Kapil Project(2)

8/7/2019 Kapil Project(2)

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A PROJECT REPORT

ON

ANALYSIS OF PERFORMANCE OF PRIVATE SECTOR

BANKS ON CAMEL MODEL

IN THE PARTIAL FULFILLMENT OF THE DEGREE OF

MASTER OF BUSINESS AND ADMINISTRATION

SESSION: 2009-2011

SUBMITTED TO

UP TECHNIVAL UNIVERSITY, LUCKNOW

SUBMITTED BY

KAPIL DEV

ROLL NO: - 0911470039

INSTITUTE OF PROFESSIONAL EXCELLANCE AND

MANAGEMENT GHAZIABAD

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DECLARATION

I hereby declare that this project work entitled Analysis of Performance of Private

Sectors Banks on CAMELS MODEL is my work, carried out under the guidance of

my guide Dr. Nidhi Shrivastava. My report neither fully nor partially has ever been

submitted for award of any other degree to either this university or any other

university.

KAPIL DEV

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ACKNOWLEDGMENT

Words are the dress of thoughts, appreciating and acknowledging those who are

responsible for the successful completion of the project.

My sincerity gratitude goes to Dr. Nidhi Shrivastava who assigned me responsibility

to work on this project and provided me all the help, guidance and encouragement to

complete this project.

The encouragement and guidance given by Dr. Nidhi Shrivastava have made this a

personally rewarding experience. I thank him for his support and inspiration, without

which, understanding the intricacies of the project would have been exponentially

difficult.

I am sincerely grateful to my parents and friends who provided me with the time and

financial assistance and inspiration needed to prepare this training report in congenial

manner.

WITH SINCERE THANKS

KAPIL DEV

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PREFACE

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 timeforging 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 CAMEL 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 reformmeasures. Keeping this in mind, signs of improvements and deteriorations are

discussed for the three groups of scheduled banks in the following sections.

CAMELS Framework

Supervisory framework, consistent with international norms, covers risk-monitoring

factors for evaluating the performance of banks. This framework involves the analyses

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

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. The fact that banks work under the most

volatile conditions and the banking industry as such in the booming phase makes it an

interesting subject of study. 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

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reveal a banks performance and how this particular model encompasses a wide range

of parameters making it a widely used and accepted model in todays scenario.

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CONTEXT

CONTENTS PAGE NO.

DECLARATION 2

ACKNOWLEDGEMENT 3

PREFACE4

CONTEXT 5

INTRODUCTION 7-28

LITERATURE SURVAY 29-54

OBJECT OF STUDY 55

SCOPE OF STUDY 56

RESEARCH METHODOLOGY 57-59

DATA ANALYSIS 60-68

FINDINGS 69-71

CONCLUSION 72

RECOMMENDATION 73

LIMITATIONS 74

BIBLOGRAPHY 75

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INTRODUCTION

Indian Banking Industry

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Banking in India originated in the first decade of 18th century with The General Bank

of India coming into existence in 1786. This was followed by Bank of Hindustan. Both

these banks are now defunct. The oldest bank in existence in India is the State Bank

of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple

of decades later, foreign banks like Credit Lyonnais started their Calcutta operations

in the 1850s. At that point of time, Calcutta was the most active trading port, mainly

due to the trade of the British Empire, and due to which banking activity took roots

there and prospered. The first fully Indian owned bank was the Allahabad Bank, which

was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab

National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of

which were founded under private ownership. The Reserve Bank of India formally

took on the responsibility of regulating the Indian banking sector from 1935. After

India's independence in 1947, the Reserve Bank was nationalized and given broader

powers.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate

the development of the Indian economy. At the same time, it has emerged as a large

employer, and a debate has ensued about the possibility to nationalize the banking

industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of theGOI in the annual conference of the All India Congress Meeting in a paper entitled

"Stray thoughts on Bank Nationalisation." The paper was received with positive

enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an

ordinance and nationalised the 14 largest commercial banks with effect from the

midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described

the step as a "masterstroke of political sagacity." Within two weeks of the issue of the

ordinance, the Parliament passed the Banking Companies (Acquition and Transfer ofUndertaking) Bill, and it received the presidential approval on 9th August, 1969.

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A second dose of nationalisation of 6 more commercial banks followed in 1980. The

stated reason for the nationalisation was to give the government more control of credit

delivery. With the second dose of nationalisation, the GOI controlled around 91% of

the banking business of India.

After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer

to the average growth rate of the Indian economy.

Liberalisation

In the early 1990s the then Narasimha Rao government embarked on a policy of

liberalisation and gave licences to a small number of private banks, which came to be

known as New Generation tech-savvy banks, which included banks such as UTI

Bank(now re-named as Axis Bank) (the first of such new generation banks to be set

up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the

economy of India, kickstarted the banking sector in India, which has seen rapid growth

with strong contribution from all the three sectors of banks, namely banks, private

banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation inthe norms for Foreign Direct Investment, where all Foreign Investors in banks may be

given voting rights which could exceed the present cap of 10%,at present it has gone

up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,

were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of

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functioning. The new wave ushered in a modern outlook and tech-savvy methods of

working for traditional banks.All this led to the retail boom in India. People not just

demanded more from their banks but also received.

