
9010.93
160.19
1.78
8633.39
158.80
1.84
5003.12
488.85
9.77
5802.76
221.77
3.82
6340.71
189.28
2.99
-660.6
228.22
34.55
FEDERAL BANK
The tables 2,3, 4 and 5 shows clearly that while there has been a consistent increase in advances in most cases, the increase in advances has also been
accompanied by increase in NPAs and consequent provisioning
requirements. Hence, interest income, is not a very consistent source of income for the banks. The increase in NPAs has a double edged effect on the profitability of the banks as can be seen in the tables above : i)
Banks cannot charge interest on the NPAs leading to lower interest yield on advances
ii)
Provision for the NPAs will progressively increase depending on the age of the NPAs. It can be seen from the Table 5 above that increase in advances has been consistently accompanied by increase in provisions for NPAs.
iii)
Another important issue is to maintain adequate capital in absolute terms in order to maintain necessary CRAR. Capital comes with a cost and this cost too has to adjusted in the income derived from interest income.
iv)
Very high competition from other banks would leave very little scope for banks to increase the rate of interest.
For the above reasons, every bank strives to increase their non interest income.
Non-Interest Income The non interest income of the banks has the following features: 1. Fee /Commission income is stable and relatively insulated from the downturn of the economy. 2. Non-Interest income does not require any additional investment and may require only marginally higher manpower resources 3. The income by way of fee or commission does not require provision requirements unlike advances. 4. The activity which fetches commission income does not lead to any loss as it involves only rendering a service or agency business. 5. Fee levied for providing service are out of regulatory purview and are as per the discretion of the bank providing the service.
Other income earned by select banks during the years 2009-10 to 2013-14 is given below: TABLE 6 – Non Interest income earned by banks from 2009-10 to 2013-14 (Rs in crore) 2009-10
2010-11
2011-12
2012-13
2013-14
STATE BANK OF INDIA
9640.86
11563.27
12090.9
11483.71
12611.3
PUNJAB NATIONAL BK
1682.16
2045.19
2374.81
2337.26
2579.38
897.28
1020.63
1274.15
1313.29
1437.39
351.77 223.51 723.92 4830.8 3235.14 379.11 105.26
364.94 335.53 755.83 5514.63 3849.16 586.97 114.44
358.24 268.53 796.93 5435.11 4312.09 767.69 251.56
356.54 257.01 867.81 5461.66 5442.63 1076.21 304.68
438.7 259.11 982.76 6307.34 6096.88 1260.92 333.83
BANK OF BARODA UNION BANK OF INDIA INDIAN BANK CANARA BANK ICICI HDFC YES BANK FEDERAL BANK
TABLE 7 NON INTEREST INCOME AS PERCENT OF NET PROFIT(Rupees in Crore)
STATE BANK OF INDIA
PUNJAB NATIONAL BANK BANK OF BARODA UNION BANK OF INDIA INDIAN BANK CANARA BANK
NET PROFIT FOR 200910
NonInt Income FOR 200910
%
NET PROFIT FOR 201011
9166.00
9640.86
105.18
8265.00
3905.35
1682.16
43.07
3058.33
897.28
2074.92
NonInt Incom e FOR 201011
NonInt Incom e FOR 201213
NonInt Incom e FOR 201314
%
10891
12611.3
115.79
49.23
3342.57
2579.38
77.17
1313.3
29.31
4541.08
1437.39
31.65
2157.93
356.54
16.52
1696.20
438.7
25.86
15.37
1581.14
257.01
16.25
1358.17
259.11
19.08
796.93
24.28
2872.10
867.81
30.22
2438.19
982.76
40.31
%
NET PROFIT FOR 201112
Non-Int Income FOR 201112
11563
139.91
11707.3
12090.9
103.28
14105
11484
81.42
4433.49
2045.2
46.13
4884.20
2374.81
48.62
4747.67
2337.3
29.34
4241.67
1020.6
24.06
5006.96
1274.15
25.45
4480.72
351.77
16.95
2081.95
364.94
17.53
1787.13
358.24
20.05
1555.00
223.51
14.37
1714.10
335.53
19.57
1746.97
268.53
3021.43
723.92
23.96
4025.89
755.83
18.77
3282.71
%
NET PROFIT FOR 2012-13
%
NET PROFIT FOR 201314
ICICI
6834.63
4830.8
70.68
8615.75
5514.6
64.01
6465.26
5435.11
84.07
8325.47
5461.7
65.60
9810.48
6307.34
64.29
HDFC
2948.7
3235.14
109.71
3926.4
3849.2
98.03
5167.09
4312.09
83.45
6726.28
5442.6
80.92
8478.37
6096.88
71.91
YES BANK FEDERAL BANK
477.70
379.11
79.36
727.10
586.97
80.73
976.99
767.69
78.58
