Public bank vs private bank

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Can Public Sector Banks Compete with Foreign / Private Banks? A Statistical Analysis
Associate Professor (QM Area) Associate Professor (Finance Area)
Official e-mail:
Personal e-mail:
T.A.PAI Management Institute (TAPMI),MANIPAL – 576 104
Udupi District, Karnataka, India, Ph. (Office): 0820 – 257 1358 / 257 3162 / 257 3163

Key Words: Banking Survey, Efficiency, Financial Strength, Globalization, Profitability, Public Sector, Private and Foreign Banks, Size and Scale, Statistical Techniques, Transition Analysis

Topic Area: Banking

The economic reforms in India started in early nineties, but theiroutcome is visible now. Major changes took place in the functioning of Banks in India only after liberalization. Due to reforms in the 1990s, the depth and width of financial system in India has improved. Though role of banks as financial intermediaries has reduced gradually, market share of banks continues to remain the largest in the financial market (CRIS INFAC Banking Annual Review: August,2002). Increased competition, new information technologies and thereby declining processing costs, the erosion of product and geographic boundaries, and less restrictive governmental regulations have all played a major role for Public Sector Banks in India to forcefully compete with Private and Foreign Banks.

For the last five years, several agencies in India started comparing the working ofIndustries, B-Schools, Banks, etc. on their performance over the past, through surveys. This, some times gives a feel that pushing a person into waters who has not learnt about swimming and asking him to compete with other professional racers. Keeping this point in mind, the authors have taken the survey results on banks over a period of time and compared Indian Public Sector Banks among themselvesas a closed model and later with other banks as an open model using various Statistical Techniques like Cluster Analysis.

This article deals with clustering the banks during the period of study and then finding out the common features of these clusters. The research also focuses on the factors that made the banks moving from one cluster to another.

* Paper submitted to the InternationalConference on "Business & Finance" to be held during 15-16, December 2003 at ICF AI Business School, Hyderabad.

1. Introduction

Banking in India was defined under Section 5(A) as "any company which transacts banking, business" and the purpose of banking business defined under Section 5(B),"accepting deposits of money from public for the purpose of lending or investing, repayable on demandthrough cheque/draft or otherwise". In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949).

During Britishers' time, three Presidency Banks were opened in Bengal (1809), Bombay (1840) and Madras (1843) with powers to issue Notes. In the year 1921, dueto banking crisis during First World War, the three Presidency Banks merged to form Imperial Bank of India. In the year 1955, after Independence, Imperial Bank of India was nationalized and renamed as State Bank of India (SBI) with a primary mandate to go to rural areas by opening at least 400 branches immediately. In the year 1957, the seven banks that were earlier catering to the rulers ofdifferent areas or States viz., Patiala, Bikaner, Jaipur, Indore, Saurashtra, Hyderabad, Mysore, Travancore, became subsidiaries of SBI. In 1969 and 1980, Government of India nationalized 14 and 6 major banks respectively. After the merger of New Bank of India with Punjab National Bank during the era of Financial Sector Reforms, the number of PSBs became 27, which are under present study.

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