Factors Affecting Public Sector Banks

Hello readers….as you all know that this article is about-“Factors affecting the public sector banks”, so first we should know some abstract facts about this fastly growing banking industry and some of the public sector banks and then the factors affecting them.

Introduction: Banking sector is one of the fastest growing sectors in India. It accounts for around 14.8 percent of the aggregate net sales of the top 500 companies of India. And now the banking sector is becoming more complex. So evaluating the factors influencing the efficiency of banks is not an easy task. There are so many factors that need to b considered.

To know about all the factors that are affecting the public sector banks, a research has been done. Also, some studies have been undertaken for measuring the productivity and operational efficiency of banks. Let’s take an example of some of the top public sector banks of India namely: State Bank of India (SBI), Central Bank of India(CBI),Oriental Bank of Commerce(OBC), Bhartiya Mahila Bank(BMB) and Punjab National Bank(PNB). IFSC code of oriental bank of commerce is used by their customer in Fund transfer. After all the research work we get to know about some factors that are affecting the public sector banks. Some of the factors are as follows:

  • Factors Influencing Capital Adequacy.
  • Factors influencing the quality of assets.
  • Factors affecting the management efficiency of banks.
  • Factors affecting quality of earnings.
  • Factors affecting the liquidity of banks.

Factors Influencing Capital Adequacy:

The important thing for a bank is to maintain its depositors’ confidence and to prevent the bank from going bankrupt. This factor also reflects the overall financial condition of banks and also its ability to meet the need of additional capital. It also indicates that whether the bank is capable of absorbing the unexpected loses in future. Capital adequacy ratios act as indicators of bank leverage. The ratios are as follows:

  1. Capital adequacy ratio (CAR)
  2. Debt-Equity ratio (D/E)
  3. Total advances to total assets (ADV/AST)
  4. G-secs to total investments (G-Sec/Inv.)

Factors Influencing The Quality of Assets:

To gauge the strength of a bank, the quality of assets is an important parameter. The main motive behind measuring the assets quality is to declare the component of nonperforming assets as a percentage of total assets. This indicates what type of advances the bank has made to generate the interest on income. The ratios necessary to assess the quality of assets are:-

  1. Total net NPAs to Total Assets (NNPAs/TA)
  2. Net NPAs to Net Advances (NNPAs/NA)
  3. Total Assets (TI/TA)
  4. Percentage change in Net NPAs

Factors affecting the management efficiency of banks:

This includes the subjective analysis of ratios to measure the efficiency and effectiveness of management. The management of bank takes crucial decisions depending on its risk perception. It helps bank to set its vision and goals for the entire organization and sees that it achieves them. This parameter is used to evaluate management efficiency so as to assign premium to better quality banks and discount to poorly managed ones. The ratios used to evaluate management efficiency are:-

  1. Total Advances to Total Deposits (TA/TD)
  2. Profit per Employee (PPE)
  3. Business per Employee (BPE)
  4. Return or Net worth (RONW)

Factors affecting quality of earnings:

One of the most important criterions that determine the ability of a bank to earn consistently is quality of earnings. It basically determines the probability of a bank and explains its sustainability and growth in earning in coming future. This parameter puts light on much of a bank’s income which is earned through non- core activities like investments, treasury operations and corporate advisory services and so on. The following ratios explain the quality of income generated:-

  1. Operating profit by Average Working Funds (OP/AWF)
  2. Percentage growth in Net Profit (PAT growth)
  3. Net Profit/Average assets (PAT/AA)

Factors affecting the liquidity of banks:

Risk of liquidity is a curse to the image of bank. Bank has to take a good care of liquidity risks, at the same time ensuring good percentage of funds invested in high return generating securities, so that it is in a position to generate profit with provisional liquidity to the depositors. Following are the ratios use to measure the liquidity:-

  1. Liquid Assets Deposits (LA/DD)
  2. Liquid Assets to Total Deposits (LA/TD)
  3. Liquid Assets to Total Assets (LA/TA)
  4. G-Sec to Total Assets (G-Secs/TA)
  5. Approved Securities/Total Assets (AS/TA)

All the south indian bank branches has an identification code called as IFSC code. This code is issued by RBI (Reserve Bank of India).