“EVALUATION OF PERFORMANCE OF AXIS BANK ON THE BASIS OF CAMELS

MODEL”

A REPORT SUBMITTED TO UTKAL UNIVERSITY IN PARTIAL FULFILLMENT OF THE DEGREE OF MASTER OF FINANCE AND CONTROL

(2009 – 11)

SUBMITTED BY

Dillip KhuntiaDillip KhuntiaDillip KhuntiaDillip Khuntia Roll No. 1370V091011

Deepak KDeepak KDeepak KDeepak Kumar umar umar umar JJJJunejaunejaunejauneja Roll No. 1370V091008

UNDER THE GUIDANCE OF

Prof. Samson Moharana

Director, Master of Finance & Control

P.G. Department of Commerce

MASTER OF FINANCE AND CONTROL (MFC) P.G. DEPARTMENT OF COMMERCE

UTKAL UNIVERSITY

BHUBANESWAR

DECLARATIONDECLARATIONDECLARATIONDECLARATION

We do hereby declare that the project entitled

““““Evaluation of PerformanceEvaluation of PerformanceEvaluation of PerformanceEvaluation of Performance of Axis Bank on the basis of of Axis Bank on the basis of of Axis Bank on the basis of of Axis Bank on the basis of

CAMELS modelCAMELS modelCAMELS modelCAMELS model”””” is an authentic piece of work done by us

under the guidance of Prof. Samson MoProf. Samson MoProf. Samson MoProf. Samson Moharana, harana, harana, harana, Director,

Master of Finance and Control (MFC), Utkal University for

the partial fulfilment of the requirement for the degree of

Mater of Finance and Control (MFC), Mater of Finance and Control (MFC), Mater of Finance and Control (MFC), Mater of Finance and Control (MFC), Utkal University,

Bhubaneswar. This piece of research is our genuine work and

has not been published anywhere at any time to the best of

our knowledge.

Place: Bhubaneswar Dillip KhuntiaDillip KhuntiaDillip KhuntiaDillip Khuntia

&&&&

Date: DeepakDeepakDeepakDeepak Kumar JunejaKumar JunejaKumar JunejaKumar Juneja

I

Prof. Prof. Prof. Prof. Samson MoSamson MoSamson MoSamson Moharanaharanaharanaharana

Professor, Master of Finance and Control (MFC)

P.G .Department of Commerce,

Utkal University, Vanivihar,

Bhubaneswar-751004

CERTIFICATECERTIFICATECERTIFICATECERTIFICATE

This is to certify that this project entitled “Evaluation of PerformanceEvaluation of PerformanceEvaluation of PerformanceEvaluation of Performance of of of of

Axis BankAxis BankAxis BankAxis Bank on the basis ofon the basis ofon the basis ofon the basis of CAMELSCAMELSCAMELSCAMELS ModelModelModelModel”””” is a bona fide work of Dillip Dillip Dillip Dillip

KhuntiaKhuntiaKhuntiaKhuntia and Deepak Kumar Junejaand Deepak Kumar Junejaand Deepak Kumar Junejaand Deepak Kumar Juneja, , , , under my supervision and it embodies the

result of his original contribution. The project has reached the standard of

fulfilling the requirements of regulation relegating the degree of Master of Finance Master of Finance Master of Finance Master of Finance

and Control (MFC)and Control (MFC)and Control (MFC)and Control (MFC). To the best of our knowledge, no parts of this project have

been submitted to any other institution for the award of any degree.

I wish them all the success in their future endeavors

Place: Bhubaneswar

Date: (P(P(P(Profrofrofrof. . . . Samson MoSamson MoSamson MoSamson Moharanaharanaharanaharana))))

II

AcknowledgementAcknowledgementAcknowledgementAcknowledgement

The satisfaction that accompanies the successful completion of any task

would be incomplete without mentioning people who made it possible, whose

encouragement and consistent guidance crowned our efforts with success.

We would like to express our heartfelt indebtedness and deep sense of

gratitude to our faculty guide ProfProfProfProf. S. S. S. Samson Moamson Moamson Moamson Moharanaharanaharanaharana for sharing his knowledge

and giving us guidance and generous co-operation. We would like to thank Axis

Bank for its cordial help in the completion our project.

Finally, we thank all those who have directly or indirectly helped us in our

project. We express our profound thanks to our teachers as well as friends who

are the constant source of encouragement for us.

Dillip KhuntiaDillip KhuntiaDillip KhuntiaDillip Khuntia

&&&&

Deepak Kumar JunejaDeepak Kumar JunejaDeepak Kumar JunejaDeepak Kumar Juneja

III

EXECUTIVE SUMMARY

The banking sector has been undergoing a complex, but comprehensive phase of restructuring

since 1991, with a view to make it sound, efficient, and at the same time it is forging its links firmly

with the real sector for promotion of savings, investment and growth. Although a complete

turnaround in banking sector performance is not expected till the completion of reforms, signs of

improvement are visible in some indicators under the CAMELS framework. Under this bank is

required to enhance capital adequacy, strengthen asset quality, improve management, increase

earnings and reduce sensitivity to various financial risks. The almost simultaneous nature of these

developments makes it difficult to disentangle the positive impact of reform measures.

CAMELS Framework

CAMELS’ norms are the supervisory framework consisting of risk-monitoring factors used for

evaluating the performance of banks. This framework involves the analysis of six groups of

indicators reflecting the health of financial institutions. The indicators are as follows:

� CAPITAL ADEQUACY

� ASSET QUALITY

� MANAGEMENT SOUNDNESS

� EARNINGS & PROFITABILITY

� LIQUIDITY

� SENSITIVITY TO MARKET RISK

The whole banking scenario has changed in the very recent past on the recommendations of

Narasimham Committee. Further BASELL II Norms were introduced to internationally standardize

processes and make the banking industry more adaptive to the sensitive market risks. Amongst

these reforms and restructuring the CAMELS Framework has its own contribution to the way

modern banking is looked up on now. The attempt here is to see how various ratios have been

used and interpreted to reveal a bank’s performance and how this particular model encompasses

a wide range of parameters making it a widely used and accepted model in today’s scenario.

The project attempts to analyse the performance of Axis bank on the basis of CAMELS model and

gives suggestions on the basis of the finding of the analysis. The overall strategy of Axis bank is

also studied to gain a better understanding of the working of the bank and to identify its strength

and weakness.

IV

CONTENT DECLARATION

CERTIFICATE

ACKNOWDGEMENT

CHAPTER 1: INTRODUCTION TO THE STUDY

1.1 INTRODUCTION TO THE BANKING REFORMS

1.2 INTRODUCTION TO BASEL II ACCORD

1.3 OBJECTIVE OF THE STUDY

1.4 SCOPE OF THE STUDY

1.5 METHODOLOGY OF STUDY

1.6 LIMITATION

CHAPTER 2: COMPANY PROFILE

2.1 AXIS BANK

CHAPTER 3: CAMELS FRAMEWORK

3.1 THE CAMELS FRAMEWORK

3.2 CAMELS RATING IN SUPERVISORY MONITORING OF BANKS

3.3 CAPITAL ADEQUACY

3.4 ASSET MANAGEMENT

3.5 MANAGEMENT SOUNDNESS

3.6 EARNINGS & PROFITABILITY

3.7 LIQUIDITY

3.8 SENSITIVITY TO MARKET RISK

CHAPTER 4: DATA ANALYSIS & INTERPRETATION

CHAPTER 5: FINDINGS, RECOMMENDATIONS & SUGGESTIONS

BIBLIOGRAPHY

V

LIST OF TABLES

� Table – 2.1 FINANCIAL INDICATORS

� Table – 2.2 PROFIT AMD LOSS ACCOUNT

� Table – 2.3 TYPES OF RESTRUCTURED LOANS

� Table – 2.4 PORTFOLIO BREAK-UP OF RESTRUCTURED LOANS

� Table – 2.5 SECTOR-WISE BREAK-UP OF RESTRUCTURED LOANS

� Table – 2.6 INVESTMENT PORTFOLIO

� Table – 4.1 CAPITAL ADEQUACY RATIO OF AXIS BANK ACCORDING TO

BASELL I

� Table – 4.2 CAPITAL ADEQUACY RATIO OF AXIS BANK ACCORDING TO

BASEL II

� Table – 4.3 GROSS NPA

� Table – 4.4 NET NPA

� Table – 4.5 ASSET TURNOVER RATIO

� Table – 4.6 RETURN ON ASSET

� Table – 4.7 CREDIT DEPOSIT RATIO

LIST OF GRAPHS

� Graph No. – 4.1 CAPITAL ADEQUACY RATIO

� Graph No. – 4.2 GROSS NPA

� Graph No. – 4.3 NET NPA

� Graph No. – 4.4 ASSET TURNOVER RATIO

� Graph No. – 4.5 RETURN ON ASSET

� Graph No. – 4.6CREDIT DEPOSIT RATION

VI

CHAPTER ONE

� INTRODUCTION TO BANKING REFORMS.

