A Comparative Study On Investment Pattern...

ISSN: 2277-4637 (Online) | ISSN: 2231-5470 (Print)
Opinion Vol. 2, No. 1, June 2012
A Comparative Study on Investment Pattern of Indian Banking in the Global Era

Dr. Rimpi Kaur* Pallavi Manik**
Abstract
In 1991, much after China and other south Asian countries, waves of globalization touched Indian shores. Being a new player to globalization, many economic reforms were recommended by various economists. These reforms revolutionized the Indian economy in the era of globalization where India is performing pretty well and strong banking system of India has contributed a lot towards recovery of Indian economy from recession. Indian banking industry has direct impact on economy in terms of improved return on investment, decreasing non performing assets, deregulation of interest rates, return on capital and many more. Among all investment is one of the important factors to be studied. By taking into account the importance of investment, this paper studies the investment pattern of Indian banks. To study the investment pattern return on investment, interest income, investment deposit ratio, non approved investment are considered and the statistics conclude that investment is increasing in India but not in proportion to deposits even returns are also lesser. This paper also enlightens the problems and prospects with regard to investment of banks in globalized era. Keywords: Indian Economy, Indian Banking Industry, ROI, Investment pattern
Introduction
The global financial stability report, 2011 has cautioned that for the 1st time since 2008, the risk to global financial stability has increased which means global economy is under crisis where the banking system of advanced countries is continued to be on uncertain grounds on account of increasing credit strains and uncertainty of investments. Radelet and Sachs (1998) attribute the Asian financial crisis to financial panic. Several other
researchers including Delhaise (1998) blame the Asian crisis on overgenerous and indiscreet lending by banks, especially western banks, and then switching to overly strict lending policies when market turned sour. Even then Indian economy is standing on the urge of economic revival in the situation of global crisis where growth and recovery are taping our access. Indian economy is having a lot of potential as a manufacturing base country to attract more and more interest of the world. A
*Asst. Professor, Commerce, Lajpat Rai DAV College, Jagraon, District Ludhiana, Punjab **Asst. Professor, Commerce, Lajpat Rai DAV College, Jagraon, District Ludhiana, Punjab
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Opinion: International Journal of Management
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progressively growing balance sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks in developed markets, lower incidence of non performing assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling. The way forward for the Indian banks is to innovate to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks. Global banking system today stands at a juncture, where risks and challenges overweigh the positive efforts made by banking system towards regaining growth and health. The banking sector occupies a very important place in the countrys economy, acting as an intermediary to all industries, ranging from agriculture, construction, textile, manufacturing, and so on. Without any doubt, lot of development has been taken place in the investment pattern of Indian economy specially in case of banking industry; credit goes to the various economic reforms introduced by Indian government from time to time. Moreover, another very important reason for the development is the emergence of innovative instruments such as systematic investment plan; RBI bonds, infrastructure bonds etc. are much more attractive for investors as compare to old instruments of banks. With high potential of Indian banking industry, banks have immense opportunities to further expand their business with traditional and modern products both. The banking sector thus contributes directly to national income and its overall growth. As the banking sector has a major impact on the economy as a whole, evaluation, analysis, and monitoring of its performance is very important. Thus the paper studies the investment pattern of Indian banking and its impact on selected variables.
