Commercial Banks’ Performance in India during Sub-Prime Meltdown

The sub-prime crisis in US that had its origin in 2007–08 had devastating effect in the financial segment of the economics across major part of the world which subsequently transmitted to the real economy thus causing prolonged recession. Banking sector was the major financial segment that got affected during sub-prime crisis which posed systemic risk. The present study focused on how the different commercial banks in India performed as the sub-prime crisis in US unfolded. The objective was to see which all banks ranked higher vis-à-vis their competitors in terms of maintaining a sound balance between profitability and stability during crisis. The study used multivariate Principal Component Analysis to measure the performance of commercial banks in India for 2008–09. The commercial banks in India have been classified into three different categories namely nationalized banks, private banks and foreign banks. The Reserve Bank of India and government of India have been taking various reform measures over the years thereby injecting competition in the banking sector. Such liberalization and competition policies induce banks to indulge into some kind of risky activities to earn profit. However, Reserve Bank of India time to time has issued several guidelines to the commercial banks so as to maintain stability in the banking sector to achieve macroeconomic stability. There exists a trade-off between profitability and stability. Thus, the bank that is maintaining a good balance between the two conflicting goals of stability and profitability should be viewed as a good performing bank. The present study tried to capture the overall performance of each individual bank in terms of both profitability and soundness during crisis year. The study used Principal Component Analysis to develop a composite index for each individual bank under a particular category—using various indicators reflecting soundness, asset quality and profitability—and then ranked the banks according to the index score obtained with respect to other banks in the category.