� INTRODUCTION TO BASEL II ACCORDS.

P a g e | 1

1.1 INTRODUCTION TO BANKING REFORMS

In 1991, the Indian economy went through a process of economic liberalization, which was

followed up by the initiation of fundamental reforms in the banking sector in 1992. The banking

reform package was based on the recommendations proposed by the Narsimhan Committee

Report (1991) that advocated a move to a more market oriented banking system, which would

operate in an environment of prudential regulation and transparent accounting. One of the primary

motives behind this drive was to introduce an element of market discipline into the regulatory

process that would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market

discipline, especially in the financial liberalization phase, reinforces regulatory and supervisory

efforts and provides a strong incentive to banks to conduct their business in a prudent and efficient

manner and to maintain adequate capital as a cushion against risk exposures. Recognizing that

the success of economic reforms was contingent on the success of financial sector reform as well,

the government initiated a fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of multidimensional strategies

from time to time with varying degrees of success. Banks are very important for the smooth

functioning of financial markets as they serve as repositories of vital financial information. From a

central bank’s perspective, such high-quality disclosures help the early detection of problems

faced by banks in the market and reduce the severity of market disruptions. Consequently, the RBI

as part and parcel of the financial sector deregulation, attempted to enhance the transparency of

the annual reports of Indian banks by, among other things, introducing stricter income recognition

and asset classification rules, enhancing the capital adequacy norms, and by requiring a number

of additional disclosures sought by investors to make better cash flow and risk assessments.

During the pre economic reforms period, commercial banks & development financial

institutions were functioning distinctly, the former specializing in short & medium term financing,

while the latter on long term lending & project financing.

Commercial banks were accessing short term low cost funds through savings investments

like current accounts, savings bank accounts & short duration fixed deposits, besides collection

float. Development Financial Institutions (DFIs) on the other hand, were essentially depending on

budget allocations for long term lending at a concessionary rate of interest.

The scenario has changed radically during the post reforms period, with the resolve of the

government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had

posted dismal financial results. In fact, their very viability has become a question mark. Now they

have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into the

universal banking system.

1.2 BASEL II ACCORD

It is the bank capital framework sponsored by the world's central banks designed to

promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk

management among large, internationally active banking organizations. The International Capital

Accord, as it is called, will be fully effective by January 2008 for banks active in international

markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital

guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely

overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars,"

of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement,

a minimum capital-to-asset ratio equal to at least 8% of risk-weighted assets. Second, bank

supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital

levels for individual banks above the 8% minimum when necessary. The third supporting pillar

calls upon market discipline to supplement reviews by banking agencies.

Basel II is the second of the Basel Accords, which are recommendations on banking laws

and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II,

which was initially published in June 2004, is to create an international standard that banking

regulators can use when creating regulations about how much capital banks need to put aside to

guard against the types of financial and operational risks banks face. Advocates of Basel II believe

that such an international standard can help protect the international financial system from the

types of problems that might arise should a major bank or a series of banks collapse. In practice,

Basel II attempts to accomplish this by setting up rigorous risk and capital management

requirements designed to ensure that a bank holds capital reserves appropriate to the risk the

bank exposes itself to through its lending and investment practices. Generally speaking, these

rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the

bank needs to hold to safeguard its solvency and overall economic stability.

The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;

2. Separating operational risk from credit risk, and quantifying both;

3. Attempting to align economic and regulatory capital more closely to reduce the scope for

regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still areas

where regulatory capital requirements will diverge from the economic. Basel II has largely left

unchanged the question of how to actually define bank capital, which diverges from accounting

equity in important respects. The Basel I definition, as modified up to the present, remains in

place.

The Accord in operation

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing

risk), (2) supervisory review and (3) market discipline – to promote greater stability in

the financial system.

The Three Pillars of Basel II

The Basel I accord dealt with only parts of each of these pillars. For example: with respect

to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market

risk was an afterthought; operational risk was not dealt with at all.

The First Pillar

The first pillar deals with maintenance of regulatory capital calculated for three major

components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are

not considered fully quantifiable at this stage. The credit risk component can be calculated in three

different ways of varying degree of sophistication, namely standardized approach, Foundation IRB

and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there

are three different approaches - basic indicator approach or BIA, standardized approach or TSA,

and advanced measurement approach or AMA. For market risk the preferred approach is VaR

(value at risk). As the Basel 2 recommendations are phased in by the banking industry it will move

from standardized requirements to more refined and specific requirements that have been

developed for each risk category by each individual bank. The upside for banks that do develop

their own bespoke risk measurement systems is that they will be rewarded with potentially lower

risk capital requirements. In future there will be closer links between the concepts of economic

profit and regulatory capital.

Credit Risk can be calculated by using one of three approaches

1. Standardized Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardized approach sets out specific risk weights for certain types of credit risk.

The standard risk weight categories are used under Basel 1 and are 0% for short term

government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100%

weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit

ratings. The minimum capital requirement( the percentage of risk weighted assets to be held as

capital) remains at 8%. For those Banks that decide to adopt the standardized ratings approach

they will be forced to rely on the ratings generated by external agencies. Certain Banks are

developing the IRB approach as a result.

The Second Pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators

much improved 'tools' over those available to them under Basel I. It also provides a framework for

dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration

risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the

title of residual risk. It gives banks a power to review their risk management system.

The Third Pillar

The third pillar greatly increases the disclosures that the bank must make. This is designed

to allow the market to have a better picture of the overall risk position of the bank and to allow the

counterparties of the bank to price and deal appropriately. The new Basel Accord has its

foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate

properly the various risks that banks face and realign regulatory capital more closely with

underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk.

The regulatory capital will be focused on these three risks. The second pillar gives the bank

responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it

also casts responsibility on the supervisors to review and validate banks’ risk measurement

models. The third pillar on market discipline is used to leverage the influence that other market

players can bring. This is aimed at improving the transparency in banks and improves reporting.

1.3 STATEMENT OF PROBLEM

The study is conducted to analyse Axis Bank on the basis of CAMELS model.

1.4 OBJECTIVE OF STUDY

To evaluate the strength of Axis Bank by using CAMELS model technique.

1.5 RESEARCH METHODOLOGY

The area of survey is Axis Bank.

DATA SOURCE:

� Primary Data: Primary data was collected from the company balance sheets and company

profit and loss statements and interaction with the employees of Axis Bank.

� Secondary Data: Secondary data on the subject was collected from Business journals,

Business dailies, company prospectus, company annual reports and RBI websites.

1.6 LIMITATIONS OF STUDY

� Time and resources constraints.

� The study was completely done on the basis of ratios calculated from the balance sheets. � It has not been possible to get a personal interview with the top management employees of

Axis Bank. � It has not been possible to get sensitive real data on actual CAMELS analysis performed by

the RBI on Axis bank.

CHAPTER TWO COMPANY PROFILE

2.1 INTRODUCTION

Axis Bank, previously called UTI Bank, was the first of the new private banks to have

begun operations in 1994, after the Government of India allowed new private banks to be

established. The Bank was promoted jointly by the Administrator of the Specified Undertaking of

the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance

Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company, The

Oriental Insurance Corporation and United Insurance Company Ltd. UTI-I holds a special position

in the Indian capital markets and has promoted many leading financial institutions in the country.

The bank changed its name to Axis Bank in April 2007 to avoid confusion with other unrelated

entities with similar name. Shikha Sharma was named as the bank's managing director and CEO

on 20 April 2009 after the bank’s chairman, P.J. Nayak, stepped down in August after a stint of

nine-and-a-half years.

