As 2019/20 was coming to a close, India went in for a severe lockdown. Banks had to test their business continuity plans as the pandemic was globally spreading from China to Europe and the US to Asia. The immediate strategy was to raise capital, initiate a stress test of portfolio and help customers. In a challenging work-from-home environment, Business Today-KPMG started the annual survey of picking the best banks and fintechs. The six-month long process started with knowledge partner KPMG studying annual reports and inviting self-nomination from banks, Small Finance Banks (SFBs) and fintechs for quantitative and qualitative analysis.
New features were introduced in the study. For the first time, the study included SFBs for both quantitative analysis and qualitative factors. Banks' qualitative awards were expanded from Best in Innovation and Fintech Engagement to Best in Talent & Workforce and Best in Enterprise Resilience. A special recognition-Lifetime Achievement Award was also introduced. In the Fintech category, lending Fintechs have not been rated this year due to the pandemic impact and insufficient data in the public domain regarding the financial performance, asset quality and liquidity levels. The Best in Financial inclusion category is now subsumed in the previous category of SFBs, whose objective is to achieve financial inclusion.
The next step was to put the findings before an independent jury to pick up the nine awards. The jury comprised of Shailesh Haribhakti, an independent director on the board of many companies and an eminent Chartered Accountant; Gunit Chadha, ex-CEO, Asia-Pacific region of Deutsche Bank AG & Founder, APAC Financial Services; Chet Kamat, Managing Director & CEO, Oracle Financial Services Software; N. Sivaraman, Managing Director & Group CEO, ICRA Ratings and Ranu Vohra, Co-founder & Executive Vice chairman of Avendus Capital.
The jury debated the various categories at length with focus on long-term sustainability of innovations and Fintech engagement initiatives and the larger impact on operational efficiencies. The jury also discussed the business model transformation where the banks are able to direct customers from branches to digital model. For Fintechs, the jury was clear that these start-ups have to last for long and cannot be a flash in the pan. The capital position of Fintechs was also discussed. The jury also appreciated the efforts of some public sector banks as they have to work under various constraints. The jury decided to create a special award as Best PSB, which went to the State Bank of India. This increased the jury awards to 10. Here is the detailed methodology for BT -KPMG Best Bank survey 2020.
For rankings based on pure financial performance, data was taken from published annual reports of banks from FY17 to FY20. During the current year, Indian Small Finance Banks (Group VI) were included in the survey and data was taken from published annual reports of banks for FY19 and FY20. The survey covered 61 scheduled commercial banks that had published annual reports in the public domain or provided their annual reports at the time of conducting the survey prior to December 31, 2020.
Scheduled commercial banks (except in case of Indian Small Finance Banks) with balance sheet size of less than Rs 5,000 crore on March 31, 2020 were not considered. Also not covered were scheduled commercial banks whose financial statements were not available with us or which had not completed four years in India as on March 31, 2020 (other than Indian Small Finance Banks) or were involved in mergers or were under liquidation.
The Ranking Process
The banks were divided between 'Indian banks' (consisting of public and private sector banks), 'Foreign banks' (branches of foreign banks operating in India) and Indian Small Finance Banks. The banks (other than Indian Small Finance Banks) were classified based on balance sheet size as on March 31, 2020.
- Group I: Indian banks with balance sheet size of more than or equal to Rs 300,000 crore.
- Group II: Indian banks with balance sheet size of more than Rs 100,000 crore and less than Rs 300,000 crore.
- Group III: Indian banks with balance sheet size of less than or equal to Rs 100,000 crore.
- Group IV: Foreign banks with balance sheet size of more than or equal to Rs 25,000 crore.
- Group V: Foreign banks with balance sheet size of more than Rs 5,000 crore and less than Rs 25,000 crore
- Group VI: Indian Small Finance Banks.
The banks were judged on three parameters - Growth, Size and Strength - divided into 35 sub-parameters:
Growth: There were 10 sub-parameters in this category, which included growth over FY19 in deposits, alongside three-year compounded annual growth rate (CAGR), of total deposits (one year for Indian Small Finance Banks); growth over FY19 in loans and advances, alongside three-year CAGR in loans and advances (one year for Indian Small Finance Banks); growth over FY19 in fee income (commission, exchange, brokerage plus miscellaneous income), alongside three-year CAGR (one year for Indian Small Finance Banks) in fee income; growth over FY19 in operating profit, alongside three-year CAGR (one year for Indian Small Finance Banks) in operating profit; and absolute increase in market share of deposits and of Current Account Savings Account balances.
Size: There were three sub-parameters in this category, which included size of total deposits, size of operating profits and size of balance sheet as at March 31, 2020.