Current Situation

Currently (2007), banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the

private sector and foreign banks. In terms of quality of assets and capital adequacy,Indian banks are considered to have clean, strong and transparent balance sheets

relative to other banks in comparable economies in its region. The Reserve Bank of

India is an autonomous body, with minimal pressure from the government. The stated

policy of the Bank on the Indian Rupee is to manage volatility but without any fixed

exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may also

expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its

stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an

investor has been allowed to hold more than 5% in a private sector bank since the

RBI announced norms in 2005 that any stake exceeding 5% in the private sector

banks would need to be vetted by them.

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Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks

(that is with the Government of India holding a stake), 29 private banks (these do not

have government stake; they may be publicly listed and traded on stock exchanges)

and 31 foreign banks. They have a combined network of over 53,000 branches and

17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public

sector banks hold over 75 percent of total assets of the banking industry, with the

private and foreign banks holding 18.2% and 6.5% respectively.

Private sector banks

A new wave in the banking industry came about with the private sector banks in India.

With policies on liberalization being generously taken up, these private banks were

established in the country that also contributed heavily towards the growth of the

economy and also offering numerous services to its customers. Some of the most

popular banks in this genre are: Axis Bank, Bank of Rajasthan, Catholic Syrian Bank,Federal Bank, HDFC Bank, ICICI Bank, ING Vysya Bank, Kotak Mahindra Bank and

SBI Commercial and International Bank. The Foreign Banks in India like HSBC,

Citibank, and Standard Chartered bank etc can also be clubbed here.

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Private Sector Banks in India

Bank of Punjab

Bank of Rajasthan

Catholic Syrian Bank

Centurion Bank

City Union Bank

Dhanalakshmi Bank

Development Credit Bank

Federal Bank

HDFC Bank

ICICI Bank

IndusInd Bank

ING Vysya Bank

Jammu & Kashmir Bank

Karnataka Bank

Karur Vysya Bank

Laxmi Vilas Bank

South Indian Bank

United Western Bank

UTI Bank

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PERFORMANCE ANALYSIS OF BANKS

Banks and other financial institutions are a unique set of business firms whose assets

and liabilities, regulatory restrictions, economic functions and operating make them an

important subject of research, particularly in the conditions of the emerging financial

sectors in the EU accession countries from Central and Eastern Europe (CEE).

Banks' performance monitoring, analysis and control needs special analysis in respect

to their operation and performance results from the viewpoint of different audiences,

like investors/owners, regulators, customers/clients, and management themselves.

Some historical notes on the development of the Estonian banking system and the

capital structure of banks are presented in this article. Different versions of financial

ratio analysis are used for the bank performance analysis using financial statement

items as initial data sources. The usage of a modified version of DuPont financial ratio

analysis and a novel matrix approach is discussed in the article. Empirical results of

the Estonian commercial banking system performance analysis are also presented in

the article (1994-2002).

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CAMEL FRAMEWORK

LIQUIDITY

EARNINGS

MANAGEM

ENT

SOUNDNESS

ASSETS

QUALITY

CAPITAL

ADEQUECY

CAMELMODEL

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CAMEL 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. This rating system is used by the three federal banking supervisors (the

Federal Reserve, the FDIC, and the OCC) and other financial supervisory agencies to

provide a convenient summary of bank conditions at the time of an exam.

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

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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 suggetions 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 ona 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 abank exam is not disclosed to the public by supervisors, although studies show that it

does filter into the financial markets.

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. 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.

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

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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 toexamine 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.

Small depositors are protected from possible bank default by FDIC 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. Jordan, et al., (1999) find that uninsured

deposits at banks that are subjects of publicly-announced enforcement actions, suchas cease-and-desist orders, decline during the quarter after the announcement.

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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). As of year-end 1998, bank holding companies

(BHCs) had roughly $120 billion in outstanding subordinated debt. DeYoung, 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.

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.

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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 debtholders, 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 informationbeyond 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.

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 Basle 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 risksforeign exchange, credit, and

interest rate risksby assigning risk weightings to the institutions assets.

A Capital Adquecy 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).

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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 offinancial systems around the world.

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 non-performing 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 isapparently diminishing in emerging markets, substantively, they continue to play a

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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 totalloans (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

non-performing when it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

Interest and/or instalment of principal remains overdue for a period of more than 90

days in respect of a term loan;

The account remains "out-of-order'' in respect of an Overdraft or Cash Credit

(OD/CC);

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

and discounted;

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

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.

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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 2008, the net NPL ratio 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 andeffective actions in legal, institutional and judicial processes.

Management Soundness

Management of financial institution is generally evaluated in terms of capitaladequacy, 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

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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 serveas, for instance, efficiency measures doas 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

.

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

=

Revenue

Total Assets

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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-depthanalysis, 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 interpretfor 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:

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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

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.

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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 marketplacehow 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.

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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 cashwithdrawals.

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PERFORMANCE RATING STANDARDS

Each of the above six parameters are weighted on a scale of 1 to 100 and contains

number of sub-parameters with individual weightings.

Rating

SymbolRating symbol indicates

A Bank is sound in every respect

B Bank is fundamentally sound but with moderate weaknesses

Cfinancial, operational or compliance weaknesses that give cause for

supervisory concern.

