Capital Structure Dessertation Final

7/26/2019 Capital Structure Dessertation Final

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Capital Structure: Comparative Study of CANARA andICICI Bank

Abstract

The Capital Structure of a company is made up of debt and equity securities that comprise a

firms financing of its assets. Today business organizations use a range of alternatives for

collecting the funds. Small and Big organizations used the way of collecting funds according

to their paying capacity, degree of ris, size of capital, woring system of the business etc. so,

here in this pro!ect report analyse the capital structure of two bans according to its

convenience. Capital Structure is the "atio of long#term sources of finance in the total capital

of the firm includes $%roprietor$s &unds$ and $Borrowed &unds$'%roprietors &unds include

equity capital, preference capital, reserves and surpluses retained earnings and Borrowed

&unds include long#term debts such as loans from financial institutions, debentures etc. (n

this pro!ect, has taen two bans viz. (C(C( and C)*)") for maing comparison of their

debt and equity. By using, the technique of average and percentage. The pro!ect has made the

conclusion about the collection of funds of these bans. +astly, some suggestions have given

which the bans can follow. ence, the research may contribute in providing a new way to

the bans for capital structure decision.

Keywords: -quity /ebts Cost of Capital Cost of /ebts

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0. (*T"1/2CT(1*

The term $Capital Structure$ refers to the proportion between the various long#term sources

of finance in the total capital of the firm includes $%roprietor$s &unds$ and $Borrowed

&unds$'%roprietors &unds include equity capital, preference capital, reserves and surpluses

retained earnings and Borrowed &unds include long#term debts such as loans from financial

institutions, debentures etc. 1n the other hand, equity share capital is the most costlier source

of finance 'as return e3pected by equity shareholders is greater, than the interest on

debentures and the dividend on preference shares4 but these are least risy 'as there is no

fi3ed commitment to pay dividend and the return of equity capital4. %reference share capital

lies between debentures and equity. Capital in terms of ris and cost. 5hile choosing the

source of finance a financial manager maes an attempt to ensure that ris as well as cost of

capital also minimum for this purpose he has to answer the following questions6

0. ow much amount should be raised through issue of equity7

8. ow much amount should be raised through issue of preference share capital7

9. ow much amount should be raised through debentures and other long#term debts7

:. 5hat should be the proportions of equity and debt in the capital structure7

;. ow much financial leverage should employ7

The primary factors that influence a company's capital-structure decision are:

1. Business risk:

-3cluding debt, business ris is the basic ris of the company$s operations. The greater the

business ris, the lower the optimal debt ratio.

8. Company's Tax Exposure

/ebt payments are ta3 deductible. )s such, if a company$s ta3 rate is high, using debt as ameans of financing a pro!ect is attractive because the ta3 deductibility of the debt payments

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protects some income from ta3es.

9.inancial lexibility6

This is essentially the firm$s ability to raise capital in bad times. (t should come as no surprise

that companies typically have no problem raising capital when sales are growing and

earnings are strong. owever, given a company$s strong cash flow in the good times, raising

capital is not as hard. Companies should mae an effort to be prudent when raising capital in

the good times, not stretching its capabilities too far. The lower a company$s debt level, the

more financial fle3ibility a company has.

:. !ana"ement #tyle:


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8. "-S-"C /-S(>*6

8.0 &esearch roblem

The study is to find the different determinant of capital structure in the baning industry as it

affects the whole form of the organization. So it is very important to have a clear idea about

these factors and cost of different sources in the baning industry. So the problem in the study

is to find out effective determinant of capital structure.

(.(. Title of the #tudy

Capital Structure6 Comparative Study of C)*)") and (C(C( Ban

(.). &esearch *esi"n

The research design used is descriptive between capital structure and cost of capital of (C(C(

and C)*)"). The study is descriptive because already a wide literature is present on this

topic.

(.+. ,eed and #i"nificance of the roect

Capital structure decision is one of the strategic decisions taen by the financial management.

