So how many bank employees does it take to bring in ₹x in performing assets?
The ratio of performing assets to the size of employees helps quantify the large gap in operational efficiencies that exists between the small and large banks.
Banks employ many ways to measure the output of their employees, including ratios like Operating Profit Per Employee and Total Business Output per Employee (sum of deposits, advances divided by employee strength). Traditionally, to achieve larger asset sizes, banks have relied on more outreach, primarily by adding more branches, and consequently increasing the number of employees. However, with the changes brought about by a push towards more digital transactions (on both, the retail and business side), I wanted to look at how the output of employees at dispensing advances at publicly listed banks has fared over the last few years.
This exercise could help us establish a benchmark to compare the new-age lenders with the incumbent banks, whom they are seeking to beat by being more efficient at their operations.
To measure the Employee Output (EO) for assets, I looked at the ratio of money lent (calculated as Gross Advances less the Gross NPAs* accumulated by the banks at the end of every year) to the number of Full Time Employees (FTE).
One may also look at the Net Interest Margins that they make from the performing asset, and compare it with the average incomes of the employees, to measure the operational efficiency. For this post, let’s just keep things simple.
RBI categorizes banks under different heads based of their mode of functioning, among other things (check out Praneeth’s piece on scheduled v/s unscheduled banks). I grouped the banks that RBI recognizes as banks in one category, those that are recognized as Small Finance Banks into another.
Take a look at the chart below that depicts the EO over the last five years. HDFC, despite a large loan book size (of roughly Rs. 57k crs over 5 years) has ramped up its output by roughly 2x over the last 5 years. The EO of ICICI which a comparable loan book size as that of HDFC has grown by a modest number from Rs 5.49 cr / FTE to Rs. 6.23 cr /FTE.
Banks, like most other businesses, go through a gestation period in their initial years and leverage their distribution network once set up to create momentum. A striking example of a bank that has managed to create a great deal of momentum for itself is RBL, which has grown its EO by 2.5x over the last 5 years. What was even more impressive was that RBL has managed to shore up a similar momentum on the liabilities side with the size of deposits outmatching the advances in 4 out of 5 years.
To provide some additional perspective to this chart, I also looked at the numbers of Bank of Baroda**, a PSU bank with a large loan book size. Despite having an average GNPA of over 9% (calculated over gross advances), BoB’s numbers seem comparable to that of the private banks primarily perhaps because a large percentage of BoB’d debts are made up of very large institutional loans to govt bodies, which are usually backed by sovereign guarantees. DCB, which is often compared to RBL for its aggressive growth, has only seen a marginal increase in the output from Rs. 3.17 cr / FTE to Rs. 3.7 cr / FTE.
Kotak has in the past been quite vocal about its push for digital accounts (especially with the 811 account), and yet it seems like the bank hasn’t been able to realize many large gains in driving employee output in this particular area. The bank has seen a 2.7x increase in the advance book size and a comparably large increase of about 2.2x in its size of FTE. From what it seems, the bank’s lending operations continue to be driven by a people-heavy approach.
Employee output of SFBs
Small Finance Banks are a separate category in themselves. And given the context for their conversion into banks, their target audiences, the scale of operations, it wouldn’t make much sense to compare them with the larger banks.
Small finance banks graduated from Micro Finance lending to banking in FY2016–17, looking at their previous numbers wouldn’t make much sense either.
The difference in the scale between SFBs and larger banks is immediately striking. It appears that larger banks are, on average are 6–7 times more efficient in racking up performing assets. This can be partly explained by the fact that the SFBs primarily lend small loans to individuals and MSMEs, and not to large corporate houses. Also, given that the customers of these banks are comprised of tier-2 and tier-3 audiences, the operational costs of reaching out to this TG is currently higher.
Curious case of Bandhan
Bandhan bank received the ‘universal banking license’ to operate as a bank in mid-2015, and given the similarities of its TG and products, I decided to bucket it with other SFBs. However, it must be noted that Bandhan has a much bigger loan book, last reported at Rs. 44776 cr, comparable with that of RBL’s Rs.54k cr loan book. If one were to club Bandhan among larger banks like RBL and DCB, Bandhan’s EO would stick out like a sore thumb (EO of ~Rs. 1.3cr/FTE to Rs. 9cr /FTE of RBL), but when one considers their TG and product more carefully and compares them with SFBs, Bandhan outperforms its peers, both in terms of the size of its loan books and the efficiency of disbursements.
Employee Output for advances is a made-up metric and isn’t to be taken as a definitive measure of the performance of the banks. Plus, it is obviously true that only a fraction of the total employee strength of a bank is employed at dealing with loans. In fact, as I previously noted, banks these days generate income to the tune of 45% of entire revenues through fee-based activities. With that said, this metric offers an interesting glimpse at the operational efficiencies and the differences between different categories of the banks.
The large difference between SFBs and Large banks is an opportunity that is being eyed by the new crop of NBFCs and Digital lenders who are aiming to serve large audiences (individuals and enterprises) at minimal marginal costs. And as these businesses will scale, the existing banks will face the pressure of either trimming down their size or increase their asset size by multiple folds. We’ll have to wait to see how things pan ultimately out.
P.S: All the data has been taken from the publicly available annual reports of the banks. I’ve made the link to the raw data publicly available.
*I went with Gross NPAs and not Net NPAs. Net NPAs are calculated as GNPAs discounted by the provisioning accounted by banks, and so using that would slightly skew the metric.
**I wanted to add SBI to the mix, but unfortunately, rather very characteristic of SBI’s ways, the links to the annual reports of the last two years, on the SBI website returned 404s.
