Public sector banks will not have to focus on their top line growth, as there will be no targets for them to meet credit and deposit growth for the current financial year. Instead, the finance ministry has asked the government-owned banks to focus on increasing efficiency and bringing down non-performing assets. Banks will now have targets on lowering the number of loss-making branches and cutting bad loans of regional rural banks.
At the beginning of every financial year, the government-owned banks indicate their targets to the finance ministry in statements of intent. The statements consist of parameters such as business growth, low-cost deposit growth, net NPAs, net profit, etc. Banks state their targets in each of the parameters in the financial year. Their performances are reviewed at the end of the financial year.
Now, the finance ministry wants banks to focus on increasing their profitability and improving the asset quality. As a result, some new parameters would come in. The finance ministry is holding meetings with each PSB bank chairman to finalise the targets. “The focus this time is on increasing the profitability,” said a PSB chairman and managing director. “We have to emphasise on parameters such as return on asset, net profit per employee, cost-to-income ratio, and staff ratio in branches, among others.”
The ministry’s move to eliminate business-growth parameters comes on the back of banks scrambling for cash during quarter ends, which results in a sharp spike in interest rates. For example, in March, short-term rates went past 12 per cent while liquidity became tight, as banks rushed for funds to meet their yearly targets. Bankers said though loan and deposit growth targets are being removed, the target for growth in the current and savings account deposits — the low-cost deposits — has been retained.
The ministry has been telling PSBs to raise their efficiency at a time when the government has shown commitment to adequately capitalise the lenders. Earlier, banks were asked not to start fresh ventures in non-core activities such as insurance and the asset management business, but to focus on core banking.
Bankers, however, said the move to not have business growth targets might result in balance sheets becoming smaller. “With credit and deposit growth not picking up, some of the banks have already seen a contraction in the balance sheet size over the March figures,” said a senior banker.
According to Reserve Bank of India data, banks’ credit registered just three per cent growth as on June end when compared with March end, while deposit growth was 5.4 per cent. Over a year, as on June 29, credit growth had fallen to 16.5 per cent from 20 per cent a year before. Deposit growth has slowed to 13.4 per cent from 18.5 per cent a year before.
| EFFICIENCY PARAMETERS (2010-11) | |||
| Public sector banks | New private sector banks | Foreign banks | |
| Number of banks | 26 | 7 | 33 |
| Business per employee (Rs lakh) | 1,013.63 | 826.07 | 1,559.74 |
| Profit per employee (Rs lakh) | 5.93 | 8.93 | 27.59 |
| Wage as % of total expenses | 17.27 | 13.83 | 23.31 |
| Return on assets | 0.96 | 1.51 | 1.74 |
| Net non-performing asset ratio | 1.09 | 0.56 | 0.67 |
| Source: RBI | |||
While a high interest rate has been cited as one reason for slowing in credit demand, high inflation has made the real return to depositors unattractive.