Considerable attention is required to decide the mi3 up of various sources of finance. )

!udicious and right capital structure decision reduces the cost of capital and increase the value

of a firm while a wrong decision can adversely affect the value of the firm. )s discussed

earlier, various sources of finance differ in terms of ris and cost. ence, there is utmost need

of designing an appropriate capital structure. Capital structure decisions are of great

significance due to the following reasons6

Capital structure determines the ris assumed by the firm.

Capital structure determines the cost of capital of the firm.

(t affects the fle3ibility and liquidity of the firm.

(t affects the control of owners on the firm.

(.. /becti0es of the #tudy

0. To conduct comparative study regarding to capital structure of C)*)") and (C(C( ban

8. To find out the cost of different financial sources of pro!ect financing.

9. To now the portion of debt and equity in capital structure.

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:. To find out the overall cost of capital of C)*)") ? (C(C( Ban

(.. #cope of the study

The area of the Study is two bans C)*)") and (C(C( to mae a comparison between the

Capital Structure. (n fact, the research design is the conceptual structure within which

research conducted. (t constitutes the blue print for the collection, measurement and analysis.

This report is of -3planatory ? analytical in nature. (n e3planatory ? analytical research we

have sufficient data on the concept and research material. Because many researcher have

been done the wor on the concept.

(.2. !ethods of collectin" data

Since the report required studying the theoretical as well as practical aspects of %ro!ect

&inance, the boos have provided in the theoretical aspects of the study. To get the latest

information, (nternet was also used as a medium at various stages. The data for the pro!ect

report has been collected from the secondary sources.

(.3. eriod of the study

The period for the present study covers three years from 8@09 to 8@0;

(.4. &e0ie% of literature

5illiam Sharpe '0A=94 used a better ar. measure in his %h./. thesis. )lthough the measure is

different from ilbert '0A94 studied the impact of size and organizational form of the

commercial ban on its efficiency. Cost and output of the bans were collected for this

purpose. They used 898 commercial bans that loo part in the .&ederal "eserve$s &unctionalCost )nalysis %rogram in 0A=D. Bans were categorized into unit bans, branch bans and

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holding company subsidiaries on the basis of their organizational form and the amount of

assets they had. The minimum average cost ')C4 al which ban of lie same size and

organizational form can operate is called as technical efficiency of the ban while the e3cess

)C of the ban over minimum )C represents the operational inefficiency of the ban.

)ly '0AA@4 analysed technical, scale and locative efficiencies in 2.S. baning by using non

parametric frontier approach on a sample of 9.88 independent bans. )ccording to them,

ma!or contributor to the low score of overall efficiency was technical inefficiency in the

baning units as compared to al locative inefficiency.

Berger '0AA94 stated that rapid changes in financial service industries mae it important to

determine the efficiency of financial institutions. Bans play an important role in the financial

marets of the developing countries and it is very important to evaluate whether bans

operate efficiently or not. There are many research studies that try to loo into the efficiency

of bans operating within a country and across the countries. These studies can be

differentiated on the basis of used methodologies, considered variables, type and number of

bans included in the sample.

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9. (*/2ST"F %"1&(+-

Bank: -

) ban is a financial intermediary that creates credit by lending money to a borrower, thereby

creating a corresponding deposit on the bans balance sheet. +ending activities can be

performed either directly or indirectly through capital marets. /ue to their importance in the

financial system and influence on national economies, bans are highly regulated in most

countries.


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Bank 5ndustry rofile:

(n the present scenario service sector plays an important role in the country. )mong service

sector baning industry is one. Baning is one of the classical economic functions and plays a

vital role in economic development. (ndia has a well#developed baning system.


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*ew phase of (ndian Baning system with advent of (ndian &inancial and Baning sector

reforms after 0AA0.

%hase 0

The >eneral Ban of (ndia was set up in the year 0D=. *e3t was come Ban of industan

and Bengal Ban. The -ast (ndia Company established Ban of Bengal '0D@A4. Ban of

Bombay '0D:@4 and Ban of


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were nationalized. Second phase of nationalization (ndian Baning Sector "eform was

carried out in 0AD@ with seven more bans. This step brought D@H of the baning segment in

(ndia under >overnment ownership.

The following are the steps taen by the >overnment of (ndia to "egulate Baning

(nstitutions in the Country6

0A:A6 -nactment of Baning "egulation )ct.

