(February 26, 2009) This publication analyzes the financial performance of banks in South Asia between 2001 and 2006 utilizing standardized indicators. These measures are important for achieving financial inclusion to reduce poverty, as limitations are key constraints to development. While Getting Finance Indicators cannot predict the onset of a financial crisis, the analysis of these indicators has identified certain weaknesses in regional financial sectors. It is important for the supervisory authorities to take remedial actions to address these shortcomings.
Facts: - On access to finance, Sri Lanka ranks first in South Asia. - On performance and efficiency, the top ranking goes to Pakistan. - On capital market development, India ranks first. - India - First in Market concentration and competitiveness in the banking sector. - On corporate governance, Pakistan ranks first.
The overall progress is commendable for most countries. Analysis of the indicators confirms that commercial banking sectors in Bangladesh, India, Nepal, Pakistan, and Sri Lanka have made great strides in some dimensions (returns, capital adequacy, and market concentration), whereas other dimensions (credit quality, provisioning, and access measures) need further improvements to compare favorably to benchmark groups, which are composed of a number of high income countries.
Chapter 2: Country Rankings on the Getting Finance Indicators
Overall, India secured the top rank with an overall composite score of 0.80-emerging as having the strongest South Asian commercial banking sector. The Indian commercial banking sector was competitive, financially stable, and was ably supported by a well-developed capital market. Pakistan was second (overall composite score of 0.67) with strong performance and quality corporate governance. Sri Lanka secured the third place (overall composite score of 0.65) with healthier financial outreach by the commercial banking sector. Bangladesh was fourth (overall composite score of 0.57) and demonstrated improved access to finance and market concentration. Nepal was ranked fifth (overall composite score of 0.45). All countries have attempted to issue corporate governance guidelines to the banking sector. It has made commendable efforts in certain areas; however, it needs to address many issues to improve its commercial banking system.
Comparative analysis of the 12 micro indicators for 2006 show that South Asian countries compare well on such ratios as returns, capital adequacy, and market concentration. Areas requiring attention include credit quality issues of nonperforming loans and provisioning. South Asia needs to focus on developing its capital market so that it can meet the long-term finance needs of commerce as well as the portfolio appetite of institutional investors. When comparative data over the six-year period are examined overall, however, it is evident that South Asia is making commendable progress in making their banking systems more efficient and comparable to international standards.
Financial sector development in the region can be observed in many ways, including better allocations of resources, lower intermediation costs, increased efficiencies through technological developments, diversity of the market players, availability of innovative instruments, market-oriented regulatory systems, and better access to finance. Supervisory authorities continue to monitor these developments to spot vulnerabilities and weaknesses and thus take preventive measures. The data and analysis in this report are useful tools in this process, when combined with other observations about the local situation and the industry.
Chapter 5: Compilation Guide For The Getting Finance Indicators For South Asia
As part of the World Bank's regional initiative to develop standardized indicators to measure the performance and soundness of the financial sector, this report uses indicators under six categories: (1) access to finance, (2) performance and efficiency, (3) financial stability, (4) capital market development, (5) market concentration and competitiveness, and (6) corporate governance. The World Bank issues a Compilation Guide providing definitions, data sources, and concepts for both compilers and users of the indicators Annual data on the commercial banking sector in each of the five countries representing South Asia; Bangladesh, India, Nepal, Pakistan, and Sri Lanka-were compiled for the six years from 2001 to 2006.
The second part of the report is comprised of the compilation guide and discusses the metholodgy of the study as well as discussing policy developments with regards to regulation in the regional countries.