Literature Review
Bose S & Dipankor C (2003) made an attempt to understand the nature and extent of imperfection of the Indian market for corporate bonds. The paper examined that Imperfections in the secondary market for corporate bonds are manifest in infrequent trading, high liquidity risk, a high degree of dispersion of price/ YTM over
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time, and a lack of strong and unidirectional relationship between bonds credit rating (risk) and its market price/ YTM. The need to have mandatory credit ratings, irrespective of whether the debt is publicly issued or privately placed, has been stressed in recent times. Dash Mahir & Das Annyesha employed CAMELS rating system to analyze banking performance in terms of six critical elements of a financial institutions operations. The paper concludes that here was no significant difference in the overall CAMELS ratings of private/foreign banks over public sector banks. The results of the study show that private/foreign banks fared better than public sector banks on most of the CAMELS factors in the study period where two contributing factors for the better performance of private/foreign banks were Management Soundness and Earnings and Profitability. The results of the study suggest that public sector banks have to adapt quickly to changing market conditions, in order to compete with private/foreign banks. Ghosh C & Phani B V evaluated the effect of liberalization of FDI limits on domestic stocks of Indian banking and analyze that the price increase is higher for smaller banks that have less debt, are less efficient, less productive, and burdened with non-performing assets. The paper concludes the evidence is consistent with the hypothesis that the valuation gains reflect the vulnerability to and premium of potential takeover of the inefficient banks following the liberalization. Ghosh Chinmoy, Harding John & Phani B. V. (2006) examined that the gains by private sector banks were almost double those of nationalized banks and analyze the firm specific abnormal returns crosssectional regressions and find a significant relation between firm-specific abnormal returns and factors typically associated with a banks potential for takeover. These results provide the first empirical support for Stulzs hypothesis that one cause of the valuation gains associated with liberalization is the expected gain from a reduction of agency costs. Hans V. Basil (2009) assessed the current economic situation and analyzes some practical solutions to the problems at hand and the impending ones. The paper suggests that India needs an overall boost in economic
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performance and improving efficiency in resource-use and conservation should be the guiding force of any further policy-change and stimulus packages. Khatri Deepak & Kumar Nitin studied the performance of Indian banks at group level in a panel data framework. The results suggest that initially private sector and foreign banks were performing better but as the competition increased the public sector banks reduced the performance gap. The paper concludes that neither ownership nor competition has any influence on banks performance even the entry of private and foreign banks increased the competition in banking sector of India. Lakshmi K analyzed the differences in the level of foreign portfolio investment in public sector banks and private sector banks. The study finds that the foreign portfolio investment in private sector banks is higher than the public sector banks when FIIs investment is considered as a percentage of total shareholding however, the difference disappears when FIIs shareholding is measured as a percentage of free float shares. The results suggest that strong, stable and efficient banking system is a pre-requisite for economic growth of any country. Lodha Kalpit studied that introduction of derivatives is assumed to be dangerous by the regulatory bodies because time is not yet ripe to introduce and, such trading is also not a priority item for the stock exchanges. The results suggest that before venturing for derivatives, the regulators should nurture and develop the existing primary and secondary market on sound and healthy lines and make them safe for investors. The government should encourage FDI and exports and plan contingency funds to tackle emergencies on the foreign exchange front rather than relying on a volatile portfolio investment of short-term nature which may pose a danger to the markets and the economy anytime in the future.
This research gap is an inspiration to study the issues related to the theme.
Objective of the Study

To analyze the investment pattern of Indian banking industry in terms of selected ratios. To highlight the major problems and prospects especially in concern to globalized era. H0: There is no significant correlation between total investments and selected variables
Research Methodology
To address the objectives of the study Indian banking industry has been taken as a universe of the study and four bank groups public sector banks, old private sector banks, new private sector banks and foreign banks are taken into consideration for analysis. Data is analyzed at bank group level and industry level. To analyze the investment pattern parameters evaluated are investment deposit ratio, return on investment, total investment in India and outside India, share of interest income in total income and non approved investment. Study is descriptive in nature where secondary data has been taken from the reports of RBI Reports on Trends and Progress of Banking in India. The time period of the study is ten years from the year 2001 to 2011. Statistical techniques used are average, standard deviations, coefficient of variations, growth and correlation coefficient.
Results and Discussion

Table 1 shows the investment pattern of Indian banking industry inside India and outside India at group level and industry level. The facts depict that PSBs have the highest share in total investment in India and outside India with an average of Rs.641001.30 crore and Rs. 4582.50 crore respectively followed by NPSBs with average investment of Rs.109745.60 crore in India and Rs.156.80 crore outside India. Overall industry gives an idea about average investment of Rs.860308.20 crore in India and Rs.4939 crore outside India. Among all the bank groups FBs witness the maximum variations in their investment pattern in India and outside India for the study period i.e. 58.02 pc and 316.23 pc
Research Gap
The review of literature is apparent of scares scholarly research on various aspects of investment pattern of banking. In India also, there is lack of sufficient research on such theme that adequately address the impact of investment on dependent variables of banking in India.
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respectively in terms of coefficient of variations though it has negligible share in its investment outside India. Overall industry and other bank groups explain between 40 pc and 60 pc variations in their respective investments. NPSBs depict the tremendous growth i.e. 1011.70 pc in India and 2344.74 pc outside India investment followed by foreign banks in India, though OPSBs and
FBs shows 100 pc declines in their outside India investment. Overall investment is growing at appreciable rate with 238.18 pc and 166.46 pc augmentation respectively in India and outside India with 40 pc variations. The picture in the chart 2 also demonstrate that banks have maximum investment in India though they have negligable share in investment outside India.