D serious or immoderate finance, operational and managerial weaknessesthat could impair future viability

Ecritical financial weaknesses and there is high possibility of failure in the

near future.

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LITRATURE SURVAY ABOUT SYUDY

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Department of Banking Supervision

The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect

and supervise commercial banks. These powers are exercised through on-site

inspection and off site surveillance. Till 1993, regulatory as well as supervisoryfunctions over commercial banks were performed by the Department of Banking

Operations and Development (DBOD). Subsequently, a new Department of Banking

Supervision (DBS) was set up to take over the supervisory functions relating to the

commercial banks from DBOD. For dedicated and integrated supervision over all

credit institutions, i.e., banks, development financial institutions and non-banking

financial companies, the Board for Financial Supervision (BFS) was set up in

November 1994 under the aegis of the Reserve Bank of India. For focussed attention

in the area of supervision over non-banking finance companies, Department of

Supervision was further bifurcated in August 1997 into Department of Banking

Supervision (DBS) and Department of Non-Banking Supervision (DNBS). These

Departments now look after supervision over commercial banks & development

financial institutions and non-banking financial companies, respectively. Both these

departments now function under the direction of the Board for Financial Supervision

(BFS).

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The Board for Financial Supervision constituted an audit

sub-committee in January 1995 with the Vice-Chairman of the Board as its Chairman

and two non-official members of BFS as members. The sub-committees main focus is

upgradation of the quality of the statutory audit and concurrent / internal audit

functions in banks and development financial institutions.

On site Inspection

On site inspection of banks is carried out on an annual basis. Besides the head

office and controlling offices, certain specified branches are covered under inspection

so as to ensure a minimum coverage of advances.

The Annual Financial Inspection (AFI) focusses on statutorily mandated areas of

solvency, liquidity and operational health of the bank. It is based on internationally

adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality,

management, earning, liquidity and system and control. While the compliance to the

inspection findings is followed up in the usual course, the top management of the

Reserve Bank addresses supervisory letters to the top management of the banks

highlighting the major areas of supervisory concern that need immediate rectification,

holds supervisory discussions and draws up an action plan, that can be monitored. All

these are followed up vigorously. Indian commercial banks are rated as per

supervisory rating model approved by the BFS which is based on CAMELS concept.

Off-site Monitoring

As part of the new supervisory strategy, a focussed off-site surveillance function was

initiated in 1995 for domestic operations of banks. The primary objective of the off site

surveillance is to monitor the financial health of banks between two on-site

inspections, identifying banks which show financial deterioration and would be a

source for supervisory concerns. This acts as a trigger for timely remedial action.

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During December 1995 first tranche of off-site returns was introduced with five

quarterly returns for all commercial banks operating in India and two half yearly

returns one each on connected and related lending and profile of ownership, control

and management for domestic banks. The second tranche of four quarterly returns for

monitoring asset-liability management covering liquidity and interest rate risk for

domestic currency and foreign currencies were introduced since June, 1999. The

Reserve Bank intends to reduce this periodicity with effect from April 1,2000.

Corporate Governance

With a view to strengthening the corporate governance and internal control function in

the banks, several steps have been initiated. Introduction of concurrent audit system,

constitution of independent audit committee of board, appointment of RBI nominees

on boards of banks, creation of a post of compliance officer, such are some steps.

Besides,the Reserve Bank monitors the implementation of recommendations of Jilani

Committee relating to internal control systems in banks on an on-going basis during

the annual financial inspection of banks.

Initiatives and Directions

The Reserve Bank has taken several other supervisory policy initiatives. These

include quarterly monitoring visits to banks displaying financial and systemic

weaknesses, appointment of monitoring officers and direct monitoring of certain

problem areas in house-keeping, etc. In addition the department provides secretarial

support to the Board for Financial Supervision and acts as its executive arm. It is the

BFS which evolves policies relating to supervision. It also attends to appointment of

statutory central auditors / branch auditors for all banks and selected all India financial

institutions and to complaints against banks. The department monitors cases of frauds

perpetrated in banks and reported to it. The department as a one time measure,

issued several guidelines to banks and all india financial institutions to enable them to

become Y2K compliant.

Core Principles

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Against the backdrop of banking sector reforms in India and the global focus on

internal control and supervisory mechanism, the need for building a strong andefficient banking system comparable to the international standards cannot be

gainsaid. A detailed study was carried out so as to ascertain gaps, if any, in

implementing the 25 core principles of effective banking supervision enunciated by the

Bank for International Settlements (BIS). Necessary steps have already been initiated

to fill in the gaps, so as to make the regulatory as well supervisory system more sound

and comparable to international standards.

Supervision over FIs

On the basis of the recommendations made by an in-house group, the monitoring of

the financial institutions first started after 1990. This was done through prescribed

quarterly returns on liabilities / assets, source and deployment of funds, etc. The

objective of this monitoring was to obtain a macro level perspective for evolving

monetary and credit policy, to assess the quality of assets of the financial system and

to improve co-ordination between banks and FIs. In 1994, these institutions were

brought under the prudential regulation of the Reserve Bank.