1300.68
1076.2
82.74
1617.78
1260.92
77.94
464.54
105.26
22.66
587.08
114.44
19.49
776.80
251.56
32.38
838.17
304.68
36.35
838.89
333.83
39.79
The above table is the finale of our study which clearly demonstrates that the non interest income of the private sector banks viz ICICI Bank, HDFC Bank and Yes Bank have grown by leaps and bounds. All the public sector banks, with the exception of SBI, in the table above have reported a low percentage of net profits as non interest income. In the case of Punjab national Bank too, the percentage of non interest income increased to 77 % of net profits only in 2013-14. In the earlier years, PNB’s ratio was only averaging around 48 %. In the case of SBI, the high percentage of non interest income to net profits is primarily due to Government agency business. Thus, if the government component is removed, it will significantly affect SBI’s profitability. Infact, it can be seen that the net interest income for SBI has actually declined from Rs 12090 crore in 2011-12 to to Rs 11484 crore due to RBI reducing the commission on Government business. This demonstrates that much of the non interest of income of SBI comes from Government business. This is true for Punjab National Bank also. For the remaining public sector banks in the table above viz. Bank of Baroda, Union Bank, Indian Bank and Canara Bank the percentage of non interest income to net profit is averaging around 30 % only. Performance by Private Sector Banks The table 7 above also reveals that the private sector banks viz. HDFC Bank, ICICI Bank and Yes Bank have realized the true benefits of having a high proportion of their profits accounted by non-interest income. Although, the percentage of profits to Net profit has marginally declined during the years under review, the contribution of non interest income is a very significant 65 % to 75 %. In the case of Yes Bank, there has been a consistent increase in non interest income both in absolute terms as well as percentage of net profits over the years. An interesting point that may be noted here is that Federal Bank and Yes bank were having almost same level of advances as on March 31, 2013. In the case of Federal bank , as on March 31, 2013, the total advances stood at Rs 44096.70 crore while the advances for Yes Bank for the same date stood at Rs 46999.60 crore. However, the net profits of Federal Bank and Yes Bank for the year ended 2012-13 was Rs 838.17 crore and Rs 1300.68 crore. This huge difference is primarily due to very high non-interest income of Yes Bank which was Rs 1076.20 crore, while the non interest income of Federal Bank for the same period (2012-13) was Rs 304.68 crore. This holds good for all public sector banks which have tremendous scope for increasing their fee based income.
Conclusion In the light of the above data and analysis, it is evident that public sector banks in India are not fully using their potential to increase the non interest income. Even the old generation private banks like Federal Bank are shy of increasing their non-interest income. Evidently, new generation private banks could fully exploit the benefits of non interest income due to better technology which ensures better customer service. Innovative products and services also lead to increased non interest income which these private banks have done. Public sector banks should focus more on activities such as merchant banking activities which in a buoyant capital market will go a long way in improving their non-interest income. Satisfied customers do not mind paying a bit more if the service rendered is really good. Making the net banking portals more friendly at the same time fully secure is one such step in this direction. The public sector banks with their reach across the country can fully exploit this advantage and increase their non interest income similar to the new generation private sector banks.
*******
Source: The data given above in the tables is entirely based on the Annual reports of the respective banks (2009 to 2014) .
