Table of content

Chapter No.

Content List of Tables List of Figures Executive summary

Page No


Introduction Overview of Banking Objective of study Research methodology Limitation of study


Review of literature CAMELS Framework



4. 5.

Findings and conclusion Bibliography

Email: - PUNE 2010


List of Tables
Table No. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Table Content Capital Adequacy ratio Earnings Per Share Net Profit Margin Return On Assets Credit Deposit Ratio Gross NPA Net NPA Page No.

List of Figures

Figure No. 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12


Page No.


Capital Adequacy ratio Earnings Per Share Net Profit Margin Return On Assets Credit Deposit Ratio Gross NPA Net NPA

Email: - PUNE 2010


Executive Summery The banking sector has been undergoing a complex, but comprehensive phase of restructuring since 1991, with a view to make it sound, efficient, and at the same time it is forging its links firmly with the real sector for promotion of savings, investment and growth. Although a complete turnaround in banking sector performance is not expected till the completion of reforms, signs of improvement are visible in some indicators under the CAMELS framework. Under this bank is required to enhance capital adequacy, strengthen asset quality, improve management, increase earnings and reduce sensitivity to various financial risks. The almost simultaneous nature of these developments makes it difficult to disentangle the positive impact of reform measures.

CAMELS Framework

CAMELS’ norms are the supervisory framework consisting of risk-monitoring factors used for evaluating the performance of banks. This framework involves the analysis of six groups of indicators reflecting the health of financial institutions. The indicators are as follows:

Email: - PUNE 2010



The whole banking scenario has changed in the very recent past on the recommendations of Narasimham Committee. Further BASELL II Norms were introduced to internationally standardize processes and make the banking industry more adaptive to the sensitive market risks. Amongst these reforms and restructuring the CAMELS Framework has its own contribution to the way modern banking is looked up on now. The attempt here is to see how various ratios have been used and interpreted to reveal a bank’s performance and how this particular model encompasses a wide range of parameters making it a widely used and accepted model in today’s scenario. The project attempts to analyse the performance of Axis bank on the basis of CAMELS model and gives suggestions on the basis of the finding of the analysis. The overall strategy of Axis bank is also studied to gain a better understanding of the working of the bank and to identify its strength and weakness.

Email: - PUNE 2010




Email: - PUNE 2010


Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

Email: - PUNE 2010


PHASE-01 The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Email: - PUNE 2010


PHASE-02 Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: • 1949: Enactment of Banking Regulation Act. • 1955: Nationalization of State Bank of India. • 1959: Nationalization of SBI subsidiaries. • 1961: Insurance cover extended to deposits. • 1969: Nationalization of 14 major banks. • 1971: Creation of credit guarantee corporation. • 1975: Creation of regional rural banks. • 1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Email: - PUNE 2010



This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Email: - PUNE 2010




The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2, 20,000. Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following:

• To regulate the issue of banknotes • To maintain reserves with a view to securing monetary stability and • To operate the credit and currency system of the country to its advantage.

Email: - PUNE 2010

10 | P a g e

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. • Issue Of Notes Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.

Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business,
Email: - PUNE 2010 11 | P a g e

via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.

Email: - PUNE 2010

12 | P a g e

Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a license from the Reserve Bank of India to do banking business within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.
Email: - PUNE 2010 13 | P a g e

Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. Though there were periods of extreme pressure in favor of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.

Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major

Email: - PUNE 2010

14 | P a g e

Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

Promotional functions
The Bank now performs variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

Email: - PUNE 2010

15 | P a g e

“To study the strength of using CAMELS framework as a tool of performance evaluation for banking institutions.”

RESEARCH METHODOLOGY Research methodology is a very organized and systematic way through which a particular case or problem can be solved efficiently. It is a step-by-step logical process, which involves:

Defining a problem Laying the objectives of the research Sources of data Methods of data collection Tabulation of data Data analysis & processing Conclusions & Recommendations

Email: - PUNE 2010

16 | P a g e


In the recent years the financial system especially the banks have undergone numerous changes in the form of reforms, regulations & norms. CAMELS framework for the performance evaluation of banks is an addition to this. The study is conducted to analyze the pros & cons of this model.


To do an in-depth analysis of the model. To analyze 5 banks to get the desired results by using CAMELS as a tool of measuring performance.

1. Type of research: Descriptive i)

The survey was done for three banks. The study environment

was the Banking industry. ii) DATA SOURCE:

Primary Data: Primary data was collected from the company balance sheets and company profit and loss statements. Secondary Data: Secondary data on the subject was collected from ICFAI journals, company prospectus, company annual reports and IMF websites.

Email: - PUNE 2010

17 | P a g e


SAMPLING TECHNIQUE : Convenience sampling: Convenience sampling was done for the selection of the banks.

iv) PLAN OF ANALYSIS: 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..

2. Identification of the parameter:-

The different parameters that were selected for the comparison is:CAR Net Profit Margin EPS Credit Deposit Ratio GNPA NPA ROA.

4. Sampling plane:-

Sample- ICICI, HDFC, IDBI, AXIS Bank and State Bank of India.

Email: - PUNE 2010

18 | P a g e


1) The study was limited to 5 banks. 2) Time and resource constrains. 3) The method discussed pertains only to banks though it can be used for performance evaluation of other financial institutions. 4) The study was completely done on the basis of ratios calculated from the balance sheets. 5) It has not been possible to get a personal interview with the top management employees of all banks under study.

