INTRODUCTION AND DESIGN OF THE STUDY

INTRODUCTION

The Indian banking can be broadly categorized into nationalized (government

owned), private banks and specialized banking institutions.The Reserve Bank of India
acts a centralized body, monitoring any discrepancies and shortcoming in the system.
Since the nationalization of banks in 1969, the public sector banks or the nationalized
banks have acquired a place of prominence and has since then seen tremendous progress.
The need to become highly customer focused has forced the slow-moving public sector
banks to adopt a fast track approach. The unleashing of products and services through the
net has galvanized players at all levels of the banking and financial institutions market
grid to look anew at their existing portfolio offering. Conservative banking practices
allowed Indian banks to be insulated partially from the Asian currency crisis.Indian banks
are now quoting higher valuation when compared to banks in other Asian countries (viz.
Hong Kong, Singapore, Philippines etc.) that have major problems linked to huge Non
Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed
in approach and armed with efficient branch networks focus primarily on the ‘high
revenue’ niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the
‘new’ Indian market and is addressing the relevant issues to take on the multifarious
challenges of globalization. Banks that employ IT solutions are perceived to be
‘futuristic’ and proactive players capable of meeting the multifarious requirements of the
large customers base. Private banks have been fast on the uptake and are reorienting their
strategies using the internet as a medium The Internet has emerged as the new and
challenging frontier of marketing with the conventional physical world tenets being just
as applicable like in any other marketing medium.
 The Indian banking has come a long way from being a sleepy business institution
to a highly proactive and dynamic entity. This transformation has been largely brought
about by the large dose of liberalization and economic reforms that allowed banks to
explore new business opportunities rather than generating revenues from conventional
streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30
banking units contributing to almost 50% of deposits and 60% of advances. Indian
nationalized banks (banks owned by the government) continue to be the major lenders
in the economy due to their sheer size and penetrative networks which assures them
high deposit mobilization. The Indian banking can be broadly categorized into
nationalized, private banks and specialized banking institutions.

The Reserve Bank of India act as a centralized body monitoring any discrepancies
and shortcoming in the system. It is the foremost monitoring body in the Indian
financial sector. The nationalized banks (i.e. government-owned banks) continue to
dominate the Indian banking arena. Industry estimates indicate that out of 274
commercial banks operating in India, 223 banks are in the public sector and 51 are in the
private sector. The private sector bank grid also includes 24 foreign banks that have
started their operations here. Under the ambit of the nationalized banks come the
specialized banking institutions. These co-operatives, rural banks focus on areas of
agriculture, rural development etc., unlike commercial banks these co-operative banks
do not lend on the basis of a prime lending rate. They also have various tax sops
because of their holding pattern and lending structure and hence have lower overheads.
This enables them to give a marginally higher percentage on savings deposits. Many of
these cooperative banks diversified into specialized areas (catering to the vast retail
audience) like car finance, housing loans, truck finance etc. in order to keep pace with
their public sector and private counterparts, the co-operative banks too have invested
heavily in information technology to offer high-end computerized banking services to its
clients.
SERVICES TYPICALLY OFFERED BY BANKS

Although the basic type of services offered by a bank depends upon the type of
bank and the country, services provided usually include:

 Taking deposits from their customers and issuing current (UK) or checking (US)

accounts and savings accounts to individuals and businesses.

 Extending loans to individuals and businesses.

 Cashing cheques.

 Facilitating money transactions such as wire transfers and cashier's checks

 Issuing credit cards, ATM cards, and debit cards

 Storing valuables, particularly in a safe deposit box

 Cashing and distributing bank rolls

 Consumer & commercial financial advisory services

 Pension & retirement planning

 Financial transactions can be performed through many different channels

 A branch, banking centre or financial centre is a retail location where a bank or

financial institution offers a wide array of face to face service to its customers

 ATM is a computerised telecommunications device that provides a financial

institution's customers a method of financial transactions in a public space

without the need for a human clerk or bank teller

 Mail is part of the postal system which itself is a system wherein written

documents typically enclosed in envelopes, and also small packages containing

other matter, are delivered to destinations around the world

 Telephone banking is a service provided by a financial institution which allows its

customers to perform transactions over the telephone

TYPES OF BANKS

Banks' activities can be divided into retail banking, dealing directly with individuals
and small businesses; business banking, providing services to mid-market business;
corporate banking, directed at large business entities; private banking, providing wealth
management services to High Net Worth Individuals and families; and investment banking,
relating to activities on the financial markets. Most banks are profit-making, private
enterprises. However, some are owned by government, or are non-profits.

Central banks are non-commercial bodies or government agencies often charged

with controlling interest rates and money supply across the whole economy. They
generally provide liquidity to the banking system and act as Lender of last resort in
event of a crisis.

IMPORTANCE OF THE STUDY

In any economic society all active participants do become interested in varying

degrees in the performance of the business enterprises. Within every commercial
enterprise, of whatever size, there are inevitably many different interests to be served. .

Some of these interest groups include owners, employees, customers, society,

government, suppliers and managers. By appraising the performance through financial
statement analysis, management may review the bank’s progress to date and decide upon
the course of action to be taken in future performance. The appraisal helps management
in the task of planning of operations.

The performance appraisal programme enables the management to operate the

control system of the business organization more effectively. It helps to identify the spot
weakness in the bank’s operations and to take corrective action. Furthermore, it tends
to restrain management as they are under pressure to maintain a favourable financial
position.
 Investors comprising shareholders and debentureholders, have a vital interest in
the appraisal of performance of an enterprise. Investors are interested in two things.

