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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

A STUDY OF THE PROFITABILITY OF URBAN COOPERATIVE BANKS (IN GREATER MUMBAI ANDJALGAON FOR 5YEARS)
DR.SEEMA SANT*; DR P.T CHAUDHARI**
*Sr. Faculty Member, Indigrow Institute of Professional Studies, Mira Road East. **Head of Department of Commerce, M.J.College, Jalgaon (M.S).

ABSTRACT This paper evaluates the performance of Urban Cooperative banks for the period 2004-2009. Financial ratios are employed to measure the profitability, liquidity and credit quality performance of Ten Urban Cooperative banks from Jalgaon and Greater Mumbai The study found that overall bank performance increased considerably in the years of the analysis. A significant change in trend is noticed at the onset of the global financial crisis in 2007, reaching its peak during 2008-2009. This resulted in falling profitability, less liquidity and deteriorating credit quality in the Indian Banking sector. KEYWORDS: Bank performance, financial ratio analysis, Profitability, Urban Cooperative bank. ______________________________________________________________________________ INTRODUCTION The study uses Ratio analysis to compare profitability and productivity of UCBs of selected banks as Ratio analysis is a powerful tool of financial analysis. In financial analysis ratios are generally used as benchmarks for evaluating a firms position or performance. The absolute values may not provide us meaningful values until and unless they are related to some other relevant information. Ratios represent the relationship between two or more variables. Ratios help to summarize large data to draw qualitative judgments about the firms performance. The common denominator used for developing the various profitability ratios is business volume (deposits + advances). The banks generally use calculate spread ratio as % of total assets. The total assets are accounting (Balance sheet) figures, which are based on historical costs and hence are not very suitable to evaluate the current performance of the banks. In order to have a suitable indicator for evaluating current bank performance we have used the volume of business (Advances + Deposits) in the denominator. . Productivity has been measured in terms of the outputs (like Business, deposits, advances) per input (employee). The ratios used for measuring the profitability of the banks are as: 1. Interest earned ratio (r) = Total interest earned/Volume of business x 100 2. Interest paid ratio (p) = Total interest paid/Volume of business x 100

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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

3. Non-interest income ratio (n) =Total incomeinterest income/Volume of business x 100 4. Other operating expenses ratio (o) =Total expensesinterest expenses/Volume of business x 100 The following equations are derived from the above ratios: 1. Spread ratio (s) = Interest earned ratio Interest paid ratio (r-p) x 100 2. Burden ratio (b) = other operating expenses ratio Non interest income ratio (o-n) x 100 The profitability ratio is worked out as follows: Profitability ratio = Spread ratio Burden ratio x 100 OBJECTIVES OF THE STUDY 1) To understand the performance of Urban Cooperative banks over the period of time HYPOTHESES OF THE STUDY Null Hypothesis 1: There is no significant improvement in the performance of UCB over time. Alternate Hypothesis 1: There is a significant improvement in the performance of UCB over time. Null Hypothesis 2: There is no significant difference between the performance of UCB in Greater Mumbai and Jalgaon Alternate Hypothesis 2: There is a significant difference in the performance of UCB in Greater Mumbai and Jalgaon. Null Hypothesis 3: There is no difference in the yearly performance of UCB in Greater Mumbai and Jalgaon. Alternate Hypothesis 3: There is a significant difference in the yearly performance of UCB in Greater Mumbai and Jalgaon. METHODOLOGY OF THE STUDY In order to compare the performance of different cooperative banks we used SPSS v16. The parameters used to evaluate the performance of banks include burden ratio, profitability ratio and credit-deposit ratio. Further, there are two independent variables: financial year during which the banks performance is tested (with five levels: 2004-05, 2005-06, 2006-07, 2007-08 and 200809) and location of bank (with two levels: Greater Mumbai and Jalgaon). The financial year is the repeating factor as the performance parameter is measured during each financial year for each bank. The other factor, location of bank, is a fixed factor, and therefore a two-way repeated

