The IUP Journal of Bank Management
Impact of Asset Allocation on Public Sector Banks' Performance

Article Details
Pub. Date : May, 2022
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJBM020522
Author Name : Ashutosh Jaiswal
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages :27



The debate over performance differential between Public Sector Banks (PSBs)1 and Private Sector Banks (PVBs) in India is not new. The huge performance differential between PSBs and PVBs on GNPA (Gross NPA) of 14.8%/3.8% and Return on Assets (ROA) of -0.7%/1.2% (as of September 20182) continue to narrate the grim performance of PSBs. Through this study, we looked at how banks in India responded to the financial crisis of 2008, and its impact on their performances thereof, with specific focus on whether increased lending by PSBs led to their poor performance in subsequent years. We focused on the asset allocation strategies of banks in India for the period FY 2005- 17, which covers the period of financial crisis, and measured their performances through indicators such as ROA, Return on Equity (ROE) and GNPA ratio (GNPAs/Advances). The analysis shows significantly divergent asset allocation paths taken by banks in India post the financial crisis of 2007-08, which shows that the PSBs indeed took the mantle of credit creation in the economy. PSBs significantly increased asset allocation to credit from 2007/08 in contrast to PVBs, and it continued up till FY 2013. Comparison of financial performance post FY 2013 up till FY17 shows significant underperformance of PSBs vis-a-vis PVBs. However, this study did not find any linkage between aggressive credit creation post the financial crisis (during 2007/08-2013) and subsequent poor performance of PSBs.


This study assesses the extent of change the asset allocation of banks in India had undergone over the period 2005-17 and the concomitant change in their performance. We take an asset side balance sheet approach to understand how assets of banks3 had evolved over time. While a large portion of banks' assets are pre-empted in priority sectors and Government Securities