Firstly, they want the safety of their investment; secondly, the ability of a bank to
earn profit. They are also interested in a concern whose future is bright. Through
performance appraisal they get the information which they need Creditors and
Depositors/shareholders are interested in ascertaining whether the bank can employ
the funds raised through deposits and other borrowings in such a way that it will be able
to meet current interest obligations and repay the deposits/borrowings when it falls
due. They act as magic eye highlighting the creditworthiness of a bank. Creditors often
appraise the performance of the Bank before lending the money. . Central and state
governments and local authorities are also interested in knowing the performance of a
business in order to assess their revenues through various taxes to regulate capital
issues and public utility regulations. Employees have an interest in the operating results
and the financial strength of their concern. The remuneration of workers must be
generated from the banks revenues.

STATEMENT OF THE PROBLEM

The Banking industry in India is more than a century old and is predominantly in
the public sector. They include SBI and its eight subsidiaries, 19 Nationalised Banks
and196 Reginal Rural Banks. The aggregate loan assets, of all Private sector banks stood
at Rs.836128 crores as on 31.03.05 accounting for 75.26% of loan assets of all Scheduled
Commercial Banks and their total Operating Profits amounted to Rs.39413 crores.
Besides there are 28 Private Sector Banks, 31 Foreign Banks operating in India and all
are marketing profits except a few.

Hence, an effort has been made in this study to investigate the performance of
various activities in this banking industry and implication that emerge, have been
analysed from a strategic perspective. With this end the study will cover the
performance appraisal of selected bank with regard to its operational performance,
profitability performance and financial performance.
OBJECTIVES OF THE STUDY

The important objectives of the study are,

1. To know the Indian banking history.

2. To know the history and function of LVB.
3. To analyse the financial performance of LVB for five years.
4. To offer suggestions for further improvement.
METHODOLOGY

For the purpose of the study one of the leading banking company operating in
Tamilnadu namely, Lakshmi Vilas Bank under Private sector has been selected and
secondary data have been collected for this study. For Secondary data, annual reports of
the banks, RBI Reports for the relevant periods have been used extensively. In addition
to it, text books and journals have been referred extensively to collect various
information relating to this topic study.

PERIOD OF STUDY

The present study covers a period of five financial year from, 2005-2006,2006-
2007,2007-2008, 2008-2009 and 2009-2010.

TOOLS USED

For the purpose of analysis, various statistical and arithmetic tools have been
used extensively. These include tabulation and ratio analysis.

LIMITATION OF THE STUDY

 The availability of the information and data are limited by time factor.
 The study covers only one bank . So the findings may not be applicable to the
entire banking industry as a whole.
 As the study mainly involves the quantitative data, the qualitative aspects like
scaling techniques, quality are not much concentrated

OVERVIEW OF INDIAN BANKING INDUSTRY

The evolution of the modern commercial banking industry in India can be

traced to 1786 with the establishment of Bank of Bengal in Calcutta. Three
presidency banks were set up in Calcutta, Bombay and Madras. In 1860, the
limited liability concept was introduced in banking, resulting in the establishment
of joint stock banks like Allahabad Bank Ltd, Punjab National Bank Ltd, Bank of
Baroda Ltd and Bank of India Ltd. In 1921, the three presidency banks were
amalgamated to form the Imperial Bank of India, which took on the role of a
commercial bank, a bankers’ bank and a banker to the government. The
establishment of the RBI as the central bank of the country in 1935 ended the
quasi-central banking role of the Imperial Bank of India. In order to serve the
economy in general and the rural sector in particular, the All India Rural Credit
Survey Committee recommended the creation of a state-partnered and state
sponsored bank taking over the Imperial Bank of India and integrating with it, the
former state-owned and state-associate banks. Accordingly, the State Bank of
India (SBI) was constituted in 1955. Subsequently in 1959, the State Bank of India
(Subsidiary Bank) Act was passed, enabling the SBI to take over eight former
state-associate banks as its subsidiaries. In 1969, 14 private banks were
nationalised followed by six private banks in 1980. Since 1991 many financial
reforms have been introduced substantially transforming the banking industry in
India.
Industry Structure

Prior to 1991, India’s banking system was almost entirely owned by the
Government, with the exception of 22 private sector banks (which were
considered too small to be nationalised) and the foreign banks. After the economic
crisis in 1991, the process of financial reforms has resulted in the banking system
moving from a totally administered sector into a more market-driven system. This
was a result of the recommendations contained in the report of the Narasimham
Committee set up in 1991. In line with the established objectives of the banking
sector reforms which include improving the macro economic policy framework,
improving the financial health and competitive position of banks, building the
financial infrastructure relating to supervision, audit technology and legal
framework and improving the level of managerial competence and quality of
human resources, the reforms include progressive tightening of prudential norms
for asset quality and capital adequacy in line with international norms,
deregulation of interest rates,reducing the statutory co-operation of bank deposits
to finance Government deficits, liberalising the entry norms for new
intermediaries, and the development of new institutions (for trading, clearing and
settlement of debt market transactions, forex and derivative instruments, credit
information bureaus and asset reconstruction companies). The key drivers for this
success within the Indian Banking sector have been a clear focus on the emerging
opportunities in retail banking, technology architecture, relationship-based
approach in Corporate/Treasury, Capitalisation and a Quality Management Team.

The formal banking system in India comprises the RBI, Commercial Banks,
Regional Rural Banks and the co-operative banks. In the recent past, private non-
banking finance companies also have been active in the financial system, and are
being regulated by the RBI.
Reserve Bank of India

The RBI, established in 1935, is the central banking and monetary authority
in India. The RBI manages the country’s money supply and foreign exchange and
also serves as a bank for the Government of India and for the country’s
commercial banks. In addition to these traditional central banking roles, the RBI
undertakes certain developmental and promotional roles. The RBI issues
guidelines on various areas including exposure standards, income recognition,
asset classification, provisioning for non-performing assets, investment valuation
and capital adequacy standards for commercial banks, long-term lending
institutions and non-bank finance companies. The RBI requires these institutions
to furnish information relating to their businesses to the RBI on a regular basis.

