The IUP Journal of Bank Management
Does Size Matter? An Evaluation of the Relationship Between Asset Size, Operating Cost, and Profit of Scheduled Urban Cooperative Banks in India

Article Details
Pub. Date :Nov, 2019
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJIT31911
Author Name : Ashish Srivastava and Ashutosh Upadhyay
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 13

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Abstract

Finding an optimal asset size and consequent scale economies remains a critical challenge for the cost efficiency and profitability of banks. For the Urban Cooperative Banking (UCB) sector, with large heterogeneity in asset size, an understanding of scale economies helps in improving their business model and also aids in benchmarking for consolidation. This paper presents an analysis of the relationship between asset size, operating cost, and profitability in scheduled Urban Cooperative Banks (UCBs). The paper examines the movement in total operating cost and profit in relation to variation in asset size after controlling for business, market, and environmental factors. It finds that expansion in asset size up to 87,983 mn leads to downward movement in conditional operating cost per rupee of assets. Similarly, it finds an upward movement in conditional profit before tax with an expansion in asset size up to the level of 43,462 mn. The paper does not find any benefit of scale economies on cost and profit beyond these levels. It finds no evidence of scale economies in large UCBs having an asset size between 100 and 500 bn. However, for a majority of small and mid-sized UCBs, opportunities for achieving scale economies through organic or inorganic growth are found. The paper finds no statistical significance of the environmental strength, arising out of the strong cooperative culture in certain states, on the scale economies in the UCBs.


Description

Urban Cooperative Banks (UCBs) refer to cooperative societies working as primary cooperative banks in India. These banks work in urban and semi-urban areas and represent a small but important segment of the Indian banking landscape, but are quite heterogeneous in terms of their asset sizes. As on March 31, 2018, there were 54 scheduled UCBs and 1,497 non-scheduled UCBs and the total asset size of the scheduled UCBs at 2,647 bn was 47.1% of the total asset size of the UCB sector.1 The scheduled UCBs also have a fair share of heterogeneity in their asset sizes ranging from 2 bn to 460 bn, as on March 31, 2018, and the future direction of the sector is somewhat unclear.


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