Banking sector saw signs of stability in 2019. The year saw the government announcing the biggest ever consolidation of public sector banks (PSBs), increased capital raising by private banks, peaking of bad loan provisioning, deterioration of asset quality and return to higher operating profits. It is in this backgdrop that Business Today-KPMG started the annual exercise of picking India's Best Banks and Fintechs.
This six-month process started with knowledge partner KPMG studying annual reports of banks and reaching out to them for qualitative inputs in areas such as rural outreach, innovation and fintech engagement. The team also reached out to the fintech community in areas of Payments, Lending and Value Added Services to arrive at a list of best five in each category.
The next step was to put the entire Best Banks and Fintech study before an external jury to decide the winners. The jury comprised Vinayak Bahuguna, MD & CEO, ARCIL India; Arun Purwar, Former Chairman, State Bank of India; Shailesh Haribhakti, Chairman, Desai Haribhakti Group; Seshagiri Rao, Joint MD, JSW Steel; and Sandeep Chiber, India Head, FIS Global.
The jury commended the inherent strengths of Indian banking. There was a lengthy discussion to decide the "Bank of the Year" where the jury gave a joint award to HDFC Bank and SBI. Apart from the financial performance of top banks in quantitative terms, the jury also looked at qualitative factors. The members deliberated on issues like succession and leadership. They also talked about governance issues. The trust factor was also touched upon in view of the recent debacle at some cooperative banks. The quality of banks' books and market perception also found mention in the deliberations.
The jury was keen to cover microfinance in the financial inclusion awards, and as per its advice, the 'Financial Inclusion' nomenclature was changed to 'Best Bank in Rural Outreach.' The jury decided to give more weight to size and scale of rural outreach as the bulk of data points related to number of branches, business correspondents, Jhan Dhan accounts, Mudra loans and number of customers benefited. Here is the detailed methodology for the BT-KPMG Best Bank Survey 2019.
For rankings based on pure financial performance, data was taken from published annual reports of banks for FY16 to FY19. The survey covered 51 scheduled commercial banks that had put annual reports in public domain or provided their annual reports at the time of conducting the survey prior to December 31, 2019. Scheduled commercial banks with balance sheet of less than Rs 5,000 crore on March 31, 2019, were not considered. Also not covered were scheduled commercial banks whose financial statements were not available with us or which did not want to participate or which had not completed four years in India as on March 31, 2019, or were involved in mergers.
The Ranking Process
The banks were divided between 'Indian banks' (consisting of public and private sector banks) and 'Foreign banks' (branches of foreign banks in India). The banks in each of the above categories were further classified based on balance sheet size as on March 31, 2019.
Group I: Indian banks with balance sheet size of more than or equal to Rs 3,00,000 crore;
Group II: Indian banks with balance sheet size of more than Rs 1,00,000 crore and less than Rs a3,00,000 crore;
Group III: Indian banks with balance sheet size of less than or equal to Rs 1,00,000 crore;
Group IV: Foreign banks with balance sheet size of more than or equal to Rs 25,000 crore; and
Group V: Foreign banks with balance sheet of more than Rs 5,000 crore and less than Rs 25,000 crore.
The banks were adjudged on three parameters - Growth, Size and Strength - divided into 32 sub-parameters:
There were five sub-parameters in this category, which included growth over FY18 in deposits, alongside three-year compounded annual growth rate, or CAGR, of total deposits; growth over FY18 in loans and advances, alongside three-year CAGR in loans and advances; growth over FY18 in fee income (commission, exchange, brokerage plus miscellaneous income), alongside three-year CAGR (or less, as applicable) in fee income; growth over FY18 in operating profit, alongside three-year CAGR (or less, as applicable) in operating profit; and absolute increase in market share of deposits and current account savings account balances.
There were three sub-parameters in this category, which included size of total deposits, size of operating profits and size of balance sheet for FY19.
There were four overarching sub-parameters in this category, each with further sub-divisions, as set out below:
1. Quality of assets:
Total NPA growth ratio: Addition to NPAs during the year as percentage of average net advances; NPA coverage: provisioning for NPAs as percentage of gross NPA closing balance; net NPAs as ratio of net advances: gross NPAs net of provisioning expressed as percentage of net advances; divergence in gross NPAs: difference between gross NPAs as per the RBI rules and reported by the bank as percentage of addition to NPAs; divergence in provisioning for NPAs: difference in provisioning for NPAs as per the RBI and reported by the bank as percentage of reported profit before provisioning and contingencies; restructured assets as ratio of total average loans and advances (i.e. average of closing balance of FY18 and FY19); data for Bank of Maharashtra in the parameter "outstanding restructured assets as percentage of outstanding loans and advances" was not available.
For rankings based on divergence in gross NPAs and divergence in provisioning for NPAs, banks having divergence of less than 15 per cent and 10 per cent, respectively, were assigned the highest rank in that parameter. Further, for determining rankings based on the provision coverage ratio parameter, banks having zero NPAs and banks having a provision coverage ratio of 100 per cent were assigned the highest rank in that parameter.
2. Productivity and efficiency:
Cost to income ratio: Operating expenditure as percentage of operating income; cost to average asset ratio: operating expenditure as percentage of average total assets; absolute increase in return on assets: basis points increase in return on assets (net profit over total average assets) from FY18 to FY19; percentage increase in ratio of operating profit to total income from FY18 to FY19.
3. Quality of Earnings:
Things considered were return on assets: Ratio of net profit to average total assets; fee income as percentage of total income; return on capital employed: reported net profit divided by average net worth; net interest margin: total interest income minus total interest expenses as percentage of average interest earning assets; penalties imposed by RBI during the year.
4. Capital adequacy and liquidity coverage:
Capital adequacy ratio: Capital-to-risk weighted assets ratio for FY19; Tier-I capital: total of equity capital and disclosed reserves; liquidity coverage ratio: ratio of high-quality liquid assets (HQLA) to total net cash outflows over the following 30 calendar days.
For each bank, a score was assigned for each of the 32 sub-parameters, based on its rank on those parameters. The score under each parameter was then multiplied by the parameters weight to arrive at the final score for a bank. The results were aggregated to arrive at the final rankings based on the total score.
Banks (Innovation and Best Rural Outreach Awards): The jury considered 'Qualitative Awards' to appreciate the initiatives in Innovation and Rural Outreach. The information was collated based on self-nomination. For the Innovation category, parameters such as area of innovation, adoption level, uniqueness of innovation and overall impact on customers were considered.
The evaluation was conducted on the basis of banks' responses and secondary research to identify the uniqueness of each initiative. For the Best Rural Outreach category, in addition to banks' responses, information on customers on-boarded and customer outreach was gathered through banks' annual reports, RBI and other secondary research.
Parameters such as Customer Outreach, Rural Penetration, Customers On-boarded under various government initiatives and technology initiatives to enhance rural outreach were considered for scoring. The banks who have defined a successful model for the innovation and Rural Outreach across these parameters were evaluated and ranked.
Banks (Fintech Initiative)
KPMG received responses from banks and analysed areas of fintech association, level of adoption, uniqueness and overall impact of the initiatives. KPMG's association with the fintech ecosystem and understanding of fintech nuances based on nomination details shared by banks was instrumental in evaluating the performance of banks across the parameters.
Fintech (Lending, Payments, VAS)
The total number of nominations sourced was 32 across categories of payments, lending and VAS. The key parameters considered for scoring were financial health, funding maturity, differentiation basis business model, technology, key focus and solutions, level of adoption across customers, geographies and industry, and business volumes of the company.