Scheduled Commercial Banks

The commercial banking structure in India. Consists of scheduled

commercial bank in India unscheduled bank in India scheduled bank India
consititue those banks which have been included in the second schedule of
Reserve Bank of India Act 1934. RBI in turn includes only those banks in this
schduele which satisfy the cre teria laid down vice section 42(6) (a) of the Act.

Public Sector Banks (PSBs)

The banking sector in India has been characterized by the predominance of

PSBs. They include the State Bank of India and its associate banks, 19
nationalised banks and 196 regional rural banks. The aggregate loan assets of all
PSBs stood at Rs. 836128 crores at end Financial Year 08 accounting for 75.26%
of loan assets of all SCBs in India and their total operating profits amounted to Rs.
39,413 crores. The PSBs’ large network of branches enables them to fund
themselves out of low-cost deposits.

Private Sector Banks

 After the first phase of bank nationalization was completed in 1969, public
sector banks made up the largest portion of Indian banking. The focus on public
sector banks was maintained throughout the 1970s and 1980s. Further, existing
private sector banks which showed signs of an eventual default were merged with
state-owned banks. In July 1993, as part of the banking sector reform process and
as a measure to induce competition in the banking sector, the RBI permitted entry
by the private sector into the banking system. At end financial year 08, the total
loan assets of private sector banks aggregated Rs. 197,832 crores and accounted
for 17.80% of the total loan assets of all Schedule Commercial Banks s and their
total operating profits amounted to Rs. 7674 crores. The share of private sector
banks in total loan assets has decreased from 19.70% at end Financial year 08 to
17.80% at the end of Financial year 08.

Foreign Banks

As on September, 2005, there are 31 foreign banks operating in India with

245 branches. Some foreign banks have also set up representative offices in India.
These banks originated from 19 countries The branches of Foreign banks are
spread over 35 centres in 17 States/Union Territory. As on March 2005, deposits
of foreign banks stood at 7.9%. At end Financial year 08, the loan assets of foreign
banks aggregated Rs. 77,026 crores and accounted for 6.93% of the total assets of
all SCBs and their total operating profits of the foreign banks as on March 31,
2005 amounted to Rs. 4,597 crores. As part of the liberalization process, the RBI
has permitted foreign banks to operate more freely, subject to requirements largely
similar to those imposed on domestic banks. Foreign banks operate in India
through branches of the parent bank. The Indian government has permitted foreign
banks to operate in India by setting up branches, incorporating wholly-owned
subsidiaries or acquiring up to 74.0% of the equity share capital of an Indian
private sector bank. In its recent draft "Comprehensive Policy Framework for
Ownership and Governance in Private Sector Banks", the RBI proposed a limit of
5.0% on the shareholding of a foreign bank with a presence in India in an Indian
private sector bank. Subsequently, in a circular dated July 6, 2004, the RBI
stipulated that banks should not acquire any fresh stake in a bank's equity shares, if
by such acquisition, the investing bank's holding exceeded 5.0% of the investee
bank's equity capital. This also applies to foreign banks with a presence in India
making an investment, in Indian banks. The primary activity of most foreign banks
in India has been in the corporate segment. However, some of the larger foreign
banks have made consumer financing a larger part of their portfolios. These banks
offer products such as automobile finance, home loans, credit cards and household
consumer finance.

Co-operative Banks

Co-operative banks cater to the financing needs of agriculture, small

industry and self-employed businessmen in urban and semi-urban areas of India.
The state land development banks and the primary land development banks
provide long-term credit for agriculture. In the light of liquidity and insolvency
problems experienced by some co-operative banks in fiscal 2001, the RBI
undertook several interim measures, pending formal legislative changes, including
measures related to lending against shares, borrowings in the call market and term
deposits placed with other urban co-operative banks. Presently the RBI is
responsible for supervision and regulation of urban cooperative societies, and the
National Bank for Agriculture and Rural Development for State Co-operative
Banks and District Central Cooperative Banks.

Non-Bank Finance Companies

There are over 10,000 non-bank finance companies in India, mostly in the
private sector. All non-bank finance companies are required to register with the
RBI. The non-bank finance companies may be categorized into entities which take
public deposits and those which do not. The companies, which accept public
 deposits, are subject to strict supervision and capital adequacy requirements of the
RBI. The scope and activities of non-bank finance companies have grown
significantly over the years. The primary activities of the non-bank finance
companies are consumer credit, including automobile finance, home finance and
consumer durable products finance, wholesale finance products such as bill
discounting for small and medium-sized companies, and fee-based services such
as investment banking and underwriting. In 2003, Kotak Mahindra Finance
Limited, a large non-bank finance company was granted a banking license by the
RBI and converted itself into Kotak Mahindra Bank.

Over the past few years, certain non-bank finance companies have defaulted to
investors and depositors, and consequently actions (including bankruptcy
proceedings) have been initiated against them, many of which are currently pending.
Changing nature of corporate banking
The corporate banking business has become increasingly competitive, with most
banks targeting large corporate clients for loans and fee-based services. This has caused
a fall in margins as well as non-fund business margins. Going forward, success will hinge
on maximizing value from corporate relationships through a range of product offerings.

Retail Banking- huge growth potentialities

Traditionally, the retail market has been overlooked as a Low Cost Deposits
segment. However, structural changes in last couple of years resulted in significant
growth in retail lending business. Factors which induce the focused growth of retail
business are as follows:Changing lifestyles, strong economic growth prospects coupled
with higher disposable income etc. contributing towards the changing demographics.