Table 1: Investment Pattern of Indian Banking Industry (Rs. Crore)

Years 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average SD CV Growth(%) PSBs In India 289593 429089 507451 564345 516129 543953 643430 841597 1000015 1074411 641001.30 252564.03 39.40 271.01 1964 3153 2780 3250 3745 3421 5418 5635 8356 8103 4582.50 2221.46 48.48 312.58 OPSBs 19957 28395 35203 34719 35819 35105 42133 53623 60819 64603 41037.60 14324.99 34.91 223.71 76 84 84 76 78 0 0 0 0 0 39.80 42.04 105.63 -100.00 NPSBs In India 17779 44687 60953 62313 93635 124746 151892 163593 180209 197649 109745.60 62515.39 56.96 1011.70 0 0 0 38 134 302 0 0 165 929 156.80 289.64 184.72 2344.74 23310 30803 32672 34043 40880 56220 82851 99997 117492 111960 63022.80 36567.74 58.02 380.31 FBs 1 0 0 0 0 0 0 0 0 0 0.10 0.32 316.23 -100.00 SCBS In India 428363 532976 636267 680641 687989 750733 920241 1158714 1358534 1448624 860308.20 350377.70 40.73 238.18 OutsideIndia 3390 3238 2877 3363 3957 3723 5558 5730 8521 9033 4939.00 2237.85 45.31 166.46 Out ofIndia In India Out ofIndia OutsideIndia In India OutsideIndia
Source: Report on Trend and Progress of Banking in India (2001 to 2011) Chart 1 : Average Investment Pattern of Indian Banks
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Table 2 depicts the investment deposit ratio of bank groups and Indian industry. Among all the bank groups foreign bank group is at the top by making an average 55.52 pc of its deposits in investment followed by NPSBs with 49.63 pc average and this is the only group which shows the highest growth rate of 33 pc while the other groups pertaining the negative growth rate. All the bank groups show consistent investment deposit ratio with coefficient of variations ranging between 12 pc to 21 pc. Overall industry is adapting 41.49 pc of its deposits as investment, though it proves decline during the study period. Overall investments are rising, yet not growing in proportion to mounting deposits. Table 2: Investment Deposit Ratio
(Per Cent) Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average SD CV Growth (%) PSBs 46.92 50.56 51.00 47.77 39.06 33.34 32.60 32.53 32.66 30.38 39.68 8.45 21.28 -35.25 OPSBs 42.29 43.74 45.06 38.29 34.69 31.57 32.66 36.29 36.32 35.08 37.60 4.65 12.37 -17.05 NPSBs 71.50 58.17 53.51 48.50 45.40 41.33 44.07 43.59 45.64 44.60 49.63 9.21 18.55 -37.62 FBs 51.70 58.85 52.14 49.61 47.09 47.41 51.74 60.89 66.97 68.76 55.52 7.88 14.19 33.00 All SCBs 48.70 51.17 50.92 47.33 40.09 35.26 35.46 35.67 36.17 34.12 41.49 7.17 17.28 -29.94
but these investments are not yielding adequate ROI, because growth rate of ROI has declined as compare to increasing rate of industry investment Table 3: Return on Investment
(Per Cent) Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average SD CV Growth (%) PSBs 9.6 9.2 8.5 8.2 8.2 7.5 6.6 6.2 6.7 6.8 7.75 1.17 15.08 -29.17 OPSBs 10.9 9.2 7.7 7.7 7.2 7.2 6.3 5.7 6.1 6.2 7.42 1.60 21.53 -43.12 NPSBs 4.7 8.2 5.2 5.2 5.5 6.6 6.4 6.9 6.3 6.6 6.16 1.03 16.75 40.43 FBs 11.0 7.7 6.9 6.9 7.5 7.6 7.1 6.7 6.4 7.4 7.52 1.29 17.19 -32.73 All SCBs 10.8 9.6 8.1 7.8 7.7 7.3 6.6 6.4 6.5 6.8 7.76 1.44 18.56 -37.04
Source: Report on Trend and Progress of Banking in India (2001 to 2011)
Table 3 exposes a very interesting picture of return on investment of Indian banking industry. Where PSBs group is earning the maximum ROI with an average of 7.75 pc, but the issue of concern is its negative growth rate, followed by FBs with 7.52 pc average returns. Among all the bank groups, only NPSBs encompass increasing rate of 40.43 pc with a lowest ROI of 6.16 pc. Coefficient of variations of all the banks depicts consistency in their returns as the amount of ration is very little. Overall industry is earning 7.76 pc ROI. No doubt investment by Indian banking industry is increasing,
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Table 4 demonstrates the share of interest income in total income of all bank groups. All the bank groups are presenting an increasing trend in their interest income where PSBs witness the highest interest income i.e. average 85.56 pc. The all bank groups keep up the same level of interest income as their coefficient of variations is not more than 5 pc. Though share of interest income in total income is rising, but ROI is diminishing, because proportion of interest on investment is showing a downward trend, as banking industry is focusing more on non banking activities which yield handsome income. Table 4: Interest Income to Total Income