The Bank today is capitalized to the extent of Rs. 358.97 crores with the public holding

(other than promoters) at 57.59%.As on the year ended March 31, 2009 the Bank had a total

income of Rs. 8801 crores and a net profit of Rs 581.45 crores.

2.2 Branch Network

At the end of March 2009, the Bank has a very wide network of more than 835 branch

offices and Extension Counters. Total number of ATMs went up to 3595. The Bank has loans now

(as of June 2007) account for as much as 70 per cent of the bank’s total loan book of Rs 2,00,000

crore. In the case of Axis Bank, retail loans have declined from 30 per cent of the total loan book

of Rs 25,800 crore in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of June

2007). Even over a longer period, while the overall asset growth for Axis Bank has been quite high

and has matched that of the other banks, retail exposures grew at a slower pace. If the sharp

decline in the retail asset book in the past year in the case of Axis Bank is part of a deliberate

business strategy, this could have significant implications (not necessarily negative) for the overall

future profitability of the business. Despite the relatively slower growth of the retail book over a

period of time and the outright decline seen in the past year, the bank’s fundamentals are quite

resilient. With the high level of mid-corporate and wholesale corporate lending the bank has been

doing, one would have expected the net interest margins to have been under greater pressure.

The bank, though, appears to have insulated such pressures. Interest margins, while they have

declined from the 3.15 per cent seen in 2003-04, are still hovering close to the 3 per cent mark.

2.3 Risk and earnings perspective

Such strong emphasis and focus on lending also does not appear to have had any

deleterious impact on the overall asset quality. The bank’s non-performing loans are even now,

after five years of extremely rapid asset build-up, below 1 per cent of its total loans. From a

medium-term perspective, it appears that Axis Bank could be charting out a niche for itself in the

private bank space. It appears to be following a business strategy quite different from the high-

volume and commodity-style approach of other private players like ICICI Bank and HDFC Bank.

That strategy also has its pluses in terms of the relatively higher margins in some segments of the

retail business and the in-built credit risk diversification (and mitigation) achieved through a widely

dispersed retail credit portfolio. But, as indicated above, Axis Bank has been to able to maintain

the quality of its loan portfolio despite the concentrated nature of wholesale corporate lending.

Table – 2.1

Financial Indicators

Table – 2.2

Profit & Loss Account

2.4 Net Interest Income (NII)

The Bank registered a 25% yoy growth in Q4 in its Net Interest Income of Rs. 1,032.60

crores as against Rs. 828.43 crores in Q4 of the preceding year. The industry-wide slowdown in

the growth of CASA deposits and the steep rise in the cost of funds in the third quarter resulted in

slower growth in NII. Against this backdrop, the Bank did well to register a growth of 43% in NII

which rose from Rs. 2,585.35 crores in 2007-08 to Rs. 3,686.21 crores in 2008-09. The advances

of the Bank grew to Rs. 81,556.77 crores as at end March’09 from Rs. 59,661.14 crores as at end

March’08, a growth of 37% yoy, while investments rose to Rs. 46,330.35 crores from Rs.

33,705.10 crores a year earlier, a growth of 37% yoy.

2.5 Improving Margins driven by reduction in cost of funds

The Net Interest Margin (NIM) for Q4 increased to 3.37%, up by 25 basis points from the

NIM of 3.12% in the preceding quarter, Q3, but lower than the NIM of 3.93% for Q4 of the

preceding year. The growth in NIM was on account of a reduction in the cost of funds once the

money markets stabilized towards the end of the previous quarter, accompanied by a rebound in

low cost deposits from the previous quarter. The NIM for FY 2008-09 was 3.33%, as against

3.47% in FY 2007-08. The daily average cost of funds was 6.64% in Q4, 27 basis points lower

than that in Q3 (6.91%), but higher than 5.82% in Q4 of the preceding year, FY 2007-08. The cost

of funds for FY 2008-09 was 6.50%, up from 6.02% for FY 2007- 08 and is reflective of the general

increase of interest rates in the economy in the earlier part of the last financial year. The share of

low cost deposits - Savings Bank and Current Accounts was 43% as at end March’09 as

compared to 46% as at end March’08 and 38% as at end December’08. Savings Bank deposits

registered a growth of 29% yoy, from Rs. 19,982 crores as at end March’08 to Rs. 25,822 crores

as at end March’09. The daily average Saving Bank balances over the year grew by 42% yoy.

Current Account deposits grew by 24% yoy, from Rs. 20,045 crores as at end March’08 to Rs.

24,822 crores as at end March’09. The daily average Current Account balances over the year

grew by 24% yoy.

2.6 Fee Income

Fee Income registered a significant growth of 42% yoy, rising to Rs. 664.40 crores in Q4 as

compared to Rs. 468.21 crores in Q4 of the preceding year, FY 2007-08. For FY 2008-09, the Fee

Income grew to Rs. 2,447.35 crores as compared to Rs. 1,494.85 crores in the preceding year FY

2007-08, a growth of 64% yoy.

2.7 Trading Profits

The Bank generated Rs. 166.16 crores of Trading Profits in Q4, as compared to Rs. 44.64

crores in Q4 of the preceding year 2007-08, a growth of 272% yoy. The share of Trading Profits to

the Operating Revenue increased from 3.22% in Q4 of the preceding year FY 2007-08 to 8.85% in

Q4 FY 2008-09. Trading Profits during FY 2008-09 grew by 47% yoy to Rs. 373.86 crores, as

compared to the Trading Profits of Rs. 253.59 crores in FY 2007-08. Trading Profits during FY

2008-09 constituted 5.68% of the Operating Revenue, as against 5.79% in FY 2007-08.

2.8 Cash Management Services

Under Cash Management Services, the Bank handled a cash remittance throughput of Rs.

3,60,318 crores in Q4 as compared to a throughput of Rs. 2,61,012 crores in the preceding

quarter Q3 and significantly higher than the throughput of Rs 2,12,394 crores during Q4 of the

preceding year, a growth of 70% yoy. In FY 2008-09, the Bank registered a total remittance

throughput of Rs.10, 83,004 crores from 4,852 clients as compared to Rs. 7,46,286 crores from

3,193 clients in the preceding financial year, a growth of 45% yoy.

2.9 Placement / Syndication and Project Advisory

The Bank maintained its No.1 rank as Debt Arranger as assessed by Prime Database for

the 9 months ended December’08. Further, in the Bloomberg league table for ‘India Domestic

Bonds’, the Bank has been ranked No.1 for the quarter ended March’09. The Bank was the

arranger for syndication of debt aggregating Rs 27,206 crores during Q4 of FY 2008-09 as

compared to Rs. 24,533 crores during the previous quarter, Q3 and substantially higher than Rs.

17,210 crores in Q4 of the preceding year, a growth of 58% yoy. For FY 2008-09, the Bank has

syndicated debt amounting to Rs. 69,062 crores as compared to Rs. 57,327 crores in the

preceding year FY 2007-08, a growth of 20% yoy. The Bank continues to strengthen its focus on

project advisory services.

2.10 Growing Retail Business

The Bank's retail business continued to show strong growth. The number of Savings Bank

accounts grew from 61.64 lakhs as at end March’08 to 76.18 lakhs as at end March’09, thereby

creating a buoyancy in Savings Bank deposit balances.

Retail Asset Products: Retail advances grew from Rs. 13,592 crores as at end March'08 to Rs.

16,052 crores as at end March'09, a growth of 18% yoy. Retail Advances account for 20% of the

total Advances of the Bank as at end March'09. The Bank has set up 64 Retail Asset Centres

(RACs) for focussed retail lending.

Card products: The Bank's International Debit Card issuance has risen to 118 lakhs debit cards

as at end March’09 as compared to 87 lakh cards as at end March’08. The Bank had over 5,

33,000 Credit Cards in force as at end March’09. The Bank has an installed base of over 1, 15,000

Electronic Data Capture (EDC) machines as at end March’09.

Wealth Advisory Services and Third Party Products: The Bank offers Wealth Advisory

Services and Mohur - Gold Coins and bars - through its select branches, and Personal Investment

Products including Mutual Funds, Life Insurance products in association with Metlife India,

General Insurance products in association with Bajaj Allianz Insurance, and Online trading

accounts in association with Geojit Securities.