Indian retail market is still miniscule and nascent compared to Asian peers, in
terms of per capita usage of retail product offerings such as housing finance,
credit cards, auto loans, consumer finance etc.
Other factors like the mammoth size of the Indian market couple with an
 unexplored base for retail finance products.
Increasing propensity of the urban populace to take credit.
Technology offering the competitive edge

Technology has revolutionized the delivery chains for financial products and
services with ATMs, Home Banking, Telephone banking which have replaced banking
only at branches.

Mergers and Acquisitions

The domestic banking sector has witnessed mergers and acquisitions take place
both in public sector banks (owing to the need to support weak banks) and private
sector banks (focused towards the need to expand). Apart from providing the private
players an effective route to fortify their reach and presence in the sector, merger and
acquisition trend may also intensify the proposed reduction in government shareholding
in public sector banks and provide international banks an opportunity to expand
business in India.

Asset Classification

Under the RBI’s master circular on income recognition, asset classification and
provisioning pertaining to the advances portfolio of banks, issued in July 2005, non-
performing assets are classified as described below:

Sub-Standard Assets

Assets that are non-performing assets for a period not exceeding 12 months. In
such cases, the current net worth of the borrower / guarantor or the current market value
of the security charged is not enough to ensure recovery of dues to the banks in full. Such
an asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and
are characterised by the distinct possibility that the bank will sustain some loss, if
deficiencies are not corrected.
Doubtful Assets

Assets that are non-performing assets for more than 12 months. A loan classified
as doubtful has all the weaknesses inherent in assets that are classified as substandard,
with the added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently known facts, conditions and values, highly questionable and
improbable.

Loss Asset
Assets on which losses have been identified by the bank or internal or external
auditors or the Reserve Bank India inspection but the amount has not been written off
fully.

There are separate guidelines for projects under implementation which are based
on the achievement of financial closure and the date of approval of the project financing.

The RBI has separate guidelines for restructured assets. A fully secured standard
asset can be restructured by reschedulement of principal repayments and/ or the interest
element, but must be separately disclosed as a restructured asset. The amount of sacrifice,
if any, in the element of interest, measured in present value terms, is either written off or
provision is made to the extent of the sacrifice involved. Similar guidelines apply to sub-
standard assets. The sub-standard accounts which have been subjected to restructuring,
whether in respect of principal installment or interest amount are eligible to be upgraded
to the standard category only after the specified period, i.e., a period of one year after the
date when first payment of interest or of principal, whichever is earlier, falls due, subject
to satisfactory performance during the period.

To put in place an institutional mechanism for the restructuring of corporate debt,

the RBI has devised a corporate debt restructuring system.

ASSET POSITION OF LVB FOR THE LAST FIVE YEARS (2005-06 to 2009-10)
S. For the period March March March March March
No ended 31,2006 31,2007 31,2008 31,2009 31,2010
1 Cash & Balance 230.4 258.79 200.11 286.31 385.34
With RBI
2 Cash With RBI 191.7 216.73 155.42 243.21 326.11
3 Cash And hand 38.7 42.06 44.69 43.1 59.23
/others
4 Balace with bank 49.73 95.46 263.29 355.16 229.56
5 Investment 1338.17 1180.86 1279.87 1309.03 1693.68
6. Government 1084.01 1070.42 1167.69 1187.04 1554.09
securities
7. Other apporved 28.77 16.89 16.89 15.89 13.65
securities
8. Equity share 6.59 3.92 3.59 4.45 9.42
9. Debenture and 108.33 45.09 39.04 32.09 39.12
bonds
10. Other Investment 110.47 44.54 52.03 68.08 76.06
11 Advances 2038.17 2317.71 2952.82 3612.7 3858.79
12 Bills purchase and 206.69 209.59 194.16 181.89 307.99
discount
1.3 Cash credit, over 993.67 1220.37 1363.24 2009.09 2242.99
draft loans
14 Term loan 838.34 887.75 1395.42 1421.72 1307.81

15 Fixed asset 31.31 34.11 32.46 35.05 39.94

16 Net block 34.29 37.09 35.44 35.05 39.94
17 Premises 21.31 22.89 23.87 21.32 23.24
18 Other fixed asset 62.02 69.31 73.02 84.58 84.71
19 (-) Acc. Deprection 50.53 56.06 62.94 70.04 38.01
20 Other asset 135.84 169.79 194.49 231.47 333.75
21 Interest accured 32.88 26.66 24.29 28.03 39.09`
22 Additional tax paid 80.70 87.46 96.61 106.28 136.41
23 Stationary and 0.66 0.68 0.71 0.62 0.62
stamps
24 Others 19.36 19.77 31.88 30.46 38.56
 25. Insurance 1.40 1.40 1.32 2.80 0.48
26. Other Expenditure 12.17 11.84 12.91 20.79 3.59
TOTAL 3824.19 4056.72 4923.04 5030.44 6541.06
Credit Risk

As per two approaches to credit risk management, Standardized, and Internal

Rating Based (IRB). The latter may be Foundation or Advanced.

Standardised approach

In the Standardised approach, the various types of assets are first classified on
the basis of their credit risk rating and risk weights are assigned as predetermined for
each of these rating categories instead of a common risk weight for the assets, making it
more risk sensitive when compared to the existing approach.

Regulations relating to Making Loans

The provisions of the BR Act govern the making of loans by banks in India. The
RBI issues directions covering the loan activities of banks. Some of the major guidelines
of RBI, which are now in effect, are as follows:

 The RBI has prescribed norms for bank lending to non-bank financial
companies and financing of public sector disinvestments.

