SBI Fee income: Pitfalls, Challenges and Opportunities

Sirisha Kumari Akella

VP (Statistician)

SBSC

Acknowledgements

I express my gratitude to Shri. Mohan. S General Manager & Principal State Bank Staff College, for giving me the oppurtutinity to doing the project.

I express my gratitude to Shri.BK. Toppo, DGM (PD&A), State Bank Staff College, for providing me the support and guidance to complete the project.I express my gratitude to Shri. Shakeel AGM, PPR Dept., for providing me data to complete the project. Sirisha Kumari Akella

VP (Statistician)

Dated: 04.03.2015Contents

S.NoTopicPage

1Executive summary4

2Introduction6

3Objective of the study7

4Methodology8

5Trend Analysis9

6Correlation Analysis9

7Regression Analysis11

8SWOT Analysis12

9Strategies15

10Conclusion16

Executive Summary

In banking business nationalize and private banks earn huge income from these sources but not all schedule banks offer so many services and schedule banks earn less "Non-interest income as compare to nationalize and private banks in India.

Objective of the Study:

Strategies to boost the Fee income of the Bank.

Methodology:

1. Trend Analysis for comparisons of peer group Fee income.

2. Correlation analysis for relation between performance indicator, macro economic parameters and Fee Income.

3. Multiple Regression Model for Fee income, how impact fee income of the bank on macro economic parameters and bank performance parameters. These ratios are then used to construct a regression model to establish the relationship of each variable of the banks income using Fee income the dependent variable.4. Finally, carrying out the SWOT analysis for implementing the optimization of fee income.Analysis &Results Relation between Fee income and ROA, Per capita income is Strong positive correlation implies that if ROA and Percapita income are increases then Fee income is also increase.

These independent variables are perfectly related to Fee income, Means that impact of these parameters on Banks Fee income. So, we can predict Fee income from this model using these independent variables. If the economy grows, the demand for fee-based services of banks services is certain to go up.

SWOT AnalysisSuggested Strategies for boost up Fee income a Bank:1. Improve collection of current fees.

2. Put a value on Customer relationships.

3. Improve Marketing on products and services.

Conclusion:From the trend analysis other income to fee income ratio is high for private banks as compare to PSU banks.

From the correlation analysis strong relation between fee income and macro economic parameters, bank performance indicator means that economic conditions are impact on fee income.

From regression Analysis an R-square to 1.0 indicates that we have accounted for all of the variability with the variables specified in the model. So, Bank should make standard monitor system and adopt new strategies on regular basis. SBI Fee income: Pitfalls, Challenges and OpportunitiesIntroduction

In post reform period RBI has deregulated interest rate on Loans and Advances and hence every bank is independent to determine the interest rate on Loans and Advances. Now RBI has deregulated interest rate on saving account also, therefore almost all banks will increase interest rate on saving account to increase deposits in their banks. Therefore, banks offer low interest rate on Loans and Advances to increase advances and on other hand increase rate of interest rate on savings or other deposits in bank account. To increase revenue, banks offer other services to their customers or clients and from these other services banks earn "NON-INTEREST INCOME" (fees, commission, charges, exchange fees etc.) Banks offer various services to their customers at a cheaper rate. In banking business, nationalized and private banks earn sizeable income from these sources but not all scheduled banks offer so many variety services and hence, they earn less "Non-interest income as compared to nationalized and private banks in India.

Following are the services offered by various banks in India.

* ATM facilities* NEFT money transfer* Demand draft/ pay orders* Signature verification* Demat account* Online bill/ Tax payments* Online ticket booking* Third party product* Sale of insurance* Sale of mutual funds * Sale of gold coins etc. Opening &confessing of LCs and grauntees.Significance

Banks, the world over, are transcending their normal business operations and diversifying their activities in response to economic and financial sector reforms. The Indian banking industry too has been seen steadily shifting away from traditional sources of revenue like from loan advances to non-traditional sources that generate fee income, service charges, trading revenue, and other types of noninterest income. Objective of the Study:Strategies to boost the Fee income of the Bank.

