SUBMITTED TO: MISS.
SUBMITTED BY: MUKESH VERMA BBA-MBA (INT.) SEC. A R346A29
Success is an amalgam of dedication. Hard work and able guidance of people around us”
I am indebted to my teachers and gurus who molded at this junction of my career from where I can take off better in the competitive scenario of today’s world . Working on this project has been a great pleasure & a stimulating experience. Firstly I would like to express our deep gratitude to God all mighty for his blessings, which provided me strength & patience to complete my term paper. I would also like to convey my thanks to Mr. Bill Gates who have developed the Ms Office without his contribution we would not able to make this type of attractive & in a printed way. I would also like to thanks my friends who helped me in all possible ways. I am also thankful to MISS. HARJEET KAUR Who provided me needed information about their department and guided my term in the right direction.
MUKESH VERMA (SIGNATURE)
INTRODUCTION TO BANKING INDUSTRY History
In the history of banking, there is no unanimous opinion regarding the beginning of banks. Some trace its origin to French word BANGUI and some to Italian word BANCA. According to one viewpoint, in gold old days, Italian money lenders were known as “Banechi” or “Banacheri” because people kept a special type of table to transact their business called “Banchi”. The practice of safekeeping and saving was found in the temple of Babylon. Chankya in his Arthashastra has also mentioned about existence of powerful guilds of merchant bankers who received deposits, advanced loans and issued hundis. First Bank: Casa De San Giorgio was the first bank to be established in 1148. In 1157, first public bank ‘Bank of Venice’ was established in Italy. First Bank in India: The first bank in India was started in 1770 as ‘Bank of Hindustan’. First Bank in modern sense: ‘Bank of Bengal’ was the first bank in modern sense in 1806.
Bank may be defined as a financial institution which is engaged in the business of keeping money for savings and checking accounts or for exchange or for issuing loans and credit etc. A set of services intended for private customers and characterized by a higher quality than the services offered to retail customers. Based on the notion of tailor-made services, it aims to offer advice on investment, inheritance plans and provide active support for general transactions and the resolution of asset-related problems. The essential function of a bank is to provide services related to the storing of deposits and the extending of credit. Basic function may include Credit collection, Issuer of banking notes, Depositor of money and lending loans.
Origin: In 1786, the England Agency Houses had established the Bank of Bengal at Calcutta. This heralded the beginning of modern banking in India, subsequently three presidency banks
were set up, one each at Calcutta (1806), Bombay (1840), and madras (1846), till 1862, these presidency banks were allowed to issue currency notes. The banks in existence during the period opened branches in various cities and towns like Agra, Mumbai, Banaras, Simla, and Delhi.
From 1860 to 1900: In 1860, the concept of limited liability was introduced in banking. As a result several joint stock banks were floated. Some of the prominent joint sector banks thus established during the period was 1) The Allahabad Bank 2) The Alliance Bank of Simla 3) The Oundh Bank and 4) The Punjab National Bank.
From1900 to 1950: The Swadeshi movement, which started in the early 1900s, gave stimulus to the growth of indigenous joint stock bank. Some of the banks established during the period were: 1) The people’s Bank of India 2) The Bank of India 3) The Bank of Baroda 4) The Central Bank of India. In 1921 the three presidency Banks were merged to form the Imperial Bank of India. On the eve of independence in 1947, there were 648 commercial banks comprising 97 scheduled and 551 non-scheduled banks. The number of offices of Banks stood at 2,987 total deposits at Rs.1080 crore and advances at Rs.475 crore. On the basis of major recommendations of the Central Banking Enquiry Committee the RBI Act was passed in 1934 and the RBI came into existence in 1934 as the central banking authority of the country. In 1949, the banking Regulation Act (BR Act) was passed which provided the framework for the RBI’s regulation and supervision of banks. It gave wide powers to RBI to regulate, supervise and develop the banking systems. Such powers encompassed the establishment of new banks. During the period following 1949, RBI attempted to institutionalize the saving of the public and to adopt a credit system suitable to the emerging needs of the economy. From 1950 to 1969: During this period, two important developments took place. First, the all India Rural Credit survey Committee, which examined the issue of credit availability at the rural areas, recommended the creation of the state partnered/sponsored bank entrusted with the task of opening branches in the rural areas. Accepting this recommendation, the State Bank of India Act 1955 was passed under which the RBI took control of the Imperial Bank of India, which was renamed State Bank of India (SBI). Later in 1959, the State Bank of India (Subsidiary bank) Act was passed enabling SBI to take over eight princely-state-association banks as the subsidies. The
conversion of Imperial Bank of India into the State Bank of India and the constitution of the association banks accelerated the pace of extending banking facilities all over the country.