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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

measure ANOVA, with time as the repeating factor and location as fixed factor, is the appropriate test PROFITABILTY COMPARISON Profitability ratio is a financial measure used to assess a businesss ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. Profitability Ratio = Spread Ratio Burden Ration x 100 SPREAD RATIO: The spread ratio is the difference between the average ratios of interest income to assets and the average ratios of interest expended on liabilities. BURDEN RATIO: The burden ratio is the difference of other operating expenses to non interest income. An increasing trend would show lack of burden bearing. The descriptive statistics showing the profitability of banks are presented in Table 1. The results indicate that the profitability of banks in Greater Mumbai is 1.18% in 2004-05, 1.04% in 2005-06, 0.63% in 2006-07, 1.07% in 2007-08 and 1.43% in 2008-09. On the other hand, the profitability of banks in Jalgaon is 0.39% in 2004-05, 0.35% in 2005-06, 0.24% in 2006-07, 0.40% in 2007-08 and 0.57% in 2008-09. Further, it is observed that the profitability of banks in Greater Mumbai is highest in the year 2008-09 and lowest in the year 2006-07. Similarly, the profitability of banks in Jalgaon is lowest in the year 2006-07 and highest in the year 2008-09. TABLE 1 DESCRIPTIVE STATISTICS SHOWING THE PROFITABILITY RATIO OF GREATER MUMBAI AND JALGAON BANKS FROM 2004-05 TO 2008-09 Mean Year Bank N (%) Greater Mumbai 2004-05
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Std. Deviation (%) 0.54 0.56 0.52 0.43 0.55 0.30

7 3 7 3 7 3

1.18 0.39 1.04 0.35 0.63 0.24

Jalgaon Greater Mumbai 2005-06 Jalgaon Greater Mumbai 2006-07 Jalgaon

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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

Greater Mumbai 2007-08 Jalgaon Greater Mumbai 2008-09 Jalgaon Overall years for 5 Greater Mumbai Jalgaon

7 3 7 3 7 3

1.07 0.40 1.43 0.57 1.07 0.39

0.53 0.24 0.71 0.38 0.60 0.35

Source: Complied and calculated from annual reports of 10 selected UCBs Period-wise, it can be observed from the above table that the profitability of the UCBs in both Greater Mumbai & Jalgaon is not stagnant and steadily increasing. It is either increasing or decreasing by a slight margin as the Profitability of the Banks largely depends on more income of the banks with less expenditure. However, from the above table, it is observed that the same has not been achieved by the banks as though the income of the banks has increased considerably, it has not been able to stop themselves from lessening the expenses and expenses has proportionately increased with that of the income. As a result, these variations have been seen in the above table. Further, the results indicate that during each of the five years the average profitability of banks in Greater Mumbai is higher than the average profitability of bank in Jalgaon. However, the F-test results indicate that this difference in the yearly profitability of banks in Greater Mumbai and Jalgaon is statistically insignificant, F (4, 32) = 0.311, p>0.05. Thus, we conclude that though there is some difference in the average profitability of UCBs in the two cities for all the five years, the performance of banks in terms of profitability is same.

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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

FIGURE.1 PROFITABILITY OF BANKS IN GREATER MUMBAI AND JALGAON FOR THE FIVE YEAR PERIOD

Source: Compiled The 5-year average profitability of banks in Greater Mumbai (M=1.07%, SD=0.60%) is higher than the average profitability of banks in Jalgaon (M=0.39%, SD=0.35%). Moreover, the F-test results indicate that this difference in the overall profitability of banks in the two cities is statistically significant, F (1, 8) = 8.62, p<0.05. Thus, we conclude that the overall performance of UCBs in Greater Mumbai is better than the overall performance of UCBs in Jalgaon. The distribution of the profitability of banks in Greater Mumbai and Jalgaon for the five year period is shown in Figure 1. The profitability of UCBs decreases initially during 2004-05 up till 2006-07, probably due to the onset of economic recession world over which has drastic influence on the people as far as their investment, expenses and usage of financial schemes through the banks came down heavily. The recession had also influenced in the industrial belt universally and thus put the banks and financial institutions in a fix. Further one of the reasons for the above performance of the banks due to this was low investment in technological up gradation, and then the same increases continuously. The descriptive statistics in Table 1 suggest that the profitability of UCBs is highest for the year 2008-09 (M=1.17, SD=0.74) and lowest for the year 2006-07 (M= 0.52, SD=0.51). However, the F-test results indicate that there is no significant difference in the profitability of banks over time, F (4, 32) =1.549, p>0.05. Thus, we
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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