2.11 Prudent NPA Management

The Net NPAs and the Gross NPAs as proportions of Net and Gross Customer Assets were

at 0.35% and 0.96% respectively as at end March’09 as compared to 0.39% and 0.90% as at end

December’08, and 0.36% and 0.72% as at end March’08. The Bank has in recent years written off

impaired assets aggressively. The provisions held together with accumulated write-offs, as a

proportion of Gross NPAs and accumulated write-offs, amount to 85.31% at end March’09. If the

accumulated write-offs are excluded, then the provisions held as a proportion of Gross NPAs

amount to 63.56% as at end March’09.

2.12 Disclosures on loans restructured during the year

During the year, the Bank restructured loans aggregating to Rs. 996.17 crores, taking the

cumulative total of loans restructured till 31st March 2009 to Rs. 1,625.87 crores (of which Rs.

22.06 crores comprise loans restructured a second time, in terms of the Reserve Bank of India

dispensation). This constitutes 1.74% of gross customer assets (GCA), as compared to 1.11% at

the end of December 2008 and 0.92% at the end of March 2008. The table below provides further

details and indicates that at end March 2009, 1.06% of gross customer assets had been

restructured with just a principal deferment facility, without any interest rate concessions. This

amounts to 61% of the total restructured assets. The diminution in fair value against the

restructured loans amounted to Rs. 65 crores and has been provided for.

Table – 2.3

Types of Restructured Assets

40% of the assets restructured during the year were either under the CDR mechanism or under

multiple bank lending facilities. The portfolio-wise breakup of loans restructured during the year is

as follows.

Table – 2.4

Portfolio-wise Break-up of Restructured Loans

The sector-wise breakup of loans restructured during the year is as follows:

Table – 2.5

Sector wise Break-up of Restructured Loans

2.13 Investment Portfolio

The book value of the Bank’s investment portfolio as of 31st March 2009 was Rs. 46,330

crores, of which Rs. 27,723 crores was in government securities while Rs. 18,607 crores was in

other investments including corporate bonds, equities, preference shares, mutual funds etc. 87%

of the government securities have been classified in the Bank’s HTM category while 98% of the

corporate bond portfolio has been classified in the HFT and AFS categories. The distribution of the

investment portfolio in the three categories as well as the modified duration in each category was

as follows.

Table – 2.5

Investment Portfolio

2.14 Network Expansion

The Bank has a wide presence through its 835 Branches & Extension Counters and 3,595

ATMs across 515 cities and towns. During the year the Bank added 164 Branches & Extension

Counters and 831 ATMs. During Q4 it added 86 Branches and 424 ATMs.

2.15 International Business

The Bank has five international offices – branches at Singapore, Hong Kong and Dubai (at

the DIFC) and Representative Offices in Shanghai and Dubai - with focus on corporate lending,

trade finance, syndication, investment banking, risk management and liability businesses. The

total assets under overseas operations amounted to US$ 2.30 billion as at end March’09 as

compared to US$ 1.66 billion as at end March’08, a growth of 39% yoy.

2.16 Capital & Net Worth:

The Net Worth of the Bank was Rs. 9,757 crores as at end March’09 as compared to Rs.

8,449 crores a year earlier, a growth of 15% yoy. The Capital Adequacy Ratio for the Bank was at

13.69%, as at end March’09, as compared to 13.73% as at end March’08. The Tier - I capital

amounted to 9.26% as at end March’09 as against 10.17% as at end March’08.

CHAPTER THREE

CAMELS FRAMEWORK

3.1 The CAMELS FRAMEWORK

During an on-site bank exam, supervisors gather private information, such as details on

problem loans, with which to evaluate a bank's financial condition and to monitor its compliance

with laws and regulatory policies. A key product of such an exam is a supervisory rating of the

bank's overall condition, commonly referred to as a CAMELS rating. The acronym "CAMEL" refers

to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality,

Management, Earnings, and Liquidity. A sixth component, a bank's Sensitivity to market risk , was

added in 1997; hence the acronym was changed to CAMELS. (Note that the bulk of the academic

literature is based on pre- 1997 data and is thus based on CAMEL ratings.) Ratings are assigned

for each component in addition to the overall rating of a bank's financial condition. The ratings are

assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any,

supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees

of supervisory concern. In 1994, the RBI established the Board of Financial Supervision (BFS),

which operates as a unit of the RBI. The entire supervisory mechanism was realigned to suit the

changing needs of a strong and stable financial system. The supervisory jurisdiction of the BFS

was slowly extended to the entire financial system barring the capital market institutions and the

insurance sector. Its mandate is to strengthen supervision of the financial system by integrating

oversight of the activities of financial services firms. The BFS has also established a sub-

committee to routinely examine auditing practices, quality, and coverage. In addition to the normal

on-site inspections, Reserve Bank of India also conducts off-site surveillance which particularly

focuses on the risk profile of the supervised entity. The Off-site Monitoring and Surveillance

System (OSMOS) was introduced in 1995 as an additional tool for supervision of commercial

banks. It was introduced with the aim to supplement the on-site inspections. Under off-site system,

12 returns (called DSB returns) are called from the financial institutions, wich focus on supervisory

concerns such as capital adequacy, asset quality, large credits and concentrations, connected

lending, earnings and risk exposures (viz. currency, liquidity and interest rate risks). In 1995, RBI

had set up a working group under the chairmanship of Shri S. Padmanabhan to review the

banking supervision system. The Committee certain recommendations and based on such

suggestions a rating system for domestic and foreign banks based on the international CAMELS

model combining financial management and systems and control elements was introduced for the

inspection cycle commencing from July 1998. It recommended that the banks should be rated on a

five point scale (A to E) based on the lines of international CAMELS rating model. All exam

materials are highly confidential, including the CAMELS. A bank's CAMELS rating is directly

known only by the bank's senior management and the appropriate supervisory staff. CAMELS

ratings are never released by supervisory agencies, even on a lagged basis. While exam results

are confidential, the public may infer such supervisory information on bank conditions based on

subsequent bank actions or specific disclosures. Overall, the private supervisory information

gathered during a bank exam is not disclosed to the public by supervisors, although studies show

that it does filter into the financial markets.

3.2 CAMELS ratings in the supervisory monitoring of banks

Several academic studies have examined whether and to what extent private supervisory

information is useful in the supervisory monitoring of banks. With respect to predicting bank failure,

Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling

for a wide range of publicly available information about the condition and performance of banks.

STUDY BY COLE & GUNTHER

Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings

contain useful information, it decays quickly. For the period between 1988 and 1992, they find that

a statistical model using publicly available financial data is a better indicator of bank failure than

CAMEL ratings that are more than two quarters old.

STUDY BY HIRTLE & LOPEZ

Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks'

current conditions. They find that, conditional on current public information, the private supervisory

information contained in past CAMEL ratings provides further insight into bank current conditions,

as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to

1995, the private supervisory information gathered during the last on-site exam remains useful

with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years).

The overall conclusion drawn from academic studies is that private supervisory information, as

summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions.

CAMELS ratings in the public monitoring of banks

Another approach to examining the value of private supervisory information is to examine

its impact on the market prices of bank securities. Market prices are generally assumed to

incorporate all available public information. Thus, if private supervisory information were found to

affect market prices, it must also be of value to the public monitoring of banks. Such private

information could be especially useful to financial market participants, given the informational

asymmetries in the commercial banking industry. Since banks fund projects not readily financed in

public capital markets, outside monitors should find it difficult to completely assess banks' financial

conditions. In fact, Morgan (1998) finds that rating agencies disagree more about banks than

about other types of firms. As a result, supervisors with direct access to private bank information

could generate additional information useful to the financial markets, at least by certifying that a

bank's financial condition is accurately reported. The direct public beneficiaries of private

supervisory information, such as that contained in CAMELS ratings, would be depositors and

holders of banks' securities.

STUDY BY GILBERT & VAUGHN

Small depositors are protected from possible bank default by insurance, which probably

explains the finding by Gilbert and Vaughn (1998) that the public announcement of supervisory

enforcement actions, such as prohibitions on paying dividends, did not cause deposit runoffs or

dramatic increases in the rates paid on deposits at the affected banks. However, uninsured

depositors could be expected to respond more strongly to such information.