Secondly, the need about wider diffusion of banking facilities and to change the uneven distributive pattern of bank lending was realized. Hence, to ensure an equitable and purposive distribution of credit within the available resources and keeping in view the relative priorities of developmental needs, the scheme of social control over banks was announced in the Parliament in December 1967. The measures designed under the social control aimed at achieving a social orientation of banking within the framework of the existing ownership. The National Credit Control Council was set up in 1968 to assess the demand for Bank Credit from various sectors of the economy and to determine their respective priorities in allocation. The period witnessed further consolidation in banking. At the launch of the first five years plan in1951, there were 566 commercial banks consisting of 92 scheduled, 474 non scheduled banks. In 1969 total number of banks declined to 89 out of which 73 were scheduled and 16 were non-scheduled
From 1969 to 1990: (Era of nationalization): The Indian banking scene underwent significant changes during this period. Several structural and functional changes took place. In July 1969, the government of India nationalized 14 major scheduled commercial banks, each having a minimum aggregate deposit of Rs. 50 crore. According to the Bank nationalization act, 1969, the objective and reason for the nationalization was: “An institution such as the banking systems, which touches and should touch lives of millions has to be inspired by a larger social purposes and has to sub-serve national The acquisition of ownership of banks was thus to enable banks to play more efficient the role of a catalytic agent for the economic growth by extending banking facilities to the most deserving classes. Again, in 1980, the government of India had nationalized another six banks, each having deposits of Rs. 200 crore or above. Another important structural development was the formation of the Regional Rural Banks (RRBs). In 1973 the government of India had set up a working group to study the credit availability at the rural areas. The working group identified various weaknesses of the cooperative credit agencies and commercial banks and came to the conclusion that they may not be able to fill the regional and functional needs of the credit systems. Therefore, the study group recommended a new type of institution, which combined the rural touch, and experience of co-operative with the modernized outlook and capacity to mobilize
deposit possessed by commercial banks. Such institution was to carry on banking business within the local limits specified by the government through notification. The government of India accepted this recommendation and permitted the establishment of RRBs. The RRBs are state sponsored, region based, rural-oriented commercial banks. Such institution was to carry on banking business within the local limits specified by the government through notification. The Government of India accepted this recommendation and permitted the establishment of RRBs are state sponsored, region based, rural-based rural oriented commercial banks set up under the Regional Banks Act 1976. Their ownership vests with the sponsoring commercial bank, the Central Government, and the Government of the state in which they are geographically located. Under this approach, 196 RRBs were set up.
1990 Onwards: Era of Reforms: In 1991, the Government of India had launched an extensive economic reform programme. As part of the general programme, reforms were introduced in the banking sector. The main objective of the reform is to promote efficiency of the banking system through intensified competitive forces. The strategy adopted is to improve operational efficiency of the banking system and to impact functional autonomy through reduced state direct intervention in the working of the institution.
Banking is one of the most heavily regulated businesses in the world and it is no exception in case of India, especially after economic reforms started in 1991-92. No one can start a bank without some government’s permission to do so, and no one can close a bank without the government’s approval. Yet, the extensive rules that constrain bankers’ services, behaviour, and performance are changing as well. Regulators looking over the industry are paying more attention to its risk and to signals from the private marketplace. Increasingly it is recognized today that government rules and regulations can only do so much, and that private decision-makers-businesses and consumers-can do as much or more to determine which banks are most accommodating and efficient and which should be allowed to fail (or, perhaps, be absorbed by other, better managed institutions). This paper has been divided into four parts. Part I deals with overall Indian Banking scenario. Part II deals with Basle norms. Part III deals
with Indian Central Bank’s response to implement Basle norms. Part IV deals with Basle II norms and India’s preparedness to implement it. Part V conclusion.