0A;;6 *ationalization of State Ban of (ndia.

0A;A6 *ationalization of SB( subsidiaries.

0A=06 (nsurance cover e3tended to deposits.

0A=A6 *ationalization of 0: ma!or bans.

0A06 Creation of credit guarantee corporation.

0A;6 Creation of regional rural bans.

0AD@6 *ationalization of seven bans with deposits over 8@@ crore.

)fter the nationalization of bans, the branches of the public sector ban (ndia rose to

appro3imately D@@H in deposits and advances too a huge !ump by 00,@@@H.

%hase (((

This phase has introduced many more products and facilities in the baning sector in its

reforms measure. (n 0AA0, under the chairmanship of < *arasimham, a committee was set up

by his name which wored for the liberalization of baning practices. The country is flooded

with foreign bans and their )T< stations. -fforts are being put to give a satisfactory service

to customers. %hone baning and net baning is introduced. The entire system became more

convenient and swift. Time is given more importance than money.

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+. rofile of 5C5C5 Bank

(C(C( was formed in 0A;; at the initiative of the 5orld Ban, the >overnment of (ndia and

representatives of (ndian industry. The principal ob!ective was to create a development

financial institution for providing medium#term and long#term pro!ect financing to (ndian

businesses. (n the 0AA@s, (C(C( transformed its business from a development financial

institution offering only pro!ect finance to a diversified financial services group offering a

wide variety of products and services, both directly and through a number of subsidiaries and

affiliates lie (C(C( Ban

(C(C( Ban is (ndias largest private sector multinational baning and financial services

company with total assets of "S =:=08A billion 'usI 0@9 billion4 at march 90,8@0; and %rofit

after ta3 "s 000.; billion 'us I 0DD million4 for the year ended march 90, 8@0; (C(C( has a

networ of :@@ branches and 09.:: )T


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"evenue 6 "s A@80= crore '2SI09billion4

'8@0;4

%rofit 6 "s 08A:8 Crore '2SI0.A billion4

'8@0;4

Total assets 6 "s D8=@A crore '2SI08@ billion4 '8@0;4

*umber of

-mployees 6 =,D; '8@0;4

5ebsite 6 www.iciciban.com

1b!ectives of (C(C( Ban6#

(C(C( Ban$s >reen initiative is to mae healthy environment in the organisation i.e. to

create intrapersonal sills among the customer and understanding between employees of the

organisation.

Broad ob!ectives of the (C(C( are6

0. To assist in the creation, e3pansion and modernisation of private concerns

8. To encourage the participation of internal and e3ternal capital in the private concerns

9. To encourage private ownership of industrial investment.

:. *ot giving *1C after settlement of loans

;. Tussle with the collection agent " ." >roups, /asnagar, owrah is going on and the

ban is harassing the customers

(C(C( Ban %roducts

-3tra home loans6 Countrys first Kuarantee baced loans # K(C(C( Ban -3tra

ome +oans for retail customers aspiring to purchase their first homes in the affordable

housing segment were introduced in )ugust 8@0;. This allows a borrower to enhance the loan

amount by up to 8@H and also provides the option to e3tend the repayment period up to =

years of age. This initiative is in association with (ndia uarantee Corporation

'(C4. (C is a !oint venture between *ational ousing Ban '*B4, an "B( subsidiary

which regulates ome &inance Companies in (ndia *FS-#listed >en worth &inancial (nc., a

&ortune ;@@ company (nternational &inance Corporation '(&C4 and )sian /evelopment Ban

')/B4

Page 12
http://www.icicibank.com/http://www.icicibank.com/


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Smart ault6 The ban launched fully automated state#of#the#art locers, KSmart ault which

is available 8:3, including weeends and post baning hours in )ugust 8@0;. The KSmart

ault uses robotic technology to access the locers from the safe vault and enables customers

to conveniently access their locers at any time of their preference, in total privacy, without

any (ntervention of the branch staff, in the comfort of a secure lounge where the locer

automatically comes up to the customer.

Saral +oans 6 (n )ugust 8@0;, (C(C( Ban introduced KSaral#"ural ousing +oan.