Email: - PUNE 2010

19 | P a g e


Review of literature

Email: - PUNE 2010

20 | P a g e

Number of studies has been conducted about the use of CAMEL model. And number of reviews on the previous researches is present but due to paucity of time, a few snapshots of literature are given here.

Swindle, C, (1995) This study uses the capital adequacy component of the
CAMEL rating system to assess whether regulators in the 1980s influenced inadequately capitalized banks to improve their capital. Using a measure of regulatory pressure that is based on publicly available information, I find that inadequately capitalized banks responded to regulators' demands for greater capital. This conclusion is consistent with that reached by Keeley (1988). Yet, a measure of regulatory pressure based on confidential capital adequacy ratings reveals that capital regulation at national banks was less effective than at statechartered banks.

Cole, Rebel A. and Gunther(1995) Their findings suggest that, if a bank
has not been examined for more than two quarters, off-site monitoring systems usually provide a more accurate indication of survivability than its CAMEL rating. The lower predictive accuracy for CAMEL ratings "older" than two quarters causes the overall accuracy of CAMEL ratings to fall substantially below that of off-site monitoring systems. The higher predictive accuracy of offsite systems derives from both their timeliness-an updated off-site rating is available for every bank in every quarter-and the accuracy of the financial data on which they are based. Cole and Gunther conclude that off-site monitoring systems should continue to play a prominent role in the supervisory process, as a complement to on-site examinations.

Email: - PUNE 2010

21 | P a g e

Gilbert R., Meyer A., & Vaughan M. (2000) This article examines the
potential contribution to bank supervision of a model designed to predict which banks will have their supervisory ratings downgraded in future periods. Bank supervisors rely on various tools of off-site surveillance to track the condition of banks under their jurisdiction between on-site examinations, including econometric models. One of the models that the Federal Reserve System uses for surveillance was estimated to predict bank failures. The number of banks downgraded to problem status in recent years has been substantially larger than the number of bank failures. During a period of few bank failures, the relevance of this bank failure model for surveillance depends to some extent on the accuracy of the model in predicting which banks will have their supervisory ratings downgraded to problem status in future periods. This paper compares the ability of two models to predict downgrades of supervisory ratings to problem status: the Board staff model, which was estimated to predict bank failures, and a model estimated to predict downgrades of supervisory ratings. We find that both models do about as well in predicting downgrades of supervisory ratings for the early 1990s. Over time, however, the ability of the downgrade model to predict downgrades improves relative to that of the model estimated to predict failures. This pattern reflects the value of using a model for surveillance that can be re-estimated frequently. We conclude that the downgrade model may prove to be a useful supplement to the Board's model for estimating failures during periods when most banks are healthy, but that the downgrade model should not be considered a replacement for the current surveillance framework.

Email: - PUNE 2010

22 | P a g e

Lacewell, Stephen Kent (2001). Stage one in the estimation of cost and
alternative profit efficiency scores using a national model and a size-specific model. Previous research referred in the paper asserts that an efficiency component should be added to the current CAMEL regulatory rating system to account for the ever-increasing diverse components of modern financial institutions. Stage two is the selection and computation of financial ratios deemed to be highly correlated with each component of the CAMEL rating. The research shows that there is definitely a relationship between bank efficiency scores and financial ratios used to proxy a bank's CAMEL rating. It is also evident that certain types of efficiency models are better suited to large banks than to small banks and vice versa.

Richard S Barr, Kory A Killgo, Thomas F Siems, & Sheri Zimmel. (2002) This study reviews previous research on the efficiency and performance
of financial institutions and uses Siems and Barr's (1998) data envelopment analysis (DEA) model to evaluate the relative productive efficiency of US commercial banks 1984-1998. It explains the methodology, discusses the input and output measures used and relates bank performance measures to efficiency. It describes the CAMEL rating system used by bank examiners and regulators; and finds that banks with high efficiency scores also have strong CAMEL ratings. The study summarizes the other relationship identified and recommends the use of DEA to help analysts and policy makers understand organizations in greater depth, regulators and examiners to develop monitoring tools and banks to benchmark their processes.

Email: - PUNE 2010

23 | P a g e

Godlewski (2003) has tested the validity of the CAMEL rating typology for
bank's default modification in emerging markets. He focused explicitly on using a logical model applied to a database of defaulted banks in emerging markets. He found that the principle results of the early warning signals models follow the CAMEL typology. The proxy variables of bank solvability, assets' quality and liquidity, particularly loan losses provisions, management quality, profitability, and intermediation rate have a negative impact on the one year probability of bank's default.

Said and Saucier (2003) examined the liquidity, solvency and efficiency of
Japanese Banks. Using CAMEL rating methodology, for a representative sample of Japanese banks for the period 1993-1999, they evaluated capital adequacy, assets and management quality, earnings ability and liquidity position. They quantified bank’s managerial quality by calculating X-inefficiency using data envelopment analysis (DEA). Results support the view that the major problem of failed banks was not inefficiency of management, but below standard capital adequacy and considerable problems in their assets quality. Significantly above average efficiency of ailing banks could be explained by a survival strategy that pushed them to drastically improve management.