Indian Banking Scenario: In India banking industry is divided into sub categories of Scheduled Commercial Bank and scheduled cooperative bank. Commercial Bank again is subcategorized as: (a) public sector bank; (b) private sector bank; (c) foreign banks; (d) Regional Rural Bank.
Part II Basel – I: The last two decades saw unprecedented changes in the banking and financial systems all over the world. While England, the historical seat of banking, witnessed a process of deregulation of the financial system at the beginning of the 1970s (which was soon to cross the Atlantic to the United States), India moved in the opposite direction, tightening controls over the financial system by nationalizing the major commercial banks of the country. It was done at a time when the Indian banking system, having established itself domestically in strength and stability, was about to move towards global integration. For that, it had to wait for a quarter of a century. In India, the decade beginning 1990 saw the commutation of the crisis of the regulated regime with the worsening of the external balance of payments, a low foreign exchange reserve, raging inflation and dwindling GNP. It was felt that a major restructuring of the Indian economy was needed. On the external front, the signing of the General Agreement on Tariffs and Trade, (GATT) followed by membership of the World Trade Organization (WTO), paved the way for global integration.
Part III Indian Central Bank took prompt initiative to respond to the framework of Basle in terms of implementation of the 1988 Accord. In an effort to implement, monitor prudential norms in the area of credit, advances and control the functioning of the banks, the Central Bank of the country came out with comprehensive guidelines in the following areas:
: Pre conditions of effective Banking and Supervision; : Licensing and Structure : Prudential Regulations and Requirements: Liquidity Risk Management
: Methods of Ongoing Banking Supervision
Part IV Basel – II: With increasing financial sector liberalization and emergence of financial conglomerates, financial sector stability has emerged as a key objective of the Central Bank in India. The recent emphasis in the regulatory framework in India is on ensuring good governance through “fit and proper” owners, directors and senior managers of the banks infuses a qualitative dimension to the conventional discharge of financial regulation through prescribing prudential norms and encouraging market discipline. in India. In totality, however, these measures interact to produce a positive impact on the overall efficiency and stability of the banking system There has been a marked improvement in capital adequacy, asset quality and the profitability of the banking system. Commercial banks in India will start implementing Basel II with effect from March 31, 2007. They will adopt the Standardized Approach for credit risk and the Basic Indicator Approach for operational risk, initially. After adequate skills are developed, both at the banks and also at supervisory levels, some banks may be allowed to migrate to the Internal Rating Based Approach. Banks have also been advised to formulate and operationalized the Capital Adequacy Assessment Process as required under Pillar II of the New Framework. Implementation of Basel II will initially require more capital for banks in India in view of the fact that operational risk is not captured under Basel I, and the capital charge for market risk was not prescribed until recently. Consequently, banks are exploring all avenues for meeting the capital requirements under Basel II.
Part V To day Indian banking industry is in change. Rather than being something in particular, it is continually booming something new - offering new services, merging and consolidating into much larger and more complex businesses adopting new technologies that seem to change faster than most of us can comprehend and facing a new and changing set of rules. Despite all of these changes sweeping through this vital industry, there are still something in banking that never seem to change. It is an probably will always remain to be service industry providing an intangible product that is hard to differentials from the products offered by competitors.
Besides India has got in succession Central Bankers and professional team who has left their mark in managing the banking system despite turbulence in neighbouring countries especially the financial turmoil which struck Asia in mid 1997.
Major players and their market share
Figure: 220.127.116.11 The banking Industry structure has changed rapidly. It has evolved from doing traditional activities of borrowing and lending to providing specialized financial products and services like advisory services, structured products etc. Several banks are pursuing global strategies as Indian companies are expanding global. At the same time, the industry witnessed increased competition with many global banks showing increasing interest in the Indian Banking sector. The banking sector not only diversified into non-traditional activities, but there has been a shift in the ownership and management of the banking sector from a predominantly public sector to private sector. The private sector banks are now invading the market share of the public sector banks rapidly. Their share in the total profits as well the total assets have been increasing rapidly over the past few years.