 Banks are free to determine their own lending rates but each bank must declare
its prime lending rate as approved by its Board of Directors. Each bank should
also indicate the maximum spread over the prime lending rate for all credit
exposures other than retail loans. The interest charged by banks on advances
upto Rs. 200,000 to any one entity (other than most retail loans) must not
exceed the prime lending rate. Banks are also given freedom to lend at a rate
below the prime lending rate in respect of creditworthy borrowers and
exposures. Interest rates for certain categories of advances are regulated by the
RBI. The RBI has recently directed banks to introduce benchmark prime
 lending rates based on various parameters including cost of funds, operating
expenses, capital charge and profit margin, and discontinue the system of
multiple prime lending rates linked to the maturity of the credit facility.

 In terms of Section 20(1) of the BR Act, a banking company is prohibited from

entering into any commitment for granting any loans or advances to or on
behalf of any of its Directors, or any firm in which any of its Directors is
interested as partner, manager, employee or guarantor, or any company (not
being a subsidiary of the banking company or a company registered under
Section 25 of the Companies Act, 1956, or a Government company) of which,
or the subsidiary or the holding company of which any of the Directors of the
bank is a Director, managing agent, manager, employee or guarantor or in
which he holds substantial interest, or any individual in respect of whom any of
its Directors is a partner or guarantor. There are certain exemptions in this
regard as the explanation to the section provides that ‘loans or advances’ shall
not include any transaction which the RBI may specify by general or special
order as not being a loan or advance for the purpose of such section.

Non-Performing Assets

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank.

A non-performing asset (NPA) is a loan or an advance where;

 interest and/ or instalment of principal remain overdue for a period of more

than 90 days in respect of a term loan,

 the account remains ‘out of order’ as indicated in respect of an

Overdraft/Cash Credit (OD/CC),

 the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
  the instalment of principal or interest thereon remains overdue for two crop
seasons for short duration crops,
 the instalment of principal or interest thereon remains overdue for one crop
season for long duration crops.
Interest in respect of non-performing assets is not transferred or credited to the
income account unless collected.

Regulations Relating to Deposits

The RBI has permitted banks to independently determine rates of interest offered
on term deposits. However, banks are not permitted to pay interest on current account
deposits. Further, banks may only pay interest of 3.5% per annum on savings deposits. In
respect of savings and time deposits accepted from employees, LVB is permitted by the
RBI to pay an additional interest of 1% over the interest payable on deposits from the
public.

Domestic time deposits have a minimum maturity of 15 days (seven days in

respect of deposits over Rs. 1.5 million with effect from April 19, 2001) and a maximum
maturity of 10 years. Time deposits from non-resident Indians denominated in foreign
currency have a minimum maturity of one year and a maximum maturity of five years.

Starting April 1998, the RBI has permitted banks the flexibility to offer varying
rates of interests on domestic deposits of the same maturity subject to the following
conditions:

 Time deposits are of Rs. 1.5 million and above; and

 Interest on deposits is paid in accordance with the schedule of interest rates

disclosed in advance by the bank and not pursuant to negotiation between the
depositor and the bank.

The RBI has, effective September 15, 2003, stipulated that the interest rate on
NRE deposits should not exceed 100 basis points over the US dollar LIBOR/ swap rates
for the corresponding maturity.

Requirements of the Banking Regulation Act

Prohibited Business
The BR Act specifies the business activities in which a bank may engage. Banks
are prohibited from engaging in business activities other than the specified activities. The
Bank is prohibited from doing trading activity in terms of section 8 of The Banking
Regulation Act, 1949 which may act as an operational constraint.
Reserve Fund
Any bank incorporated in India is required to create a reserve fund to which it
must transfer not less than 20% of the profits of each year before dividends. If there is an
appropriation from this account, the bank is required to report the same to the RBI within
21 days, explaining the circumstances leading to such appropriation. The Government of
India may, on the recommendation of the RBI, exempt a bank from the requirements
relating to reserve fund.

Restriction on Share Capital and Voting Rights

Banks can issue only Equity Shares. The BR Act specifies that no shareholder in a
banking company can exercise voting rights on poll in excess of 10% of total voting
rights of all the shareholders of the banking company.

Regulatory Reporting and Examination Procedures

The RBI is empowered under the BR Act to inspect a bank. The RBI monitors
prudential parameters at quarterly intervals. To this end and to enable off-site monitoring
and surveillance by the RBI, banks are required to report to the RBI on aspects such as:

 assets, liabilities and off-balance sheet exposures;

 risk weighting of these exposures, the capital base and the capital adequacy
ratio;
  unaudited operating results for each quarter;

 asset quality;

 concentration of exposures;

 connected and related lending and the profile of ownership, control and
management; and

 other prudential parameters.

The RBI also conducts periodic on-site inspections on matters relating to the
bank’s portfolio, risk management systems, internal controls, credit allocation and
regulatory compliance, at intervals ranging from one to three years. LVB is subject to the
on-site inspection by the RBI at yearly intervals. The inspection report, along with the
report on actions taken by us, has to be placed before the Board of Directors. On approval
by the Board of Directors, the bank is required to submit the report on actions taken by us
to the RBI. The RBI also discusses the report with the management team including the
Managing Director.

The RBI also conducts on-site supervision of selected branches with respect to
their general operations and foreign exchange related transactions.

ORIGIN AND DEVELOPMENT OF LVB

The Lakshmi Vilas Bank Limited was founded eight decades ago (in 1926) by
seven people of Karur under the leadership of Shri V. S. N. Ramalinga Chettiar, mainly to
cater to the financial needs of varied customer segments. The bank was incorporated on
3rd November, 1926 under the Indian Companies Act, 1913 and obtained the certificate
to commence business on 10 th November, 1926. The bank obtained its license from RBI
in June 1958, and it became a Scheduled Commercial bank in August 1958. The Bank
shifted its Registered and Administrative office from 693, Jawahar Bazaar, Karur – 639
001 to the present registered office on September 11, 1991.

