Academic journal article Review of Management

Measuring the Performance of Banks: An Application of AHP Model

Academic journal article Review of Management

Measuring the Performance of Banks: An Application of AHP Model

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Indian banking sector has emerged as one of the strongest drivers of India's economic growth. Positive changes witnessed in the last two decades have impacted every aspect of banking, ranging from regulatory standards to customer management. Indian banks adapting to the changing landscape along with the vision of the regulator and the Government in shaping the future growth of banking were two of the noteworthy features of this transition1. The Indian banking system is among the healthier performers in the world, when compared with top three banks in total assets and in terms of return on assets. This sector is tremendously competitive and recorded as growing in the right trend2. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The banking sector now compares favourably with other sectors in the region on metrics like growth and profitability. While banks evolved their strategies in response to increasing competition and changing customer requirements, the regulator guided its growth with policies of gradual liberalisation and benchmarking the domestic system with the best in the world3.

As the world recovers from the global financial crisis, Indian banking has remained resilient while continuing to provide growth opportunities. India has by-and-large been spared of global financial contagion due to the subprime turmoil for a variety of reasons. India's growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period. It also has a very comfortable level of foreign exchange reserves. The credit derivatives market is in an embryonic stage; the originate-to- distribute model in India is not comparable to the ones prevailing in advanced markets; there are restrictions on investments by residents in such products issued abroad; and regulatory guidelines on securitisation do not permit immediate profit recognition. Financial stability in India has been achieved through perseverance of prudential policies which prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent45.

With the increased participation of new private sector and foreign banks, the Indian banking industry has become fiercely competitive. Competition will be further intensified with the proposed entry of new private players and non banking financial companies (NBFCs). A few banks have established an outstanding track record of innovation, growth and value creation, reflected in their market valuation6. The changed competition and accounting environment compelled the commercial banks to provide unprecedented attention to cost cutting and supplementing fund-based income by fee-based income7. Commercial banks lending and deposit taking business has declined in recent years. Deregulation and new technology have eroded bank's comparative advantages and made it easier for non bank competitors to enter these markets. In response, banks have shifted their sales mix towards noninterest income-by selling fee based financial services such as mutual funds, by charging fees for services that used to be bundled together with deposit or loan products. Earnings from fee based products are more stable than loan based earnings and fee based activities reduce bank risk via diversification8. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. India's banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success9.

A diverse range of various studies have been conducted by the researchers for measuring the performance of the banks, which present different perspective with regards to the performance of the banks in different countries. …

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