can conclude that statistically there is no improvement in the profitability of the banks over the period of time. BURDEN RATIO COMPARISON Burden ratio shows the expense burden (net of other income) during a year as a fraction of total business volume during that year. Burden Ratio = Other Operating Expenses Ratio Non Interest Income Ratio x 100 Other operating expenses: Equals the non-interest expenses. The operating expenses to AWF ratio explain the overall operational efficiency of a bank. In fact, this ratio is one of the indictors of profitability of a bank. Average working funds (awf) The AWF at the beginning and at the close of an accounting year or at times worked out as fortnight or monthly average Non interest income: Non-interest income this is other income of a bank. It includes items such as exchange commission, brokerage, gains on sale and revaluation of investments and fixed assets and profits from exchange transactions. The descriptive statistics showing the burden ratio of banks are presented in Table 4. The results indicate that the burden ratio of banks in Greater Mumbai is 1.38 in 2004-05, 1.44 in 2005-06, 1.69 in 2006-07, 1.30 in 2007-08 and 0.86 in 2008-09. On the other hand, the burden ratio of banks in Jalgaon is 1.69 in 2004-05, 1.53 in 2005-06, 1.80 in 2006-07, 1.77 in 2007-08 and 1.72 in 2008-09. Further, it is observed that the average burden ratio of banks in Jalgaon is highest in the year 2006-07 and lowest in the year 2005-06. Similarly, the burden ratio of banks in Greater Mumbai is lowest (M=0.86, SD=1.11) in the year 2008-09 and highest (M=1.69, SD=0.67) in the year 2006-07. Moreover, the results indicate that the average burden ratio each year of banks in Greater Mumbai is lower than the average burden ratio of bank in Jalgaon for all the five-years. The higher burden ratio in Jalgaon banks compared to the burden ratio in Greater Mumbai can be attributed to the lack of infrastructure facilities, lack of training, and shortage of skilled human resources. However, the F-test results indicate that the difference in the annual burden ratio of banks in Greater Mumbai and Jalgaon is statistically insignificant, F (4, 32) = 0.755, p>0.05. A bank with a low burden ratio is better off. An increasing trend would show lack of burden bearing capacity
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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

TABLE 4 DESCRIPTIVE STATISTICS SHOWING THE BURDEN RATIO OF GREATER MUMBAI AND JALGAON BANKS FROM 2004-05 TO 2008-09 Mean Location N (%) Greater Mumbai 7 2004-05 Jalgaon 3 1.69 1.44 1.53 1.69 1.80 1.30 1.77 0.86 1.72 1.33 1.70 0.43 0.63 0.34 0.67 0.16 0.57 0.66 1.11 1.05 0.76 0.52
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Std. Deviation (%) 0.66

1.38

Greater Mumbai 7 2005-06 Jalgaon 3

Greater Mumbai 7 2006-07 Jalgaon 3

Greater Mumbai 7 2007-08 Jalgaon 3

Greater Mumbai 7 2008-09 Jalgaon Overall years for 5 3

Greater Mumbai 7 Jalgaon 3

Source: Complied and calculated from annual reports of 10 selected UCBs The 5-year average burden ratio of banks in Jalgaon (M=1.70, SD=0.52) is higher than the average burden ratio of banks in Greater Mumbai (M=1.33, SD=0.76). However, the F-test results indicate that this difference in the overall burden ratio of banks in the two cities during the 5 year period is statistically insignificant, F (1, 8) = 0.937, p>0.05. The distribution of the mean burden ratio of banks in Greater Mumbai and Jalgaon for the five year period is shown in Figure 4. The burden ratio of banks in Greater Mumbai during the five year period increases initially and then decreases. On the other hand, the burden ratio of banks in Jalgaon decreases

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initially, then increases and finally decreases. The initial increase in the burden ratio can be due to heavy investment in technology and onset of recession and the decrease thereafter can be a result of better productivity of employees and improved profitability. FIGURE 4 BURDEN RATIO OF BANKS IN GREATER MUMBAI AND JALGAON FOR THE FIVE YEAR PERIOD

Source: Compiled The descriptive statistics in Table 6.14 suggest that the burden ratio of banks is lowest for the year 2008-09 (M=1.12, SD=1.11) and highest for the year 2006-07 (M= 1.72, SD=0.55). However, the F-test results indicate that there is no significant difference in the mean burden ratio of banks over the time, F (4, 32) = 0.848, p>0.05.
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CREDIT DEPOSIT RATIO COMPARISON The amount of a bank's loans divided by the amount of its deposits at any given time. The higher the ratio, the more the bank is relying on borrowed funds, which are generally more costly than most types of deposits. It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher the loan-assets created from deposits. Credit Deposit Ratio = Total Advances Total Deposits x 100

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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