Strength: There were four sub-parameters in this category, each with further sub-divisions as set out below:
- Quality of assets - NPA growth ratio: Additions to NPAs during the year as percentage of average net advances (i.e. average of closing balance of FY19 and FY20); 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 RBI rules and reported by the bank as a percentage of addition to NPAs; divergence in provisioning for NPAs: difference in provision for NPAs as per RBI rules and reported by the bank as a percentage of reported profit before provisions and contingencies; restructured assets as a ratio of total average loans and advances (i.e. average of closing balance of FY19 and FY20); outstanding restructured assets as percentage of outstanding loans and advances; deposits of 20 largest depositors as a percentage of total deposits, advances to 20 largest borrowers as a percentage of total advances, exposure to 20 largest borrowers/customers as a percentage of total exposure.
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.
- Productivity and efficiency - Cost to income ratio: Operating expenditure as percentage of operating income; cost to average asset ratio: operating expenditure as a percentage of average assets (i.e. average of closing balance of FY19 and FY20); absolute increase in return on assets: basis points rise in return on assets (net profit over total average assets) from FY19 to FY20; percentage rise in ratio of operating profit to total income from FY19 to FY20.
- Quality of earnings - Return on assets: Ratio of net profit to average assets (i.e. average of closing balance of FY19 and FY20); fee income as percentage of total income; return on capital employed: reported net profit divided by average net worth (i.e. average of closing balance of FY19 and FY20); net interest margin: total interest income minus total interest expenses as percentage of average interest earning assets; penalties imposed by RBI during the year.
- Capital adequacy and liquidity coverage - Capital adequacy ratio: Capital-to-risk weighted assets ratio for FY20; Tier-I capital: total of equity capital and disclosed reserves; Liquidity coverage ratio: ratio of high-quality liquid assets to total net cash outflows over the following 30 calendar days (For Karnataka Bank Ltd, in absence of annual LCR, LCR for the quarter ended 31 March 2020 was considered).
Final Scoring / Rating
For each bank a score was assigned for each of the 35 sub-parameters, based on its rank. 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. In total, 32 banks were not considered for the survey in FY20 due to mergers, amalgamations, liquidation, non-availability of annual reports / complete annual reports in public domain for FY20 and balance sheet size of less than Rs 5,000 crore.
Qualitative Awards (Payments, Value-added Sevices)
Four 'Qualitative awards' categories were considered to recognise and appreciate the initiatives undertaken by banks in the areas of innovation, talent and workforce, enterprise resilience and Fintech.
Best Bank Innovation award - Banks were invited to describe their innovation initiatives across four critical focus areas of customer experience, business model, service delivery and digital adoption. Every innovation initiative was evaluated and ranked based on four key parameters viz. area of impact, adoption level by the bank, impact created by the initiative and the uniqueness of the solution.
Best Bank: Talent and workforce award - Banks were evaluated on interventions across four critical focus areas under talent and workforce management, including digital initiative taken in the area of PMS and talent management, initiative taken in the area of women leadership development and gender diversity, innovative people management initiatives during Covid and innovative practices in the area of future of workforce.
Best Bank: Enterprise Resilience award - This award focused on technology resiliency and financial resiliency. Banks were scored across each of these parameters to arrive at a cumulative weighted average score.
As part of technology resiliency, bank's technology architecture and third-party risk management were assessed.
Technology architecture strategy: Banks responses
were evaluated in terms of their technology upgrade strategy, adoption of modern scalable technologies and strategy on solutions and partnerships to make customer-servicing capabilities more resilient. This also covered adoption of Cloud and IT infrastructure modernisation. Additionally banks were evaluated on measures that were put in place to allow remote working/ WFH.
Third-party risk management programme (TPRMP): Banks were evaluated on aspects such as oversight from Board and senior management, risk-management processes across vendor lifecycle starting from due-diligence to periodic review and exit plan, maturity of the third-party risk management framework and coverage of risk domains e.g. resiliency, data privacy etc, apart from cyber security.
- Financial resiliency: Banks were evaluated in terms of measures taken for liquidity or asset-liability management in tough environment and actions taken to measure the stress testing to address enhanced credit default risk.
- Liquidity or asset liability management: Banks were judged on parameters around their risk appetite, risk behaviour, compliance to LCR/NSFR ratios, stress testing exercises, stability of deposits and stable funding, and quantitative explanations to substantiate their stand.
- Credit default risk: Banks were evaluated around their responses on the ICAAP exercise, stress impact of Covid-19, creation of downturn scenarios, impairment governance measures, capital management, ALCO meetings, recovery aspects and strategy. Also, if quantitative analysis was provided it was also factored in for scoring.
Award For Best Fintech Initiative By Banks
Banks were invited to describe their Fintech initiatives which were evaluated and ranked based on four key parameters viz. area of impact, adoption level by the bank, impact created by the initiative and the uniqueness of the solution
Qualitative Awards - Fintech Awards
There were two award categories - payments and value-added services segment. The key parameters considered for evaluation of fintech players were company health (years of operation, revenue generated per employee), funding maturity, business volumes of the company, differentiation (basis business models, product features, IP and technology, key focus and solutions) and adoption levels across customer segments and geographies; along with industrial partnerships.