The cost-to-income ratio of banks has increased to 50.6 per cent in the third quarter of financial year 2023-24 (FY24) from 48.4 per cent in FY20, highlights a recent report by CareEdge ratings. The report cites heavy expenditure on technology, branch expansion, wage revision and pension liability as some of the reasons for the increase in the cost-to-income ratio.
“Banks have spent heavily on technology and branch expansion and have seen an increase in employee expenses, especially public sector banks due to the wage revision and pension liability which has led to an increase in the cost-to-income ratio of the overall private and public sector banks from 48.4 per cent in FY20 to 50.6 per cent in Q3FY24,” stated the CareEdge Report.
On 8 March 2024, the negotiating committee of the Indian Banks’ Association (IBA) and Bank Officers’ Associations and workmen employees unions signed an agreement for a 17 per cent increase in salary revision, translating into a collective outgo of Rs 12,589 crore for 12 public sector banks (PSBs) which are party to the 12th industry-wide bipartite wage settlement.
The report further mentioned, “Both private sector banks and public sector banks have reported an increased cost-to-income ratio. The private sector banks cost-to-income ratio has increased from 44.9 per cent during FY20 to 47.2 per cent during Q3 FY24, while PSBs have increased from 51.2 per cent to 53.9 per cent.”
It highlighted that the increase in the technology expense, the number of branches from 34,000 to 41,000 (as per RBI) and the increase in employee cost due to branch expansion and salary costs, have been the primary drivers of cost to income in the case of private sector banks while for PSBs, the 17 per cent hike in the annual wages of the employees and technology expense has been a key driver.
The impact of wage revision and pension liability has also been highlighted by Managing Directors and Chief Executive Officers of multiple public sector banks during the analyst calls of the third quarter of the financial year 2023-24.
“Our net profit in 9M FY24 stood at Rs 40,378 crores, which has witnessed an increase of 20 per cent plus over 9MFY23. This is despite providing for wage revision of Rs 12,718 crores during the current financial year as per the Bipartite Wage Settlement at the rate of 17 per cent wage hike,” said Dinesh Khara, Chairman, State Bank of India, earlier.
The SBI’s Q3 FY24 profit stood at Rs 9,164 crores after absorbing the additional liability to the tune of Rs 7,100 crores in a single quarter as a one-time exception item (wage revision).
Khara had said that additional liability comprises two subitems specifically, Rs 5,400 crores, which is on account of an increase in pension and addressing the anomaly which used to be there between the employees who retired many years back.
Similarly, Satyanarayana Raju, Managing Director (MD) and Chief executive officer (CEO), Canara Bank has said, “I would like to clarify here itself why the cost of Cost-income ratio for the quarter is 50.37 per cent. There is not much increase in the Operating Expenses but you are aware that in the current quarter, the bipartite settlement has been signed between the Employees Association and the IBA. They signed the agreement at a 17 per cent incremental growth in wages.”
Raju has also emphasised that an additional Rs 700 crore Canara bank has provided towards meeting the requirements of the staff wage revision impact so that there will not be any much pressure on the next two quarters on this particular issue.
Rajneesh Karnatak, MD & CEO, Bank of India also made similar observations while stating, “Our operating profit on a nine-month basis has grown year on year by 14 per cent from Rs 9,209 crore for the period ended 31 December 2022 to Rs10,511 crore for the period ended 31 December 2023. Though, on a YoY basis, it has come down due to increased provisions on account of expected wage revision and depreciation in investment.”
The credit-deposit ratios of the banks are likely to remain elevated due to a persistent shortfall in deposit growth compared to the pace of credit expansion, aligned with the overall positive growth outlook for the economy. The deposit lag, coupled with the repricing of deposits and a liquidity deficit in the market, is likely to elevate the cost of funds in the near term, the CareEdge report concluded.