The descriptive statistics showing the credit-deposit ratio of banks are presented in Table 6.5. The results indicate that the credit-deposit ratio of banks in Greater Mumbai is 55.24% in 2004-05, 55.74% in 2005-06, 58.23% in 2006-07, 60.08% in 2007-08 and 57.74% in 2008-09. On the other hand, the credit-deposit ratio of banks in Jalgaon is 70.39% in 2004-05, 66.29% in 2005-06, 69.83% in 2006-07, 65.51% in 2007-08 and 59.70% in 2008-09. TABLE 5 DESCRIPTIVE STATISTICS SHOWING THE CREDIT-DEPOSIT RATIO OF GREATER MUMBAI AND JALGAON BANKS FROM 2004-05 TO 2008-09 Location Greater Mumbai 2004-05 Jalgaon Greater Mumbai 2005-06 Jalgaon Greater Mumbai 2006-07 Jalgaon Greater Mumbai 2007-08 Jalgaon Greater Mumbai 2008-09 Jalgaon Overall years for 5 Greater Mumbai Jalgaon 3 7 3 59.70 57.40 66.34 3.96
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N 7 3 7 3 7 3 7 3 7

Mean (%) 55.24 70.39 55.74 66.29 58.23 69.83 60.08 65.51 57.74

Std. Deviation (%) 14.40 0.80 16.27 3.13 11.94 2.97 9.09 2.38 8.38

12.02 2.65

Source: Complied and calculated from annual reports of 10 selected UCBs Further, it is observed that the average credit-deposit ratio of banks in Jalgaon is highest in the year 2004-05 and lowest in the year 2008-09. Whereas, the credit-deposit ratio of banks in Greater Mumbai is lowest in the year 2004-05 and highest in the year 2007-08. Moreover, the results indicate that the average credit-deposit ratio each year of banks in Greater Mumbai is

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lower than the average credit-deposit ratio of bank in Jalgaon for all the five-years. The F-test results indicate that the difference in the annual credit-deposit ratio of banks in Greater Mumbai and Jalgaon is statistically significant, F (4, 32) = 2.674, p<0.05. The 5-year average credit-deposit ratio of banks in Jalgaon (M=66.34%, SD=2.65%) is higher than the average credit-deposit ratio of banks in Greater Mumbai (M=57.40%, SD=12.02%). However, the F-test results indicate that this difference in the overall credit-deposit ratio of banks in the two cities during the 5 year period is statistically insignificant, F (1, 8) = 1.678, p>0.05. The distribution of the credit-deposit ratio of banks in Greater Mumbai and Jalgaon for the five year period is shown in Figure 5. FIGURE .5 CREDIT-DEPOSIT RATIO OF BANKS IN GREATER MUMBAI AND JALGAON FOR THE FIVE YEAR PERIOD

Source: Compiled The credit-deposit ratio of banks in Greater Mumbai during the five year period increases between 2004-05 and 2007-08 and then decreases. On the other hand, the credit-deposit ratio of banks in Jalgaon decreases initially, then increases and finally decreases. The descriptive statistics in Table 5 suggest that the credit-deposit ratio of banks is lowest for the year 2008-09 (M=58.33%, SD=7.16%) and highest for the year 2006-07 (M = 61.71%, SD=11.33%). However, the F-test results indicate that there is no significant difference in the credit-deposit ratio of banks over the period of time, F (4, 32) =1.666, p>0.05.

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International Journal of Multidisciplinary Research Vol.2 Issue 5, May 2012, ISSN 2231 5780

CONCLUSION The analysis of different financial ratio of UCBs operating in Greater Mumbai and Jalgaon suggest that the technological changes have significantly improved the productivity and profitability margins of these banks. Further, the statistics indicate that the performance of UCBs in Greater Mumbai is significantly better than the performance of UCBs in Jalgaon. Moreover, with the advancement of communication technology the UCBs have been successful in reducing their burden ratio and credit-deposit ratio over the time. REFERENCE Kulkarni, Dr. A. P. (2005, April). Analysis of Financial Statement of Urban Cooperative Banks with Special Reference to Pune. Rao, K. V. & Nirmala, D. (2006, October-December). Performance Evaluation of Urban Cooperative Banks. The Indian Journal of Commerce: Indian Commerce Association, 36-50. Sharma, G. & Kawdia, G. (2006). Efficiency of Urban Co-operative Banks of Maharashtra: A DEA Analysis. The ICFAI Journal of Bank Management: The ICFAI University Press, 25-38.

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