Tamal Bandyopadhyay: Where Indian banks fall short

In terms of profitability and quality of assets, Indian banks are as good as their global peers, and even better. However, in one crucial area they are still lagging behind their global counterparts "" the kitty of fee-based income. Fee and commission income account for between 20 and 30 per cent of the total income of the best banks of the world. The scene is different in India. The average fee income as a percentage of total income for the entire banking industry was a mere 7.83 per cent in 2004-05. In absolute terms, 77 banks operating in India registered Rs 14,704 crore worth of fee income against Rs 1,87,887.97 crore total income (that is, interest income plus other income such as sale, securities and so on) last year.

The State Bank of India roughly accounts for one-fourth of the industry's fee income "" Rs 3,544.67 crore. This may sound huge but it's only 8.96 per cent of the country's largest commercial bank's total income.

In fact, only eight domestic banks had their fee income accounting for over 10 per cent of their total income in 2004-05. The situation was worse in the previous year with only two banks having double-digit fee income as a percentage of their total income. The case with foreign banks operating in India is quite different. Twelve foreign banks had their fee income over 10 per cent of their total income last year. One of them even had over 43 per cent of total income in the form of fee and commission. However, the volume of overall business of some of these banks are so small that it is unfair to compare them with local banks. 

Bank	Total Income  (Rs cr)	2004-05 Comm*  Fee (Rs cr)	% Fee to total	Comm*  Fee 5 yr CAGR (%)
State Bank of India	39,547.90	3,544.67	8.96	6.66
ICICI Bank	12,826.03	1,921.00	14.98	95.61
Punjab National Bank	10,135.53	691.29	6.82	12.61
Canara Bank	9,115.80	410.89	4.51	5.16
Bank of Baroda	7,736.25	342.60	4.43	4.09
Bank of India	7,187.33	450.00	6.26	8.97
Union Bank of India	5,735.89	176.92	3.08	9.21
HDFC Bank	3,744.83	604.96	16.15	48.71
Citibank	3,146.50	607.19	19.30	15.06
Standard Chartered Bank	3,018.38	435.23	14.42	21.16
Corporation Bank	2,814.37	155.07	5.51	3.55
UTI Bank	2,339.98	330.52	14.12	49.18
HSBC	2,287.90	352.84	15.42	23.47
*Comm = Commission

In the pack of private sector banks, six players had fee income over 10 per cent of their overall income last year. The list includes HDFC Bank, ICICI Bank, UTI Bank besides Centurion and Bank of Punjab (which have subsequently been merged) and Ing Vysya. In case of HDFC Bank, it is 16.15 per cent, and for ICICI Bank it was 14.98 per cent. In absolute terms, ICICI Bank's fee income is over Rs 1,900 crore against HDFC Bank's Rs 600 crore. However, if one takes a close look at the five-year CAGR of fee income of the private sector banks, ICICI Bank presents a stunning picture. Its five year CAGR of fee income is 95.61 per cent. A very distant second is UTI Bank with a 49.18 per cent CAGR of fee income and the third slot goes to HDFC Bank (48.71 per cent).

The public sector banks are far behind their counterparts in the private sector. Only two State Bank of India associates "" State Bank of Bikaner & Jaipur, and State Bank of Mysore "" have a fee income of over 10 per cent of their total income. The fee income of two large banks, Punjab National Bank and Bank of India, is less than 7 per cent of their total income and in the case of two other large banks, Canara Bank and Bank of Baroda, it's even less than 5 per cent.

What is worrisome is the fact there has not been much growth in public sector banks' fee income over the past five years. The five-year CAGR of SBI's fee income is 6.66 per cent. Among the large public sector banks, only Punjab National Bank's five-year CAGR of fee income is above 12 per cent. The five-year CAGR of fee income for the Bank of India is 8.97 per cent; for Canara Bank it is 5.16 per cent; and for Bank of Baroda it is 4.09 per cent. The Manipal-based Corporation Bank is a particular disappointment. A few years ago, Life Insurance Corporation of India picked up a substantial stake in this bank. The idea was to use Corporation Bank as a vehicle to sell its insurance products across the country. That should have acted as a booster dose for Corporation Bank's fee income. Yet, the five-year CAGR of its fee income is 3.55 per cent.

Among the foreign banks, the fee income of Citibank is over 19 per cent of its total income; that of HSBC is over 15 per cent and Standard Chartered's is over 14 per cent. Their fee income kitty has been growing. The five-year CAGR of HSBC's fee income is over 23 per cent, that of Standard Chartered over 21 per cent and Citibank 15 per cent.

One of the reasons for tardy growth in fee income for the entire banking industry is the increasing focus on relationship with corporate and even retail clients. Letter of guarantees and bank drafts do not fetch much fees these days since they are often given free to retain the customers so that the banks can earn a higher interest income. However, this can be more than compensated for by increasing the sale of other products such as mutual fund units and insurance products from bank branches. The 65,000-strong branch network of the Indian banking system is the best distribution channel for selling financial products. If banks fail to seize this opportunity, they are to blame themselves. Fee income is the best barometer to gauge a bank's efficiency.