)pplicants from rural areas including women borrowers as well as seeers from weaer

sections can now avail home loans at the (C(C( Ban Base "ate 'L(#BaseM4 which is currently

at A.@H. )n eligible borrower can tae up to "s.0; lac under the K(C(C( Ban Saral#"ural

ousing +oan

(C(C( Ban 2nifare Bangalore


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(C(C( Ban %ay on Twitter

(C(C( Ban in Ganuary, 8@0; launched baning services on Twitter, christened as $(C(C( Ban

%ay$. This service in (ndia enables (C(C( Ban customers to transfer money to anyone in the

country who has a Twitter account, chec account balance, view last three transactions and

recharge prepaid mobile in a completely secure manner

Contactless Credit and /ebit Cards (C(C( Ban in Ganuary, 8@0; announced the launch of the

countrys first KContactless debit and credit cards, enabling its customers to mae electronic

payments by !ust waving the cards near the merchant terminal in lieu of dipping or swiping

them. These cards are based on the *ear &ield Communication '*&C4 technology, which

provides customers the improved convenience of speed as these cards require significantly

less time than traditional cards to complete a transaction along with enhanced security as they

remain in control of the customer.


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%rofile of C)*)") ban

Bac ground and (nception of the Company6#

C)*)") B)*E was founded in 0A@= by Sri, )mmembalSubba"ao%ai. The ban was

initially named as C)*)") Ban indu %ermanent &und. (t blossomed in to a limited

company in 0A0@ and was renamed as C)*)") Ban +td, in 0A=A the ban was

nationalized and thereafter came to be nown as C)*)") Ban. Today C)*)") Ban is

one of the premier Bans in the country with a networ of 8,;D branches spread all over the

country. The Ban has many distinctions to its name. (t was the first Ban to be conferred

&(CC( award for contribution to rural development C)*)") Ban was the first among

Bans to launch networed )T


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segments. Baning operations consist of corporate Baning. "etail Baning, personal and

commercial Baning, Cash management services, /eposits and other allied services.

Treasury operations consist of dealing in S+" and *on#S+" securities and


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Data analysis:

Capital Structure of CANARA and ICICI Bank:

Capital Structure i' a com(ination of de(t and e)uity* +,e optimal Capital

Structure -,ic, ma.imi/e' t,e value and minimi/e' t,e co't of capital*

Table no0.0 Capital Structure of C)*)") and (C(C( Ban

S

o u

r c

e6

)nnual reports of C)*)") and (C(C( Ban

:.8. Comparison of -quity Capital

The funds for a business can rise by selling stoc or by retaining earnings. -quity capital is

owners capital and most costly source of finance but least risy then the preference and debt

source of finance.

Page 1#

Ban C)*)") (C(C(

Fear source -quity /ebt -quity /ebt

8@09 ::9@ [email protected] 00;9=.9= 0:;9:0:.A;

8@0: :=08.;A [email protected]; 00;;@.:: 0;:;A@.;9

8@0; :;0.A 8;=8D.8@ 00;A=.=@ 08:09.:A


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1 2 3&

2&&&

&&&

"&&&

$&&&

1&&&&

12&&&

canara

icici

Chart no :.0 comparison of equity capital

(nterpretation6

(t is clear from the study that equity used by (C(C( is more than C)*)"). The equity used

by (C(C( and C)*)") at increasing rate. -quity capital is owners capital it means a good

indicator for health of an organization.

:.9 Comparison of /ebt

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/ebt are least costly source of finance because the rate of interest is lower than the rate of

dividend and interest paid on debenture is deducted from the profit while calculating the ta3es

but these are most risy

1 2 3

&

2&&&&&

&&&&&

"&&&&&

$&&&&&

1&&&&&&

12&&&&&

1&&&&&

1"&&&&&

1$&&&&&

canara icici

Chart no :.8 Comparison of /ebt

(nterpretation

(t is clear from the study that debt used by (C(C( is more than C)*)"). The debt used by

(C(C( at increasing rate. )nd debt used by C)*)") increased in 8@0:. &or last year it is

decreasing.