Business Goal:

Optimization of Fee income of the Bank by carrying out the SWOT Analysis, best practices adopted by peer banks in India and abroad.Data & Methodology:

5. Trend Analysis for comparisons of peer group Fee income.

6. Correlation analysis for relation between performance indicator, macro economic parameters and Fee Income. 7. Multiple Regression Model for Fee income, impact of fee income of the bank on macro economic parameters and bank performance parameters. These ratios are then used to construct a regression model to establish the relationship of each variable of a banks income using Fee income with dependent variable.8. Finally, carrying out SWOT analysis for implementing the optimization of fee income.Data:Fee income, performance indicators and efficiency ratios of banks are obtained from various bank sites. Macro economic parameters are obtained from RBI site.Limitations of the Study:In this study we obtained only our bank data. We unable to collect the peer group data due to other banks and privative sector banks are reluctant to share their data with us.Analysis:Trend Analysis: In statistics, trend analysis often refers to techniques for extracting an underlying pattern of behaviour in a time series which would otherwise be partly or nearly completely hidden by noise. A simple description of these techniques is trend estimation, which can be undertaken within a formal regression analysis.

Trend for SBI and other peer group of Fee income: Rs.in Crs

From the trend analysis for all the banks, fee income has an increasing trend at a variable pace .Weak trend of growth in the entire banks fee income in 2009 to 2010 period (recession period) turned around with positive growth from 2011. SBI Fee income growth rate is highest of all other banks growth.Trend for SBI and other peer group of Fee income to other income ratio:

From the trend Analysis for fee income to other income ratio, it reveals that the Private Banks ratio is better than that of PSU Banks.Now we are going to observe any relation between SBI fee income and banks ROA, Macro economic parameters like GDP, Inflation and Per capita Income through correlation analysis.Correlation Analysis:

Correlation analysis is one of the most widely used and reported statistical methods in summarizing research data. It is useful to determine if any relationship exists between two different variables. If so, how significant or how strong is this association between the two variables.

A positive correlation coefficient indicates that an increase in the first variable would correspond to an increase in the second variable, thus implying a direct relationship between the variables.

A Negative correlation coefficient indicates that an increase in the first variable would correspond to decreases in the second variable, thus implying a direct relationship between the variables.

Where correlation coefficients (in absolute value) which are = 0.90 very high correlations.

Table 1:Correlation between Fee income and ROA,Percapita income, Inflation and GDP

ROAFee incomePer capitaInflationGDP

ROA1.00

Fee income-0.651.00

Per capita-0.560.861.00

Inflation0.88-0.90-0.691.00

GDP-0.10-0.22-0.64-0.061.00

From the Table 1: Relation between Fee income/ ROA and Per capita income is Strong positive correlation implies that if ROA and Percapita income increase, then Fee income is also increase.

Relation between Fee income and Inflation is Strong negative correlation implying that if Inflation increases then Fee income is decreases. Relation between Fee income and GDP is Low negative correlation suggesting that if GDP increases, then Fee income decreases.Next, we are going to fit multiple regression models for Fee income and other independent variables. From the model, we can predict a Fee income on the basis of multiple independent variables (ROA, GDP, Inflation, Per capita income). In this study, it is observed that these are independent variables for Fee income model fit, it may include some other independent variables also.Regression Analysis:In statistics, regression analysis is a statistical process for estimating the relationships among variables. It includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables.

Model Fit

To identify the determinants of Fee income of the Bank during 2004-2014 years, this study has chosen multiple regression analysis. The period of study is 10 years starting from 2004 till 2014. The regression model is as follows:

Regression Model for Fee income:

Fee income = 0 + 1X1 + 2X2 + 3X3+ 4X4+ 5X5+ 6X6+

Whole Model for Fee income:

Fee income = 0 + 1 GDP+ 2 per capita income + 3 Banks ROA + 4 Inflation +

Table 2 : Model Summary:Model Summary

ModelRR SqaureAdjusted R SquareStd.Error of the Estimate

11.001114.49584

Predictors: constant, Inflation, ROA, GDP and per capita income, dependent variable is Fee income.

The coefficient R is 100%. This shows that all of the independent variables collectively explain 100% changes in Fee income. This is explained by cumulative effect of the 4 independent Variables employed in this study: ROA, Inflation, GDP and Per capita Income. From these findings it is clear that there is a Perfect significant relationship between 4 independent variables and Fee income of a bank. An R-square to 1.0 indicates that we have accounted for all of the variability with the variables specified in the model. Conclusion, these independent variables are perfectly related to Fee income, means that impact of these parameters on Banks Fee income. So, we can predict Fee income from this model using these independent variables. If the economy grows, the demand for fee-based services of banks services is certain to go up.Finally, in this study obtained SWOT analysis for Optimize the Fee income of the Bank.SWOT Analysis For Fee income of BankA study undertaken by an organization to identify its internal strengths and weaknesses, as well as its external opportunities and threats.