(Per Cent) Year 2001-02 2002-03 2003-04 2004-05 2005-06 PSBs 85.89 83.45 79.62 83.43 86.29 OPSBs 79.72 79.07 78.93 88.27 89.48 NPSBs 79.25 75.94 76.15 76.88 78.34 FBs 74.86 74.50 70.24 70.35 69.58 All SCBs 84.06 81.64 78.52 81.90 85.91
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2006-07 2007-08 2008-09 2009-10 2010-11 Average SD CV Growth (%) 88.95 86.66 86.63 86.22 88.44 85.56 2.74 3.20 2.97 88.96 86.99 87.07 86.67 88.49 85.37 4.32 5.06 11.00 80.33 79.18 81.38 78.30 80.60 78.64 1.88 2.39 1.70 73.26 69.75 67.06 72.62 72.22 71.44 2.46 3.44 -3.53 84.33 83.63 83.83 83.96 86.07 83.39 2.22 2.66 2.39 Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Average SD CV Growth (%)
declining in all bank groups except OPSBs and industry. Table 5: Non Approved Investment to Total Investment
PSBs 20.36 17.45 15.71 15.03 15.79 17.17 17.59 15.55 15.96 18.28 16.89 1.62 9.58 -10.22 OPSBs 29.32 26.61 24.20 21.12 19.68 18.86 21.64 25.59 26.82 30.19 24.40 3.96 16.24 2.97 NPSBs 79.66 33.50 30.09 34.88 30.67 27.03 32.30 30.12 33.34 39.70 37.13 15.33 41.28 -50.16 FBs 33.80 21.02 24.11 20.06 21.80 21.22 16.20 23.28 26.24 32.34 24.01 5.47 22.77 -4.32 (Per Cent) All SCBs 22.77 19.93 18.06 16.42 17.82 17.02 20.37 19.10 20.17 23.75 19.54 2.38 12.16 4.30
Table 5 reveals that NPSBs have the highest share i.e. 37.13 pc average in non approved government securities though declined at 50 pc rate during the study period. OPSBs and FBs have almost equal investment in non approved securities i.e. 24 pc and only OPSB group comprises growth while other groups witness decline. All scheduled commercial banks witness just 20 pc investments in non approved securities which mean that Indian banking industry is more concentrating on approved securities. Overall investment of Indian banking industry is increasing, but investment in non approved securities has been
Chart 2 & 3 describe the image more clear where chart 2 shows the comparison of all four ratios among
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all bank groups where interest income to total income is the highest one while the ROI is the lowest one. Chart 3 depicts growth in investment ratio where all ratios shows the mixed affect in case of ROI and interest income to total income, almost equal growth is witnessed, while investment deposit ratio and ratio of non approved investment to total investment varies. Maximum ratios of almost all the bank groups represent decreasing trend, though the investment is escalating which makes it clear that investments are not earning significant amount of return. Table 6 explains the correlation co-efficient between investment pattern and different ratios where investment pattern is independent and ratios are dependent variables. The statistics depict that investment has negative impact on investment deposit ratio and return on investment which is significant in case of all schedule commercial banks at 1 pc significant level. Here PSBs witness significant impact in case of both the variables while OPSBs have insignificant impact of their investment on investment deposit ratio and FBs have in case of ROI but others show significant impact which means investments are mounting but investments share in deposits and returns are decreasing at significant rate which is a matter of concern. On the other hand, Interest income to total income and non approved investments share in total investments have positive but insignificant impact of total investment though its insignificant in case
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of all bank groups except in case of NPSBs that has significant impact on interest income only and PSBs and NPSBs have negative impact on their non approved investments. Overall interest income and non approved investments are growing with increase in investment though the impact is insignificant but investments share in deposits and returns are decreasing at significant rate with rise in investment which is a major issue of concern. Table 6: Correlation Co-efficient between Total Investment and Selected Ratios
Dependent Variables Investment Deposit Ratio Return on Investment Interest Income to Total Income PSBs -0.745* OPSBs -0.466 NPSBs FBs ASCBs
-0.780** 0.754* -0.779** 0.361 0.638* -0.451 -0.500 -0.793** -0.285 0.130 0.445 0.355
-0.838** -0.847** 0.414 0.534 0.282
Non Approved -0.251 Investment to Total Investment
Note: *Correlation is significant at the 0.05 level (2-tailed) **Correlation is significant at the 0.01 level (2-tailed)
Issues
1. Decreasing share on investment outside India especially by private and foreign banks as industry shows not just 1 pc of its total investments outside India which causes lesser foreign exchange earnings.
