Computation of EVA in Indian Banks

Economic Value Added (EVA) is a value-based framework that provides a unique insight into value creation and unites the finance theory with the competitive strategy framework. EVA is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise. Creation of wealth is an important task for banks. The banking sector in India has not so far addressed itself to the need of analyzing its performance from the angle of shareholder value addition. The analysis of EVA achieved by banks bears relevance in this context. A review of literature reveals that Indian banks do not create any economic value. In other words, they destroy the wealth of the shareholders. Is it so? The main objectives of this study are to measure the economic value added; to analyze the relationship between EVA and non-performing assets; and the relationship between EVA and employee productivity. This study analyzes the performance of 21 banks (8 public sector banks and 13 private sector banks) during the years 2000-01, 2001-02 and 2002-03. A comparative study based on the public and private sector banks is also made. It is found that banks, both private and public sector ones, create economic value and that there is a positive relationship between EVA and productivity, and a negative one between EVA and non-performing assets.