The Reserve Bank has adopted more or less, the CAMELS approach for regulation of

Fis. Since FIs are vested with developmental role as welland with responsibility of

supervision of other institutions, evaluation of their developmental, co-ordinating and

supervisory role is also undertaken.

The newly created division in the department at present supervises and regulates ten

select all-India financial institutions viz., IDBI, ICICI, IFCI, IIBI, Exim Bank, NABARD,

NHB, SIDBI, IDFC and TFCI. With a view to having a continuous monitoring and

supervision of these FIs, an off-site surveillance system has also been put in place.

Further, the division collects from LIC, GIC and UTI information relating to assets and

liabilities and flow of funds for the purpose of overall assessment of the impact of the

operations of FIs on the total flow of resources in the economy and for compiling new

liquidity and monetary aggregates

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THE 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 and can potentially alleviate the problems created by

information asymmetries. From a central banks 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

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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 thru 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. Infact, 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.

Major Recommendations by the Narasimham Committee on Banking Sector

Reforms

Strengthening Banking System

Capital adequacy requirements should take into account market risks in

addition to the credit risks.

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In the next three years the entire portfolio of government securities should be

marked to market and the schedule for the same announced at the earliest

(since announced in the monetary and credit policy for the first half of 1998-99);government and other approved securities which are now subject to a zero risk

weight, should have a 5 per cent weight for market risk.

Risk weight on a government guaranteed advance should be the same as for

other advances. This should be made prospective from the time the new

prescription is put in place.

Foreign exchange open credit limit risks should be integrated into the

calculation of risk weighted assets and should carry a 100 per cent risk weight.

Minimum capital to risk assets ratio (CRAR) be increased from the existing 8

per cent to 10 per cent; an intermediate minimum target of 9 per cent be

achieved by 2000 and the ratio of 10 per cent by 2002; RBI to be empowered

to raise this further for individual banks if the risk profile warrants such an

increase. Individual banks' shortfalls in the CRAR are treated on the same line

as adopted for reserve requirements, viz. uniformity across weak and strong

banks. There should be penal provisions for banks that do not maintain CRAR.

Public Sector Banks in a position to access the capital market at home or

abroad be encouraged, as subscription to bank capital funds cannot be

regarded as a priority claim on budgetary resources.

Asset Quality

An asset is classified as doubtful if it is in the substandard category for 18 months in

the first instance and eventually for 12 months and loss if it has been identified but not

written off. These norms should be regarded as the minimum and brought into force in

a phased manner.

For evaluating the quality of assets portfolio, advances covered by Government

guarantees, which have turned sticky, be treated as NPAs. Exclusion of such

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advances should be separately shown to facilitate fuller disclosure and greater

transparency of operations.

For banks with a high NPA portfolio, two alternative approaches could be adopted.One approach can be that, all loan assets in the doubtful and loss categories should

be identified and their realisable value determined. These assets could be transferred

to an Assets Reconstruction Company (ARC) which would issue NPA Swap Bonds.

An alternative approach could be to enable the banks in difficulty to issue bonds which

could from part of Tier II capital, backed by government guarantee to make these

instruments eligible for SLR investment by banks and approved instruments by LIC,

GIC and Provident Funds.

The interest subsidy element in credit for the priority sector should be totally

eliminated and interest rate on loans under Rs. 2 lakhs should be deregulated for

scheduled commercial banks as has been done in the case of Regional Rural Banks

and cooperative credit institutions.

Prudential Norms and Disclosure Requirements

In India, income stops accruing when interest or installment of principal is not paid

within 180 days, which should be reduced to 90 days in a phased manner by 2002.

Introduction of a general provision of 1 per cent on standard assets in a phased

manner be considered by RBI.

As an incentive to make specific provisions, they may be made tax deductible.

Systems and Methods in Banks

There should be an independent loan review mechanism especially for large borrowal

accounts and systems to identify potential NPAs. Banks may evolve a filtering

mechanism by stipulating in-house prudential limits beyond which exposures on

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single/group borrowers are taken keeping in view their risk profile as revealed through

credit rating and other relevant factors.

Banks and FIs should have a system of recruiting skilled manpower from the openmarket.

Public sector banks should be given flexibility to determined managerial remuneration

levels taking into account market trends.

There may be need to redefine the scope of external vigilance and investigation

agencies with regard to banking business.

There is need to develop information and control system in several areas like better

tracking of spreads, costs and NPSs for higher profitability, , accurate and timely

information for strategic decision to Identify and promote profitable products and

customers, risk and asset-liability management; and efficient treasury management.

Structural Issues

With the conversion of activities between banks and DFIs, the DFIs should, over a

period of time convert them to bank. A DFI which converts to bank be given time to

face in reserve equipment in respect of its liability to bring it on par with requirement

relating to commercial bank.

Mergers of Public Sector Banks should emanate from the management of the banks

with the Government as the common shareholder playing a supportive role. Merger

should not be seen as a means of bailing out weak banks. Mergers between strong

banks/FIs would make for greater economic and commercial sense.

Weak Banks' may be nurtured into healthy units by slowing down on expansion,

eschewing high cost funds/borrowings etc.

The minimum share of holding by Government/Reserve Bank in the equity of the

nationalised banks and the State Bank should be brought down to 33%. The RBI

regulator of the monetary system should not be also the owner of a bank in view of

the potential for possible conflict of interest.