Corporate philosophy of the bank is to develop a range of quality services for

creating value for customers, shareholders and the society by motivating people to
achieve excellence in performance, leading to sustained profitable growth and in that
process build a learning organization.

OBJECTS OF THE BANK

The main object clause of the Memorandum of Association of the bank enables it
to undertake the activities for which the funds are being raised and the activities which
it has been carrying on till date.

The main objects of the bank as contained in its Memorandum of Association are:

It is the object of this bank that it should utilize the resources gathered from the
Bank’s Shareholders and its depositors by advancing loans to applicants of integrity
against guarantees, and on the security of commercial products, at a fair rate of
interest; to conduct prize deposits and to carry on the affairs of the bnk in terms of the
resolutions passed in the General Meetings dated 23-3-1959 and 30-3-1960 as
confirmed by the Madras High Court in its order No. O.P.211/1959 dated 15-4-60, as per
provisions of Sec. 6 of the Banking Companies Act, 1949 detailed below.

To carry on the business of

1. The borrowing, raising or taking up of money; the lending or advancing of money

either upon or without security; the drawing, making, accepting, discounting,
buying, selling, collecting and dealing in bills of exchange, hundies, promissory
notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures,
certificates, scrips and other instruments, and securities, whether transferable or
negotiable or not; the granting and issuing of letters of credit, travelers’ cheques
 and circular notes; the buying, selling and dealing in bullion and species; the
buying and selling of foreign exchange including foreign bank notes; the
acquiring, holding, issuing on commission, underwriting and dealing in stock,
funds, shares, debentures, debenture stock, bonds, obligations, securities and
investments of all kinds; the purchasing and selling of bonds, scrips of other
forms of securities on behalf of constituents or other, the negotiating of loans
and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or
for safe custody or otherwise; the providing of safe deposit vaults; the collecting
and transmitting of money and securities;

2. Acting as agents for any Government or local authority or any other person or
persons; the carrying on of agency business of any description including the
clearing and forwarding of goods, giving of receipts and discharges and otherwise
acting as an attorney on behalf of customers but excluding the business of a
managing agent of a company.

3. Contracting for public and private loans and negotiating and issuing the same;

4. The effecting, insuring, guaranteeing, underwriting participating in managing and

carrying out of any issue, public or private of State, municipal or other loans or of
shares, stock, debentures or debenture stock of any company, corporation or
association and the lending of money for the purpose of any such issue;
5. Carrying on and transacting every kind of guarantee and indemnity business;
6. Managing, selling and realizing any property which may come into the possession
of the company in satisfaction or part satisfaction of any of its claims;
7. Acquiring and holding and generally dealing with any property or any right, title
or interest in any such property which may form the security or part of the
security for any loans, or advances or which may be connected with any such
security;
8. Undertaking and executing trust;
9. Undertaking the administration of estates as executor, trustee or otherwise;
10. Establishing and supporting or aiding in the establishment and support of
association, institutions, funds trusts and conveniences calculated to benefit
employees or ex-employees of the company or the dependants or connections of
such persons; granting pensions and allowances and making payments towards
insurance; subscribing to or guaranteeing moneys for charitable or benevolent
objects or for any exhibition or for any public, general or useful object;
11. The acquisition, construction, maintenance and alteration of any building of
works necessary or convenient for the purposes of the company;
12. Selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing of or turning into account or otherwise dealing with all or any part of
the property and rights of the company;
13. Acquiring and undertaking the whole or any part of the business of any person or
company, when such business is of a nature enumerated or described in the
above clauses;
14. Doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company.
15. Any other form of business which the Central Government may, by notification in
the Official Gazette, specifying as a form of business in which it is lawful for a
banking company to engage.
16. To open, establish, maintain and operate currency chests and small coin depots
on such terms and conditions as may be required by the Reserve Bank of India
established under the Reserve Bank of India Act, 1934 and enter into all
administrative or other arrangements for undertaking such functions with the
Reserve Bank of India.
 17. To finance Hire Purchase, Leasing out movable properties of any kind including
machinery and plants of all kinds.
18. To purchase, invest, subscribe, sell, resell, exchange or acquire otherwise or hold
or transfer or deal otherwise in Mutual Funds of all types including UTI.
19. To operate and conduct organised Credit Card Business by issuing Credit Cards to
members and to enter into contracts with relative establishments in this behalf.
ADMINISTRATION AND MANAGEMENT

The Lakshmi Vilas Banks is administrated by the Board of Directors

elected by the members. All the members are eligible to vote in the election . As
per the by- laws of this bank, Directors are to be elected by the shareholders
once in three years.

GROWTH OF THE BANK

Founded on 3rd November 1926, the bank was aptly christened as “ The
Lakshmi Vilas Bank Limited “ , the abode of prosperity. Social uplift through
catering to the financial needs of the local community remains as avowed
objectives of the bank.

Good seed grows and also multiplies. That applies to The Lakshmi Vilas
Bank Limited also. The bank grew from a seeding into a tree with its second
branch being opened on 05.05.1930 at Tindivanam in south Arcot district. Bank’s
branch network increased considerably not only by the opening of new branches
but also by the merger of 7 banks with it, between 1961 and 1965.

In its quest for new business opportunities and to widen the clientele base
and reach out new markets, the bank has been expanding the network of
branches at important centers where business potential is high.
BRANCHES

The first branch of the bank was opened on 5.5.1930 at Tindivanam, where
there were no banking facilities to the public expect for a co-operative society.
Today the bank has 274 branches throughout Tamil Nadu and has also extended its
activities to other states like Andhra Pradesh, Maharastra, Orissa, Rajasthan, Haryana,
Jharkand and Delhi. During the year the bank net work by opening 6 branches in
Tamilnadu.