Derviz et al. (2004) investigated the determinants of the movements in the
long term Standard & Poor’s and CAMEL bank ratings in the Czech Republic during the period when the three biggest banks, representing approximately 60% of the Czech banking sector's total assets, were privatized (i.e., the time span 1998-2001). The same list of explanatory variables corresponding to the CAMEL rating inputs employed by the Czech National Bank's banking sector
Email: - PUNE 2010 24 | P a g e

regulators were examined for both ratings in order to select significant predictors among them. They employed an ordered response logit model to analyze the monthly long-run S&P rating and a panel data framework for the analysis of the quarterly CAMEL rating.

Gasbarro et al. (2004) examined the changing financial soundness of
Indonesian banks during the crisis. During the recent Southeast Asian financial crisis, numerous banks failed quickly and unexpectedly. This study used a unique data set provided by Bank Indonesia to examine the changing financial soundness of Indonesian banks during this crisis. Bank Indonesia's non-public CAMEL ratings data allowed the use of a continuous bank soundness measure rather than ordinal measures. They argued that the nature of the risks facing the Indonesian banking community calls for the addition of a systemic risk component to the Indonesian ranking system. The empirical results show that during Indonesia's stable economic periods, four of the five traditional CAMEL components provided insights into the financial soundness of Indonesian banks.

Baral (2005) analysed the performance of joint ventures banks in Nepal on the
basis of CAMEL Model. For the purpose of the study data set published by joint venture banks in their annual reports was used. This paper examined the financial health of joint venture banks in the CAMEL framework. The health check up was conducted on the basis of publicly available financial data. It concluded that the health of joint venture banks is better than that of the other commercial banks. In addition, the perusal of indicators of different components of CAMEL indicated that the financial health of joint venture banks was not so strong to manage the possible large scale shocks to their balance sheet and their health was fair.
Email: - PUNE 2010 25 | P a g e

Kapil (2005) examined the relationship between the CAMEL ratings and the
bank stock performance. The viability of the banks was analyzed on the basis of the Offsite Supervisory Exam Model—CAMEL Model. The M for Management was not considered in this paper because all Public Sector Banks, (PSBs) were government regulated, and also because all other four components—C, A, E and L—reflect management quality. The remaining four components were analyzed and rated to judge the composite rating. Part A of the study analyzed the interbank performance by determining their CAEL composite score. Part B of the study assessed the relation between the banks’ composite CAMEL ratings with the banks’ stock performance. The paper revealed that the Off-site Supervisory Exam Model, CAMEL, is related to the banks’ stock performance in the capital market.

Hirtle and Lopez, (2005),This research paper was carried out; to find the
adequacy of CAMEL in capturing the overall performance of a bank; to find the relative weights of importance in all the factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in evaluating banks' efficiency. In addition, the best ratios in each of the factors in CAMEL were identified. For example, the best ratio for Capital Adequacy was found to be the ratio of total shareholders' fund to total risk weighted assets. The paper concluded that no one factor in CAMEL suffices to depict the overall performance of a bank. Among other recommendations, banks' regulators are called upon to revert to the best identified ratios in CAMEL when evaluating banks performance.

Email: - PUNE 2010

26 | P a g e

Sarker (2005) examined the CAMEL model for regulation and supervision of
Islamic banks by the central bank in Bangladesh. With the experience of more than two decades the Islamic banking now covers more than one third of the private banking system of the country and no concerted effort has been made to add a Shariah component both in on-site and off-site banking supervision system of the central bank. Rather it is being done on the basis of the secular supervisory and regulatory system as chosen for the traditional banks and financial institutions. To fill the gap, an attempt had been made in this paper to review the CAMEL standard set by the BASEL Committee for off-site supervision of the banking institutions. This study enabled the regulators and supervisors to get a Shariah benchmark to supervise and inspect Islamic banks and Islamic financial institutions from an Islamic perspective.

Email: - PUNE 2010

27 | P a g e

"Nuts and Bolts" Concept of CAMELS Framework?

Capital Adequacy Asset Quality Management Soundness Earnings & Profitability Liquidity Sensitivity To Market Risk

Email: - PUNE 2010

28 | P a g e

Capital Adequacy

A Capital Adequacy Ratio is a measure of a bank's capital. It is expressed as a percentage of a bank's risk weighted credit exposures. Also known as ""Capital to Risk Weighted Assets Ratio (CRAR). Capital adequacy is measured by the ratio of capital to risk-weighted assets (CRAR). A sound capital base strengthens confidence of depositors. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.

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 writtenoff 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.

Email: - PUNE 2010

29 | P a g e

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 recognizing the importance of diversification in the institutional and instrument-specific aspects of financial intermediation in the interests of wider choice, competition and stability. However, the dominant role of banks in financial intermediation in emerging economies and particularly in India will continue in the medium-term; and the banks will continue to be “special” for a long time. In this regard, it is useful to emphasise the dominance of banks in the developing countries in promoting non-bank financial intermediaries and services including in development of debt-markets. Even where role of banks is apparently diminishing in emerging markets, substantively, they continue to play a leading role in non-banking financing activities, including the development of financial markets. One of the indicators for asset quality is the ratio of non-performing loans to total loans (GNPA). The gross non-performing loans to gross advances ratio is more indicative of the quality of credit decisions made by bankers. Higher GNPA is indicative of poor credit decision-making.
Email: - PUNE 2010 30 | P a g e

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:

1. Interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan; 2. The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC); 3. The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; 4. A loan granted for short duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for two crop seasons; and

A loan granted for long duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for one crop season. The Bank classifies an account as an NPA only if the interest imposed during any quarter is not fully repaid within 90 days from the end of the relevant quarter. This is a key to the stability of the banking sector. There should be no hesitation in stating that Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. For 2008, the net NPL ratio for the Indian scheduled
Email: - PUNE 2010 31 | P a g e

commercial banks at 2.9 per cent is ample testimony to the impressive efforts being made by our banking system. In fact, recovery management is also linked to the banks’ interest margins. The cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the Indian banks. No doubt, improving recovery-management in India is an area requiring expeditious and effective actions in legal, institutional and judicial processes.

