After almost two years of the Covid-19 pandemic and lockdowns, the banking industry is finally showing some resilience. Most banks are well-stocked with capital and liquidity, and profitability and asset quality numbers are improving. The big challenge is credit growth. In addition, the real picture of non-performing assets (NPAs) will come out only after the end of several regulatory forbearances. This was the backdrop against which Business Today and KPMG commenced its annual exercise. The task was to analyse banks’ balance sheets and reach out to them for their initiatives on innovation, fintech engagement, talent and workforce management and enterprise resilience.
The innovation category received 80-plus nominations. Under talent and workforce, banks responded to the future of workplace parameters with innovative practices like work from home, hot seat concept, gig, and contract manpower. Post-Covid-19, enterprise resilience, especially technology and risk resilience, has taken centre stage, and the banks responded with such initiatives.
The next step was to engage with a jury that comprised Anand Sinha, former Deputy Governor, Reserve Bank of India; Romesh Sobti, former MD & CEO, IndusInd Bank; Rashesh Shah, Chairman, Edelweiss Financial Services; Sanjay Jalona, CEO & MD, Larsen & Toubro Infotech; and Amit Harlalka, Deputy CFO, ArcelorMittal Nippon Steel India.
The jury debated issues such as the impact and effectiveness of digital initiatives, risk management, portfolio quality, and deliberated the banks’ claims. Governance issues, leadership stability, and quality of loan growth were also looked at while deciding the Bank of the Year. The jury decided to award the Lifetime Achievement Award jointly to Rajnish Kumar, former Chairman, State Bank of India, and Sobti of IndusInd bank. As Sobti was part of the jury, he did not participate in the deliberations to decide this particular award. Here is the detailed methodology for the BT-KPMG Best Banks Survey 2020-21.
For rankings based on financial performance, data was taken from banks’ published annual reports from FY18 to FY21. For the current year, Indian small finance banks or SFBs were included in the survey and the data was taken from their published annual reports for FY19 to FY21. The survey covered 46 scheduled commercial banks that had published annual reports in the public domain or had provided their annual reports at the time of conducting the survey prior to December 31, 2021. Indian banks (except SFBs) with a balance sheet size of less than Rs 5,000 crore and foreign banks with a balance sheet size of less than Rs 25,000 crore as on March 31, 2021, 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, 2021 (other than SFBs) or were involved in mergers in the past four years or were under liquidation. The survey also did not include small foreign banks with a balance sheet size of Rs 5,000-25,000 crore.
THE RANKING PROCESS
Banks were classified as ‘Indian banks’ (both public and private), ‘foreign banks’ (branches of foreign banks operating in India) and Indian small finance banks. Indian banks were further classified based on balance sheet size as on March 31, 2021:
Besides these there were two other categories:
Banks were judged on three parameters—growth, size and strength—divided into 35 sub-parameters:
Growth: This had 10 sub-parameters: growth over FY20 in total deposits and three-year compounded annual growth rate (CAGR) of total deposits (two-year for SFBs); growth over FY20 in loans and advances, with three-year CAGR in loans and advances (two-year for SFBs); growth over FY20 in fee income (commission, exchange and brokerage income plus miscellaneous income), and three-year CAGR in fee income (two-year for SFBs); growth over FY20 in operating profit, alongside three-year CAGR in operating profit (two-year for SFBs); and absolute increase in market share of deposits and of current account savings account balances.
Size: This had three sub-parameters: size of total deposits, size of operating profits and size of balance sheet as of March 31, 2021.
Strength: This had four overarching sub-parameters, each with further sub-divisions:
Quality of assets: Total NPA growth ratio: additions to NPAs during the year as percentage of average net loans and advances (i.e. average of closing balance of FY20 and FY21); NPA coverage: provisioning as of March 31, 2021 for NPAs as percentage of gross NPA closing balance; net NPAs as ratio of net advances: gross NPAs’ closing balance net of provisioning as of March 31, 2021 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 FY20 and FY21); 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 with divergence of less than 15 per cent and 10 per cent, respectively, were assigned the highest rank. Further, for determining rankings based on provision coverage ratio, banks with zero NPAs and banks with a provision coverage ratio of 100 per cent were assigned the highest rank.