BRANCH NETWORK-AREA WISE IN INDIA

DURING THE YEAR (2008-2010)

S. NO AREA WISE NO OF BRANCHES

1 RURAL 55
2 SEMI- URBAN 98
3 URBAN 85
4 METRO 36
TOTAL 274

Source : Annual Report of LVB 2009-10

HUMAN RESOURCE DEVELOPMENT

In the wake of increasing competition and newer challenges, the bank

continues its focus in the area of trading. During the year total number of employees
of the bank stood at 1926. Focusing on training it is employees on a continuous basis,
training programs are being conducted by the bank with internal and external facilitity.
RISK MANAGEMENT

The major risk confronted by the banks are credit risk, interest rate risk,
liquidity risk, Price risk, Exchange risk, etc. The policy frame work has been reviewed
periodically for exchanging the scope of risk management process in the bank.

The integrated risk management committees of the board and of the top
management undertake the supervisory review of the risk management commission of
the bank.

BANK ASSURENCE – CORPORATE AGENCY

Under the Lakshmi Vilas Bank Limited (LVB) is the “Corporate Agent” for world
renewed “ AVIVA Life Insurance Company India (P) Limited” for distributing that life
insurance products in India, through bank’s select branches LVB has obtained the license
for “Corporate Agency” from IRDA on 4/12/2002 for distributing of AVIVA life insurance
product without any risk and equity partice potion. The new scheme of life insurance
products viz Easy life plus, pension loan, Amar Suraksham, Secure Life, Life Bond are
being launched which takes cares of life protection, savings and investment element
besides tax planning. A specially designed life insurance product is being designed
exclusively for the members of Sell Help Groups (SHG) in Tamilnadu and Andrapredsh.
The scheme offers life coverage to the members of SHG with accident coverage and
creditor product at confessional premium.

BUSINESS STRATEGY OF LVB

The business strategy of the bank has been designed keeping in view different
aspects like historical performance, operation limitations, economic scenario,
competition, future environment, industry perception and to ensure stability. The
following business strategies are contemplated to attain the expected level of business
volume and to optimize profitability of the bank:

 Focus on the growth of demand deposits under deposit mix.

 Ensure uniform performance by all branches. To avoid dependence on select

branches to attain the business goals.

 Quality credit growth for credit operations.

 Expansion of clientele base through focus on retail lending, targeting

identified well managed medium sized corporate with sound financial for
credit marketing, endeavoring positive credit growth at all branches.

 Prudential risk management practices in credit by timely identification,

management and mitigation of various risks associated with credit portfolio
shall receive greater attention.

 Improve the average yield on advances by increasing share of lending at

relatively higher rate of interest to borrowers in retail / personal segment and
to small & medium segment borrowers who are less sensitive to interest rate
and will utilize the sanctioned limit to the maximum extent.

 Branches to first target the known delinquent accounts and ensure that these
accounts are either recovered or upgraded during the financial year.

Marketing of insurance products both life & non life to augment the revenue.

FOREIGN EXCHANGE BUSINESS

The Bank has a centralised International banking Division at Mumbai to support

International Trade business undertaken by its Branches. The branches are well
equipped with sophisticated infrastructure to efficiently handle transactions and are
SWIFT enabled for speedy conduct and execution of transactions. The Bank arranges
medium/long term foreign currency loans, short-term finance through letters of credit,
loans against foreign currency liabilities etc.

The Bank’s internal control systems, backed by strong technical support, helps it
to provide efficient and cost effective support to its operations, customer service,
executive information and to enhance profitability.

TYPES OF DEPOSITS OFFERED BY LVB

Fixed Deposits

Recurring Deposits

Dhanachakra Deposits

Thirumagal Thiruvizha Thittam

Lakshmi Star Deposit Scheme

Lakshmi Kripa Deposit Scheme

ONLINE SEVICES

NATIONAL ELECTRONIC FUND TRANSFER (NEFT)

Lakshmi Vilas Bank is proud to offer the National Electronic Fund Transfer system
(NEFT) facility.

NEFT enables an efficient, secure, economical and reliable system of transfer of

funds between accounts of customers of different Banks.

Features and Benefits;

 Electronic payment system in which payment instructions between banks are

processed and settled on deferred net settlement (DNS) basis at fixed times
during the day.
  There is no minimum or maximum stipulated transaction value for using this
facility.

 NEFT facility is available in all the branches of our Bank.

Funds transferred under NEFT will be credited to the beneficiary’s account on the
same day or next day.

 Inward remittance is free.

 No courier/postal charges payable by customers.

 Secured Transfer of funds across the Banks.

TRANSACTION HOURS

 The NEFT service is available from 9.00 hours to 17.00 hours on week
days(Monday-Friday) and from 9.00 hours to 12.00 noon on Saturday

 NEFT system work on all days except on Sundays and common National Holidays
across the states.

 The request for NEFT will be accepted up to 15 minutes before the cut off timings
at our Branches.

INTERNET BANKING

Internet Banking (IB) allows customers to conduct financial transactions on a

secure website operated by their retail or corporate services. The bank has launched
Internet Banking at Chennai, on August 09, 2008. This is yet another milestone activity
of the bank, after achieving the status of 100% Core Banking System. This is a cost
effective delivery channel to all customers of the bank. The facility can be availed by any
individual customer of the bank, having an operative account with the branches. (An
Individual who is a customer can operate the account individually)
 The customers who are willing to avail LVBiNet facility can approach any branch
of LVB to get the IB facility application form or directly download the application form
from our website www.lvbank.com which is readily available.

To start with, the bank is offering the following services under Internet banking
Features;

 Funds Transfer between Accounts in LVB.

 One view for all the accounts of a customer.
 Account Summary and Account details.
 View, Print and Download Statement of Accounts

THE FOLLOWING ARE THE UPCOMING FEATURES OF LVB INET

 Cheque Book request.

 Stop Payment request.