Management Soundness

Management of financial institution is generally evaluated in terms of capital adequacy, asset quality, earnings and profitability, liquidity and risk sensitivity ratings. In addition, performance evaluation includes compliance with set norms, ability to plan and react to changing circumstances, technical competence, leadership and administrative ability. In effect, management rating is just an amalgam of performance in the above-mentioned areas.

Sound management is one of the most important factors behind financial institutions’ performance. Indicators of quality of management, however, are primarily applicable to individual institutions, and cannot be easily aggregated across the sector. Furthermore, given the qualitative nature of management, it is difficult to judge its soundness just by looking at financial accounts of the banks. Nevertheless, total expenditure to total income and operating expense to total expense helps in gauging the management quality of the banking institutions.
Email: - PUNE 2010 32 | P a g e

Sound management is key to bank performance but is difficult to measure. It is primarily a qualitative factor applicable to individual institutions. Several indicators, however, can jointly serve—as, for instance, efficiency measures do—as an indicator of management soundness. The ratio of non-interest expenditures to total assets (MGNT) can be one of the measures to assess the working of the management. . This variable, which includes a variety of expenses, such as payroll, workers compensation and training investment, reflects the management policy stance. Efficiency Ratios demonstrate how efficiently the company uses its assets and how efficiently the company manages its operations.

Asset Turnover Ratio = Total Revenue/Total Assets
Indicates the relationship between assets and revenue. Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover - it indicates pricing strategy This ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales Asset Turnover Analysis: This ratio is useful to determine the amount of sales that are generated from each dollar of assets. As noted above, companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover.

Email: - PUNE 2010

33 | P a g e

Earnings and Profitability

Earnings and profitability, the prime source of increase in capital base, is examined with regards to interest rate policies and adequacy of provisioning. In addition, it also helps to support present and future operations of the institutions. The single best indicator used to gauge earning is the Return on Assets (ROA), which is net income after taxes to total asset ratio.

Strong earnings and profitability profile of banks reflects the ability to support present and future operations. More specifically, this determines the capacity to absorb losses, finance its expansion, pay dividends to its shareholders, and build up an adequate level of capital. Being front line of defense against erosion of capital base from losses, the need for high earnings and profitability can hardly be overemphasized. Although different indicators are used to serve the purpose, the best and most widely used indicator is Return on Assets (ROA). However, for in-depth analysis, another indicator Net Interest Margins (NIM) is also used. Chronically unprofitable financial institutions risk insolvency. Compared with most other indicators, trends in profitability can be more difficult to interpret— for instance, unusually high profitability can reflect excessive risk taking. ROA-Return On Assets

An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate
Email: - PUNE 2010 34 | P a g e

earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is:

ROA tells what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company. The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit. When you really think about it, management's most important job is to make wise choices in allocating its resources. Anybody can make a profit by throwing a ton of money at a problem, but very few managers excel at making large profits with little investment
Email: - PUNE 2010 35 | P a g e


An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio.

Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash.

An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash. A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices. An asset is said to be liquid if the market for that asset is liquid.

Email: - PUNE 2010

36 | P a g e

The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash—or conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an institution depends on:

the institution's short-term need for cash; cash on hand; available lines of credit; the liquidity of the institution's assets; The institution's reputation in the marketplace—how willing will counterparty is to transact trades with or lend to the institution?

The liquidity of a market is often measured as the size of its bid-ask spread, but this is an imperfect metric at best. More generally, Kyle (1985) identifies three components of market liquidity:

Tightness is the bid-ask spread; Depth is the volume of transactions necessary to move prices; Resiliency is the speed with which prices return to equilibrium following a large trade. Examples of assets that tend to be liquid include foreign exchange; stocks traded in the Stock Exchange or recently issued Treasury bonds. Assets that are often illiquid include limited partnerships, thinly traded bonds or real estate. Cash maintained by the banks and balances with central bank, to total asset ratio (LQD) is an indicator of bank's liquidity. In general, banks with a larger volume

Email: - PUNE 2010

37 | P a g e

of liquid assets are perceived safe, since these assets would allow banks to meet unexpected withdrawals. Credit deposit ratio is a tool used to study the liquidity position of the bank. It is calculated by dividing the cash held in different forms by total deposit. A high ratio shows that there is more amounts of liquid cash with the bank to met its clients cash withdrawals.