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There is a need for a reform of the deposit insurance scheme based on CAMELs

ratings awarded by RBI to banks.

Inter-bank call and notice money market and inter-bank term money market should bestrictly restricted to banks; only exception to be made is primary dealers.

Non-bank parties are provided free access to bill rediscounts, CPs, CDs, Treasury

Bills, and MMMF.

RBI should totally withdraw from the primary market in 91 days Treasury Bills.

INDUSTRY PROFILE

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INDUSTRY PROFILE

The following discussion deals with the 6 parameters & 5 major banks in India have

been taken for study. The following banks have been taken for the study:

CITY UNION BANK

YES BANK

FEDRAL BANK

KARUR VYSYA BANK

DHANLUXMI BANK

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CITY UNION BANK

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The bank, 'The Kumbakonam Bank Limited' as it was then called was incorporated as

a limited company on 31st October,1904. The first Memorandum of Association was

signed by twenty devoted and prominent citizens of Kumbakonam including Sarvashri

R. Santhanam Iyer, S.Krishna Iyer, V.Krishnaswami Iyengar and T.S.Raghavachariar.

Shri T.S.Raghavachariar was the First Agent of the Bank. In 1908, he was succeeded

by Shri R. Santhanam Iyer who became the Secretary of the bank under the amended

Articles of Association which created the office of a Secretary to be in charge of the

Bank's Management in the place of the Agent, which post he held till his death in

1926. He was succeeded by Shri. S. Mahalinga Iyer as Secretary who subsequently

became the First full-time Managing Director of the bank in tune with the amendment

of Articles in 1929. He held the position of Secretary from 1926 to 1929 and that of

Managing Director from 1929 to 1963.

The bank in the beginning preferred the role of a regional bank and slowly but

steadily built for itself a place in the Delta District Thanjavur. The first Branch of the

Bank was opened at Mannargudi on 24th January 1930. Thereafter, branches were

opened at Nagapattinam, Sannanallur, Ayyampet, Tirukattupalli, Tiruvarur,

Manapparai, Mayuram and Porayar within a span of twenty five years. The Bank

was included in the Second Schedule of Reserve Bank of India Act,1934, on 22nd

March 1945.

The Bank celebrated it's Golden Jubilee on 14th November, 1954 at

Kumbakonam under the Presidentship of Shri.C.R. Srinivasan, Editor, 'Swadesmitran'

& Director, Reserve Bank of India.

In 1957, the bank took over the assets and liabilities of the Common Wealth

Bank Limited and in the process annexed to it the five Branches of Common WealthBank Limited at Aduthurai, Kodavasal, Valangaiman, Jayankondacholopuram and

Ariyalur.

In 1963, Shri. R. A.Venkataramani Iyer took charge as the Chairman of the

Bank which position he held upto 1969.

In April, 1965, two other local banks viz., 'The City Forward Bank Limited' and

'The Union Bank Limited' were amalgamated with the Bank under a scheme of

amalgamation with the resultant addition of six more branches viz., Kumbakonam-

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Town, Nannilam, Koradacherry, Tiruvidaimarudur, Tirupanandal and Kuttalam.

Consequently, the Bank's name was changed to 'The Kumbakonam City Union Bank

Limited'.

In November 1965, the bank's first branch at Madras was opened at

Thiyagaraya Nagar. In May, 1969 the Bank secured the services of Shri. O.R.

Srinivasan, a former Officer of Reserve Bank of India to be at the helm of affairs as

Chairman and Chief Executive Officer which event proved to be a turning point in the

annals of the Bank. Under the new Management the Branch Expansion got a fresh

impetus and branches were opened at Eravancheri, Sembanarkoil, Tiruchirapalli,

Madurai, Thanjavur, Dindigul, Keelapalur, Tirumakkottai, Kottur, Tiruvarur Town andCoimbatore during the period from March, 1968 to August, 1973.

In April, 1974 the bank secured the services of Shri. K.Srinivasan, another

former Senior Officer of Reserve Bank of India as it's Secretary. At that time a Young

Chartered Accountant from Thippirajapuram, a village near Kumbakonam, Shri.

V.Narayanan was appointed as Assistant Secretary of the Bank.

During the period ended 31-12-1976 Branches were opened at Periyakulam,

Mandaveli (Madras), Pattukkottai, Triplicane (Madras), Cuddalore, Pudukkottai,

Chidambaram and Salem.

When Shri. O.R.Srinivasan relinquished his office in June 1977, the then

Secretary Shri. K.Srinivasan was appointed as Chairman and Chief Executive Officer

of the Bank and Shri. V.Narayanan was elevated to the rank of the Secretary.

From July,1977 to September,1979 the bank has opened ten more branches

including those at George Town (Madras), Mount Road (Madras), Tirunelveli and

Karaikudi.

The Bank celebrated its Platinum Jubilee on 9th December, 1979 at

Kumbakonam with Dr. Rajah Sir M.A.Muthiah Chettiar, Shri. G.Rengasamy

Moopanar, Shri. Kosi.Mani and Shri. M.V.Arunachalam as Guests of Honour.