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2. Decreasing share of investment in proportion to total deposits 3. Decreasing return on investments 4. Negative impact of investment on investments share in deposits and return on investment.
Conclusion
The global economy is recovering from the worst financial crisis since the great depression with the significant contribution of banking sector. Even the regulators should remain vigilant while making the policy to balance the economic growth. Keeping the current global and Indian banking industry trends in view, the current paper deals with the investment pattern of Indian banking which concludes that Indian banks are more concentrating on advances as compare to investment out of their total deposits. With this, there is also a downfall in income of banks, because ROI is lesser as compare to interest income. To sum up in the near future, banking sector need to support the growth momentum in the economy while giving due attention to balance emerging return and risk and using scale-neutral technology to compete in the globalized era.
Suggestions
1. The private banks must be motivated to invest outside India to earn maximum foreign exchange. For this RBI may limit some portion of investment as mandatory in foreign securities. 2. Investment leads interest income so should be enhanced in proportion to deposits. Its fact that banks are earning more from non banking activities but interest income contribute more than 80 pc share in total income. 3. Portfolio of investments may be upgraded to earn maximum returns on investments in which private securities may be included with enlarged share.
References 1. Bose, Suchismita and Coondoo, Dipankor (2003), A Study of the Indian Corporate Bond Market, Money & Finance, Vol. 2 (12), January-March, pp 25-51, SSRN id421440 2. Dash, Mihir and Das, Annyesha (2009), A CAMELS Analysis of the Indian Banking Industry, July 14, Available at SSRN: http://ssrn.com/abstract=1666900 or http://dx.doi.org/10.2139/ssrn.1666900 3. Delhaise, Philippe F. (1998), Asia in Crisis : The Implosion of the Banking and Finance Systems, John Wiley & Sons (Asia) Pvt. Ltd., Singapore 4. Ghosh, Chinmoy, Harding John & Phani, B.V. (2006), The Effect of Liberalization of Foreign Investment Limits: Evidence from the Indian Banking Sector, Paper presented in 2003 FMA Conference, July 27, SSRN-id921672 5. Ghosh, Chinmoy and Phani, B.V., The Effect of Liberalization of Foreign Direct Investment (FDI) Limits on Domestic Stocks: Evidence from the Indian Banking Sector, SSRN-id546422 6. Hans V. Basil (2009), Global Meltdown and India Issues, Concerns and Challenges, paper presented at the UGC sponsored two-day National Seminar on India Sixty Years in a Nations Life, 3-4th April, 2009 organised by Besant Evening College, Mangalore 7. Lakshmi K., FII Shareholding in Indian Banks Is there any difference between Public Sector and Private Sector Banks? SSRN-id1736074 8. Le, Hang and Ataullah, Ali (2006), Economic Reforms and Bank Efficiency in Developing Countries: The Case of the Indian Banking Industry, Applied Financial Economics, Vol. 16 (9)
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9. Lodha, Kalpit Rajkumar (2008), Derivatives in Indian Financial Market - Structure & Financial Concerns an Indian Perspective, February 3, Second Singapore International Conference on Finance 2008, SSRN id1089967 10. Radelet, Steven, and Jeffrey Sachs (1998), The Onset of the Esat Asian Financial Crisis, Working Paper, Harvard University, Cambridge, MA 11. Reports on Trends and Progress of Banking from the Year 2001 to 2011 12. Statistical Tables Relating to Banks in India for the Year 2001 to 2011 13. Vidyakala, K., Madhuvanthi, S. and Poornima, S. (2009), Recession in Indian Banking Sector, October 27
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ISSN: 2277-4637 (Online) | ISSN: 2231-5470 (Print)

Opinion Vol. 2, No. 1, June 2012