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Spiraling prices of essential commodities are currently leading to spurt in food price inflation, fluctuating liquidity in the system alongside lower-than-expected credit off-take, topsy-turvy industrial recovery.  Lesser credit off-take continues to crimp the banking industry. Therefore, the Government has to do a balancing act of sustaining economic growth on the one hand and maintaining price stability on the other hand. Side by side the monetary authority’s prime role is to be maintained – steps necessary towards gradually weaning away the economy from its current dependence on accommodative monetary policy and make it market-driven with an aim to prop up growth and arrest inflationary pressure. These may be the beginning of a reverse trend. The muted growth of credit is likely to be stimulated and buoyancy is restored.

The growth of economy is expected to be faster with the increased demand of credit. It is of course commending that the RBI has started to withdraw liquidity and has taken a pragmatic view to exit from the accommodative monetary policy step by step. The RBI is moving towards monetary tightening slowly and steadily so that growth is not affected. Thus, the inflationary pressure needs to be controlled without affecting the momentum for growth.

Inherent Strength

For small banks, performance in many of the controllable areas has not also been good so far as the HR Management is concerned, and a huge gap is noticed not to mention the lack of transparency in talent retention, which, in turn, has remained more restricted to paper works only. Especially for the small banks [in public sector too] the need is there to better operational performances. One of such vital areas has been comparatively high cost-income ratio. The cost-income ratios of some of the small banks are still unfavorable [quite high] compared to the biggies and thus these small banks must improve upon by increasing the business rapidly.

Besides profitability, other vital indicators such as strength and soundness, credit quality, growth and efficiency, betterment of cost-income ratio – one of the top sub-criteria in the arena of profitability - occupies the central place. Efforts must be on to move towards that direction so that within a reasonable time the ratio becomes nearer to the peer group level. The betterment, in turn, is hinging upon two vital wings – minimization of cost [interest plus operating] and maximization of income [interest plus non-interest]. The first area has been on the rise due to external factors as well as internal factors, while the second area reflects better picture emerged from the segments.

Targeting at better cost-income ratio the Banks have, no doubt, taken a number of positive steps to restrict the growth of operating expenses while at the same time increasing the net interest income as well as non-interest income. Cost-Income ratio is defined as Operating Expenses divided by the sum of interest income and non-interest income less interest expenses.

On this score the focus areas have been: Increasing low cost deposits [CASA]; increasing quality lending in Retail, SME, Agricultural sectors; recovery of NPAs through rigorous follow up inclusive of recovery in Written off accounts; restricting avoidable expenses; increasing non-interest income through LC / LG business as well as para-banking activities - these initiatives could help the cost-income ratio to come down steadily.

Though a number of areas are there that registered good growth [include, among others: number of total branches is going up; business under CBS has been 100 percent; number of employees went up along with that of business per employee and that of profit per employee was up, yet there had been a decline in yield of advances. Major reasons for decline in yield on advances were, among others - reduction of BPLR Lending to low yielding short term loan; increase in non-performing advances resulting in falling interest earning on advances.

The overall position of the Banks should reflect that the banking business indicators would be moving north in many areas whereas in number of other areas a fall can be resisted: Cost to income ratio, net interest margin, cost of deposits, cost of funds and return on assets. The NIM position is also to register a satisfactory trend.

The strategic Plan of the Bank should be a realistic and achievable one, which, in turn, could result in lowering the ratio.

To reduce the cost of deposits, the Banks have to take a conscious decision to shed high cost bulk deposits. Of late there has also been a decline on this score and this has mainly due to non-renewal of bulk term deposits mobilized at higher rate earlier. Recently, revised mode of interest payment on SB also reasonably expects SB to grow by larger volume. Rightly, utmost importance is being placed on boosting the CASA section. Hence fall in deposits cost is reasonably expected. 

Dr. B K Mukhopadhyay
Professor of Management and Author of the book ‘India’s Economy: Under a Tinsel still Tough’

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