In November, 1980, the then Secretary Shri. V.Narayanan, assumed charge

as the Chairman and Chief Executive Officer of the Bank consequent to the

completion of the term by Shri. K.Srinivasan. The event opened a glorious chapter in

the history of the bank.

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The first branch outside the state of Tamilnadu was opened at Sultanpet,

Bangalore in Karnataka in September,1980. Branches were also opened at the twin

cities of Hyderabad and Secunderabad in Andhrapradesh. In tune with the national

image attached to the Bank, the Bank's name was changed to 'City Union Bank

Limited' with effect from December,1987.

The Bank started it's own Staff Training College on 21st August, 1989 at

Kumbakonam with the avowed objective of imparting need based and result oriented

training to its Staff Members irrespective of the cadre.

Taking into account the bank's financial strength, managerial competence and

consistent progress in all spheres of its activities, Reserve Bank of India has grantedan Authorised Dealers License to deal in Foreign Exchange business with effect from

October, 1990.

The bank has introduced computerisation in the year 1990 and as of now all

the Branches have been computerised.

The Bank's Centenary Celebrations were inaugurated on 27th December,2003

at the Saraswathi Patasala Girl's Higher Secondary School Grounds, Kumbakonam

under the Chairmanship of Shri. V.Narayanan with Shri. R.Venkataraman, Former

President of India, Dr.A.R.Lakshmanan, Judge, Supreme Court, New Delhi and Shri.

N.Rengachari, Retired Chairman, IRDA & Advisor to the Government of Andhra

Pradesh as distinguished Guests.

In the glorious history of City Union Bank Limited, nearly one third of the

period of it's existence and progress centered around a key person, namely,

Shri.V.Narayanan. The enviable leadership style of Shri. V. Narayanan and his vision

for the consistent growth of the bank in all spheres, his tireless efforts in augmenting

the Bank's Business, widening the branch network, maintaining harmonious industrial

relations, ensuring the unique achievement of not loosing not even a single manday

by way of labour unrest-a record of sort in the country has earned name and fame not

only for himself but to the bank in the entire Banking Industry in India. His famous

words of 'Take care of the bank; The bank will take care of you' have made wonders

enhancing the morale and improving the productivity of the workforce, the facts of

which can be vouchsafed by the financial results of the bank during his tenure as

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Chairman. But the bank has lost it's illustrious Chairman Shri.V.Narayanan in an

unexpected car accident near chennai on 5th November, 2004.

With the irreparable loss of Shri. V.Narayanan, the mantle of leading the bankto make his dreams a reality has fallen on Shri.S.Balasubramanian, the then

Executive Director, who has been appointed as the Chairman & Chief Executive

Officer of the Bank by the Board of Directors with the approval of Reserve Bank of

India with effect from 31-1-2005.

Sri. N. Kamakodi, the then General Manager has been elevated to the rank of

Executive Director.

To provide value added services, the Bank has entered into Memoranda of

understanding with Life Insurance Corporation of India and National Insurance

Company Limited for selling insurance products. The Bank has been accorded

license by Insurance Regulatory Authority of India [IRDA] to act as Corporate Agent.

The bank has entered into an agreement with Tata Consultancy Services

Limited for introducing Core Banking Solution[CBS].As such all the branches have

been brought under CBS as on date.

The bank has made arrangements with IDBI Bank Ltd., and UTI Bank Ltd., for

issuing at par cheques and sending outstation bills for collection.

Automated Teller Machines are available at select branches of the bank

where the ATM Card holders can withdraw cash, make balance enquiries and obtain

Statement of accounts.

The Bank has tied up with Export Credit & Guarantee Corporation Limited

[ECGC] for marketing export credit insurance products through its branch network.

The Bank has obtained License to function as Depository Participant under

National Securities Depository Ltd.,

The Bank is having a network of 202 Branches spread in different parts of our

Country as on 01/02/2009

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YES BANK

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YES BANK is a state-of-the-art high quality, customer centric, service driven, private

Indian Bank catering to the Future Businesses of India, and isan outcome of the

professional & entrepreneurial commitment of Rana Kapoor, Founder, Managing

Director & CEO. As the Professionals Bank of India, YES BANK has exemplified

creating and sharing value for all itsstakeholders, and has created a differentiated

Banking Paradigm. Sinceinception, YES BANK has tried to play a catalytic role in

bridging the infrastructureand knowledge gap in various Sunrise sectors of the

economy. As part of the differentiated strategy, YES BANK has had a strong focus on

Development Banking, and has tried to play a catalytic role in bridging

theinfrastructure and knowledge gap in Sunrise sectors of the economy, asis evident

from cutting-edge work that the Bank has done in the area of Food & Agribusiness, in

most cases first-of-its kind in India, Infrastructure, Microfinance, and Sustainability.

Our focus on Governanceand Good Corporate Citizenship, actualized through YES

BANKs Responsible Banking approach, stands evidence of YES BANKs strategic

vision.

Ina short span of 6 years, YES BANK has fructified into a Full Service Commercial

Bank that has steadily built Corporate and Institutional Banking, Financial Markets,

Investment Banking, Corporate Finance, Branch Banking, Business and Transaction

Banking, and Wealth Management business lines across the country, and is well

equipped to offer a range of products and services to corporate and retail customers.