:.:. /ebt -quity "atio6

(t is a ratio of borrowed capital to the owned capital. This ratio measures the relative

claims of outsiders against the firms assets.

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/ebt#-quity "atio Q /ebt R -quity

Fear /ebt -quity /ebt -quity ratio

8@09 [email protected] R ::9@ Q :;.D

8@0: [email protected]; R :=08.;A Q ;A.8@

8@0; 8;=8D.8@ R :;0.A Q ;:.80

)verage Q ':;.D;A.8@;:.804 O 9 Q;9.@=

(C(C( B)*E

Fear /ebt -quity /ebt equity ratio

8@09 0:;9:0:.A; R 00;9=.9= Q 08;.AD

8@0: 0;:;A@.;9 R 00;;@.:: Q 099.AD

8@0; 08:09.:A R 00;A=.=@ Q 0:D.=D

)verage Q '08;.AD099.AD0:D.;D4O9 Q09=.0D

:.; Comparisons of /ebt equity ratios of (C(C( and C)*)")

Table no :.8 /ebt -quity "atios

Source6 )nnual reports of (C(C( and C)*)") ban

Page 2&

Ban C)*)") (C(C(

Fear /ebt -quity "atio /ebt equity ratio

8@09 :;.D 08;.AD

8@0: ;A.8 099.AD

8@0; ;:.80 0:D.=

average ;9.@= 09=.0D


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1 2 3

&

2&

&

"&

$&

1&&

12&

1&

1"&

CANARA 0e(t )uity

Ratio

ICICI 0e(t e)uity ratio

Chart no :.9 debt equity ratios of C)*)") and (C(C( ban

0 8@09

8 8@0:

9 8@0;

(nterpretation6

(t is clear from the graph that the debt equity ratio of (C(C( is more than C)*)"). (f the

debt equity "atio is more than it shows rather risy financial position from the long term

point of view.as it indicate that more and more fund invested in the business provided by the

long term lenders. The high debt equity ratio is a dangerous signal for the long term landers.

:.= Cost of Capital

Cost of capital is the minimum required rate of earning or the cut off rate of Capital

e3penditures.

&ormulae6

EeQ /%S R


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Ed Q ( R*%0@@

( Q (nterest

*% Q *et %roceed

Cost of /ebt of (C(C( B)*E

8@09 EdQ 8=0ADA.:9R [email protected] 0@@ Q 08A.0=

8@0: d Q 9@=@;;.9: [email protected]; 0@@ Q008.@=

8@0; d Q 9:0990.89 R08:09.:A 0@@ Q 0A.A

Cost of /ebt of C)*)") Ban

8@09 EdQ [email protected]: R 0;:;A@.;9 0@@ Q 0=.A9

8@0: d Q 8@8;.DD R0:;9:0:.A; 0@@ Q 0A.@=

8@0; d Q 9@@;0;.8AR08:09.;@ 0@@ Q 0.:8

Cost of -quity of (C(C( Ban

Ee Q /%S R maret price 0@@

Fear

8@09 Ee Q 8@.@@R8@A 0@@ QA.;=

8@0: Ee Q 89.@@ R 8:D 0@@ QA.8

8@0; Ee Q ;.@@ R 90; 0@@ Q 0.;

C)*)") Ban

8@09 Ee Q 09.@@ R 9D:.:; 0@@ Q 9.9D

8@0: Ee Q 00.@@ R 8=A.9 0@@Q:.@D

8@0; Ee Q 0@.;@ R 9=.A: 0@@Q8.D;

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+. Comparison of Cost of Capital

Cost of capital is minimum rate of return that firm must earn on the equity financed position

of an investment pro!ect in order to leave unchanged the maret price of the share.

Table no :.9 Cost of capital

Source6 annual reports of (C(C( and C)*)") Ban

1 2 3

&

1

2

3

!