SBI has its roots since 1806 which was later transformed under various names, finally SBI Was established after the act in parliament on May 1955. In the year 1959 SBI took over 8 state owned banks and since then it started to grow up carrying its heritage of servicing people at various economic levels.Strengths: SBI is the largest bank in India in terms of market share, revenue assets and net SBI has the first mover advantage in commercial banking service. SBI has 15,869 branches in India, as on 31 March 2014, of which 10,455 (52%) were in Rural and Semi-urban areas and 43,515 ATMcentres. The bank has its presence in 36 countries engaging currency trade all over the world. SBI has changed its vision and mission statements showing a sign of inclination towards new age banking services. SBI has very good products for all the segments like insurance, Credit cards and so on.Weakness: Lack of proper technology driven services when compared to private banks. Employees show reluctance to attend and solve issues quickly and customers waiting period is longer than that of the private banks. In spite of modernization, the bank still carries the perception of traditional bank to new age customers. SBI fails to attract salary accounts of corporate and many government sector employees salary accounts are also shifted to private banks for ease of operations. SBI fails to attract customers due to lack of proper advertise the products.Opportunities SBI is yet to modernize few of its banking operations, there is a better scope of using advanced technologies and software to improve customer relations. Young and talented pool of graduates are in rise to open new horizon. Offering new products and services, expanding into new markets, or entering new business lines, such as brokerage services, insurance sales or financial planning. Threats: This is a major threat to SBI as people tend to switch to Private and foreign banks for better facilities and technologies in banking service. Customer prefer to switch to private banks and financial service providers for loans and mortgages, as SBI involves stringent verification procedures and take long time for processing.Suggested Strategies for boost up Fee income a Bank:Fee income is critical to a banks long-term success. This is particularly true today, when a variety of economic and regulatory factors are having a negative impact on Fee income.

At the same time, Fee income is declining for many banks. There are several reasons for this, including general economic conditions and regulatory changes, such as opt-in requirements for overdraft protection fees and limitations on credit card fees and debit card interchange fees.1. Improve collection of current fees.This Strategy is to consistently produce fee income from traditional sources and able to maximize fee income from more than one source. To generate fee income from three primary sources: service charges on deposit accounts, gains on sales of loans and bank card and exchange fees. This type of model might require a cultural shift for many community banks. In order to adopt a model of this type, our bank would have to limit (or almost eliminate) waiver of fee.Finally, to take account of fee waiver data in regular management reports, so that the Bank can monitor results.2. Put a value on Customer relationships.The correlation between fee income and quality of customer service is quite high. Unmistakably, banks have to concentrate more on providing accurate, better, faster and more efficient customer service. Any service provided by banks has to earn the satisfaction of the customer, the ultimate judge of quality.Better and faster customer service will entail more cost to banks and, under the current dispensation; their capacity to absorb additional cost is quite limited. It would, therefore, be in the fitness of things to permit banks to charge higher rates for better and faster service.For relationship value pricing to work, its important that our bank carefully analyze the costs and benefits associated with the customer relationship to ensure the relationship is sufficiently profitable. Also, its critical to have systems that monitor the relationship. Banks often lose revenue because they are unaware that the customer relationship has changed the profit.3. Improve Marketing on products and services.Bank marketing has to go beyond loans and deposits. Banks should seriously consider launching aggressive marketing of specially priced services. This approach can be considered for other channels of services also. There is, however, a rider to focusing on Fee income.Regular basis review of your strategy, plans and consider new strategies for generating noninterest income. These might include offering new products and services, expanding into new markets, or entering new business lines, such as brokerage services, insurance sales or financial planning. ConclusionFrom the trend analysis other income to fee income ratio is high for private banks as compare to PSU banks.

From the correlation analysis strong relation between fee income and macro economic parameters, bank performance indicator means that economic conditions are impact on fee income.

From regression Analysis an R-square to 1.0 indicates that we have accounted for all of the variability with the variables specified in the model. So, Bank should make standard monitor system and adopt new strategies on regular basis. Strategies

Charge higher commission for issuing draft of large amount.

Issue and Ancash banks drafts electronically to save the time and to provide the accurate result.

Offer the excellent customer services at the counter.

Service charges for credit cards should be increasing at least to the bearable extend.Strengths

Weakness

Opportunities

Threats

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