STUDY BY JORDAN

Jordan, et al., (1999) find that uninsured deposits at banks that are subjects of publicly-

announced enforcement actions, such as cease-and-desist orders, decline during the quarter after

the announcement. The holders of commercial bank debt, especially subordinated debt, should

have the most in common with supervisors, since both are more concerned with banks' default

probabilities (i.e., downside risk).

STUDY BY DE YOUNG

As of year-end 1998, bank holding companies (BHCs) had roughly $120 billion in

outstanding subordinated debt. De Young, et al., (1998) examine whether private supervisory

information would be useful in pricing the subordinated debt of large BHCs. The authors use an

econometric technique that estimates the private information component of the CAMEL ratings for

the BHCs' lead banks and regresses it onto subordinated bond prices. They conclude that this

aspect of CAMEL ratings adds significant explanatory power to the regression after controlling for

publicly available financial information and that it appears to be incorporated into bond prices

about six months after an exam. Furthermore, they find that supervisors are more likely to uncover

unfavorable private information, which is consistent with managers' incentives to publicize positive

information while de-emphasizing negative information. These results indicate that supervisors

can generate useful information about banks, even if those banks already are monitored by private

investors and rating agencies.

The market for bank equity, which is about eight times larger than that for bank

subordinated debt, was valued at more than $910 billion at year-end 1998. Thus, the academic

literature on the extent to which private supervisory information affects stock prices is more

extensive. For example, Jordan, et al., (1999) find that the stock market views the announcement

of formal enforcement actions as informative. That is, such announcements are associated with

large negative stock returns for the affected banks. This result holds especially for banks that had

not previously manifested serious problems.

STUDY OF BERGER AND DAVIES

Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study

methodology to examine the behavior of BHC stock prices in the eight-week period following an

exam of its lead bank. They conclude that CAMEL downgrades reveal unfavorable private

information about bank conditions to the stock market. This information may reach the public in

several ways, such as through bank financial statements made after a downgrade. These results

suggest that bank management may reveal favorable private information in advance, while

supervisors in effect force the release of unfavorable information. Berger, Davies, and Flannery

(1998) extend this analysis by examining whether the information about BHC conditions gathered

by supervisors is different from that used by the financial markets. They find that assessments by

supervisors and rating agencies are complementary but different from those by the stock market.

The authors attribute this difference to the fact that supervisors and rating agencies, as

representatives of debt holders, are more interested in default probabilities than the stock market,

which focuses on future revenues and profitability. This rationale also could explain the authors'

finding that supervisory assessments are much less accurate than market assessments of banks'

future performances.

In summary, on-site bank exams seem to generate additional useful information beyond what is

publicly available. However, according to Flannery (1998), the limited available evidence does not

support the view that supervisory assessments of bank conditions are uniformly better and more

timely than market assessments.

3.3 Capital Adequacy

Capital base of financial institutions facilitates depositors in forming their risk perception

about the institutions. Also, it is the key parameter for financial managers to maintain adequate

levels of capitalization. Moreover, besides absorbing unanticipated shocks, it signals that the

institution will continue to honor its obligations. The most widely used indicator of capital adequacy

is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation

Committee (The Basel Committee) of Bank for International Settlements, a minimum 8 percent

CRWA is required. Capital adequacy ultimately determines how well financial institutions can cope

with shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take into

account the most important financial risks—foreign exchange, credit, and interest rate risks—by

assigning risk weightings to the institution’s assets.

A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a

percentage of a bank's risk weighted credit exposures. Also known as ""Capital to Risk Weighted

Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to risk-weighted assets

(CRAR). A sound capital base strengthens confidence of depositors. This ratio is used to protect

depositors and promote the stability and efficiency of financial systems around the world.

3.4 Asset Quality:

Asset quality determines the robustness of financial institutions against loss of value in the

assets. The deteriorating value of assets, being prime source of banking problems, directly pour

into other areas, as losses are eventually written-off against capital, which ultimately jeopardizes

the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to

the level and severity of non-performing assets, adequacy of provisions, recoveries, distribution of

assets etc. Popular indicators include nonperforming loans to advances, loan default to total

advances, and recoveries to loan default ratios. The solvency of financial institutions typically is at

risk when their assets become impaired, so it is important to monitor indicators of the quality of

their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the

health and profitability of bank borrowers— especially the corporate sector. Share of bank assets

in the aggregate financial sector assets: In most emerging markets, banking sector assets

comprise well over 80 per cent of total financial sector assets, whereas these figures are much

lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have

declined since 1990 in many developed countries, while in developing countries public deposits

continue to be dominant in banks. In India, the share of banking assets in total financial sector

assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in recognising the

importance of diversification in the institutional and instrument-specific aspects of financial

intermediation in the interests of wider choice, competition and stability. However, the dominant

role of banks in financial intermediation in emerging economies and particularly in India will

continue in the medium-term; and the banks will continue to be “special” for a long time. In this

regard, it is useful to emphasise the dominance of banks in the developing countries in promoting

non-bank financial intermediaries and services including in development of debt-markets. Even

where role of banks is apparently diminishing in emerging markets, substantively, they continue to

play a leading role in non-banking financing activities, including the development of financial

markets. One of the indicators for asset quality is the ratio of non-performing loans to total loans

(GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality

of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making.

NPA: Non-Performing Assets

Advances are classified into performing and non-performing advances (NPAs) as per RBI

guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the

criteria stipulated by RBI. An asset, including a leased asset, becomes nonperforming when it

ceases to generate income for the Bank.

An NPA is a loan or an advance where:

1. Interest and/or installment of principal remains overdue for a period of more than 90 days in

respect of a term loan;

2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC);

3. The bill remains overdue for a period of more than 90 days in case of bills purchased and

discounted;

4. A loan granted for short duration crops will be treated as an NPA if the installments of principal

or interest thereon remain overdue for two crop seasons; and

5. A loan granted for long duration crops will be treated as an NPA if the installments of principal

or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any quarter is not

fully repaid within 90 days from the end of the relevant quarter. This is a key to the stability of the

banking sector. There should be no hesitation in stating that Indian banks have done a remarkable

job in containment of non-performing loans (NPL) considering the overhang issues and overall

difficult environment. For 2009, the unchanged net NPL ratio in comparison to the previous year

for the Indian scheduled commercial banks at 2.9 per cent is ample testimony to the impressive

efforts being made by our banking system. In fact, recovery management is also linked to the

banks’ interest margins. The cost and recovery management supported by enabling legal

framework hold the key to future health and competitiveness of the Indian banks. No doubt,

improving recovery-management in India is an area requiring expeditious and effective actions in

legal, institutional and judicial processes.

3.5 Management Soundness

Management of financial institution is generally evaluated in terms of capital adequacy,

asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition,

performance evaluation includes compliance with set norms, ability to plan and react to changing

circumstances, technical competence, leadership and administrative ability. In effect, management

rating is just an amalgam of performance in the above-mentioned areas. Sound management is

one of the most important factors behind financial institutions’ performance. Indicators of quality of

management, however, are primarily applicable to individual institutions, and cannot be easily

aggregated across the sector. Furthermore, given the qualitative nature of management, it is

difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless,

total expenditure to total income and operating expense to total expense helps in gauging the

management quality of the banking institutions. Sound management is key to bank performance

but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions.

Several indicators, however, can jointly serve—as, for instance, efficiency measures do—as an

indicator of management soundness. The ratio of non-interest expenditures to total assets

(MGNT) can be one of the measures to assess the working of the management. . This variable,

which includes a variety of expenses, such as payroll, workers compensation and training

investment, reflects the management policy stance. Efficiency Ratios demonstrate how efficiently

the company uses its assets and how efficiently the company manages its operations.

Asset Turnover Ratio = Revenue/ Total Assets

Indicates the relationship between assets and revenue.

Things to remember

• Companies with low profit margins tend to have high asset turnover, those with high profit

margins have low asset turnover - it indicates pricing strategy.

• This ratio is more useful for growth companies to check if in fact they are growing revenue

in proportion to sales.

Asset Turnover Analysis:

This ratio is useful to determine the amount of sales that are generated from assets. As

noted above, companies with low profit margins tend to have high asset turnover, those with high

profit margins have low asset turnover.