Sensitivity To Market Risk

It refers to the risk that changes in market conditions could adversely impact earnings and/or capital. Market Risk encompasses exposures associated with changes in interest rates, foreign exchange rates, commodity prices, equity prices, etc. While all of these items are important, the primary risk in most banks is interest rate risk (IRR), which will be the focus of this module. The diversified nature of bank operations makes them vulnerable to various kinds of financial risks. Sensitivity analysis reflects institution’s exposure to interest rate risk, foreign exchange volatility and equity price risks (these risks are summed in market risk). Risk sensitivity is mostly evaluated in terms of management’s ability to monitor and control market risk. Banks are increasingly involved in diversified operations, all of which are subject to market risk, particularly in the setting of interest rates and the carrying out of foreign exchange transactions. In countries that allow banks to make trades in stock markets or commodity exchanges, there is also a need to monitor indicators of equity and commodity price risk.
Email: - PUNE 2010 38 | P a g e

Interest Rate Risk Basics In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance the quantity of re-pricing assets with the quantity of re-pricing liabilities. For example, when a bank has more liabilities re-pricing in a rising rate environment than assets re-pricing, the net interest margin (NIM) shrinks. Conversely, if your bank is asset sensitive in a rising interest rate environment, your NIM will improve because you have more assets re-pricing at higher rates.

An extreme example of a re-pricing imbalance would be funding 30-year fixedrate mortgages with 6-month CDs. You can see that in a rising rate environment the impact on the NIM could be devastating as the liabilities re-price at higher rates but the assets do not. Because of this exposure, banks are required to monitor and control IRR and to maintain a reasonably well-balanced position.

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity.

Liquidity risk tends to compound other risks. If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. Suppose a firm has offsetting cash flows with two different counterparties on a given day. If the counterparty that owes it a payment defaults, the firm will have to raise cash from other sources to make
Email: - PUNE 2010 39 | P a g e

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

Accordingly, liquidity risk has to be managed in addition to market, credit and other risks. Because of its tendency to compound other risks, it is difficult or impossible to isolate liquidity risk. In all but the most simple of circumstances, comprehensive metrics of liquidity risk don't exist. Certain techniques of assetliability management can be applied to assessing liquidity risk. If an organization's cash flows are largely contingent, liquidity risk may be assessed using some form of scenario analysis. Construct multiple scenarios for market movements and defaults over a given period of time. Assess day-to-day cash flows under each scenario. Because balance sheets differed so significantly from one organization to the next, there is little standardization in how such analyses are implemented. Regulators are primarily concerned about systemic

implications of liquidity risk.

Business activities entail a variety of risks. For convenience, we distinguish between different categories of risk: market risk, credit risk, liquidity risk, etc. Although such categorization is convenient, it is only informal. Usage and definitions vary. Boundaries between categories are blurred. A loss due to widening credit spreads may reasonably be called a market loss or a credit loss, so market risk and credit risk overlap. Liquidity risk compounds other risks, such as market risk and credit risk. It cannot be divorced from the risks it compounds.

An important but somewhat ambiguous distinguish is that between market risk and business risk. Market risk is exposure to the uncertain market value of a portfolio. Business risk is exposure to uncertainty in economic value that cannot
Email: - PUNE 2010 40 | P a g e

be marked-to-market. The distinction between market risk and business risk parallels the distinction between market-value accounting and book-value accounting.

The distinction between market risk and business risk is ambiguous because there is a vast "gray zone" between the two. There are many instruments for which markets exist, but the markets are illiquid. Mark-to-market values are not usually available, but mark-to-model values provide a more-or-less accurate reflection of fair value. Do these instruments pose business risk or market risk? The decision is important because firms employ fundamentally different techniques for managing the two risks. Business risk is managed with a long-term focus. Techniques include the careful development of business plans and appropriate management oversight. bookvalue accounting is generally used, so the issue of day-to-day performance is not material. The focus is on achieving a good return on investment over an extended horizon.

Market risk is managed with a short-term focus. Long-term losses are avoided by avoiding losses from one day to the next. On a tactical level, traders and portfolio managers employ a variety of risk metrics —duration and convexity, the Greeks, beta, etc.—to assess their exposures. These allow them to identify and reduce any exposures they might consider excessive. On a more strategic level, organizations manage market risk by applying risk limits to traders' or portfolio managers' activities. Increasingly, value-at-risk is being used to define and monitor these limits. Some organizations also apply stress testing to their portfolios.
Email: - PUNE 2010 41 | P a g e



Email: - PUNE 2010

42 | P a g e


Email: - PUNE 2010

43 | P a g e


HDFC Bank Ltd. is a major Indian financial services company based in Mumbai, incorporated in August 1994, after the Reserve Bank of India allowed establishing private sector banks. The Bank was promoted by the Housing Development Finance Corporation, a premier housing finance company (set up in 1977) of India. HDFC Bank has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all branches of the bank are linked on an online real-time basis. As of September 30, 2008 the bank had total assets of INR 1006.82 billion. For the fiscal year 2008-09, the bank has reported net profit of Rs.2,244.9 crore, up 41% from the previous fiscal. Total annual earnings of the bank increased by 58% reaching at Rs.19,622.8 crore in 2008-09. HDFC Bank is one of the Big Four Banks of India, along with State Bank of India, ICICI Bank and Axis Bank — its main competitors.