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 total assets (i.e. average of closing balance of FY20 and FY21); absolute increase in return on assets: basis points increase in return on assets (net profit over total assets) from FY20 to FY21; percentage increase in ratio of operating profit to total income from FY20 to FY21.
Quality of earnings: Return on assets: ratio of net profit to average total assets (i.e. average of closing balance of FY20 and FY21); 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 FY20 and FY21); net interest margin: total interest income minus total interest expenses as percentage of average interest earning assets; penalties imposed during the year.
Capital adequacy and liquidity coverage: Capital adequacy ratio: capital-to-risk weighted assets ratio for FY21; Tier-I capital: total of equity capital and disclosed reserves; liquidity coverage ratio (LCR): ratio of high-quality liquid assets to total net cash outflows over the following 30 calendar days. (For Karnataka Bank, in the absence of annual LCR, LCR for the quarter ended March 31, 2021, was considered).
FINAL SCORING AND RATING
Each bank was assigned a score for each of the 35 sub-parameters, based on its rank on those parameters. The score under each parameter was then multiplied by the parameter’s weight to arrive at the final score. The results were aggregated to arrive at the final rankings based on the total score. In all, 45 banks were not considered for the survey due to mergers, amalgamations, liquidation, non-availability of annual reports/complete annual reports in the public domain for FY21 and balance sheet size of less than Rs 5,000 crore.
Four ‘qualitative awards’ recognised the initiatives and strategies undertaken by banks in the areas of innovation, talent and workforce, enterprise resilience and fintech.
Best Bank - Innovation award: Banks had to describe their initiatives across the four focus areas of customer experience, business model, service delivery and digital adoption. Every 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 uniqueness of the solution.
Best Bank - Talent & Workforce award: Participating banks were evaluated on interventions across four focus areas under talent and workforce management, initiative taken in development of women leadership and diversity, employee experience and well-being and innovative practices in the area of the future of the workforce. These focus areas were each further evaluated on uniqueness of idea, breadth of initiative, implementation evidence and impact achieved. The overall scores and responses were presented to the jury, who picked a winner.
Best Bank - Enterprise Resilience award: This broadly focussed on technology resilience and financial resilience. Banks were scored across each of these parameters basis their response to arrive at a cumulative weighted average score.
As part of technology resilience, banks were evaluated around the areas of IT strategy, usage of technology for risk management & compliance and strength of third-party risk management programme. Responses were evaluated on the basis of degree of adoption of emerging technologies, strong governance and risk management capabilities, ability to leverage global solutions, partnerships with fintech firms, data governance aspects and IT skills deployed. Banks providing specific and detailed use cases and examples scored higher.
As part of financial resilience, banks were evaluated in terms of measures taken on the following parameters:
Liquidity or asset-liability management: Preparedness on inflow, outflow and investment during Covid-19; plan to deal with increased market volatility and other macroeconomic scenarios like challenge in NAV calculation during Covid-19 and market stress; stress testing and scenario analyses on liquidity.
Addressing enhanced credit default risk: Preparation for integrating crisis impact into existing stress testing framework and processes; incorporation of current crisis and associated economic repercussions into the capital planning and forecasts; preparation for a significant enhancement and realignment of capital approaches and stress-testing infrastructure.
ESG and sustainability: Embedding ESG and sustainability issues into risk management frameworks, in particular stress testing.
Serving lower segments of society: Addressing supply side issues and impact of lending and banking offerings and policies, particularly considering the impact of Covid-19 on lower-income and under-served segments of society at large through loans to SMEs, online platforms, launching green products, etc.
Award for Best Fintech Initiative by banks: Banks were asked 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 (VALUE-ADDED SERVICES, PAYMENTS)
There were two categories: value-added services and payments. The key parameters considered to evaluate fintech players were company health (e.g. years of operation, revenue per employee), funding maturity, business volumes of the company, differentiation (basis business models, product features, IP and tech, key focus and solutions) and adoption levels across different customer segments and geographies; along with current industrial partnerships.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today