Earnings & Profitability

Earnings and profitability, the prime source of increase in capital base, is examined with

regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support

present and future operations of the institutions. The single best indicator used to gauge earning is

the Return on Assets (ROA), which is net income after taxes to total asset ratio. Strong earnings

and profitability profile of banks reflects the ability to support present and future operations. More

specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to

its shareholders, and build up an adequate level of capital. Being front line of defense against

erosion of capital base from losses, the need for high earnings and profitability can hardly be

overemphasized. Although different indicators are used to serve the purpose, the best and most

widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator

Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk

insolvency. Compared with most other indicators, trends in profitability can be more difficult to

interpret—for instance, unusually high profitability can reflect excessive risk taking.

ROA-Return on Assets

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as

to how efficient management is at using its assets to generate earnings. Calculated by dividing a

company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this

is referred to as "return on investment".

The formula for return on assets is:

ROA tells what earnings were generated from invested capital (assets). ROA for public companies

can vary substantially and will be highly dependent on the industry. This is why when using ROA

as a comparative measure, it is best to compare it against a company's previous ROA numbers or

the ROA of a similar company. The assets of the company are comprised of both debt and equity.

Both of these types of financing are used to fund the operations of the company. The ROA figure

gives investors an idea of how effectively the company is converting the money it has to invest into

net income. The higher the ROA number, the better, because the company is earning more money

on less investment. For example, if one company has a net income of $1 million and total assets

of $5 million, its ROA is 20%; however, if another company earns the same amount but has total

assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at

converting its investment into profit. When you really think about it, management's most important

job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a

ton of money at a problem, but very few managers excel at making large profits with little

investment

3.6 Liquidity

An adequate liquidity position refers to a situation, where institution can obtain sufficient funds,

either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is,

therefore, generally assessed in terms of overall assets and liability management, as mismatching

gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between

rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly

used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is

gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward

closure by poor management of short-term liquidity. Indicators should cover funding sources and

capture large maturity mismatches. The term liquidity is used in various ways, all relating to

availability of, access to, or convertibility into cash.

An institution is said to have liquidity if it can easily meet its needs for cash either because

it has cash on hand or can otherwise raise or borrow cash.

A market is said to be liquid if the instruments it trades can easily be bought or sold in

quantity with little impact on market prices.

An asset is said to be liquid if the market for that asset is liquid.

The common theme in all three contexts is cash. A corporation is liquid if it has ready

access to cash. A market is liquid if participants can easily convert positions into cash— or

conversely. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

The institution's short-term need for cash;

Cash on hand;

Available lines of credit;

The liquidity of the institution's assets;

The institution's reputation in the marketplace—how willing will counterparty is to transact

trades with or lend to the institution?

The liquidity of a market is often measured as the size of its bid-ask spread, but this is an

imperfect metric at best. More generally, Kyle (1985) identifies three components of market

liquidity:

� Tightness is the bid-ask spread;

� Depth is the volume of transactions necessary to move prices;

� Resiliency is the speed with which prices return to equilibrium following a large trade.

Examples of assets that tend to be liquid include foreign exchange; stocks traded in the

Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include

limited partnerships, thinly traded bonds or real estate.

Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an

indicator of bank's liquidity. In general, banks with a larger volume of liquid assets are perceived

safe, since these assets would allow banks to meet unexpected withdrawals. Credit deposit ratio

is a tool used to study the liquidity position of the bank. It is calculated by dividing the cash held in

different forms by total deposit. A high ratio shows that there is more amounts of liquid cash with

the bank to met its clients cash withdrawals.

3.7 Sensitivity to Market Risk

It refers to the risk that changes in market conditions could adversely impact earnings

and/or capital. Market Risk encompasses exposures associated with changes in interest rates,

foreign exchange rates, commodity prices, equity prices, etc. While all of these items are

important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this

module. The diversified nature of bank operations makes them vulnerable to various kinds of

financial risks. Sensitivity analysis reflects institution’s exposure to interest rate risk, foreign

exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity

is mostly evaluated in terms of management’s ability to monitor and control market risk. Banks are

increasingly involved in diversified operations, all of which are subject to market risk, particularly in

the setting of interest rates and the carrying out of foreign exchange transactions. In countries that

allow banks to make trades in stock markets or commodity exchanges, there is also a need to

monitor indicators of equity and commodity price risk.

Interest Rate Risk Basics

In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance

the quantity of repricing assets with the quantity of repricing liabilities. For example, when a bank

has more liabilities repricing in a rising rate environment than assets repricing, the net interest

margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest rate

environment, your NIM will improve because you have more assets repricing at higher rates.

An extreme example of a repricing imbalance would be funding 30-year fixed-rate mortgages with

6-month CDs. You can see that in a rising rate environment the impact on the NIM could be

devastating as the liabilities reprice at higher rates but the assets do not. Because of this

exposure, banks are required to monitor and control IRR and to maintain a reasonably well-

balanced position.

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its

credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes

counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity

risk if markets on which it depends are subject to loss of liquidity. Liquidity risk tends to compound

other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate

that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows

with two different counterparties on a given day. If the counterparty that owes it a payment

defaults, the firm will have to raise cash from other sources to make its payment. Should it be

unable to do so, it too we default. Here, liquidity risk is compounding credit risk.

Accordingly, liquidity risk has to be managed in addition to market, credit and other risks.

Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk.

In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist.

Certain techniques of asset-liability management can be applied to assessing liquidity risk. If an

organization's cash flows are largely contingent, liquidity risk may be assessed using some form of

scenario analysis. Construct multiple scenarios for market movements and defaults over a given

period of time. Assess day-today cash flows under each scenario. Because balance sheets

differed so significantly from one organization to the next, there is little standardization in how such

analyses are implemented.

Regulators are primarily concerned about systemic implications of liquidity risk. Business

activities entail a variety of risks. For convenience, we distinguish between different categories of

risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only

informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to

widening credit spreads may reasonably be called a market loss or a credit loss, so market risk

and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It

cannot be divorced from the risks it compounds.

An important but somewhat ambiguous distinguish is that between market risk and

business risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is

exposure to uncertainty in economic value that cannot be marked-tomarket. The distinction

between market risk and business risk parallels the distinction between market-value accounting

and book-value accounting. The distinction between market risk and business risk is ambiguous

because there is a vast "gray zone" between the two. There are many instruments for which

markets exist, but the markets are illiquid. Mark-to-market values are not usually available, but

mark-to model values provide a more-or-less accurate reflection of fair value. Do these

instruments pose business risk or market risk? The decision is important because firms employ

fundamentally different techniques for managing the two risks. Business risk is managed with a

long-term focus. Techniques include the careful development of business plans and appropriate

management oversight. book-value accounting is generally used, so the issue of day-to-day

performance is not material. The focus is on achieving a good return on investment over an

extended horizon. Market risk is managed with a short-term focus. Long-term losses are avoided

by avoiding losses from one day to the next. On a tactical level, traders and portfolio managers

employ a variety of risk metrics —duration and convexity, the Greeks, beta, etc.—to assess their

exposures. These allow them to identify and reduce any exposures they might consider excessive.

On a more strategic level, organizations manage market risk by applying risk limits to traders' or

portfolio managers' activities. Increasingly, value-at-risk is being used to define and monitor these

limits. Some organizations also apply stress testing to their portfolios.

CHAPTER FOUR

DATA ANALYSIS

AND

INTERPRETATION

Now each parameter will be taken separately & discussed in detail.

4.1 CAPITAL ADEQUACY:

Capital adequacy ratio is defined as

where Risk can either be weighted assets ( ) or the respective national regulator's minimum total

capital requirement. If using risk weighted assets,

The percent threshold (8% in this case, a common requirement for regulators conforming to

the Basel Accords) is set by the national banking regulator.

Two types of capital are measured: tier one capital, which can absorb losses without a bank being

required to cease trading, and tier two capital, which can absorb losses in the event of a winding-

up and so provides a lesser degree of protection to depositors.

Table 4.1

CAPITAL ADEQUACY RATIO OF AXIS BANK ACCORDING TO BASEL I

Particulars 2004 2005 2006 2007 2008 2009

Axis Bank 11.21% 12.66% 11.08% 11.57% 13.73% 13.91%

Table 4.2

CAPITAL ADEQUACY RATIO OF AXIS BANK ACCORDING TO BASEL II

Particulars 2008 2009

Axis bank 13.99% 13.69%

Capital Adequacy of Axis bank

The increase in capital adequacy over the past 4 years has

adequacy norms by the RBI. A 13.69

comfortable position to absorb the losses and inspires confidence in investors.