HDFC Bank was incorporated in the year of 1994 by Housing Development Finance Corporation Limited (HDFC), India's premier housing finance company. It was among the first companies to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector.The Bank commenced its operations as a Scheduled Commercial Bank in January 1995 with the help of RBI's liberalization policies. In a milestone transaction in the Indian banking industry, Times Bank Limited (promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., in 2000. This was the first merger of two private banks in India. As
Email: - PUNE 2010 44 | P a g e

per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. In 2008 HDFC Bank acquired Centurion Bank of Punjab taking its total branches to more than 1,000. The amalgamated bank emerged with a strong deposit base of around Rs. 1,22,000 crore and net advances of around Rs. 89,000 crore. The balance sheet size of the combined entity is over Rs. 1,63,000 crore. The amalgamation added significant value to HDFC Bank in terms of increased branch network, geographic reach, and customer base, and a bigger pool of skilled manpower.

Figure 3.1 HDFC BANK

Email: - PUNE 2010

45 | P a g e


State Bank of India is the largest banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India. SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans.

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks.
Email: - PUNE 2010 46 | P a g e

The State bank of India is the 29th most reputed company in the world according to Forbes.

Figure 3.2 SBI

Email: - PUNE 2010

47 | P a g e


Axis Bank, formally UTI Bank, is a financial services firm that had begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United India Insurance Company UTI-I holds a special position in the Indian capital markets and has promoted many leading financial institutions in the country. The bank changed its name to Axis Bank in April 2007 to avoid confusion with other unrelated entities with similar name. After the Retirement of Mr. P. J. Nayak, Shikha Sharma was named as the bank's managing director and CEO on 20 April 2009. As on the year ended March 31, 2009 the Bank had a total income of Rs 13,745.04 crore (US$ 2.93 billion) and a net profit of Rs. 1,812.93 crore (US$ 386.15 million). On February 24, 2010, Axis Bank announced the launch of 'AXIS CALL & PAY on atom', a unique mobile payments solution using Axis Bank debit cards. Axis Bank is the first bank in the country to provide a secure debit card-based payment service over IVR. Axis Bank is one of the Big Four Banks of India, along with ICICI Bank, State Bank of India and HDFC Bank

Email: - PUNE 2010

48 | P a g e

Branch Network At the end of March 2009, the Bank has a very wide network of more than 835 branch offices and Extension Counters. Total number of ATMs went up to 3595. The Bank has loans now (as of June 2007) account for as much as 70 per cent of the bank’s total loan book of Rs 2,00,000 crore. In the case of Axis Bank, retail loans have declined from 30 per cent of the total loan book of Rs 25,800 crore in June 2006 to around 23 per cent of loan book of Rs.41,280 crore (as of June 2007). Even over a longer period, while the overall asset growth for Axis Bank has been quite high and has matched that of the other banks, retail exposures grew at a slower pace. The bank, though, appears to have insulated such pressures. Interest margins, while they have declined from the 3.15 per cent seen in 2003-04, are still hovering close to the 3 per cent mark.

Figure 3.3 AXIS BANK

Email: - PUNE 2010

49 | P a g e


The Industrial Development Bank of India Limited commonly known by its acronym IDBI is one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorized IDBI as an "other public sector bank". It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently 10th largest development bank in the world in terms of reach with 1210 ATMs, 720 branches and 486 centers. Some of the institutions built by IDBI are the National Stock Exchange of India (NSE), the National Securities Depository Services Ltd (NSDL), the Stock Holding Corporation of India (SHCIL), the Credit Analysis & Research Ltd, the Export-Import Bank of India (Exim Bank), the Small Industries Development bank of India(SIDBI), the Entrepreneurship

Development Institute of India, and IDBI BANK, which today is owned by the Indian Government, though for a brief period it was a private scheduled bank. The Industrial Development Bank of India (IDBI) was established on July 1, 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBI’s public issue in July 1995, the former continues to be the major shareholder (current shareholding: 52.3%).
Email: - PUNE 2010 50 | P a g e

During the four decades of its existence, IDBI has been instrumental not only in establishing a well-developed, diversified and efficient industrial and institutional structure but also adding a qualitative dimension to the process of industrial development in the country. IDBI has played a pioneering role in fulfilling its mission of promoting industrial growth through financing of medium and long-term projects, in consonance with national plans and priorities. Over the years, IDBI has enlarged its basket of products and services, covering almost the entire spectrum of industrial activities, including manufacturing and services. IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernization and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI evolved an array of fund and fee-based services with a view to providing an integrated solution to meet the entire demand of financial and corporate advisory requirements of its clients.

Figure 3.4 IDBI

Email: - PUNE 2010

51 | P a g e


ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is a major banking and financial services organization in India. It is the 4th largest bank in India and the largest private sector bank in India by market capitalization. The bank also has a network of 1,700+ branches (as on 31 March 2010) and about 4,721 ATMs in India and presence in 19 countries, as well as some 24 million customers (at the end of July 2007). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and specialization subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. (These data are dynamic.) ICICI Bank is also the largest issuer of credit cards in India. ICICI Bank's shares are listed on the stock exchanges at Kolkata and Vadodara, Mumbai and the National Stock Exchange of India Limited; its ADRs trade on the New York Stock Exchange (NYSE). The Bank is expanding in overseas markets and has the largest international balance sheet among Indian banks. ICICI Bank now has wholly-owned subsidiaries, branches and representatives offices in 19 countries, including an offshore unit in Mumbai. This includes wholly owned subsidiaries in Canada, Russia and the UK (the subsidiary through which the Hi SAVE savings brand is operated), offshore banking units in Bahrain and Singapore, an advisory branch in Dubai, branches in Belgium, Hong Kong and Sri Lanka, and representative offices in Bangladesh, China, Malaysia, Indonesia, South Africa, Thailand, the
Email: - PUNE 2010 52 | P a g e

United Arab Emirates and USA. Overseas, the Bank is targeting the NRI (NonResident Indian) population in particular. ICICI reported a 1.15% rise in net profit to Rs. 1,014.21 crore on a 1.29% increase in total income to Rs. 9,712.31 crore in Q2 September 2008 over Q2 September 2007. The bank's CASA ratio increased to 30% in 2008 from 25% in 2007.