YES BANK offers a full-range of client-focused corporate banking services, including

working capital finance,specialised corporate finance, trade and transactional

services, treasury riskmanagement services, investment banking solutions and

liquidity management solutions among others to a highly focused client base. The

Bank also has a widespread branch network of over 200 branches across 149

cities, with over 290 ATM's and 2 National Operating Centres in Mumbai and

Gurgaon. Sinceinception, YES BANK has adopted innovative and creative

technologies that facilitate robust systems and processes and facilitate in the delivery

of world-class banking solutions that significantly improve the business andfinancial

efficiency of our clients.

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YES BANK has been recognized amongst the Top and the Fastest Growing Bank in

various Indian Banking League Tables by prestigious media houses and Global

Advisory Firms, and has received national and international honours for our various

Businesses including Corporate Finance, Investment Banking, Treasury,Transaction

Banking, and Sustainable practices through Responsible Banking. TheBank has

received several recognitions for our world-class IT infrastructure,and payments

solutions, as well as excellence in Human Capital.

The sustained growth of YES BANK is based on the key pillars of Growth, Trust,

Technology, Human Capital, Transparency and Responsible Banking. YES BANK is

committed towards building the Best Quality Bank of the World in India resting on

the strengths of its six key pillars and differentiation built through exemplary Customer

Service, to ensure that it provides the finest Banking Experience to its customers.

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FEDRAL BANK

History:

The history of Federal Bank dates back to the pre-independence era. Though initially

it was known as the Travancore Federal Bank, it gradually transformed into a full-

fledged bank under the able leadership of its Founder, Mr. K P Hormis. The nameFederal Bank Limited was officially announced in the year 1947 with its headquarters

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nestled on the banks on the river Periyar. Since then there has been no looking back

and the bank has become one of the strongest and most stable banks in the country.

Vision:

Become the dominant numero uno bank in Kerala and a leading player in target

markets.

Be the trusted partner of choice for target (SME, Retail, NRI) customers.

Be a customer-centric organisation setting the benchmarks for service.

Offer innovative yet simple products supported by the state-of-the art technology.

Have a dynamic and energised workforce with a strong sense of belonging.

Deliver top tier financial performance and superior value to stakeholders.

Be a role model for corporate governance and social responsibility.

Mission:

Devote balanced attention to the interests and expectations of stakeholders, and

Adopt best industry practices.

Future:

We are the fourth largest bank in India in terms of capital base and can easily boast of

a Capital Adequacy Ratio of 17.23 %, one of the highest in the industry. This along

with the existence in a highly regulated environment has helped the bank to tide over

the recession with minimum impact to its financial stability.

In fact we have been expanding organically over the past few months. We believe in

extending our reach to our customers by making our services available to all, 24x7.

We have Branches and ATMs across India in addition to the Representative Office at

Abu Dhabi that serves as a nerve centre for the NRI customers in UAE.

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We are transforming ourselves, keeping our principles in tact, into an organisation that

offers service beyond par.

Being in the service industry we are conscious of our surroundings and what happensin the society.

KARUR VYSYA BANK

Karur Vysya Bank was started in the year 1916 in Karur, then a small textile town with

a vast agricultural background, by two illustrious sons of the soil Sri M.A.

Venkatarama Chettiar and Sri Athi Krishna Chettiar. What started as a venture with a

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seed capital of Rs. 1.00 lakh has grown into a leading financial institution that offers

the wide gamut of financial services to millions of its customers under one roof.

Commercial banking in India can boast of a history of about200 years. Though one could trace the history of banking back to the 19th century, the

beginning of the last century saw the birth of many banks in India, set up by people

with vision, commitment and national spirit.

The Karur Vysya Bank Limited, popularly known as KVB, one such endeavour, was

set up in 1916 by two great visionaries and illustrious sons of Karur, the Late Shri M A

Venkatarama Chettiar and the Late Shri Athi Krishna Chettiar to inculcate the habit of

savings and provide financial assistance to traders and small agriculturists in andaround Karur, a textile town in Tamil Nadu.

Though the bank started with a seed capital of Rs.1 lakh, it has withstood innumerable

changes and challenges in the past few decades and has profitably emerged as one

of the leading banks in India without compromising on its fundamentals.

The bank is professionally managed and guided by the Board of Directors drawn from

different fields with vision, experience, knowledge and business acumen.

Shedding its inherent regional flavour, the bank has now spread its wings far and wide

with over 320 branches in 13 States and 3 Union Territories in order to gain a pan

India presence. The bank has been conducting its affairs meticulously to conform to

all the prudential norms and exacting statutory regulations.

KVB has consistently maintained strong fundamentals with a higher percentage of

Capital Adequacy Ratio than mandated by the RBI. KVB has also been generating

profits and rewarding its stakeholders with handsome dividends since inception.

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DHANLUXMI BANK

Incorporated in November 1927 at Thrissur, Kerala by a group of ambitious

entrepreneurs, Dhanlaxmi Bank Ltd. started business with Rs. 11,000 as capital and

seven employees. It became a Scheduled Commercial Bank in 1977, and in 2009,

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was awarded approvals by the Reserve Bank of India for opening 66 branches.