4.2 ASSET QUALITY

Tables showing the Gross NPA and Net NPA of Axis Bank

Gross NPA

Particulars 2004 2005

Axis Bank .83% 1.14%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2004 2005

Graph 4.1

Capital Adequacy of Axis bank

increase in capital adequacy over the past 4 years has shown the tightening of capital

equacy norms by the RBI. A 13.69% capital adequacy ratio shows that Axis bank is in a

comfortable position to absorb the losses and inspires confidence in investors.

Tables showing the Gross NPA and Net NPA of Axis Bank

Table 4.3

Gross NPA

2006 2007 2008

1.69% 1.99% 2.93%

2006 2007 2008 2009

shown the tightening of capital

% capital adequacy ratio shows that Axis bank is in a

2009

1.09%

2009

Basel I

Basel II

Net NPA

Particulars 2004 2005

Axis Bank .42% .72%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2004 2005

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

2004 2005

Graph 4.2

Table 4.4

Net NPA

2006 2007 2008

.99% 1.39% 1.20%

Graph 4.3

2006 2007 2008 2009

Gross NPA

2006 2007 2008 2009

Net NPA

2009

.40%

Gross NPA

2009

Net NPA

There is a reduction in the NPAs because of the bank’s sound management practices and

prudent principles of lending. The Bank has created total provisions (excluding provisions for tax)

of Rs. 939.68 crores against Rs. 579.64 crores in the previous year. The Bank has provided Rs.

732.21 crores towards non-performing assets against Rs. 322.69 crores

while the provision for standard assets was Rs. 105.50 crores against Rs. 153.46 crores in the

previous year. The Bank has also provided Rs. 65.46 crores towards restructuring of assets. The

Bank continued to maintain the generally h

percentage of net customer assets declined from the previous year level of 0.36% to 0.35% in

2008-09. The business expansion plans of the Bank need to be backed by

During the year under review, the Bank has raised

subordinated bonds (unsecured redeemable non

capital. The raising of this non-equity capital has helped the Bank continue its

has strengthened its capital adequacy ratio. The

ratio as at the end of the year at 13.69%, substantially above the benchmark

stipulated by Reserve Bank of India. Of this Tier I

last year, while Tier II Capital was at 4.43%.

4.3 MANAGEMENT SOUNDNESS

Asset Turnover Ratio

Particulars 2004 2005

Axis bank 3.565 3.01%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

2004 2005 2006

Asset Turnover Ratio

There is a reduction in the NPAs because of the bank’s sound management practices and

The Bank has created total provisions (excluding provisions for tax)

of Rs. 939.68 crores against Rs. 579.64 crores in the previous year. The Bank has provided Rs.

performing assets against Rs. 322.69 crores in the previous year,

while the provision for standard assets was Rs. 105.50 crores against Rs. 153.46 crores in the

previous year. The Bank has also provided Rs. 65.46 crores towards restructuring of assets. The

Bank continued to maintain the generally high quality of its assets and net NPAs, as the

percentage of net customer assets declined from the previous year level of 0.36% to 0.35% in

The business expansion plans of the Bank need to be backed by

w, the Bank has raised capital of Rs. 1,700 crores by way of

redeemable non-convertible debentures) qualifying as Tier II

equity capital has helped the Bank continue its growth strategy and

strengthened its capital adequacy ratio. The Bank is well capitalized with the capital adequacy

of the year at 13.69%, substantially above the benchmark

stipulated by Reserve Bank of India. Of this Tier I Capital amounted to 9.26%, as against 10.17%

Capital was at 4.43%.

Table 4.5

Asset Turnover Ratio

2006 2007 2008

4.00% 4.97% 6.32%

Graph 4.4

2006 2007 2008 2009

Asset Turnover Ratio

There is a reduction in the NPAs because of the bank’s sound management practices and

The Bank has created total provisions (excluding provisions for tax)

of Rs. 939.68 crores against Rs. 579.64 crores in the previous year. The Bank has provided Rs.

in the previous year,

while the provision for standard assets was Rs. 105.50 crores against Rs. 153.46 crores in the

previous year. The Bank has also provided Rs. 65.46 crores towards restructuring of assets. The

igh quality of its assets and net NPAs, as the

percentage of net customer assets declined from the previous year level of 0.36% to 0.35% in

The business expansion plans of the Bank need to be backed by adequate capital.

capital of Rs. 1,700 crores by way of

convertible debentures) qualifying as Tier II

growth strategy and

Bank is well capitalized with the capital adequacy

requirement of 9%

nted to 9.26%, as against 10.17%

2009

7.78%

Asset Turnover Ratio

During 2008-09, the yield on earning assets increased by 37 basis points to 9.73% from

9.36% which, however, was offset by an

2008-09, the net interest margin (NIM) declined by 14 basis points to

previous year. On a quarter-on-quarter basis, the NIM was 3.35%, 3.51%, 3.12% and 3.37% in

Q1, Q2, Q3 and Q4 respectively.

4.4 EARNINGS & PROFITABILITY

ROA – Return on Asset

Particulars 2004 2005

Axis bank 1.27% 1.21%

Net Interest Income is up 42.58% to Rs. 3686.21 crores in the year 2008

increase in returns resulted in an increase

2523.02 crores. The cost of funds for Axis bank is cheaper as CASA accounts for

total deposits.

4.5 LIQUIDITY

Credit Deposit Ratio

Particulars 2004 2005

Axis bank 43.63% 47.40%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

2004 2005

09, the yield on earning assets increased by 37 basis points to 9.73% from

however, was offset by an increase in cost of funds by 48 basis points. During

09, the net interest margin (NIM) declined by 14 basis points to 3.33% from

quarter basis, the NIM was 3.35%, 3.51%, 3.12% and 3.37% in

Table 4.6

Return on Asset

2006 2007 2008

1.18% 1.10% 1.24%

Graph 4.5

Net Interest Income is up 42.58% to Rs. 3686.21 crores in the year 2008

in an increase in ROA. Fee & Other Income went

The cost of funds for Axis bank is cheaper as CASA accounts for

2006 2007 2008

% 52.79% 59.85% 65.94%

2006 2007 2008

ROA

ROA

09, the yield on earning assets increased by 37 basis points to 9.73% from

increase in cost of funds by 48 basis points. During

3.33% from 3.47% in the

quarter basis, the NIM was 3.35%, 3.51%, 3.12% and 3.37% in

2009

1.44%

Net Interest Income is up 42.58% to Rs. 3686.21 crores in the year 2008-09. So the

went up 63.63% to Rs.

The cost of funds for Axis bank is cheaper as CASA accounts for almost 63% of

2009

68.89%

2009

Axis bank has been improving its liquidity in the past 5 years. It allows the bank to adopt

itself effectively to internal and external changes. Sufficient liquidity will help it to sustain its growth

momentum and absorb any deterioration in asset quality

challenging macro environment.

4.6 SWOT ANALYSIS OF AXIS BANK

1. STRENGTH

• Extremely Competitive And Profitable Banking Franchise

• Banking Services Include Corporate Credit, Retail Banking, Business Banking, Capital

Markets, Treasury And International Banking.

• Sound Technological Platform With Centralized Database And Operations

• Retail Banking Savings Bank Deposits Grew To Rs.

Rs. 19,982 Cr. As On 31st March 2008 Showing

• Corporate Banking: Current Account deposits grew by 24% yoy, from Rs. 20,045 crores as

at end March’08 to Rs. 24,822 crores as at end March’09.

• Support of various Promoters

• Strong technology

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2004 2005

Credit Deposit Ratio

Graph 4.6

Axis bank has been improving its liquidity in the past 5 years. It allows the bank to adopt

itself effectively to internal and external changes. Sufficient liquidity will help it to sustain its growth

momentum and absorb any deterioration in asset quality that may result from increasingly

SWOT ANALYSIS OF AXIS BANK

Extremely Competitive And Profitable Banking Franchise

Banking Services Include Corporate Credit, Retail Banking, Business Banking, Capital

Treasury And International Banking.

Sound Technological Platform With Centralized Database And Operations

Savings Bank Deposits Grew To Rs. 25,822 Cr. On 31st March 2009 from

Cr. As On 31st March 2008 Showing a Year on Year Growth Of 29%.