 Statement of Accounts request.

 Term Deposit opening.

 DD/BC Issue request.

 Loans repayment and more

PROFITABILITY PERFORMANCE

PROFITABILITY ANALYSIS

Profits are the soul of the business without which it is lifeless. In fact, profits are
useful intermediate beacon towards which a firm’s capital should be directed. It is
difficult for a business to breathe well without profit. It may be regarded as a mirror of
the operating performance of business activities. In today’s real business environment
profit is, thus, not the sole objective but one of the most important objectives, which
normally guide and direct business operations. The importance of profit and judging and
directing business affairs have been recognized both by economic thinkers and
accounting practitioners. According to economic thinkers, profits are the report card of
the past, the incentive gold star for the future and also the stake for the new venture.
Accountants ascertain profits, because profit index as they perceive, is not only a
reliable measure of efficient performance in using productive resources.

Since profit should be a key indicator of production-efficiency and effectiveness,

Cohen and Robbins have observed, “ Despite their loose base, profits are probably the
most widely used measure of performance.

Investors employ it when they evaluate a company, competitors relay upon it for
gauging relative progress, and employees resort to it wage determination”.

In the era of economic development, the profit and the profitability are two different
concepts. Although both of them are controversial, even then both are inter-related and
mutually inter-dependent. Profit is the absolute term and profitability is the relative
concept.

INTRODUCTION
In the process of performance appraisal of a business, profitability ratios can be
calculated to measure the operating efficiency. The profitability ratios can be
determined on the basis of either investement or sales, and for this purpose a
quantitative relationship between the profit and the investement or the sales is
established. In the words of James C.Van Horne, “Profitability ratios are of two types
those showing profitability in relation to sale and those showing profitability in relation
to sale and those showing profitability in relation to investment.

He further adds, “With all the profitability ratios comparisons of a company with
similar companies are extremely valuable. Only by comparison are we able to judge
whether the profitability of a particular company is good or bad, and why. Absolute
figures give some insight, but it is a relative performance which is most important”. 7 The
profitability of the company should also be evaluated in terms of its investement in
assets and in terms of capital contributed by creditors and owners. If a company is
unable to earn a satisfactory return on investements, its survival is threatened.

RATIO ANALYSIS

Ratio analaysis can be calculated to measure the operating efficiency. This ratio
can be dertermined on the basis of either investment or sales.

Ratio analysis are following in this chapter,

1. Current Ratio

2. Gross profit ratio

3. Net profit ratio

CURRENT RATIO

This ratio is used to asses the firm’s ability to meet its current liabilities. The
relationship of current asset to current liabilities is known as current ratio. The ratio
is calculated as,

Current Assets

Current Ratio= ---------------------------

Current liabilities

Normally, a high current ratio is considered to be a sing of financial strength.

Bankers in India have used a norm of 1.33.

CURRENT RATIO
 Years Current assets Current liabilities Rupees Ratio
Rupees in crores in crores
2005-2006 1379.13 1046.66 1.31
2006-2007 1417.53 1257.08 1.12
2007-2008 1669.75 1439.65 1.15
2008-2009 1767.56 2064.96 0.85
2009-2010 2150.87 2340.98 0.91
CURRENT RATIO 1.05

INTERPRETATION

From the table 4.1 reveales that, the current ratio was high in the year 2005-06.
(1.31). The lowest current ratio was during the year 2008-09.(0.85). An average current
ratio for the five years (2004-05 to 2008-09) was 1.05. It is less than the standard
current ratio (1.33). Hence the firm’s ability to meet the current liabilities is not
satisfactory.

GROSS PROFIT RATIO

This ratio indicates the efficiency of trading activities. The relationship of gross
profit to sales is known as gross profit ratio.

Gross Profit

Gross profit Ratio = ----------------------------- x 100

Sales
 A high gross profit ratio is considered to be a sign of financial strength. Bankers
in India have used a norm of 21.0

GROSS PROFIT RATIO

Years Gross profit Sales Ratio

Rupees in crores Rupees in crores
2005-2006 83.33 285.95 29.1
2006-2007 92.2 298.2 30.9
2007-2008 96.89 322.06 30.0
2008-2009 105.9 418.26 25.3
2009-2010 107.95 506.06 21.3
Gross profit ratio 27.32

INTERPRETATION

From the table 4.2 indicates that, the gross profit ratio was high in the year 2006-
07 (30.9). The lowest gross profit ratio was during the year 2009-10 (21.3). An average
gross profit for the five years (2005-06 to 2009-10) was 27.32. It is graeter than the
stanadard gross profit ratio (21.0). Hence the efficiency of trading activities is also good.

NET PROFIT RATIO

This Ratio determines the overall efficiency of the business. The Relationship of
Net profit to sales is known as net profit ratio.

Net profit
 Net profit Ratio = -------------------------- x 100

Sales

High net profit ratio is considered to be a sign of financial strength. Bankers in

India used a norm of 4.9.

NET PROFIT RATIO

Years Net profit Sales Ratio

Rupees in crores Rupees in crores
2005-2006 1.17 285.95 0.14
2006-2007 0.08 298.2 0.02
2007-2008 0.5 322.06 0.15
2008-2009 0.33 418.28 0.07
2009-2010 0.41 506.06 0.08
Net profit ratio 0.14

INTERPRETATION

From the table 4.3 it is reveals that, the net profit ratio was high in the year 2007-
08 (0.15). the lowest net profit ratio was during the year 2006-07(0.02). An average net
profit for the five years(2005-06 to 2009-10) was 0.14. It is less than the standarad net
profit ratio (4.9). Hence the relationship overall efficiency of business is not good of LVB.
A study on Performance appraisal in Lakshimi Vilas
Bank

2nd Interim Report

Reg No: 09BA223

Name: Sathya Selvan