Private Banks added value to their client by providing newer products and services. The distinguishing features of the private sector banks are product innovation and diversification, optimum use of information technology and focus on the customer. Private Banks ventured into products like structured finance, investment banking etc. Though such business had an element of risk attached, it was for this risk that the private banks were rewarded. Private Banks were more opportunistic as they concentrated on high margin business. Concepts such as any where banking, 12-hour banking and transactions through ATMs (Automatic Teller Machines), which were introduced by them, have revolutionized the banking practices in India. Further private banks have adopted an outsourcing model, which helps them in reducing their cost considerably. This in turn resulted in more profitability, and therefore they got a higher premium.
INTRODUCTION TO INDUSLAND BANK
IndusInd Bank came into existence in 1994 and is an outcome of the vision of Mr. Srichand P. Hinduja, the head of the Hinduja Group. The Bank derives its name and inspiration from the Indus Valley Civilisation. IndusInd Bank has carved a niche for itself in technology-supported, cost-efficient, and customer-friendly banking. Starting with Corporate and Wholesale Banking the Bank has now forayed aggressively into Retail Banking as well. IndusInd Bank launched Internet Banking in 1996 and Mobile Banking in 1997, well in advance of other Indian banks. In 2002-03, the Bank became one of the first banks to implement the RBI - Electronic Funds Transfer scheme. In 2003-04, the Bank became the first Indian Commercial Bank to achieve certification for its "Entire Network of Branches" under the ISO 9001:2000 Quality Management System. Presently (2004-05), the Bank has a business turnover of over Rs. 22000 crores and a network of 115 branches, 9 extension counters and 195 ATMs, spread over 95 geographical locations.
PROFILE OF THE COMPANY
Company Profile: Ticker: Exchanges: 2008 Sales: Major Industry: Sub Industry: Country:
Indusind Bank Ltd IBK BOM 22,185,000,000 Financial Commercial Banks INDIA
Indusind Bank Ltd. The Company's principal activity is to provide banking services. It operates under four segments: Treasury, Corporate/wholesale banking, Retail Banking and Other Banking. It involves in accepting deposits, providing loans, financing and other related services in treasury to consumers and industries. The Company operates through 170 branches spread across 141geographical locations and 99 Offsite ATMs with the opening 30 new branches.
EXPENSES 2008 2007
Stationery and stamps Commission exchange & brokerage Rent,taxes & lighting Printing and stationery Advertisement and publicity Postage,telegrams and phones Repairs & maintainence Other expenses
23712 519047 319991 61033 3443 59721 84012 417901
22403 49333 306946 59633 3423 53561 77109 352421
The company cannot have a full fledge cost sheet as it provides services to the bank.it cannot have direct expenses, but it has some office and administration and selling expense and income.
Profit loss account
Particulars Operating income Material consumed Manufacturing expenses Personnel expenses Selling expenses Adminstrative expenses Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Nonrecurring items Other non cash adjustments Reported net profit Earnings before appropriation Equity dividend Preference dividend Dividend tax Retained earnings Mar 08 2,010.57 121.90 2.11 298.93 422.93 7.78 164.71 172.49 1,579.86 40.16 132.33 39.23 75.72 -0.67 75.05 75.05 19.19 3.26 52.60 Mar 07 1,564.18 96.29 3.33 266.17 365.78 -30.45 205.55 175.10 1,228.85 34.09 141.00 39.16 95.87 -27.65 -0.99 67.22 67.22 19.19 3.26 44.77
COMPARATIVE BALANCE SHEET
Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-inprogress Investments
320 0.51 0 789.39 0 0 19,037.42 20,147.32 0 0 969.93 239.81 354.41 375.71 9.63 6,629.70
320 0 0 736.79 0 0 17,644.80 18,701.59 0 0 675.07 0 314.29 360.78 8.79 5,891.66
ABSOLUT E CHANGE
0 0.51 0 52.6 0 0 1392.62 1445.73 0 0 294.86 239.81 40.12 14.93 0.84 738.04
0 100 0 6.663373 0 0 7.315172 7.175793 0 0 30.40013 100 11.32022 3.97381 8.722741 11.13233
COMPARATIVE INCOME STATEMENT Amount is given in Rs. millions
Interest income Other income Interest expense Net interest income Operating expense Gross profit Gross profit margin Provisions/contingencies Profit before tax Extraordinary Inc (Exp) Minority Interest Prior Period Items Tax Profit after tax Net profit margin
15,003 2,441 12,288 2,715 3,440 -725 -4.8 642 1,074 0 0 -10 392 672 4.5
11,883 1,888 8,732 3,151 3,166 -15 -0.1 1,654 592 0 0 0 224 368 3.1
ABSOLUT E CHANGE
3,120 553 3,556 -436 274 -710 -5 -1,012 482 0 0 -10 168 304 1
20.79584 22.65465 28.9388 -16.0589 7.965116 97.93103 97.91667 -157.632 44.87896 0 0 100 42.85714 45.2381 31.11111
COMMON-SIZE BALANCE SHEET 2008 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total 6,269.42 100 % 2007 %
320 0.51 789.39 19,037.42 20,147.32
1.588301 0.002531 3.918089 94.49108 100
969.93 239.81 354.41 375.71 9.63 6,629.70
15.47081 675.07 3.825075 5.652995 314.29 5.992739 360.78 0.153603 8.79 105.7466 5,891.66
12.02369 5.597827 6.425862 0.156559 104.9365
1,033.70 1,779.31 -745.61
16.48797 28.38078 -11.8928 -
986.32 1,633.04 -646.72
17.56737 29.08612 -11.5187
COMMON-SIZE PROFIT STATEMENT
Operating income Equity share capital Share application money
2,010.57 320 0.51
100 1.588300578 0.002531354
1,564.18 320 0
100 1.711084 0
Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Profit before tax 0 789.39 0 0 19,037.42 20,147.32 75.05 #REF! 3.918089354 0 0 94.49107871 100 0 736.79 0 0 17,644.80 18,701.59 67.22s 0 3.939718 0 0 94.3492 100
FUND FLOW STATEMENT
SOURCES Funds from operations Deposits Borrowings Decrease in working Capital AMOUNT APPLICATIONS AMOUNT 6,629.70 2,010.57 3,936.15 Investments 1,779.31 146.27 6,629.70 6,629.70
SCHEDULE OF CHANGE IN WORKING CAPITAL PARTICULARS
Current assets, loans & advances Less : current liabilities & provisions Decrease in working capital Total
ADJUSTED PROFIT & LOSS ACCOUNT
PARTICULARS To transfer to reserve AMOUNT
PARTICULARS By funds from operations
CASH FLOW STATEMENT
Profit before tax Net cashflow-operating activity Net cash used in investing activity Netcash used in fin. activity Net inc/dec in cash and equivlnt Cash and equivalnt begin of year Cash and equivalnt end of year
75.05 -327.11 -41.23 -49.03 -417.37 2,595.40 2,178.03
67.22 826.72 -64.68 352.86 1,114.90 1,480.50 2,595.40
Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted cash margin (%) Adjusted return on net worth (%) Reported return on net worth (%) Return on long term funds (%)
MAR 2008 0.38 -1.61 3.45 5.32 6.82 6.76 152.76
MAR 2007 -1.94 -4.12 3.79 7.34 9.07 6.36 129.05
Leverage ratios Total debt/equity Owners fund as % of total source Fixed assets turnover ratio 17.16 5.50 2.07 16.70 5.65 2.32
Liquidity ratios Current ratio Current ratio (inc. st loans) Quick ratio 0.58 0.04 8.63 0.60 0.05 8.02
Payout ratios Dividend payout ratio (net profit) Dividend payout ratio (cash profit) Earning retention ratio Cash earnings retention ratio 29.91 19.48 70.36 80.63 33.39 22.15 76.59 82.73
Coverage ratios Adjusted cash flow time total debt Financial charges coverage ratio Fin. charges cov.ratio (post tax) 164.28 1.11 1.07 135.77 1.14 1.08
Component ratios Selling cost Component Long term assets / total Assets 0.10 0.87 0.21 0.86
Management accounting by: Shashi K Gupta and R.K Sharma
Cost accounting by: S.P. Jain and K.L. Narang