The Bank's Board of Directors is comprised of eminent professionals who provide

leadership and guidance to a strong, multi skilled management team. Its

comprehensive range of banking and financial services and its extensive nationwide

presence has set the stage for an era of unprecedented growth.

To become a strong and innovative bank with integrity and social responsibility and to

maximize customer satisfaction and the satisfaction of its employees, shareholders

and the community."

VISION:

To become a strong and innovative bank with integrity and social responsibility and to

maximize customer satisfaction and the satisfaction of its employees, shareholders.

Achievements, Affiliations and Milestones

Achievements

Serviced business worth Rs. 12,155 crores as on 31 March 2010, comprising depositsworth Rs. 7098 crores and advances worth Rs. 5056 crores.

Earned a net profit of Rs. 23.30 crores for the financial year ended 31st March 2010,

with a capital adequacy ratio of 12.99% (Basel II) during the same period.

Put in place the Real Time Gross Settlement (RTGS) and National Electronic Fund

Transfer (NEFT) systems to facilitate large value payments and settlements online in

real time, on a transaction-by-transaction basis.

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Set up NRI Boutiques (Relationship Centres) across nine locations in Kerala and

Tamil Nadu, with plans to open specialized NRI outlets at potential locations with

emphasis on impeccable service levels.

Dispensed Micro Credit among private and public banks in Kerala, the Bank's

outstanding under micro credit was Rs. 270.62 crores at the end of March 2009.

Attained ISO 9001-2000 certification for the Bank's corporate office at Thrissur and

industrial finance branch at Kochi.

Affiliations

Al Ahalia Money Exchange Bureau

Foreign Correspondent Banks

Deutsche Bank Trust Company Americas

Wachovia Bank NA -A Wells Fargo Company

Commerzbank AG

National Westminister Bank PLC

Insurance Partner

Bajaj Allianz

Milestones

1927 - Founded on 14 November, 1927, at Thrissur, Kerala

1975 - Set up the first branch outside the home state of Kerala, at Chennai

1977 - Designated as Scheduled Commercial Bank by the Reserve Bank of India

(RBI)

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1980 - 100-strong branch network

1986 - Total business of Rs. 100 crores

1996 - First public issue. Total business of Rs. 1,000 crores

2000-Installed the first ATM

2002 - First Rights Issue

2002 - Platinum Jubilee year

2007 - Total business of Rs. 5,000 crores. 80th Anniversary year2008- Total business of Rs. 7,500 crores. Second Rights Issue

2009/10- Expanded branch network to 270 branches. Total business surpassed Rs.

12,000 crore

OBJECTIVES

To do Depth Analysis of the Model for Performance Evaluation.

To do Analysis of Performance of Private Sector Banks in India.

To Give the Raking of Private Banks in India.

To analyze 5 banks soundness & sustainability by using CAMELS as a tool of

measuring Performance.

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SCOPE OF THE STUDY

The study is useful for Banking Institutes in India.

The study is very important for Managements Institutes.

The study has the scope in Financial Research in India.

The study is Helpful in Education Sector.

The study is useful for Consulting Firm.

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RESERCH METHODOLOGY

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RESERCH METHODOLOGY

STATEMENT OF THE PROBLEM

In the recent years the financial system especially the banks have undergone

numerous changes in the form of reforms, regulations & norms. CAMEL framework for

the performance evaluation of banks is an addition to this. The study is conducted to

analyze the pros & cons of this model.

RESEARCH PROPOSAL

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The Bank after the implementation of the balanced scorecard in 2002 has under gone

a drastic change. Both its peoples and process perspectives have changed visibly andthe employees have full faith in the new strategy to produce quick results and keep

them ahead in the industry. The balanced scorecard approach has brought about

more role clarity in the job profile and has improved processes. In short it focuses not

only on short term goals but is very clear about its way to achieve the long term goal.

Type of research:

Descriptive Research is used for the study of the performance of private banks on

CAMEL MODEL in India.

Data collection:

Secondary data on the subject was collected from the Books, ICFAI journals,

company prospectus, company annual reports and IMF, RBI & SEBI websites.

SAMPLING TECHNIQUE :

Non Probability sampling (judgment sampling) was done for the whole study and

selection of Data.

PLAN OF ANALYSIS:

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The data analysis of the information got from the balance sheets was done and ratios

were used. Graph and charts were used to illustrate trends.

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DATA ANALYSIS & INTERPRETATION

ANALYSIS AND INTERPRETATION

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

(A)CAPITAL ADEQUACY:

Capital adequacy ratio is defined as

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Where Risk can either be weighted assets ( ) or the respective national regulator's

minimum totalcapital requirement. If using risk weighted assets,

8%.

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

conforming to theBasel 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.

CAPITAL ADEQUACY RATIO FOR 5 MAJOR BANKS IN INDIA

Banks City

Union

Bank

Yes

Bank

Federal

Bank

Karur

Vysya

Bank

Dhanlaxmi

Bank

Capital

Adequacy

5.00% 10.75% 5.5% 4.5% 5.25%

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http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Bank_regulationhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Basel_Accordshttp://en.wikipedia.org/wiki/Basel_Accordshttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Assethttp://en.wik

Documents

Kapil Project(2)