Figure 3.5 ICICI BANK

Email: - PUNE 2010

53 | P a g e

Data Analysis

Email: - PUNE 2010

54 | P a g e

Capital Adequacy Ratio

Table 3.1 CAR

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% HDFC SBI AXIS IDBI ICICI 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

Figure 3.6 CAR

Email: - PUNE 2010

55 | P a g e


Reserve Bank of India prescribes Banks to maintain a minimum Capital to riskweighted Assets Ratio (CRAR) of 9 percent with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 percent prescribed in Basel Documents. Capital adequacy ratio of the ICICI Bank was well above the industry average of 13.97% t. CAR of HDFC bank is below the ratio of ICICI bank. HDFC Bank’s total Capital Adequacy stood at 15.26% as of March 31, 2010. The Bank adopted the Basel 2 framework as of March 31, 2009 and the CAR computed as per Basel 2 guidelines stands higher against the regulatory minimum of 9.0%. HDFC CAR is gradually increased over the last 5 year and the capital adequacy ratio of Axis bank is the increasing by every 2 year. SBI has maintained its CAR around in the range of 11 % to 14 %. But IDBI should reconsider their business as its CAR is falling YOY. Higher the ratio the banks are in a comfortable position to absorb losses. So ICICI and HDFC are the strong one to absorb their loses.

Email: - PUNE 2010

56 | P a g e

Earning Per Share

Table 3.2 EPS
160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% HDFC SBI AXIS IDBI ICICI 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

Figure 3.7 EPS

Email: - PUNE 2010

57 | P a g e

Calculating EPS To calculate this ratio, simply divide the company’s net income by the number of shares outstanding during the same period. If the number of shares out in the market has changed during that period (ex. a share buyback), a weighted average of the quantity of shares is used. Importance of EPS The significance of EPS is obvious, as the viability of any business depends on the income it can generate. A money losing business will eventually go bankrupt, so the only way for long term survival is to make money. Earnings per share allow us to compare different companies’ power to make money. The higher the earnings per share with all else equal, the higher each share should be worth. EPS is often considered the single most important metric to determine a company’s profitability. It is also a major component of another important metric, price per earnings ratio (P/E). When we do our analysis, we should look for a positive trend of EPS in order to make sure that the company is finding more ways to make more money. Otherwise, the company is not growing and thus should be considered only if you are confident that it can at least sustain its income. When we do our analysis, we should look for a positive trend of EPS in order to make sure that the company is finding more ways to make more money. It is clear from the figure 3.7 that SBI tops the group so that investors would select SBI to invest. HDFC is also showing the positive trend over last 5 year. AXIS bank must be attracted by investors as positive growth in EPS is highest among peers who show its ability to generate profit for shareholders. ICICI has not any remarkable performances in EPS. There were so many up’s and down in ICICI business performance during economic crises which is
Email: - PUNE 2010 58 | P a g e

reflected in its EPS. IDBI’s performance is just okay. It’s neither high nor low. IDBI maintained its EPS but it’s slightly growing.

Net Profit Margin

Net Profit Margin

Table 3.3 NPM


20 2005 - 06 2006 - 07 10 2007 - 08 2008 - 09 5 2009 - 10



Email: - PUNE 2010

59 | P a g e

Figure 3.8 NPM

Net Profit margin is a key method of measuring profitability. It can be interpreted as the amount of money the company gets to keep for every dollar of revenue. That is, Net Profit Margin = Net Income ÷ Net Sales. Profit margins can be useful metrics, but typically require some specific circumstances to really have significance. Suppose we have Company A from above (15% profit margins) and Company B (with 20% profit margins). If A and B are in the same industry and, indeed, are competitors, then B may be a more intelligent investment. If, however, companies A and B are not in the same space, then the differences in profit margins may not be so insightful. Suppose A is in an industry where profit margins are typically less than 10%, and B is in an industry where margins are typically greater than 25%, then A is probably a higher quality candidate. AXIS bank shown its performance in Net Profit Margin as it’s highest among group. HDFC’s NPM is better but it decreased in first 4 year (2005-09) and then in 2009-10 its rises. SBI is slightly low as compared to HDFC but its performance is constant. IDBI’s NPM is gradually decreasing; reason is the rise in expenditures and poor performance in economic crisis. ICICI in 2005-06 has second highest NPM (18.43%) but it decreased to the only 12 % in 2008-09. ICICI has incurred huge losses in financial crisis but in 200910 it again shows its ability to perform and achieve 15.66%

Email: - PUNE 2010

60 | P a g e

Return on Assets

Table 3.4 ROA

1.80% 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% HDFC SBI AXIS IDBI ICICI 2005-06 2006-07 2007 - 08 2008 - 09 2009 - 10