"

#

$

%

1&

CANARA Co't of e)uityICICI Co't of e)uity

Chart no :.: Comparison of cost of equity

Page 23

Ban C)*)") (C(C(

year source Cost of equity cost of debt Cost of equity cost of debt8@09 9.9D 0=.A9 A.;= 08A.0=

8@0: :.@D 0A.@= A.8 008.@=

8@0; 8.D; 0.:8 .A 0A.A


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5nterpretation

(t is clear from the study that Cost of equity of (C(C( is more than C)*)"). 1n the basis of

study it is clear that cost of debt of C)*)") is more than (C(C( and cost of equity of (C(C(

is more than C)*)") and cost of debt and cost of equity is decreasing in C)*)") and

cost of debt and cost of equity is also decreasing in (C(C(.

+.2 Cost of *ebt:

The firm borrows the fund from the financial institute or public for a specific period of time

at a specific rate of interest.

1 2 3&

2&

&

"&

$&

1&&

12&

1&

CANARA co't of

de(t

ICICI co't of de(t

Chart no +. Comparison of cost of debt

5nterpretation

&rom the above table, it is clear that cost of debt of (C(C( is more than C)*)").

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:.D 1verall Cost of Capital of (C(C( B)*E

Table no :.: 1verall Cost of Capital of (C(C( ban

Source6 )nnual report of (C(C( ban

:.A 1verall Cost of Capital of C)*)") Ban

F-)" Source Boo value weight cost H age weighted )verage

cost

8@09 -quity 00;9=.9= @.@@9;9 9.9D @.@8:D

/ebt 0:;9:0.A; @.A8=: 0=.A9 0;.=D

Total 0;;;=D;0.9 0;.

8@0: -quity 00;;@.:: @.@@:@D :.@D @.@9@8

/ebt 0;:;A@.;9 @.AA8; 0A.@= 0D.A0

Total 0;;A0:@.A 0D.A:

8@0; -quity 00;A=.= @.@@==D 8.D; @.@0A

/ebt 08:09.:A @.AA99 0.:8 0.9

Total 09;@.@A 0.90

Table no :.; 1verall Cost of Capital of C)*)") Ban

Source6 )nnual report of C)*)") Ban

Page 2!

Fear Source Boo value weight Cost H age 5eighted

)verage cost

8@09 -quity ::9@ @.@809 A.;= @.8@:9

/ebt [email protected] @.AD= 08A.0= 08=.9A

Total 8@8=9.9 08=.;A

8@0: -quity :=08.;A @.@0== A.8 @.0;9D

/ebt [email protected]; @.AD99 008.@= [email protected]

Total [email protected]: [email protected]:

8@0; -quity :;0.A @.@0D00 .A @.0:9

/ebt 8;=8D.8 @.AD0D 0A.A 0A.:8

Total [email protected] 0A.;=


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1 2 3

&

2&

&

"&

$&

1&&

12&

1&

CANARA overall co't

of capital

ICICI overall co't

capital

Chart no :.; 1verall Cost of Capital of C)*)") B)*E

5nterpretation

(t is clear from the study that overall cost of capital of (C(C( is decreasing per year, cost of

capital is decreasing per year and overall cost of capital of C)*)") is less than (C(C(.

Page 2"


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indin"s and Conclusions:

The cost of capital of (C(C( is decreasing per year and cost of capital of C)*)") is

increasing.

1n the basis of study conclude that (C(C( is better than C)*)") because it continue to

focus decreasing the cost of capital as compared to C)*)")

U (C(C( have the better capital structure than C)*)").

U Cost of debt of (C(C( is more than C)*)").

U Cost of equity of (C(C( is more than C)*)").

U Cost of equity of (C(C( ? C)*)") is decreasing per year.

U Cost of debt of (C(C( is decreasing ? C)*)") is increasing

U 1verall cost of capital of (C(C( is decreasing per year.

U 1verall cost of capital of C)*)") is increasing per year.

Page 2#


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&ecommendation:-

U %rivate ban should improve their capital structure.

U %ublic sector ban should try to reduce their overall cost of capital

/eterminant of capital structure should be considered while forming capital structure.

Ban should have liquidity in their capital structure

Timely review of their capital structure is necessary in baning industry

Timely review of their cost of capital of different sources 'debt, equity4 is necessary in

baning industry

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B5B95/$&A;

0. %rasanna Chandra, ). &inancial

Documents

Capital Structure Dessertation Final