Current Account deposits grew by 24% yoy, from Rs. 20,045 crores as

at end March’08 to Rs. 24,822 crores as at end March’09.

2006 2007 2008

Credit Deposit Ratio

Credit Deposit Ratio

Axis bank has been improving its liquidity in the past 5 years. It allows the bank to adopt

itself effectively to internal and external changes. Sufficient liquidity will help it to sustain its growth

that may result from increasingly

Banking Services Include Corporate Credit, Retail Banking, Business Banking, Capital

Sound Technological Platform With Centralized Database And Operations

Cr. On 31st March 2009 from

th Of 29%.

Current Account deposits grew by 24% yoy, from Rs. 20,045 crores as

2009

• Total Deposits Rs 1,17,374 crore

• Net Advances Rs 81,557 crore

• Net NPA 0.35%

• Capital Adequacy Ratio 13.69%

2. WEAKNESS

• Not having Image UTI (fraud)

• Higher cost

• Customer service

• Market Capitalization Very Low

3. OPPORTUNITY

• Large retail and corporate market

• Wide scope in rural India

• Other Activity (Non Banking Activity)

• People are become more service oriented

4. THREAT

• Other better Saving, investment option available (like Insurance, Mutual fund, Real-estate,

Gold)

• Government Rules And Regulation

• Very high competition with Private sector (ICICI Bank, HDFC bank) or public sector

(BOB, PNB) Bank.

• Capital Market slow-down

• Rising Rates

• Future Market Trends

CHAPTER FIVE: SUMMARIES

FINDING

RECOMMENDATIONS

CONCLUSION

5.1 FINDINGS

� CAPITAL ADEQUACY:

The bank is maintaining a capital adequacy ratio, which is above the minimum requirement and

also above industry average. BASEL II norm prescribes a capital adequacy ratio of 9%, while

Axis Bank is maintaining a capital adequacy ratio of almost above 12% for last three

consecutive years. In 2007 the bank had a CAR of 11.57%. in 2008 it was 13.73% and in 2009

it was 13.69%(according to BASEL II).

� ASSETS:

For last three years the bank has shown a remarkable decrease in the NPA level, which

indicate the bank has less bad assets and constantly the level of these bad assets are also

decreasing. In 2007 the net NPA was 1.39%, while it came down to 1.20% in 2008 and in 2009

NPA level was down to .40%.

� MANAGEMENT:

Professional management and prudent practices followed by the bank helped in raising the

asset turnover ratio from 3.565% in 2004 to 7.78% in 2009. It can be observed that there is a

100% increase in asset turnover ratio within last five years and it talks about the efficiency of

the management.

� EARNINGS:

The earnings of Axis bank have been average and for last six years the ROA of the bank

stands at about 1.2%. There is an increase in the ROA from 1.24% in 2008 to 1.44% in 2009,

but this change is not a remarkable one.

� LIQUIDITY:

From the analysis of credit - deposit ratio it is quite clear that Axis Bank is comparatively more

liquid than previous years. The liquidity position improved from 43.63% in 2004 to 68.89% in

2009. The credit deposit ratio of last year was 65.94% and it stood at 68.89% in this year.

5.2 SUGGESTION

� The bank should adapt itself quickly to the changing norms.

� The system is getting internationally standardized with the coming of BASELL II accords

so the Indian banks and Axis Bank should strengthen internal processes so as to cope

with the standards.

� Though the NPA level of Axis Bank has gone down significantly, but still the bank should

look after its risk management techniques and should try to reduce it further.

� Since the bank increased the amount of investment in the market, it should find more

avenues to hedge risks as the market is very sensitive to risk of any type.

� The bank Should have a good appraisal system and proper follow up to ensure the bank

is above risk.

5.3 CONCLUSION

Axis bank is the third largest private sector bank. It has shown tremendous growth over the

past 5 years. It has been quite remarkable that it has also managed to contain NPAs and

adhere to the strict guidelines of RBI over such a long period. Axis bank has been able to

withstand the acid test of CAMELS model.

However it should not rest on its laurels. It is highly dependent on corporate lending and

should therefore attempt to diversify to take advantage of the growing affluence of the

Indian middle class by giving more focus to retail lending. It should also gear up for BASEL

II norms which are imminent in the near future. It should also strive for disruptive innovative

banking practices to beat other stronger competitors, both in the domestic as well as

international arena.

All in all, Axis bank is a bank with sound fundamentals which is growing at a really fast pace

but there are challenges which it must prepare itself for to sustain and succeed.

As a great man once said

“I have miles to go before I sleep,

I have miles to go before I sleep”

BIBLIOGRAPHY

BOOKS REFERRED

� Kothari, C.R.,(2010),“Research Methodology: Methods and Techniques”, Wishawa

Publication, Delhi.

� Srivastava, R.M., Nigam, Divya.,(2010),“Management of Indian Financial Institutions”,

Himalaya Publication House.

� Gupta, K. Shashi, Sharma, R.K., Gupta Neeti., (2010), “Financial Management”, Kalyani

Publication.

� Pannerselvam., (2009), “Research Methodology”, PHI.

� Reed, Edward, W., (2009), “Commercial Bank Management”, Harper and Row New York.

� Grosse, H.D., (2009), “Management Policies of Commercial Banks”, PHI.

� Jadhav, Narendra., (2009), “Challenges to Indian Banking: Competition, Globalisation and

Financial Markets”, Mc Millan India.

� Crosse, Howard.,(2009), “Management Policies for Commercial Banks”, PHI.

� Reserve Bank of India, Various Reports, RBI Publication, Mumbai.

JOURNALS REFERRED

� RBI Publication, (December 2009), “Supervision of the Indian Financial System”, RBI.

� Economist Intelligent Unit, (June 2009), “Bank Compliance: Controlling Risk and Improving

Effectiveness”, The Economist.

� Gopinath, Shyamala., (28 February 2010), “Pursuit of Capital markets: The Missing

Perspectives, FEDAI Annual Conference, Kenya.

� Forbes Team., (23 September 2009), “Axis Bank”, Forbes India.

� Sreedhar, R., (December 2009), “Challenges Before the Big Boys of Banking Industry”, The

Analyst.

� Kamath, K.V., (February 2010), “ Current status and Challenges of Indian banking

Industry”, Yojana.

� Sreenathan, N., (11 January 2010), “Axis Bank - Growing Stronger and Better”, Outlook.

Business

� Nirmal Bang Team., (February 2010), Indian Banking fortnightly report.

NEWSPAPERS REFERED

� Sehgal, Karan., (28 September 2008), “Axis Bank’s growth rate faster than Other Banks”,

The Economics Times.

� ET Bureau., (17 October 2009), “Axis Bank Recasts Business into Four Strategic Units”,

The Economics Times.

� Bureau., (14 December 2009), “Fitch Upgrades Axis Bank long-term Rating”, Business

Line.

� Kannan, Shobha., (18 March 2009), “Axis Bank to Curtail Personal Loan Portfolio”,

Business.

� Bureau., (13 July 2009), “Rise in Non-interest Income lifts Axis bank Q1 net 70%”, Business

Line.

� Bureau., “Axis Bank to Stay Focused on Corporate Loans”, Business World.

� Mohan, Raghu., (19 December 2009), “Fastest Growing Large: Racing to the Lead”,

Business World.

� Naveen, K., (20 September 2009), “Axis Bank Shines”, Business Standard.

� Sathe, N., (21 December 2009), “War Among Banks”, Mint.

� Lewis, T., (17 November 2009), “Axis Bank to Diversify”, The Financial Express.

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� http://www. stock- picks- focus.com/axis-bank.html

� http://www. basel2implementation.com/pillars.htm

� http://www. axis bank.com

� http://www. allbankingsolution.com/camels.htm

� http://www. shkfd.com.hk/glossary/eng/RA.htm

� http://www. wikiinvest.com/CAPITAL – ADEQUACY – RATION

� http://www. answers.com/topic/besel – ii

� http://www. rbi.org

� http://www. moneycontrol.com

� http://www. moneyvidya.com

� http://www. investorpedia.com

� http://www. rediffmoney.com

� http://www. yahoo.com/finance

� http://www. google.com/finance

� http://www. indiainfoline.com

� http://www. arthamoney.com