Figure 3.9 ROA

Email: - PUNE 2010

61 | P a g e

Return on Assets Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA for short, tells an investor how much profit a company generated for each $1 in assets. The return on assets figure is also a sure-fire way to gauge the asset intensity of a business. ROA measures a company’s earnings in relation to all of the resources it had at its disposal (the shareholders’ capital plus short and long-term borrowed funds). Thus, it is the most stringent and excessive test of return to shareholders. If a company has no debt, the return on assets and return on equity figures will be the same. HDFC has shown remarkable ROA over 5 years but AXIS bank will attract more eyes as its ROA increases for last 5 year. SBI’s ROA is slightly low as compared to HDFC; reason is the SBI has highest assets in Indian bank industry that’s why its ROA is low as compared to AXIS bank and HDFC bank. IDBI is out performed in ROA but ICICI’s ROA is quite enough to attract investors. Its rise and fall alternatively YOY.

Email: - PUNE 2010

62 | P a g e

Credit Deposit Ratio

Table 3.5 Credit Deposit Ratio

300 250 200 150 100 50 0 HDFC SBI AXIS IDBI ICICI

2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10

Figure 3.10 Credit Deposit Ratio

Email: - PUNE 2010

63 | P a g e


It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher the loan-assets created from deposits. Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 60 per cent. That means Bank X has used deposits worth Rs. 60 crores to create loan-assets. Only Rs. 40 crores is available for other investments. Now, the Indian government is the largest borrower in the domestic credit market. The government borrows by issuing securities (G-secs) through auctions held by the RBI. Banks, thus, lend to the government by investing in these Gsecs. And Bank X has only Rs. 40 crores to invest in G-secs. If more banks like X have lesser money to invest in G-Secs, what will the government do? After all, it needs to raise money to meet its expenditure. If the money so released is large, ``too much money will chase too few goods'' in the economy resulting in higher inflation levels. This would prompt investors to demand higher returns on debt instruments. In other words, higher interest rates HDFC, SBI and AXIS bank has CDR in equal range from last 5 year. IDBI has highest CDR all 5 year but good thing is that is gradually fall YOY. ICICI bank’s CDR is slightly higher than SBI , AXIS and HDFC but it also maintained its CDR YOY.

Email: - PUNE 2010

64 | P a g e

Gross Non Performing Assets

Table 3.6 GNPA



4.00% 2007 - 08 2008 - 09 2009 - 10 2.00%




Email: - PUNE 2010

65 | P a g e

Figure 3.11 Gross NPA


Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as substandard, doubtful, and loss assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio Gross Advances

SBI maintained its GNPA to 3% which is very good sign of performances as SBI is the largest lender in INDIA. HDFC’s GNPA is quite good as it is low with compared to ICICI and SBI but in 2008-09 GNPA rises. The reason may be economic crises. AXIS bank has lowest GNPA which shown its management ability. ICICI has the highest GNPA in banking industry and rising YOY.

Email: - PUNE 2010

66 | P a g e

Net Non Performing Assets

Table 3.7



1.50% 2007 - 08 1.00% 2008 - 09 2009 - 10 0.50%


Figure 3.12 Net NPA

Email: - PUNE 2010

67 | P a g e


Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following_

Net NPAs =

Gross NPAs – Provisions
Gross Advances - Provisions

AXIS Bank has least Net NPA and ICICI has highest NNPA among group. HDFC shown its management quality as it maintained its NNPA YOY. SBI has to keep NNPA below. IDBI has successful to control NNPA YOY.

Email: - PUNE 2010

68 | P a g e


Findings & conclusion

Email: - PUNE 2010

69 | P a g e

Capital adequacy: HDFC BANK has shown best performance in CAR as its gradually rising YOY and IDBI’s decreasing YOY. IDBI should reconsider their business tactics.

Return on Assets: HDFC tops the group and IDBI again at last but this tie IDBI shown consistent performance as compared to ICICI having higher ROA.

Earnings Per Share: SBI’s EPS is highest among group. IDBI has least EPS. Investors will choice SBI over all banks and IDBI at last.

Net Profit Margin: AXIS Bank has highest NPM in 2009-10 and rising YOY. IDBI’s NPM is decreasing YOY.

Credit Deposit Ratio: HDFC maintains its CDR and tops the group. IDBI again on worst side but good thing is that it’s decreasing YOY.

Gross NPA: AXIS bank has least GNPA and ICICI has highest among peers.

Net NPA: AXIS Bank again performed better than others and ICICI has maintained its position. SBI has rise in NNPA over the GNPA.

Email: - PUNE 2010

70 | P a g e

1) The banks should adapt themselves quickly to the changing norms.

2) The system is getting internationally standardized with the coming of BASELL II accords so the Indian banks should strengthen internal processes so as to cope with the standards. 3) The banks should maintain a 0% NPA by always lending and investing or creating quality assets which earn returns by way of interest and profits.

4) The banks should find more avenues to hedge risks as the market is very sensitive to risk of any type.

5) Have good appraisal skills, system, and proper follow up to ensure that banks are above the risk.

Research on which industries are best suited for the use of the CAMELS Framework. Research on how other variables can be added or how variables can be selected to suit the industry needs. Research on why the CAMELS Framework can not be used as a tool of performance evaluation.
Email: - PUNE 2010 71 | P a g e


1. Websites:

Email: - PUNE 2010

72 | P a g e

Sign up to vote on this title
UsefulNot useful